Waters Corp (WAT) 2007 Q4 法說會逐字稿

Good morning and welcome to the Waters Corporation fourth quarter financial results conference call. All participants will be able to listen-only until the question and answer session of the conference. This conference is being recorded. If anyone has any objections, please disconnect at this time. I would like to introduce your host for today's call, 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 fourth quarter and full year financial results conference call. With me on today's call is John Ornell, Waters' Chief Financial Officer, and Gene Cassis, the Vice President of Investor Relations. As is our normal practice, I'll start with an overview of the business highlights and then John will follow with details on our financial results and provide you with our outlook for the first quarter and full year 2008. Before we get going, I'll like John to cover the cautionary language.

During the course of this conference call we'll make various forward-looking statements regarding future events or future financial performance of the Company. In particular, we'll provide guidance regarding possible future income statement results of the Company this time for Q1 and full year 2008. We caution you that all such statements are only predictions and that actual events or 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 10K annual report for the fiscal year ended December 31, 2006 in part one under the caption business risk factors. We 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 April, 2008. During this call we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure is attached to 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, purchase, intangible amortization and retirement transition charges.

Thank you, John. While our fourth quarter results reflect strong operating income performance and allowed us to achieve significant sales in earnings growth for the full year and it was accompanied by very strong cash generation. However, our earnings per share growth in the fourth quarter did not materialize quite as we had anticipated, as an unexpected increase in our annual tax rate, among other factors, adversely affected our bottom-line performance. John will walk you through the details and quantify the factors that resulted in this adjustment. Now I'll review for you some of the significant trends that we saw in the fourth quarter and help set the stage for our outlook for 2008.

In the quarter, we principally saw our continuation of the trends that drove our growth through the first nine months of the year. These trends included improved pharmaceutical spending, the continued expansion of our businesses in the developing world, rapid uptake of ACQUITY UPLC and our new MS systems, and very impressive results for the TA Instrument division. Our sales growth was in line with our October outlook, however, foreign currency translation was a larger factor than we expected. In addition, our sales in Japan were weaker than anticipated due to a combination of a sluggish economic condition and a change in the testing protocols for drinking water analysis in Japan. In our opinion, however, we have maintained or even marginally expanded our market share position in Japan through this tough period.

Looking at customer segments for the Waters' division, growth in our overall pharmaceuticals sector was again driven by generic CRO and smaller specialty firms. Sales to our largest accounts showed mixed results,with a minority of firms depressing the sales growth for the group as a whole. Overall, the year-end budget flush was a little less dramatic than we had hoped, but certainly not too different than what we had expected based on their spending patterns throughout the year. On the positive side, we saw a nice increase in ACQUITY UPLC uptake with a number of multi-system orders placed by these large firms. Regionally our business in North America continued to perform well and we saw nice increases in our industrial markets, including food and environmental testing, along with strong governmental and university spending.

Pharmaceutical demand in the U.S. was stronger than in other developed economies, as our improved sales to CROs and generic drug manufacturers and to most of our large accounts allowed us to grow overall pharma revenues despite weakness from a few large players. Pharmaceutical spending was less robust in Europe, where a combination of a difficult quarterly comparison and weaker sales to large multinational firms result in the slight year-over-year decline. Overall and before currency affects, our business in Europe saw modest growth in the quarter with food testing applications continuing to be a positive contributor. Outside of Japan, our business in Asia continued to benefit from strong double digit sales growth rates in China, India, and other developing Asia markets.

Turn now to our major product lines, instrumentation systems growth in the Waters division continues to be driven by the uptake of 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 technologies with mass spec characterization appear well established in the marketplace. In the quarter we saw particular interest in ACQUITY from metabolic profiling studies. This application truly benefits from the enhanced speed and resolution that is only available by using UPLC technology. In addition, the number of multi-system ACQUITY system orders was increasing throughout the quarter as more customers were more fully outfitting entire labs with the technology.

Mass spectrometry and related systems sales growth in the quarter was led by strong demand for our high resolution Synapt HDMS and our new TQD Tandem Quadrupole instruments. Demand for MS-based systems was strongest in North America and Asia, driven by sales to CROs, prodiomics labs, and for industrial chemical applications. Synapt HDMS technology has quickly established a firm share in the high resolution mass spectrometry segment. In applications from protein structural studies to metabolized profiling to batch testing of bio-pharmaceuticals. Synapt HDMS is allowing scientists to glean new information and accelerate research studies. In October I mentioned that HDMS was driving a revolution in mass spectrometry. The demand and interest that we saw in the fourth quarter is consistent with that view and we are optimistic about our growth prospects for this technology in 2008.

