Waters Corp (WAT) 2008 Q4 法說會逐字稿

Good morning. Welcome to the Waters Corporation fourth quarter financial results conference call. 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.

Good morning and welcome to the Waters Corporation fourth quarter and full year 2008 financial results conference call. With me on today's call as usual is John Ornell, the Company's Chief Financial Officer, and Gene Cassis, the Vice President of Investor Relations. As our normal practice I will start with an overview of the business highlights and John will with details on our financial results and provide you with an outlook for our first quarter and full year 2009. But before we get going I would like John to cover the cautionary language.

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 profitable future income statement results of the Company at this time for Q1 and full year 2009.

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 10-K annual report for the fiscal year ended December 31, 2007, under the caption business risk factors. We further caution you that the Company does not obligate or permit it to provide updated predictions.

We do not plan to update predictions regarding future income statements except during our regularly scheduled quarterly earnings releases and webcast. The next earnings release is currently planned for April 2009. During this call we will be referring to certain non-GAAP financial measures. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is attached to the Company's earnings release issued this morning.

In our discussion the results of operations we may refer to pro forma results which exclude the impact of items such as those outlined in our schedule entitled Reconciliation of Net Income Per Share included in this morning's press release.

Thank you, John. Well, in the fourth quarter we recorded flat organic sales growth and a 9% increase in adjusted EPS in what was clearly a very difficult economic environment. Despite the lower than originally anticipated sales volume the strength of our business model enabled to us maintain our operating profitability and we finished the year with record annual free cash flow.

Though we believe that sales growth in 2009 remains challenging for our business, we are confident in our ability to adapt to these rather difficult economic conditions while we continue to make the critical technology and product development investment that will help ensure our long-term strength in the marketplace. The topline trends that we saw in the fourth quarter included a softening in demands by industrial chemical customers primarily in the US and western Europe. And the loss of purchasing power experienced by our customers in many developing country's caused by the adverse effects of a rapidly appreciating US dollar. Somewhat offsetting these pressures we saw stable growth in our recurring revenues and continued strong demand in China.

Reviewing our business with industrial chemical customers we estimate that around 15% of our sales come from worldwide chemical and plastic manufacturers. These companies are, in many instances, the suppliers of bulk materials used in many consumer electronic goods, automobiles and in building construction. Within these Companies are products that use primarily for new product development and in some cases for quality assurance. During most of the past couple of years our business with these firms has grown nicely as they invested in new technology instruments. This growth has been most apparent in our TA Instruments division.

In the fourth quarter we saw a downturn in instrument demand from these customers as concerns about weakening economic conditions resulted in budgetary cut back. But we are confident that researchers in these firms appreciate the advantages of our new technology instruments. We also expect that capital will be tight until concerns about a deepening global recession abate and signs of a recovery in consumer demand begin to surface. In the meantime we will focus our efforts on promoting the advantages of our technologies and improving both research and manufacturing efficiencies within these firms.

We will also position the advantage of our new instrument systems and facilitating environmentally friendly processes and in complying with product safety tests. If you look at the effects of currency the strengthening US dollar had a negative effect on our revenues for the fourth quarter. We transact about a third of our business in the European Union and the rapid appreciation of the US dollar against the Euro with the principal factor that drove the 4% reduction in reported sales due to currency translation.

However, the appreciation of the dollar also affected our businesses in parts of the development world where we transact sales in US dollars and where local currencies experienced even more significant evaluations than the Euro. In these markets including India, Korea and some smaller Latin America and Asian countries, budgets that were improved in local currencies became insufficient to purchase capital goods and consequently we saw lower than expected demands for our products. We are hopeful that some of this business will materialize in 2009 as budgets are revised to reflect the new exchange rate.

Looking at some growth drivers in the quarter, our business in China was very strong and broad-based within applications there. The government there continues to funds research initiatives in a wide range of applications. And in addition, concerns about product and foods safety issues such as the recently well published medical Melamine contamination program continued to drive new instrument sales. As our sales base in China continues to expand, sustaining national sales growth rates naturally becomes a challenge.

