Waters Corp (WAT) 2007 Q3 法說會逐字稿

Good morning, welcome to the Waters Corporation third quarter financial results conference call. All participants will be able to listen only until the question-and-answer session of the conference. The conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce your host, Mr. Douglas Berthiaume, Chairman, President and Chief Executive Officer of Waters Corporation. Sir, you may begin.

Thank you. Good morning and welcome to the Waters Corporation third quarter financial results conference call. With me on today's call as usual is John Ornell, Waters' Chief Financial Officer. As our normal practice, I will start with an overview of the quarter's highlights. And then John will follow with details on our financial results and provide you with an outlook for the fourth quarter and for the full year 2007. But before we get going, I'd like John to cover the cautionary language. John?

During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the Company. In particular, we will provide guidance regarding possible future income statement results of the Company, this time for Q4 2007. I caution you that all such statements are only predictions and that actual events -- results may differ materially.

For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see our 10-K annual report for the fiscal year ended December 31, 2006 in part one under the caption Business Risk Factors.

I further caution you that the Company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding possible future income statement results except during our regularly scheduled quarterly earnings release conference calls and webcasts. The next earnings release call and webcast is currently planned for January 2008.

During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure is attached in the Company's earnings release issued this morning. In our discussions of the results of operations, we may refer to pro forma results which exclude the impact of restructuring, purchased intangible amortization and retirement plan transition charges.

Thank you, John. The third quarter results largely indicate a continuation of positive trends that we saw through the first half of 2007. And among these trends are improved spending for our global accounts, the expansion of our businesses in Asia and generally healthy industrial demand. In addition, our global business with government and university entities continue to do very well. In all, from a product line, customer segment and geographical point of view, there were no significant surprises with all these segments reporting solid results.

I turn first to our large accounts. I would describe their spending as improved but not totally robust. Our overall pharmaceutical demand was strong in the quarter driven again by generic, CRO and specialty pharmaceutical customers. Among the large [apical] houses, we saw the majority improving considerably over last year's sales levels. However, uncertainties in a couple of large firms weighed down on the group as a whole this quarter. As we come into the fourth quarter, we are more optimistic that year-end spending, specifically on our new technology systems, will result in a sales pickup for this large customer segment.

Geographically, our largest market, the United States, continued to perform well with strong double digit growth. Contributing to the U.S. performance was accelerated demand from pharmaceutical and university customers. Outside the United States, the only really major market where we saw some softness in demand was in Japan. I think this weakness appeared related to general economic conditions and we are confident that our competitive position in Japan remains strong and that our sales there are likely to pick up as general spending conditions improve.

If you look at our businesses in Asia outside of Japan, China and India are continuing to drive our growth with each of those territories showing strong year-over-year performance. Our recent business reviews in China and India suggest that current growth rates appear sustainable as these countries continue to modernize and build scientific infrastructure and we continue to invest in people and infrastructure right along with them. Elsewhere, demand in Europe was strong for the quarter, led by continued growth in our business in government, environmental and food testing laboratories.

If you look at our major product lines, our instrumentation systems growth in the Waters division continues to be driven by the uptake in ACQUITY UPLC and ACQUITY LC/MS systems. Customer feedback on the performance, reliability and broad applicability of ACQUITY UPLC continues to be very favorable and the advantages of combining UPLC technology with mass spec characterization appear well established in the marketplace.

Mass spectrometry related system sales grew nicely in the quarter led by our high resolution Synapt and Q-Tof line and our quadrupole-based detector systems. Synapt HDMS technology seems to be driving a revolution in mass spectrometry as customers explore new and exciting ways to utilize the technology in applications that range from protein structure and function studies to high sensitivity impurity profiling for biopharmaceuticals. New capabilities that we introduced for Synapt at this year's ASMS were well received, especially the MALDI source option that enables broader application reach for the system.

Through the first nine months of this year it's clear to us that there is healthy momentum in spending for mass spectrometry technology and that we are increasingly well positioned with our recent exciting product launches to gain share in this market. We are optimistic that these trends in MS related demand will continue through the fourth quarter of '07 and we also feel that the exciting new product launches that we have planned for 2008 will further strengthen our market position.