Looking at our recurring revenue from chemical products and services, in the fourth quarter we again saw sales at a double digit rate as we continue to benefit from the strong uptick of ACQUITY column by our expanding base of ACQUITY UPLC customers. TA Instruments finished the year with yet another strong double digit sales growth quarter. For TA the growth was geographically balanced with exceptional product line growth from the division's new Q-series thermal analysis line. From a market segment view, business was strong from electronics manufacturers and from life science researches using microcalorimetry techniques . Before passing you on to John, I'd like to comment on our overall performance in 2007. The year stands out as one of Waters' strongest in terms of sales growth and successful implementation of strategic system based initiatives.

We began the year with a more conservative outlook for revenue growth as there were concerns regarding the health of our pharmaceutical accounts and we recognized that quarterly comparisons with 2006 would become more difficult as we moved into the second half of 2007. However, as we reported our results through the first three-quarters of the year, we became increasingly confident that the success of our new products, along with the health of our key markets could allow us to exceed our initial projections. All suggesting that 2007 would be another double digit sales growth year for Waters. Coming into the fourth quarter, we were very optimistic about our prospects for ACQUITY, Synapt, and our TA Instruments group. In fact, our assumptions were correct, as each of these business groups grew in excess of 20%.

Despite these successes, our fourth quarter projections came up a little short, as weaker than expected business in Japan and to a lesser extent in Europe resulted in organic sales growth about two points lower than we had anticipated. I think it's worth mentioning, however, that the fourth quarter of 2007 was by far the strongest sales quarter in Waters' history and completes a year of strong double digit sales and earnings growth for the Company. But more than looking at only the financial results, 2007 was a year that Waters continued to transform the analytical industry by establishing ACQUITY UPLC as a mainstream separations technology with applications across all market segments and successful installations all over the world.

In 2007 we also established a new market segment in research mass spectrometry HDMS, or high definition mass spectrometry. This advanced instrument has brought a new dimension into the field of mass spec, the ability to analyze and identify based upon molecular shape. We're confident that HDMS will continue to expand the application reach of mass spectrometry. ACQUITY UPLC and Synapt HDMS are examples of the future system solutions that Waters will development and commercialize in 2008 and beyond. Our goal is to offer our customers technologically advanced solutions to their most difficult scientific problems. Solutions that seamlessly and creatively integrate the technologies that our customers associate with Waters and TA Instruments.

Based on the combination of our strong product position, the continued expansion of our sales into the developing world, and the sustainability of demand from our more established markets, we anticipate double digit top-line growth in 2008 and the ability to leverage this growth to higher earnings per share and stronger free cash flow. Our commitments to continuously reduce the manufacturing cost of ACQUITY, drive consumable sales and actively transfer more production to lower cost sites will allow us to improve our trade margin. At the same time conservative expansion of SG&A and R&D expenses will help improve our overall profitability. Our free cash flow in 2007 hit $327 million. That was an increase of more than 35% over 2006. Generating this level of cash provides us with the flexibility to continuously seek opportunities to invest in our business and is indicative of the fundamental strength of Waters franchise.

In 2008 we plan to deploy this cash on our share buyback program, while continuing to look for acquisition opportunities that are synergistic with our business operation. In closing I would like to assure you that I'm confident that 2008 will be a successful year for Waters. We are well positioned to benefit from a series of exciting new products that appeal to large segments of the markets that we serve. As we start the year, it appears to us that most of the underlying business conditions that allowed us to perform well in 2007 remain intact. We'll continue to do what we're best at doing, offering our customers technically differentiated systems offerings and a strong portfolio of consumable products and services. At the same time we'll work toward offering our shareholders an investment that offers superior sales growth, industry leading profitability and strong free cash flow. Thank you and here's John with a more detailed financial

Thank you, Doug, and good morning. Fourth quarter results delivered 13% sales growth and 17% growth in non-GAAP earnings per diluted share. Earnings per share were $0.98 this quarter compared to earnings of $0.84 last year. On a GAAP basis, our earnings were $0.96 this quarter compared to $0.78 last year. A reconciliation of our GAAP to non-GAAP earnings is included in our press release issued this morning. Sales grew by 13% this quarter with currency providing five percentage points of growth and acquisitions providing about one percentage point. Looking at corporate sales growth regionally and before foreign exchange effects, our sales results were positive in most of our major geographies, with continuation of trends that we'd seen at the end of September.

Sales in the U.S. continued their double digit growth and this quarter were up 12%. Sales within Europe were a bit slower in the fourth quarter and were up 5% before currency effects. Sales in Japan were softer than expected and were down by 12% in Q4. However, outside of Japan, Asian sales remained strong and grew by 18%. Turning to the product front, within the Waters division, instrument systems grew by 3% versus a difficult base of comparison. Our service business grew by 7% and chemistry had 20% growth, which was aided by acquisitions and growth of ACQUITY after market column sales. Without acquisitions, our chemistry business grew by 11%. Our TA Instruments division had another strong quarter with sales up 19% versus prior year, resulting from strong new product sales. M&A activity contributed 2% to this result as well.