At this time we are encouraged that we will be able to sustain growth in China overt next few years as we see a long-term commitment to modernization from both governmental and private industry customers. A sales highlight in the fourth quarter was the strength of our recurring revenue line. As you may recall these products and services primarily address the needs of the large global install base of HPLC and UPLC users. Sales growth from these lines in the fourth quarter largely offset the declines that we saw from instrumentation. Within our chromatography chemistry offerings we saw very strong growth for our acuity suggesting total capture of the column business for acuity UPLC instruments. As the base for instrument continues to expands we are certain that acuity columns will positively contribute to the growth and profitability of our Company.

Looking at our business geographically, a strong performance in China allowed for overall double-digit growth in Asia. In Japan, we saw a marginal expansion in sales in the fourth quarter in what has been a tough market environment for us. Our business in the United States suffered from the effects of the economic downturn during the fourth quarter and most customer segments had negative sales results. Weakness in capital markets followed by concerns of a deepening recession contributed to the weaker demand in the US.

Globally pharmaceutical sales were down slightly in the quarter compared to 2007. The weakness already cited in India combined with softer capital spending in the US were key factor inside suppressing revenue growth. In the quarter we did see large multisystem orders for acute from large customers and expect to see more large UPLC orders in 2009. Demands from CRO's, smaller biotech companies and generic houses was not as strong as in earlier quarters and large pharma was about flat in the quarter. Other customer segment dynamics of interest in the quarter include continued strong uptick of instrument systems for food safety testing in Asia and for medical diagnostic applications.

Turning now to our major product lines. Overall our LC and MS instrumentation platforms saw similar demand trends in the quarter. The migration toward UPLC technology continued in the quarter while Company's continued to be longing out replacement of systems running legacy HPLC methods. In the quarter we benefited from initial shipments of our recently introduced XEVO Tandem Quadrupole Mass Spectrometer. Customers have been very receptive to the unique combination of high performance and ease of operation that this new stem offers. Designed to leverage the advanced separations performance of UPLC we feel that XEVO is the ideal platform for emerging applications such as food and environmental testing and for classical ADME/PK testing to support clinical trial study, sales for high resolution mass spec including our Synapt platform were impacted by a tougher spending environment for large ticket instruments.

After growing at a double-digit rate through the first three quarters of 2008 our TA Instruments division saw a modest decline in sales for the quarter due to a tougher spending environment in the chemical industry. As I mentioned earlier today, many chemical firms especially in the US significantly cut capital spending in the fourth quarter. We believe that we maintained or gained market share in the quarter and feel we have the strongest Thermal and [RealiG] product line in the industry. Also, we saw very nice growth in our recently acquired Micro-Keller inventory line and feel that growth in this life science directed business will offset continued weakness in the industrial segments.

Before passing you on to John I'd like to comment on our overall financial and operating performance in 2008. For the full year we achieved 20% adjusted EPS growth, accompanied by free cash generation at record levels. Our ability to post these results in light of an obviously tightening global economy and following a 2007 performance where sales grew by 15% and where EPS also grew by 20% clearly indicates the strength and resiliency of our business strategy. Our new product flow was strong particularly in mass spectrometry technology and our application focus in areas such as food safety testing, clinical diagnostics and life science research allowed to us solidify strong foundations in business segments with high growth potential. Geographically we continue to expand in our developing markets in Asia and Latin America and in these markets we've made investments to provide better service and support in a rapidly growing base of customers.

Operationally we manage to improve our profitability by controlling expenses and reducing manufacturing costs. We finish the year with a strong balance sheet as we used our cash flow to reduce our net debt, execute a share repurchase program and continue M&A effort. Our M&A activity is consistent with our strategy and we added complimentary product lines to our existing operating division.

In closing I'd like to say a few words about 2009. I think it's apparent to all of us that 2009 will be a challenging year as it is not yet clear when we will begin a global economic turnaround. For at least the first half of the year we have and will continue to take steps to manage our expenses to minimize the bottom line effects of anticipated lower sales.