As many of you know, we are more than a supplier of advanced instrumentation and that we offer a broad line of chromatography consumables and advanced instrument services. In fact, these sources of profitable recurring revenues are approaching almost half of our sales revenue.

In the third quarter, we grew our recurring revenues at a double digit rate, as we benefited from the strong uptake of ACQUITY columns by our expanding base of ACQUITY UPLC customers. This strength that we've developed in designing and selling advanced consumables and services is surely a key to Waters' competitive advantage. There's no better example of this than the success of ACQUITY UPLC, where with the advances in the packing material chemistry, it really resulted in a new category of instrumentation that is transforming and invigorating this marketplace.

If you look at our TA instruments business, we are very pleased with the third quarter results as this division continues to capture larger shares of the thermoanalysis and rheology markets. You may recall that TA represents about 10% of our corporate sales. However, the continuous ability to positively and profitably contribute to the corporation's overall growth has been very impressive, particularly recently. During the quarter, we added another business to the TA portfolio, Calorimetry Sciences Corporation, which is a manufacturer of micro-calorimetry instruments that have capabilities to complement the line of analytical systems that we introduced last year following the acquisition of Thermometric.

Before passing you on to John to review the financials, I'd like to say that 2007 has shaped up as a very successful year for Waters from just about every perspective. Our products are performing well in the marketplace and appear to be driving gains in share. And our financial results, relying principally on organic sales growth, continue to set the pace for the industry.

I'd like to briefly review with you a couple of principles that I feel have and will continue to drive our success. Importantly, we focus on the most relevant and attractive segments of the analytical business. At a time when some companies strive for breadth of product offerings and benefits from economies of scale, I think we have demonstrated the advantages of continuously working to be the best in delivering advanced system-based solutions, systems that uniquely merge technologies to deliver superior information content and efficiency. I believe that over the past couple of years we have evolved in the eyes of our customers to become a premier solutions provider and technology partner, the only company to advance unique offerings such as ACQUITY UPLC and Synapt HDMS.

On the acquisition front, we stay close to our comfort zone and look for companies and technologies that are synergistic with our current operations and quickly accretive to both our top line and profitability. Financially, we carefully evaluate the near- and long-term implications of our investments and work hard to deliver superior gross margins, operating margins, earnings growth and free cash flow, results we can deliver today while working towards future improvements.

I look at cash flow and I feel it's one of the clearest and most objective measures of a company's performance. And when you come down to it, it's what all companies strive for in the long run, and it's what Waters is delivering at an outstanding level today. This year, we expect our free cash flow will be over 20% of sales. This level of operational efficiency gives us flexibility to invest in our future while providing our investors with unmatched levels of confidence in our ability to leverage investments, acquisitions, share repurchases or internal development programs.

As an investor, whether you're considering investing in the analytical market or more broadly in public equities, I feel there are few companies that offer the top line growth, earnings growth and strong cash flow that we have consistently provided and plan to deliver in the years ahead.

Now with that, I'd like to turn it over to John for a more detailed financial update.

Thank you, Doug. Good morning, everyone. We are pleased to report another strong quarter of financial performance with third quarter results, delivering 17% growth in sales and 24% growth in non-GAAP earnings per diluted share. Earnings per share was $0.62 this quarter compared to earnings of $0.50 last year. On a GAAP basis, our results this quarter include a $12.2 million charge related to the U.S. transition from a defined benefit pension plan to a 401(k) plan as described in our 8-K filing last month. After tax this charge amounts to $0.08 per fully diluted share. Our GAAP earnings were $0.52 this quarter compared to $0.49 last year. A reconciliation of our GAAP to non-GAAP earnings is included in the press release issued this morning.