Now I'd like to comment on non-GAAP margins and expenses, excluding adjustments noted in this morning's press release. Gross margin came in a little lower than expected at 58.4% this quarter. Versus prior year, margins expanded this quarter and were up by 40 basis points. Versus our expectations, however, margins were lower than our October forecast due largely to less favorable manufacturing variances resulting from lower than anticipated instrument production. SG&A and R&D expenses grew by 7% this quarter compared to prior year. Our operational tax rate this quarter was 20.7%, bringing our full year operational rate to 18%. This rate was well above our expectation and is largely the result of a couple of factors. First, during the quarter our production levels at our tax favored Ireland and Singapore manufacturing facilities were lower than expected for select instrument systems due to shifts in customer demand and inventory reductions.

At the same time, production volumes at our U.K., U.S. manufacturing sites were an aggregate over plan as ACQUITY, Synapt and TA product sales were strong. These variances in manufacturing volume resulted in additional tax expense of about $2 million. And secondly, at the end of each year, during our closing process we review our legal entity results and make necessary adjustments to our inter-Company pricing to comply with our transfer pricing policies. These adjustments are the result of variances and expected volumes within sales subsidiaries, actual versus estimated legal entity costs and adjustments to estimated charges for support services, all of which impacted profitability at many of our 40 legal entities. Historically, these year-end adjustments have netted the smaller amounts and were generally offset by favorable production volumes in Ireland and Singapore. This year, however, these adjustments resulted in an additional tax expense of about $3 million.

We understand the issues which gave rise to this additional tax expense and are implementing changes to our internal processes to address them. On the stock buyback front, we continued to purchase our shares in the open market and during the fourth quarter we purchased 250,000 shares of common stock for $19.9 million. Fully diluted share count was 102.8 million shares for the quarter, up 1 million shares from Q3. This increase is the result of higher option exercises than expected this quarter and the impact of a much higher share price that under the Treasury stock method of accounting for diluted shares increased share count and reduced our earnings this quarter by about $0.01 versus our October expectation. On the balance sheet, cash and short-term investments totaled $693 million bringing us to a net debt position of about $191 million. We are 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 $86 million after funding $15 million of CapEx. Comparable free cash flow in Q4 last year was $54 million. Full year free cash flow is $327 million after funding $60 million of CapEx and adding back $17 million of FAS 123R tax benefit. 2006 comparable free cash flow without unusual payments was $242 million. Accounts receivable day sales outstanding stood at 66 days this quarter, up two days versus Q4 last year with currency effects comprising one day of the increase year-over-year. Inventories decreased $15 million this quarter and ended the year up a modest $7.5 million largely attributable to currency translation.

Turning now to full year 2007 performance, sales grew by 15% versus last year with currency adding 3% to sales growth and M&A adding about 1%. Gross margins declined by 80 basis points as a result of higher volumes of newly introduced products in our sales mix and foreign currency affects. SG&A grew by 9% and R&D was up only modestly, in spite of headcount additions made this year, due to a strong base of comparison in 2006 where large material costs for new products raised expenses that year. Operating margin as a percentage of sales was up 100 basis points and earnings per fully diluted share for the full year grew by 20%. Now I'd like to turn to our outlook for 2008.

We believe our business fundamentals remain solid, with most end-markets and geographies enjoying strong customer interest in our new products and technologies. Given this backdrop, we believe that a reasonable expectation for sales growth in 2008 would be somewhere in the range of 8% to 10% for organic sales growth for the full year. Currency at today's levels would add about 2% to growth next year, bringing our overall growth rate to 10% to 12%. Moving down the P&L, we expect gross margins to improve by about 20 basis points as a result of improved production efficiencies on higher volumes of ACQUITY products and a favorable mass spec sales mix that contains more high-end mass spec system sales next year. Operating expenses are expected to grow at a rate slightly less than sales. As the year progresses we'll moderate our spending on additional resources to keep our expense growth aligned with actual sales volumes. We expect our tax rate to be about 18% for 2008.

Of course with the unexpected increase in our rate in 2007, we've taken a hard look at the factors that will influence our tax rate for 2008 and this redo suggests that a rate of around 18% is sustainable and we'll continue to explore opportunities for movement of additional production volumes to our Singapore and Ireland facilities. Net interest expense is expected to be in the neighborhood of $21 million and our fully diluted outstanding share count is estimated to be about 103 million shares for the full year. Rolling all of this together, we currently expect non-GAAP earnings per fully diluted share to about $3.20, where sales growth is between 10% and 12% and with a tolerance of plus or minus 5%. For Q1, we expect sales growth of 13%, which includes three points of currency impact this quarter.