We rest assured though that we will continue to invest in new development programs and maintain our leading customer support structure to ensure we are well-positioned to enjoy the rewards of stronger end markets when they materialize. In the past periods of slower growth were followed by recovery periods that suggested an underlying fairly continuous market demand forked the instrument systems technologies that we offer. Now it is hard to say if there's a comparable precedent for the current weakness that we are seeing. However please understand that we are continuing to invest in new product development and we will maintain our leading customer support structure in order to ensure that we will be well-positioned to enjoy the rewards of stronger end markets when they materialize.

I'd like to thank you and here's John with a more detailed financial update.

Thank you, Doug. Good morning everyone. Our fourth quarter sales declined by 4% and non-GAAP EPS per diluted share were $1.07 this quarter compared to earnings of $0.98 last year. On a GAAP basis our earnings were $1.01 this quarter compared to $0.96 last year. Our reconciliation of our GAAP to non-GAAP earnings included in our press release issued this morning.

One item of note here is a $6.5 million pretax charge for a capital litigation provision based on a recent judgment against us in France. This result has no impact on our future product sales for financial performance. Reviewing Q4 sales results our sales were flat organically and currency reduced reported sales by about four percentage points this quarter.

Looking at corporate sales growth region until without foreign exchange effects sales within US were down 10% this quarter gradually the result of week industrial demands from industrial accounts and a strong prior year period of comparison. Within Europe sales were up 5%. Sales in Japan were up 2%. And sales in Asia, outside of Japan ,remained strong and were up 17%. Turning to the product front within the Waters division instrument sales declined by 5% and recurring revenues grew by 7% this quarter. Within our TA Instruments division sales declined by 2% versus prior year.

Now I would like to comment on our non-GAAP financial performance. Gross margin remained strong this quarter. It came in at 58.9% versus prior year, margin expanded by about 50 basis points. While currency translation reduced volumes this quarter there was a beneficial effect on the gross margin rate as the British pound declined significantly versus the dollar and the Euro this quarter making sales of our mass spec products produced in Manchester more profitable.

Additionally, product cost reductions continue to favorably impact margins this quarter. SG&A expenses declined slightly compared to prior year as a result of favorable foreign translations. R&D expenses declined modestly. Likewise from favorable currency translation effects and also the timing of project expectance. Income taxes came in favorable to plan this quarter as a result of higher legal entity profits in tax favored jurisdictions. Dramatic movements in key currency relationships across the quarter produced foreign exchange gains, lower tax offshore entities and offsetting losses in our US legal entity. While these gains and losses net to do a small balance for the entire Company they did significantly benefit the tax rate for the fourth quarter 2008.

On the balance sheet, cash and short term investments totaled $428 million debt totaled $536 million, bringing to us a net debt position of about $108 million. As I described in last quarters call our early October debt repayment actions reduced our cash and debt balances by about $490 million from ending Q3 balance providing a more conservative capital structure in these more uncertain economic times. On the stock buy back front, we continued to purchase our shares in the open market and during the fourth quarter we purchased 635,000 shares of our common stock for $26 million. For the full year 2008 we purchased 4.1 million shares for $235 million.

We define free cash flow as cash from operations less CapEx plus any non-cash tax benefit from FAS 123R accounting excluding unusual non-recurring item. For full year 2008 free cash flow was up 13% over 2007 and a record high of $369 million after funding $69 million of CapEx and adding back $7 million of FAS 123R benefits and excluding a $12 million payment associated with transition from the pension plan to a 401k plan in the US. Comparable free cash flow in Q4 2008, 2007 was $91 million and $87 million respectively. Accounts receivable days sales outstanding stood at 63 days this quarter, three days better than Q4 last year. And inventories were down $3 million year over year and down more substantially in the quarter.

Now I'd like to turn to our outlook for 2009. We currently expect the difficult economic conditions we experienced in Q4 will continue into 2009. We believe our recurring revenues will continue to provide a level of stability to our business reason likely to continue to grow at rates comparable to what we saw in Q4. On the instrument front we expect to see more resiliency from our larger base of life science customers than from our smaller base of industrial chemical customers where customer spend may continue to deteriorate. Total instrument demand is expected to be down mid to high single digits. Overall we are expecting organic sales to be down, to be between down 4% and up 1%. Foreign exchange translation will reduce 2009 sales by about 4% at current rates. Therefore, on a reported basis, we are expecting sales to decline by 3% to 8% for 2009.