Sales grew 17% this quarter with currency providing 3 percentage points of growth and acquisitions providing about 2 points. Examining corporate sales regionally before foreign exchange effects, our sales results were positive in our major geographies with continued strength in Asia where we saw a 12% increase this quarter versus a difficult base of comparison. Sales within Europe were also up 12% and in the U.S. sales continued to be very strong and grew by 18%. Sales to most of our large pharmaceutical accounts continued their positive momentum and global sales to smaller pharma and biotech customers remained robust.

Turning to the product front, the Waters division had another strong quarter with instrument systems growth of 12%. Our service business grew by 7% and chemistry had 19% growth which was aided by acquisitions. Without acquisitions, our chemistry business grew by 10%. And our TA instruments division had another strong quarter with sales up 37% versus prior year resulting from strong new product sales as well as a favorable base of comparison. M&A activity contributed about 5% to this result.

Now I would like to comment on non-GAAP margins and expenses excluding items noted in this morning's press release. Gross margins came in as expected at 57.1% this quarter. Margins were up sequentially this quarter but down from last year, due primarily to continuing foreign exchange cost pressure on European sourced products. SG&A expenses grew at a rate less than sales and were up 12% this quarter compared to prior year. Foreign exchange translation and acquisitions accounted for about 5% of this growth. R&D spending was up modestly this quarter.

Our effective tax rate this quarter was 14.8% on a GAAP basis. However, on a pro forma basis, our effective tax rate was 18.6% this quarter. This quarter's rate reflects the impact of a year-to-date catch-up of an increase in the full-year projected tax rate moving from 15% to 16.2% as well as a couple of smaller discrete items booked within the third quarter. The rate increase is the result of improved profitability in our higher tax rate geographies.

On the stock buyback front, we continue to purchase our shares in the open market and during the third quarter we purchased 402,000 shares of our common stock for $24 million. On the balance sheet, cash and short-term investments total $626 million, bringing us to a net debt position of about $284 million. We believe we remain well positioned to fund our future working capital needs and acquisition opportunities.

We measure free cash flow as cash from operations less capital expenditures plus any non-cash tax benefit from FAS 123R accounting. For the quarter, free cash flow was $72 million after funding $18 million of CapEx and adding back $9 million of FAS 123R tax benefits. Comparable free cash flow last year was $50 million. Year-to-date, free cash flow has exceeded full-year 2006. Year-to-date free cash was $241 million after funding $45 million of CapEx and adding back $19 million of FAS 123R tax benefits. 2006 full-year free cash flow was $229 million. Accounts receivable day sales outstanding stood at 70 days this quarter, up two days versus Q3 last year, all due to currency effects year-over-year. Inventories increased $13 million with currency representing about $3 million of the increase.

Now I would like to turn to our updated outlook for 2007. Our business prospects remain strong with our end markets and geographies enjoying strong customer demand. Our expectations for the fourth quarter are essentially unchanged from our July guidance. We expect sales growth of 12% for the fourth quarter. Within the fourth quarter, we expect a combination of improved gross margins and operating expense leverage to provide for operating margin of around 30%. Net interest expense is expected to be around $6.5 million for the quarter, and we expect our effective tax rate in the fourth quarter to be 15.9%. And the fully diluted outstanding shares are likely to be comparable to Q3 balances.

Rolling all of this together, we currently expect non-GAAP earnings of $1.06 per fully diluted share for the quarter with normal tolerance of $0.01 to $0.02 for the quarter. For full-year 2007 then, we expect non-GAAP earnings of $2.84 per fully diluted share with the normal tolerance of $0.01 to $0.02 for the fourth quarter. This represents 24% earnings growth over last year. Doug?

Thank you, John. I think, operator, at this point we can open it up for Q&A.

Thank you. At this time, we are ready for the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question, Quintin Lai, Robert W. Baird, your line is open.

Good morning. Congratulations on a nice quarter.

Thank you.

Diving into your large accounts and your outlook for the fourth quarter, what gives you that optimism for the sales pickup especially from those two accounts that were a little sluggish? Was it a summer seasonal thing or are you running some kind of backlog number that you're kind of going into Q4 with?