Currency effects are expected to be more favorable earlier in the year in 2008, given easier bases of comparison in the first half. While we expect gross margins to improve for the full year, in the first quarter we expect lower gross margins as a result of strong foreign currency effects early this year. And our product cost reduction efforts are not expected to have a favorable impact until later in the year. Operating expenses are expected to grow a bit less than sales and operating margins should be about comparable to Q1, 2007 and result in earnings per fully diluted share of $0.63 for the quarter plus or minus 5%. Doug?

Thanks, John. I think, operator, we can now open it up for q-and-a.

(OPERATOR INSTRUCTIONS) Our first question comes from Quinton Lai, Robert W Baird.

Good morning. Turning to Japan, could you break out what percent of your sales come from Japan right now?

Yes, about 10% of our overall sales are based in Japan.

And then, with the forecast that you're putting in, what are you expecting for Japan in 2008?

Low single digit growth and that's based on anniversarying some of this issue obviously as we go through the second half of the year, probably a little bit more of a difficult comparison early on in the year, but for the full year a few points of growth out of that region.

And then with the rest of the outlook for 2008, what are you expecting for Europe in terms of big pharma?

We're pretty much expecting a continuation of current conditions in big pharma, which is a mix of some of those showing pretty good demand, some of them being slow. Pretty much a year that's a continuation of large pharma dynamics that we're seeing at the end of 07.

And then I'll ask one more question and then I'll jump back in the queue. With respect to your cash deployment, last year it sounded like that your number one option was to do more M&A and then number two might have been share buyback. Any change in thought with current conditions now?

I think that first and foremost we'd certainly like to continue the M&A opportunities, continue to address the smaller ones that exist. We continue to [peruse] what's available in the marketplace. We've made a few smaller acquisitions over the last few years that I think are still somewhat indicative of what we might be likely to do as we move forward. To the extent that we can't deploy cash there, then we'll continue to deploy cash on the buyback effort. We are budgeted to do that as we look at the cash we're going to generate in 2008.

I answer it by saying we were reasonably aggressive buyers of our stock at its peak. To the extent that our stock were below its peak, we'd be more aggressive buyers of our stock.

Just for a point of clarification, the guidance of 103 million shares for 2008 doesn't assume significant share buyback?

Yes, it assumes about $200 million is deployed on buyback and it also assumes that option exercises continue, so that the net of those two is about a neutral situation. These are existing options that are in the market that we're anticipating will be exercised. That's probably conservative, but that's where we're starting.

All right, thanks.

Tycho Peterson. JPMorgan.

Hi, good morning. Maybe just starting off a little bit with some of your comments around the gross margins. You talked about less favorable manufacturing variances and lower than anticipated instrument production overseas, can you give a little color as to how you're thinking about the ramp in Singapore and Ireland. Is there a chance you could get more agressive over the course of the year or do you have to kind of maintain the time lines that you have previously laid out?

I'd say that as we look at margins, we certainly do expect higher volumes of our Synapt product as we continue through the year that will be favorable versus prior year. We're looking at improving our costs on our ACQUITY products. We have some engineering cost reductions that we're working on that will improve the margins on that product by a few percentage points or more as we go across the year. We're looking at moving additional production, a couple of detectors to our Singapore facility, really kind of mid-year. So there'll be, I think, a significant increase in volume through that Singapore operation. All of that then will be offset by what we think will be significant growth in ACQUITY that will put a little bit of downward pressure on all of these other factors that I'm describing. I think in total, as we look at that, we feel comfortable that for the full year that kind of that 20 basis point improvement that we target year-over-year would appear to be conservative given our plan.

I guess along the same lines in terms of the tax rate, is there an opportunity for some additional leverage here? I know you laid out what your expectations are for the year, but given the same comments in terms of the offshore ramp.

Yes. I would say certainly Singapore is expected to provide some downside pressure on the rate. However as we look at the volume coming out of the U.K., this Synapt product is going to offset that to some extent. I think as we look to the future, though, and as we look beyond movement of just these couple of detectors and the continued success of the facility that we have in Singapore, yes, there's more opportunities to move volume over multiple years and enjoy a tax rate there that perhaps will bring our overall rate down slightly in the future. I would just say for right now, I'm going to be a little,I think, cautious and suggest that starting at an 18% starting point is probably prudent.

And then finally on Japan, I appreciate you kind of quantifying the size of that business. Can you give a sense as to whether you're seeing anything different competitively specifically from [SysMex] in that market and whether you're seeing any changes just in terms of the level competition?