Moving down the P&L we expect gross margins to be down about 150 basis points versus 2008 where favorable effects of higher consumables volumes and favorable currency effects from our UK based production are more than offset by a less favorable manufacturing variances from lower production volumes and a higher proportion of service sales at a 50% margin. Operating expenses are expected to decline at a rate about equal to sales. We expect our operating tax rate to be in the neighborhood of 18%. Net interest expense is expected to be in the neighborhood of $15 million. And our fully diluted average outstanding share count for the full year 2009 is currently estimated to be about 95 million shares.

Rolling all of this together, we currently expect non-GAAP earnings per fully diluted share to be between $2.80 and $3.15 per share where sales declined between 3% and 8%. For Q1, we expect organic sales to decline near the bottom of our 2009 sales range, currency comparisons are most difficult early in the year and the current exchange rates will reduce sales growth by 5% in the first quarter. Expense comparisons are also more difficult early in the year as cost reduction are phased in as we go through the year. Considering all of these factors earnings per fully diluted share for the first quarter are expected to be between $0.56 and $0.62.

Doug?

Thank you, John. Operator, I think we can now open it up for Q&A.

(Operator Instructions). Your first question comes from Ross Muken with Deutsche Bank.

Good morning, gentlemen.

Good morning, Ross.

Can you walk us through on the instrument side sort of the assumptions relative to life science instrumentation versus industrial instrumentation? Now I can understand stand how on a relative basis clearly the demand in the life science ends markets is likely to be somewhat stronger but I'm trying to get a sense for how much, especially given some of the recent announcement, yesterday we obviously had the Wyeth Pfizer news.

You've seen pretty significant CapEx cuts in both biotech and pharma, probably a bit more so than I think some of us had modeled and then obviously the CRO segment specifically, both based on the weakness in the Rupee and just general sort of over capacity in general seems to be kind of a good deal bit weaker than was expected. Just help understand what segments you think specifically are going to kind of buoy that demands and how much better than industrial is it going to be.

Ross, let me lead off and then John can fill in. I think in general what we are seeing for next year is essentially a continuation of the demand pattern we saw in the fourth quarter. We definitely saw in the industrial chemical side of the business, demand rapidly fall off particularly in the TA instruments group that's highly focused on that segment of the market.

The life science piece is a more complicated picture. It's not I'd say clearly quite so homogenous. You have big pharmaceutical companies that have been struggling with a number of their own issues even before the financial crisis. You've got big biotech Company's who aren't suffering nearly as much as average and then you have little biotech Company's who maybe wondering where the next round comes from.

All in, I'd say we think that the fourth quarter dynamics pretty much show what you are going to see next year. Yes, you've got a big merger with Pfizer and Wyeth in all likelihood coming. We could see some effect of that on our business, but we don't think it's huge, both could say have not been robust purchasers in the last couple of years.

Combined, Pfizer and Wyeth represent something around 2% of our worldwide revenues and of that, about 1% or half of it represents recurring revenue and of the remaining probably half goes into regulated applications that are not like to the see major disruption. So the amount of disruption that comes from that large pharma-merger we think is handleable within our overall guidance for 2009. So that I think sets the picture.

We think that the currency effects in places like India, Brazil and Korea will probably have a continuing effect early in the year but we see some optimism that as we, particularly in a place like India get through the first quarter, they finish their fiscal years, there is more optimism that after that they can adjust to the currency picture and pick up demand. We see similar kinds of notion in other weak currency areas. So we think it will continue probably through the first quarter but improving conditions thereafter.

Just on a relative basis to get to that sort of mid to high single-digit, decline in instruments, is that sort of assuming then life science is sort of flat and industrial is going to be down double digits, is that sort of a safe assumption.

I think one thing we can say is that at least the large pharma-piece of our life science business has been in a little of a recession of their own if you will. I think there's probably likely to be a bit more stability and lack of incremental demand loss at least from that subset of the group.