Sure. A couple of reasons why we're reasonably optimistic about what we're looking for in the fourth quarter. The magic of quarterly performance, Quintin, is that the third quarter of '06 for those couple of large accounts were disproportionately large in the base so in the fourth quarter you don't have such a big hurdle to come over with those accounts. And secondarily, if you look at their procurement pattern this year versus what they tell us is coming in the fourth quarter in specific programs that we're working with them on, we have a reasonably high level of expectation that those quotes are going to result in real orders in the fourth quarter. Now, you know, we're short of absolutely guaranteeing that, but we feel pretty good about our ability to make a forecast in that matter.

And then, with respect to just the overall trends that you're seeing, looks like all your product lines are showing really good growth. Can you parse out what you think that the underlying market dynamics are and whether you're growing in line with that or do you have any dynamics of market share gains in -- especially like in mass spec?

I think it's a very good question. I guess the short answer is, we think we're gaining share and specifically in a couple of areas. It seems little doubt that the result of our ACQUITY UPLC strategy and technology introduction has gained overall market share. I mean, it's still to the point where we don't think that there's really good, meaningful competition for that product. That's what our customers continue to tell us.

And I think if you look at another big segment of our marketplace, which is the mass spectrometry product line, I don't think that there's any doubt that overall Synapt and our overall high-end mass spectrometry is gaining market share today. I don't think that the market is growing as fast as we are.

If you look at areas like Asia, I think we're very much holding our own and doing very well. I think the overall markets in China and India are growing pretty fast, so wouldn't surprise me that others in the market are growing fast, also. But you roll all that together, it seems to me that it's hard to add up everybody's numbers, as you know, in this market and absolutely on a quarter by quarter get market share. But I don't have a lot of doubt that overall the net result of those dynamics is that we're a little further ahead than (technical difficulty).

Great. Thank you very much.

Ross Muken of Deutsche Bank, your line is now open.

Thank you. Could you just talk a bit about the sustainability that you mentioned relative to some of the emerging markets and sort of talk about the mix there? You know, is it the same sort of customers that are ordering in China and India that were ordering six to 12 months ago or have we seen a broadening out of demand across industry segments both being pharma and industrial?

Sure. I think if you look at the current areas of the world that are growing the most quickly, and I should hasten to say that one of our fastest growing areas in the world right now is the United States. So it's interesting that we see so much strength in the U.S., and I do think that that's sustainable in the U.S. over the next 12 months. But if you look at the very fast-growing areas of China, India, Eastern Europe and particularly also the Middle East, places like Turkey, Saudi Arabia and Israel, the dynamics that are going there, I speak specifically of India and China, we don't see any real near-term likelihood that this business stops growing at the rates that we're experiencing. As I said, we've spent a lot of time with the senior management group at Waters on India and China in particular recently. We see that it's possible that those areas might accelerate rather than decelerate. The amount of projects that are being laid out in front of us in terms of the need for instrumentation and if you look at India, you're talking particularly about the pharmaceutical industry, weighted towards generic drugs. And these are programs that are on the drawing board and already under construction. So it's not things that's pie in the sky.

If you look at China, it's a little bit different case. In China, our business is not heavily weighted towards generic drugs or pharmaceutical in total. It's a much different mix of environmental, food safety, governmental laboratories and pharmaceutical. And once again, if you look at the projects just going on in the broadly described food safety and environmental areas in China, those projects look very hard to cancel or to slow down.

So I'd say our near in optimism, I think, is very well grounded in these areas that are growing the fastest. It's not saying that you can't have a hiccup here or there, but I'd say that we're pretty confident that the underlying factors are pretty sustainable.

And, you know, just quickly as a follow-up, I think your comment you made regarding the U.S. was pretty interesting. You know, it's sort of the flip-flop of what you would have expected given the weak dollar and everything that we hear about sort of U.S. industrial demand and across many industries being a bit slower now than it was two quarters ago. Can you just give a little bit of granularity on sort of what's the key components of that, especially with the comments around sort of the mixed bag from pharma? Should we just assume then that it's European pharma that's weak? What is really sort of behind that extremely strong and impressive U.S. growth?