No, I'd say just the opposite, Tycho. I believe, in all of our core applications we're probably seeing, on balance, a little bit less competitive in case by case examples. ACQUITY has done very, very well in Japan and there's really no practical competitor for it. So I do believe that this is -- now in any one quarter something can blip, but in broad terms, I'm pretty satisfied that we're more than holding our own in the Japanese market. The pharmaceutical market in Japan is probably the other thing that is much weaker even than it is in other areas of the world. So, I think that's a dynamic that we're also seeing play out in Japan a little bit more than in other areas.

Okay, thank you very much.

Ross Muken. Deutsche Bank.

Good morning, gentlemen. Can you talk a bit about sort of the trends you are seeing in mass spec. It's obvious, given your commentary, that Synapt continues to sort of gain traction. I assume that's sort of relative to market share gain versus the entire market sort of growing at that rate. Can you talk a bit about sort of that dynamic and where you're seeing most of the placements in terms of the end customer mix. And then talk about sort of on the lower end pricing trends and sort of the LC/MS business.

Sure. I think in Synapt we're seeing it prett6y much were we expected, in prodiomics, in metabolite profiling applications. We are seeing it in biopharm. Interestingly enough, in biopharm almost 2 C operations in terms of these complicated bio-pharmaceutical products being better characterized upon release with the capabilities of Synapt. That's a relatively new application for us, I'd say. Synapt is very encouraging in the kind of the spread, although it's essentially large molecules. On the low end, our results were softer than we expected, particularly in the that core bench topped single quadrupole that has traditionally been a pharmaceutical marketplace for us.

As pharmaceutical sales are tougher, that has had an impact on that single quadrupole marketplace. We've done very well, as John and I noted, with our new TQD bench-top triple quad instrument. As you know, that is aimed at more in the applied markets as opposed to that work horse drug metabolism laboratory, where the higher end triple quad is an area where we still don't have the market share that we hope to have someday.

And relative to the CRO market, which continues to be strong for you, how should we think about that sort of going forward relative to the amount of outsourcing being done at pharma? I mean, in some quarters could we see increased weakness or is it sort of a longer term trend to see maybe pharma R&D growth be a bit lower because so much of it is being outsourced to the CROs and we are seeing the growth there. So we should think about that sort of on a cumulative basis or are we not sort of at the point yet where we see that significant migration out of this sort of internal pharma R&D labs.

No, I think it's an excellent point, Ross. We're clearly seeing some of it. I think you're seeing some -- the impact of direct outsourcing, so where a large pharma is contracting to have a CRO do work that he used to do in-house. You're seeing much, as drug come off patent clearly, you're seeing work that was going on in an ethical pharmaceutical house, now that business going to a generic and that generic could be in the U.S. or it could be in India. I think what we're clearly seeing is CROs being more aggressive about adopting new technology and it's not totally clear to us whether that's just a new development in the marketplace, whether it's a new attitude, a new drive for efficiency. It perhaps signals a subtle degree of independence on the part of the CROs where they're driving more into that efficiency area and sponsor pharmas are perhaps giving up a little of the control there.

So it definitely does kind of impact you when you say what's big pharma doing versus what specialty pharma or CROs, because the work being done is probably exactly the same work and it may even being done for the same companies, just done on a contract basis. I think overall the dynamic works in our favor because there are more CROs implementing new labs, so they're not just driving more business into an existing instrument base. We're clearly seeing that in Eastern Europe in places like Poland and Checkoslovakia and in India where the generic in the CRO base is growing phenomenally fast.

And quickly, lastly on ACQUITY, obviously the uptake there continues to be strong, were you surprised by the sort of multi-instrument placements you were getting at sort of single sites? It seemed like you sort of highlighted that in the commentary and I didn't know if this was a distinct change. I thought we were seeing some of that before, but maybe the degree to which we were seeing that this quarter was maybe more evident than it was previously.

I think it's notable, particularly in light of kind of continuing weakness in some big traditional pharmaceutical accounts. So in spite of that, we're seeing ACQUITY make more progress and we like to kind of continue to watch this progress in more of the QC applications where we're clearly getting to the QC applications later than the very strong uptick in the R&D and front end applications, but we think we're really beginning to see that. That of course has been influenced by tough conditions in big pharma with these big labs where they've been under very tough spending controls. So, one is clearly being affected by the overall conditions, but in spite of that, we're seeing these multiple orders for ACQUITY and I think that's a very good long-term sign.

Great, thank you very much.

Derik De Bruin, UBS.

Hi good morning.

Good morning, Derik.

When you look at the Japanese market, I guess, could you just talk about a little bit more about (inaudible) shift in the drinking water regulations? I know nothing about that overall end market, I just was wondering if you just give me a little bit background on it?