I would say overall as we think about the mid to high single-digit instrument decline you're looking at an expectation of the life sciences piece to be closer to the mid single-digit and possibly looking at the pure chemical industrial customer set to be perhaps in the mid-teens level of decline to put you in that range overall of minus five to minus nine. Some of the governmental business that we do we think will be a more stable. Some of the food safety environmental pieces, what have we typically log into our nonlife science business, we think will be more stable as well. But I'd say the expectation is anywhere from maybe flat to up a little bit for some of those customer sets to as bad as mid-teens or maybe a little worse for some of the chemical industrial customer set.

And, Ross, I mean just to kind of put our flavor on it, neither of us would contend that we are are what we are portraying for next year is the absolute worse in our business yet but we think we are being conservative in the way we are laying out 2009. With any kind of improvement in any segment, and we think there's some basis for believing that it could be better than this. We think that the financial -- we've certainly saw an impact in the fourth quarter resulting from just the financial upset in the financial markets and people wondering whether their credit lines would be honored. We clearly saw at the end of the fourth quarter a little bit of relief on that front.

Exactly. And in the fourth quarter which we would all saw was a pretty bad quarter we saw our instrument declining mid single-digit not anything worse than that. Who knows, these are difficult times to predict.

In terms of the recurring revenue growth, it was pretty good in the fourth quarter. What is the sort of key metrics that you watch in understanding kind of the trajectory of that piece of the business. Is it a mix on the discovery side of sort of labor and you're watching unemployment and seeing whether or not we are seeing either discovery labs closed or people let go from a scientist perspective and then on the regulated side you're looking at script growth and sort of manufacturing capacity and whether or not some of these players are taking down certain facilities? What are the key things you are kind of keyed in on.

Well, Ross.

In determining that trajectory.

In terms of our service business over 60% of that is done under longer term contracts. So you've got -- of our business that we have the most visibility into, I'd say it's service. And then we track activity obviously early on from a week-to-week basis. So I think our service forecasts don't have a lot of variability to them. They could vary a couple of points plus or minus, but not a lot.

On the chemistry side, it has a similar degree I'd say. The other thing that's a little bit of an advantage to us is that in 2008 we had a negative calendar dynamic in the first quarter, simply because of the way the calendar fell. We probably have three days better calendar dynamic in the first quarter this year. But even at that, we track the weekly run rate here and don't see any current indication of major upset to our expectations. So on the consumable and recurring side I think we have pretty good visibility. Thanks a lot,.

Thanks a lot, Doug, I appreciate all the details. Thanks.

Your next question comes from Doug Shingle, Cowen & Company. Your line is open.

Hi, good morning.

Good morning, Doug.

I think there's going to be some concern or consternation about the fact that your full year guidance is a bit back loaded which while I say that I understand it's appropriate given the environment. Just want to see if there are any assumptions incorporated into your guidance for improved conditions in the second half or are you really just reflecting easier comps year over year.

I'd say certainly as you look at the currency side, Doug, the currency starts off in the least favorable condition in the first quarter and first half. I think it guilty more favorable as the year goes on.

Secondarily, some of the actions that we've taken on the cost front, the higher freeze, a wage freeze doesn't have much of an impact early in the year. We typically have our mirror process occurs in the April time frame. Will you see the benefit of the unfortunate freeze situation there on the expense side coming through later in the year. On the sales side we are just saying that the sales are going to start off closer to the bottom of the range not beyond that under full year expectations. I don't think generally we are looking at things to very dramatically improve as the year goes on to hit those full year numbers.

Thank you for that. I would say one encouraging area was the commentary on acuity. I was security as to whether you are making progress in placing acuity for QA/QC uses relative to where you were earlier in 2008.

We think we are making a lot of progress in acuity. It it's masked a little bit of course by the overall slowing economic conditions. I can report that we saw a major pharmaceutical company basically tell thus they are standardizing over the next several years totally on our UPLC platform and won't be buying significantly more amounts of competitive HPLC. As a matter of fact that vendor made a specific point of coming into my executive meeting to point out to me what a significant commitment that they were making, and how much they were relying on us. We see very good underlying evidence of the market swinging to the acuity UPLC story.