I think, again, it's a good question. I believe that our U.S. performance, what's driving it is more Waters centric than market centric. It's not necessarily a broad-based dynamic. I think it's the investments and this whole evolution that I talked about of Waters as a systems supplier with advanced technology that focuses on solutions. We -- to some I'm sure that sounds like a marketing slogan. It's real. We have spent an inordinate amount of time -- we always have, but it seems like in the past year or so even more -- talking to the senior managers of our key customers. And this -- and I think ACQUITY UPLC had a lot to do with it, where the ability of that technology to make a significant difference in a lot of the work flows of our customers has really been driven home. We've talked about the fact that this is getting penetration, that it's changing the way customers think and feel, and I think you're seeing that, and you're seeing it across big pharma in the U.S. and you are seeing it across CROs and smaller specialty pharmaceuticals. Also seeing penetration of this and our mass spec technology particularly in the U.S. into the university marketplace where a lot of advanced research is going on and they're looking for that improved sensitivity and improved efficiency of those technologies to drive their cutting edge research.

I think that's what's going on in the U.S. market and you'd expect kind of that to be the early adopter marketplace. It's not that we're not seeing that in areas of Europe, but I'm secure in saying we're seeing the front edge, the front part of that wave in the U.S.

Great. Thank you very much.

Derik De Bruin of UBS, your line is open.

Thank you. Good morning.

Good morning, Derik.

When you talk about the 12% growth in the fourth quarter for the top line, is that all in or just the organic number?

No, that's all in. That would represent probably a couple of points of foreign exchange and maybe about a point of acquisition impact.

Okay. Great. When -- you talked about the new products in 2008, any color you want to give us?

I was afraid I was going to get that question, Derik. I think what I'm comfortable about saying is we are really feeling good about what's on our plate in the mass spectrometry area. You saw us introduce last year the TQD and as the year wound down the Synapt and you're seeing the rewards of that come through in our mass spec area.

We clearly feel like we've got a good, strong momentum in that area. It clearly takes advantage of the ACQUITY UPLC as the front part of that system, and we're driving that through our R&D programs right now and I'd say that's what I'm most comfortable about saying. Watch for ASMS and even at Pittcon next year to see some significant mass spectrometry coming to the plate.

Great. Although, I don't know if I'm ready to start thinking about Pittcon yet. So when you -- can you give us a little bit of color in terms of how big of an impact you're seeing from some of the issues on food and consumer product safety? Particularly, I'm curious, is this being more companies that are buying stuff because they're worried about protecting their brand or is it stuff -- is it being government regulation driven right now?

I would say it's an interesting mix of applications that we're seeing across the world in food safety. A lot of our current business in Asia is, I would say, regulatory-driven, and that's largely driven by European regs as those producers in Asia have to meet the rigorous European requirements for food imports. We're also seeing a fair amount of food and beverage business that's probably not so much safety related as it is QC and competitive information related. So that's under that broad heading of food and agricultural. And that's quite sustainable and unrelated to any safety concerns.

I'd say the most current attention on the safety, on the food safety issues, is increased visibility in the United States. I wouldn't say that we've seen the big bolus of actual investment in that area. I think that's probably the biggest area of opportunity in the next couple of years because that will focus probably on an increased regulation on the requirements for imported food. But I wouldn't say that we're actually seeing that in our order rate. I'd say most of our business is coming out of the QA/QC part of the food and beverage business as well as established laboratories that are just meeting increased demand largely in the Asia theater.

Okay. I guess one final question. As you start to accumulate cash, it doesn't sound like you're going to be particularly aggressive in your buyback strategies. I guess do you pay down debt or is there the potential for a larger M&A move on the horizon?

I would say -- we never say there's not a potential for a larger M&A. We -- but our fundamental strategy is to continue to add to our portfolio with things that are digestible and that add to our overall strategic product portfolio. We don't -- we're not looking for a major defining acquisition. Frankly, we think this business can continue to grow at good double digit rates, and produce shareholder returns that are amongst the best in the industry. We continue to think that our stock is a good buy. We're continuing to buy. We will evaluate that as the stock approaches triple digits. But I'd say right now we're -- we think what we've been doing continues to have a high degree of attractiveness for us.