Well, Japan, specifically on the drinking water applications, Japan had very strong regulations concerning the number of samples and it began, probably in earnest about three years ago. And they continue to expand the analytical requirements and they continue to expand the number of samples that had to be run. So labs had to keep adding capacity, not only in our gear, but in a lot of analytical technologies in order to meet those requirements. And what happened last year is that the Japanese government substantially reduced the sampling requirements and as a result we saw a reduction in our business. We had a leading share in this marketplace. And we saw a reduction in both the consumable side of the business because of the samples, as well as the instruments that were required to run it.

With -- I got, I guess, take a little bit of the blame. We probably should have seen this a little earlier. We knew that the slope wasn't going to be as strong forever in these applications, but the down turn came much faster than we anticipated. So the slope in the fourth quarter was a pretty significant one and that's what caught us up by a little bit of a surprise.

Fair enough. When you look at your 2008 guidance, when you still think that, to put it in terms of instruments, consumables and services. When you look at the chemistries that are there, you still see that market, you still see the chemistries business growing 10%ish or a little bit higher than that and how do you see instruments growing?

Yes, we think that chemistry will continue to be strong. We think that the ramp that we've seen in the ACQUITY columns over the last couple years that's been very, very steep. We'll begin to impact growth as we look at 2008. So thinking of chemistry as a double digit business I don't think is the least bit aggressive based on the trends and the history that we see there. On the service front, I think we're still looking at high single digit growth for the services for the corporation and then instruments are going to modulate depending on whether organic growth is going to be 8% or 10%. We're looking for high single digit growth out of the instrument business, obviously led by ACQUITY and the Synapt mass spec and we've got some new offerings likewise coming this year at both Pittcon and ASMS that we think will aid that instrument growth too as we move through the back end of the year.

Great, that's helpful. When you look at the gross margin number, about 20 basis points increase year-over-year, how much is FX being a tailwind -- a headwind on your gross margin number. And can you just give us a little bit more color in terms of what is going into your forecast on that?

FX, if you look across the year, obviously we end the year at about the rates we're at today, we begin the year with FX being more of an impact if you will. So I would say that early in the process you're more likely to see FX be a depressant of our overall margins by maybe 20, 30 basis points and by the end of the year becoming closer to neutral. I think overall we're looking at a slight impact of FX should rates stay about where they are today.

Okay. Thank you.

Jon Groberg, Merrill Lynch.

Good morning.

Morning.

Congratulations on an overall great 2007. Just on the Japan number you gave, John, you said minus 12%, was that excluding currency or including, on some you said excluding, on some you didn't clarify.

That was excluding currency, that was before currency impact.

So it was the local currency.

Yes, the end was not nearly as variable as the euro and some other currencies. So I think the yen on average for the quarter was about 112, something like that, 111.

And if you look at that in Japan, would you categorize that minus 12% almost entirely due to this reduced number of required tests for water quality or is there -- are there other things going on in Japan?

The most significant affect was the water testing. We saw a little bit of a falloff in the food testing business also. So the regulated applications for food testing and water testing were probably the two most significant factors.

It was down 8% at actual currency rates.

Okay. And then you mentioned this to maybe to(inaudible) a number of times in your call you kept mentioning most drivers remain intact and that most end markets and geographies remain stable. Excluding Japan that maybe we've talked about, what else are you seeing out there that makes you say most as opposed to maybe a little bit more bullish commentary a quarter or two ago and what specifically, sorry, just and what specifically, it's probably questionable, people will question that the markets that you saw in the fourth quarter of '07 given what we're seeing happen kind of in the macro environment will stay as they are, so just maybe if you can address that as well.

Sure, I think it's a fair question. You remember at this time last year, probably the single biggest question that we had was how is the U.S. going to be, because the U.S. is clearly our largest territory and we have had like one quarter of decent performance in the U.S. coming out of '06. The very clear story for us in '07 was good strong, double digit growth in the United States. And you know it's partly in the U.S. it's the fact that there has been underpressure in the large accounts and we have looked to expand our business outside of those key large pharma accounts that we owned for so many years, but as we became under pressure there, we certainly have done a better job at expanding our business in smaller accounts. We've seen that keep up throughout 2008.

We've also continued to -- I think in the U.S. we're seeing this very clearly, these systems are very clear high productivity systems. So even in challenging economic times we're finding in many accounts, the ability to make a very strong case for investing in these high productivity systems. That seems to be playing itself out in the U.S. very well. If you look at our high growth areas of Asia, India, China, Korea, Taiwan, those very high double digit growth rates, we're seeing no slackening of the interest and the early demand signs from those territories as we go into 2008. As a matter of fact, in some cases we're even seeing stronger signs of growth. Our traditional, of the last couple years, high end growth factors are, we believe, continuing into '08. Japan, we think the fourth quarter was a little bit of an anomaly. Not a total anomaly, but the slope is not going to be as severe as we go into 2008. So you -- and then so Western Europe is the other large territory, geography. We saw a little bit of slow down versus our expectations in Europe in the fourth quarter, but it wasn't huge.