Great. Thank you.

Jon Groberg of Merrill Lynch, your line is open.

Good morning. Congratulations on a great quarter.

Thank you, Jon.

Just a few fairly quick questions. Last quarter you mentioned that UPLC demand would approach that of HPLC I think was your words. I just wonder where we were with that and maybe give some context, what percent of LCs sold this quarter were UPLC versus HPLC?

Jon, we're not currently providing that kind of competitive information. But I'm comfortable -- I think the line that I've used in the past is that UPLC was growing north of 25% and less than 100%. I'd be willing to say now, narrowing that range a bit, growing more than 30%, less than 100%. It's continuing to do very, very well. It's not showing any signs of coming off. It's a very fast growth trajectory. Interestingly enough, HPLC, while not growing anywhere near that rate, continues to grow. So there's no question that if we're right, those curves are going to cross at some point in the next couple of years, but --

We're not there yet.

We're not there yet.

Okay.

That's despite very fast growth in UPLC.

And just to follow up on that, as it grows this quickly, you've mentioned before very high attach rates primarily because these are being used in R&D. Are they still mainly going into R&D and so is the attach rate for the new columns still 90%-ish or is that coming off some as they move into different applications?

No, the consumables rate on the new systems is very high per system. You're seeing that in the ACQUITY column growth that is very close to 100% annually, so we're very happy about how the customers are responding to the consumables with the UPLC technology. Does that answer your question?

Yeah, yeah. And then on the financials, a quick question. Gross margins came in in line with what we were expecting. You obviously got very good leverage out of SG&A and to a lesser extent R&D. I'm just wondering about the sustainability of the SG&A and R&D levels or trajectories relative to the revenue growth that you're seeing. Is this the type of leverage that you expect as we go out into '08 or do you see a need to maybe -- I was just looking back over the years and the level that you're reaching at least in the third quarter of SG&A as a percentage of sales is getting low. Just maybe you can mention qualitatively if you think you're going to need to invest more in SG&A and R&D as we look out into '08?

If we look at our traditional model, we generally look at ourselves as being about a 10% top line company, top line growth company. Certainly we're beyond that this year and we've invested in SG&A at a higher rate than we would historically to support that growth. But as we look to next year, at this stage we're expecting double digit top line growth again and I would submit that early on, we should still be able to create a couple of points gap between the growth in SG&A and the growth in sales for next year. We're right in the middle of the budget process, but I would feel comfortable saying that that type of a gap ought to be created as we look at the needs for investment in SG&A going forward.

I think on the R&D front, however, you're looking at a year this year, even though we're investing in headcount, that isn't obvious as you look at the financial results and R&D is growing somewhat anemically this year. But it's really due to a base of comparison, where last year there were significant investments made in three large mass spec programs that were going through the pipeline. So I would say that you're looking at a point off the line this year and rather small growth in R&D and our expectation going forward would be to grow R&D about equal to sales as we look at some of the projects that are on tap for 2008.

Okay. Great. Last two quick questions. One, if you could give any update. I know the Flextronics/Solectron merger was completed in the beginning of October and that was one thing you were kind of waiting just to see how that shook out before you made your plans to move more to Singapore. I was just wondering if you could comment on that. And then a second quick one on buybacks. As Derik alluded to, any particular reason, given the cash that you generated -- I think you bought back around 70 million last quarter down to 20 million or so this quarter. Any reason for that decline?

There's no reason, no principal reason for the decline. It doesn't signal any fundamental change in our buyback.

I think on that front, we talked about maybe a couple hundred million dollars this year of buyback and reserving maybe $100 million-ish for M&A. We front end loaded that given where the stock price was. But I'd say for a full-year basis, we're principally on target for what we said we were going to do.

Okay.

And on the Flextronics front, we've had further discussions in terms of our strategic positioning in Asia. I'd say right now, we are reasonably secure in planning to pursue and proceed with that overall plan and think that over the next couple of years you'll see us build up our Asia position much the way we had intended to do with Solectron.

Thanks.

Welcome.

Tycho Peterson of JPMorgan, your line is open.

Good morning.

Good morning.

Wondering if you can comment a little bit maybe on pricing trends here. It sounds like a lot of the commentary generally has been about growth overseas and then maybe in areas such as generics and then obviously in the applied markets like food testing. And how do we think about the pricing dynamic there? You've done a very good job refreshing the portfolio at that high end. But how do we think about what the pricing dynamics are like as your customer base evolves?

I think, there's always been a level of price competition in our industry, particularly if you look at our chromatography marketplace. There've always been players who choose to compete based on a cheaper system. And some of the surprisingly larger competitors sometimes adopt that strategy.

We have never really utilized a low-priced strategy even to gain share. I mean, we've been remarkably consistent really -- certainly for the last 20 years in following a differentiation approach to our marketplace. And if you look at our gross margins and you look at our financial performance, you can see that there's very little in the way of price erosion, and I think that's still true and it's a strategy -- it's the result of our strategy as opposed to anything else, and I don't see a dynamic evolving that's really challenging that. Our UPLC products, our HPLC products are holding very firmly in the marketplace.

Yes, there's forever some moaning from our field about customers that are giving away their products, et cetera, but no level of noise that's any different than we hear in an average quarter. If you look at the emerging areas of the world, prices have held consistently and yes, there's competition there but we hone to our fundamental strategy of bringing a systems solution to the customer and it's a remarkably effective strategy regardless of where we go whether it's India, China or New Jersey. It's been very effective and well conditioned. So I don't see us changing.

Okay. I think in your comments you'd mentioned you're talking a lot more to senior managers and moving up the value chain within your respective customers. You know, is this naturally driving a lot more bundling and then the second follow-up to that is, is there an increased need then to expand the service offering and provide a broader portfolio?

I don't think so. I mean, I think it's -- certainly ACQUITY UPLC has a lot to do with it. And I'd say there's also, if you look at these large accounts, there's a growing appreciation that they need to do things differently. They're under enormous pressure from generics and from regulators. They need to do better in terms of their data needs and tying together all of their operations. They need to drive productivity and efficiency. And the remarkable thing about it or maybe not so remarkable is that, in that environment, buy a cheaper instrument has remarkably little selling power to them, you know? They're looking for ways of how they can substantially change the way they're doing R&D, and when you talk to them about what ACQUITY UPLC or Synapt can do for them, that resonates as opposed to, I'll sell you five cheaper UPLCs.

So it's absolutely clear that the level of customer who's taking that into account, who's looking at changing how they're doing things fundamental in their operations, whether it's clinical, clinical trials, the front end of R&D or QA/QC, that degree of discussion on those accounts is noticeably higher today than it was, say, five or six years ago. And I think that's what's driving things, and the recognition that UPLC, HPLC and mass spectrometry is at the heart of what these companies do. They're not talking about GC or spectrophotometers. It's just they have to focus where the heart of their R&D and development activities are and are, frankly, I think that we offer the breadth in those technologies with consumables, with the instruments, with the data, with the information services that it's hard for others to compete with us. So it doesn't surprise me that they're turning to us for this. And I think you're seeing it in the kind of business that we're driving through these accounts.

Okay. And on ACQUITY, I think it's been about a year and a half since you opened it up to competitive systems in terms of integrating it. What's been kind of the net effect looking back there? Have people been putting in ACQUITY on a thermo or an ABI system?

Yes. Unquestionably, our penetration as a UPLC in the mass spectrometry systems is unqualifiedly successful in that area. It's not just a grudging position. I would say it's almost a universal position that ACQUITY UPLC has, if not the leading position, what I would quite easily forecast to be the leading position in the front end of competitive mass specs in the not too distant future.

Finally, just on Synapt, can you give us a sense of where you think we are in the adoption cycle right now both maybe in terms of customer base, are we rapidly moving beyond the early adopters here and then are there new application areas that are emerging that weren't obvious six months ago?