You know? So we're looking at Europe carefully. Europe is a whole bunch of little markets, rather than kind of one big one, and we're -- we've leavened our expectations but we don't think it is a dramatically different from what we are seeing in the fourth quarter. You add to that a healthy dollop of new products coming in and the ramp up on things like ACQUITY and Synapt continue to be very strong. So that leads you to an '08 that's kind of as John outlined it. It's probably, it's a little bit conservative versus what we saw on average in '07, but the key geographies and the key customer sets are not all that different.

Okay. And just as a point of clarification, ending '07 what was your mix of say life science and all the (inaudible) of those clients and more industrial or applied markets? Kind of broadening out.

If you look at the overall, when we talk about our overall mix of life science sales versus industrial, John, you have that right at your fingertips.

Yes, we look at about 70% of our business in that range being broadly defined life sciences with about 15% of that being university government, the rest being for profit and then 30% being, really defined other. There's a lot of categories in there, as you know, that's food and beverage, that's environmental, that's the pure chemical industries, the Dow, the duPont. It's a pretty diverse set of customers in that other 30%.

And academic and government is 15%?

About 15% and that is worldwide. Not quite as much exposure there to the U.S. as you may think.

And what would that have looked like in '06, if you have that number, just to see if there was kind of a broadening out?

About the same because, as you know, our businesses at TA have done very, very well. A lot of the life sciences businesses have done well. A lot of the food safety applications have also done very well, so that on average we really haven't seen a dramatic shift in that proportion of our business over the last couple of years. The biggest dynamic would obviously be large pharma that has been a little bit of an anchor to our performance. But that's been offset, as we've talked about, by improvements in the generic, CRO and biotech areas.

Then last question, you also made a comment that the budget flush in the fourth quarter maybe a little less than hoped for, maybe not so far out of your expectations but than hoped for and just maybe have you talked to people in the field and got a sense as to maybe why that was the case?

Yes, I'd say we saw probably as much as we had expected in the U.S. It was probably a little bit softer in Europe. I think in general we're seeing big pharma in Europe be a little more problematical than big pharma in the U.S. You know that a lot of those accounts have the same names in Western Europe as in U.S. But we do, I think, see where the traditional European pharmas are perhaps out sourcing into Eastern Europe and into India a little faster than the traditional American big pharmas. So I think that's one of the things that we keep monitoring as we look at our European business. We're seeing some very clear anecdotes of that. I don't have any absolutely rolled up numbers to prove that, but that's what I think is happened a little bit more in Europe as we got into the end of the year.

Great, thanks a lot.

John Sullivan, Leerink Swann.

Hi guys, good morning. A couple quick ones here. John, when you were talking earlier about ACQUITY margins having a chance to grow by a few hundred basis points over 2008, is that instrument manufacturing improvement alone or does that also include perhaps some benefit of mixed shift away from instruments and toward columns?

No, no, I'm talking about truly engineering reductions of costs with those products along with higher volumes allowing for a bit more favorable production variances and a purchasing leverage as well on all of that. I think we're just that alone, we're talking about being able to improve margins by the 3% or so as we go across the year.

Okay, great. And then relatedly, do the ACQUITY related columns carry higher margins than the instrument itself at this stage of the game?

Higher, yes, but they would be comparable to the margins that we get on HPLC columns. So the margins, as we've said, are definitely are higher than the instrument margins and comparable to HPLC.

Okay. And then lastly, what portion of the Company's revenues are coming from recurring sources today?

Little over 40% we'd say come from recurring sources. 40% to 45%.

Right.

Thanks very much.

Sure.

Derik De Bruin, UBS.

Hi, just a couple of follow-ups. So what, when you look at 2008, what's your depreciation and amortization and CapEx projection?

The CapEx would be comparable to this year, so a number around the $60 million range and I don't have the depreciation and amortization with me, but it would probably be about 5% to 8% higher than this year approximately.

That's helpful, thank you. You did say during -- you don't break out the system product lines anymore, but you did say that the -- there was growth of 20% in most of the major product lines. Did I catch you correctly on that one?

No, we were specifically talking about ACQUITY, Synapt and TA Instruments being the things that we had focused on in recent communications.

Okay.

And that they in fact continue to, with their momentum in the fourth quarter.

But double digit growth in the other three lines?

Yes.

Okay, thank you.

Quinton Lai, Robert W. Baird.

Thanks for taking the follow-up. I think that one of the general concerns I think that is going to come out of this report is your exposure to cyclical markets. So can you kind of just review for us, in terms of what do you view as some of your products that might be historically exposed to cyclical markets and then as a follow-up to that, talking about TA, which has been putting out some really good numbers, your expectations for the TA business?