I would say the -- it's still early in the curve, but the growth rate's very high. I would say, the current purchases of the systems are still heavily weighted into the protein structure marketplace. We're seeing a great deal of interest in metabolite ID and other areas, but early on, I'd say it's the high end academic research centers that are very interested in the technology, but I'd say the amount of enthusiasm and quote level that we have out on Synapt and across these applications is very, very high.

Great. Thank you very much.

John Sullivan of Leerink Swann, your line is open.

Hey guys, good morning. Just a couple of very quick ones. And congratulations. Can we just talk about the global pharma customer group for one more second? You've had very good success for a few quarters in a row now with this customer group, good success in driving business. Does it change the way you think about the fourth quarter potential for these customers and specifically these customers' traditional buying pattern where a lot of the business comes through in the fourth quarter? How does the first three quarters' strength change the way, if at all, that you look at the fourth quarter potential of these customers?

Well, I'd say, discretely, we think that our opportunity in the fourth quarter is good with large pharma. As I said, that's two things. It's the level of understanding and quote activity and looking at the specific programs that we have going on with the 15 or 20 largest accounts. It's the fact that the only, I mean, it's the really largest pharmaceutical account that are the most troubling right now, and we understand that particular account pretty well, and we think we understand what's likely to come in the near term. And that's better than what we've seen in the past quarter. And the fact that, just the magic of how quarterly business fell last year. You know, the challenge in the fourth quarter for those large accounts is not nearly as high as it was in the quarter that we just passed. So that's not necessarily a statement about the next two or three years, but in the near term, it doesn't cause us a great deal of concern.

Great. I appreciate that. And then lastly, you talk about Synapt and a particular application you outlined was high sensitivity impurity profiling. Is that in the manufacturing process? Is it in biopharmaceuticals or in pills as well and is it actually occurring in the manufacturing process or is it occurring in drug development?

It's principally today in existing biopharmaceutical manufacture, John, I'd say is where the great deal of interest is amongst people who are trying to characterize their biopharmaceuticals. And as you know, that analytical challenge is pretty significant, and I think they now see the Synapt as a tool that better than anything else gives them the ability -- both the ability to characterize things that they couldn't see before as well as having to do it to avoid risk. And so that's what we're talking about in terms of impurity identification. That's essentially with people who are in the market today.

That's very helpful. Thanks and congrats again.

Thank you.

(OPERATOR INSTRUCTIONS) Quintin Lai of Robert W. Baird, your line is open. Mr. Quintin Lai, your line is open.

Hi. Thanks for taking the follow-up. With respect to tax rate, you said that there was a true up to get it to 16.2%, but then in the fourth quarter now you're saying 15.9%. So I guess why isn't fourth quarter just at 16.2%, and then kind of going forward, John, do you think 16% is kind of a good rate?

What an excellent question because that's a question that the CEO has asked three times in the wrap-up of this quarter.

Welcome to the world of FIN 48 unfortunately. Within the quarter, we had a couple of adjustments associated with estimates of liabilities for the U.S. return and the mass tax return from '06, the combination of which resulted in the fact that we had to true up those estimates all within the third quarter. It doesn't get smoothed across the entire year's rate. So those couple of amounts when you include them in kind of the run rate pro forma tax rate comes to 16.2% for the full year, but on a run rate basis when you exclude those couple of items, you're back down to 15.9%, which would be kind of the starting point for looking at what the tax rate might be going forward. So again it's taking that full impact all within the third quarter and not smoothing it across the full-year rate.

Quintin, the way I think is the easiest way to understand it is it's almost $1 million of tax provision in the third quarter. It's kind of a one-time item that unfortunately the tax laws require or the accountants require you to put that three-year provision all in the third quarter. And then it goes away in the fourth quarter. So it's confusing, but that's the way you're required to do it.

Thank you very much for the clarity. I much appreciate it.

You're welcome.

There are no further questions.

Okay. Well, thank you all for participating and we'll all look forward to meeting again after the fourth quarter. Thanks again.

Thank you. That concludes today's call. All lines may disconnect. Once again, that concludes today's call. All lines may disconnect.