Sure, I mean I suppose it's all in how you define a cyclical market. For years and years, the pharmaceutical industry wasn't cyclical and now, depending on how you define it, it's cycling in a different direction. We used to, in those days, think of the industrial chemical market as being the most cyclical, with companies like Dow and Dupont, Shell Chemical as being the ones that would have three years on and two years off. I think you really have to look underneath those broad terms of what these customers are to think about cyclicality. I still think if you look broadly at the pharmaceutical marketplace that we're talking about, including generics and CROs and biopharm, we still look at industries that are investing and are going to continue to try to find new products to improve their bottom-line and improve health.

It may be business that's done more in China or in India one quarter than is done in Europe or the United States, but overall, you're still looking at growth applications and we certainly saw that in 2006 and we saw it in 2007. So, I don't think overall, if you look at that 70% of our business, that it's not growth. It still is but it's moving around. Moving around different accounts, different applications, different customers. But I think overall there's still no reason to believe that the sum total of that, given the developing countries, the developed countries and the regulatory spending, that that doesn't support what I would call a growth industry. I also think, in these applied markets, the food safety, water testing, overall more of that's going to be done tomorrow than is done today.

More of it is going to get done in the U.S., more of it is going to be done in the exporting countries. So in any individual quarter maybe you have a blip. We obviously had one in Japan, but overall, those environmental and regulatory applications are high growth areas. So, I don't think we're in a cyclical business. I think we're -- it's sometimes tough to call from quarter-to-quarter. But overall it's not all that variable. It continues to exhibit a pretty good underlying fundamental increases in demand.

And on the TA front you had asked growth there. We're expecting about 8% organic growth out of TA and another couple of points of growth through the acquisition on the microcalorimetry front. We see some pretty interesting opportunities still on that front of incorporating those products into the TA line. TA has a new Rheometer coming out next year too that looks pretty exciting. So I think their new product pipeline continues to be strong, so it wouldn't surprise me that we saw a continued double digit top-line for TA instruments as we look at 2008.

All right, great, thank you for taking my follow-up. You know, it's tough that right off the bat you're one of the first tools companies to go off, so right now a lot of people are going to be looking at your experience and what's going on in Japan for -- is that something just a blip or is it one quarter or is it something just overall market. But from the sounds of it, it sounds like it is just a lot of that weakness was related to that water reg change and then just going into the visibility for 2008, I guess you feel okay about the Japanese market hitting more solid growth.

Yes, I think we feel okay is probably the best term. We're not expecting it to become double digit, but we're not expecting the steep drop that we saw in the fourth quarter to continue.

All right, thanks.

If you look at the basic comparison there, if we look at last year, you saw mid-teens growth in that market. It was a difficult base of comparison as well.

Tycho Peterson, JPMorgan.

Doug, following up on your comments from a moment ago about just some of these other markets that are more driven by regulation, food testing, environmental testing, things like that, can you give us a sense as to whether there are any kind of regulatory developments that you're looking at or monitoring that could impact the business one way or another over the next six months or so?

Six months may be a little early, Tycho. I think where you're going to see a bigger longer term impact is in the U.S., particularly with food and safety testing. There's definitely a lot of discussions going on in Washington concerning the regulatory environment. There's definitely concern on the part of our Asian customers, concern with how are they going to have to change their procedures to satisfy what they perceive as likely incremental regulations coming out of Washington. So I'm -- I feel pretty confident that that's likely to happen in the long-term and spur investment on both sides of the ocean, but I don't sense that happening in the six month time frame.

Okay. And then from a portfolio standpoint and kind of a sales standpoint, you feel comfortable serving those markets with what you currently have or is there a need for further portfolio evolution to kind of cater to some of these emerging market opportunities?

I think we have got a very strong portfolio to serve them now. There's always some tweaking going on kind of in the ease of use area, because often times you're dealing with technicians who are running the instruments and you need to concern with instruments that are very easy to use. But in terms of the technical capabilities, I think we have all of the capabilities that are needed to serve that marketplace.

Okay and then just finally, can you comment on the neonatal business, how that has been doing and your outlook there?

Yes, neonatal business, part of our clinical operations. We're happy. As most of you know we accessed the neonatal business through a partnership and the neonatal business is still a good business. We tend to get [boluses] of orders. It tends to be lumpy business on the instrument side. But if you look at it in full year terms, we think that application continues to be a growth opportunity for us inside the U.S., as various states get up to speed, as well as major opportunities in places like Asia.

Okay, thank you.

At this time there are no further questions.

All right, operator. Thank you all, we appreciate you taking the time this morning. We plan to talk to you again in another quarter. Thanks again.