Then on receive so, that was another bright spot in your commentary. Could you provide any color on where you are placing those? Is that actually a strong point because it's being targeted less as pharma-and is that where you are seeing placements being made? I guess outs of pharma-is what I mean.

I would say the interest in pharma is interestingly very high. Of course you're aware that there's some upset in the supplier base to that typical PK marketplace with vendors be changing ownership or having concern in that application base. We are seeing a great deal of interest in those accounts in terms of looking at XEVO. It remains to be seen in how much that turns into market share in there. We are seeing great response in the food safety and the other industrial application areas. So, particularly how, with some of those less fist indicated users XEVO's characteristics of use factor are really getting attention.

One last question, during the quarter you talked a little bit about moving some more of your North American production over to Singapore. I'm just curious as to where that stood and if you are moving forward to that. Could just share a little bit more detail on when the timing of the benefits would play out and I guess specifically margin and tax implications?

Sure. We have for the last four, five years now been on a long-term strategic plan of taking advantage of Asia manufacturing. Both from a terms of direct cost reduction as well as the integrating much more of the Asian supply channel to get that incorporated into our product cost and we see advantages for that over the long-term. We are taking advantage of that with many of our HPLC production and our detector production.

Long-term, we want to accelerate that and take greater advantage of it. That gives us product cost advantages and tax advantages. We've been in the process of looking at the long-term relationships with the sovereign part of that as well as the supplier base. We are making progress. You'll see us increase our production in Singapore over this year and we think we have the wherewithal to enhance our long-term tax posture two. I think on both front you'll see announcements as we move through the year to enhance our P&L.

Thank you very much.

(Operator Instructions). Your next question comes from Quintin Lai, Robert W. Baird Your line is open.

Good morning.

Good morning, Quintin.

Looking back at the fourth quarter, when did you begin seeing kind of the rapid slow down? And so given that when you're forecasting 2009 are you forecasting it off of the December -- the kind of the low point of the three months of the quarter or kind of the average for the quarter?

I would say we are looking at conditions that we think exist right now. Which is basically an amalgamation of everything we saw in the quarter. I won't say that we looked at the weak 13 run rate and extrapolated that. But what we looked at is, a compendium what have we think farm marks industrial chemical as well as geography as well as our product mix and we wrapped all of that in and say, this is what we think the current conditions are.

I'd say in general that reflects pretty much what we saw on average through the fourth quarter. I'd say we do think there was some effect of kind of the peak of the financial crisis of people worrying about whether they could get capital and that put a damper on things in the November time frame I'd say when the market crated and people were wondering about whether the banking industry would survive worldwide.

I would say we saw customers get a little bit more optimistic as we went through December but I won't say that reflected too much in their actual buying patterns. So if that's true I would say the first six months could, we could see a somewhat more optimistic turn of events.

Thank you for that, kind of turning to the balance sheet and some of the cash flow expectations for 2009, the inventories I notice were down from Q3 to Q4, is that how you are going to manage the lower demand and I guess then also with respect to cash flow, what are the expectations for share buy-back and CapEx for the quarter, John?

I'd say as we look at next year, we are looking to generate similar cash from operation a little bit but I think we can continues to manufacture the balance to help in the working capital side. We have talked before about the fact that we've got a facility that we are putting in place this year that's going to be about a $35 to $40 million increment on CapEx where it historically has been. CapEx is more likely to be closer to maybe $80 to $90 million for the full year given that one off event and you are likely then to see cash flow be in the neighborhood of maybe $300 or $325 million as a result of that on a relatively slow year.

As it relates to deploying that cash we do look continuously and have an interest to continue on the M&A front consistent with our history of looking at both on types of product line acquisitions. We need to do that so that's likely to the consume some amount of cash in 2009. However, we'll certainly at this stage we believe we'll have plenty of cash to continue on the buy back efforts. Thinking about the buy back being comparable to what you saw this year where we talked about it being between $200, and $250 million. You will likely see us continue on that front.

The present authorization from the program that was put in place a couple of year ago still has $100 million left on it, so you are like to the see something coming from the board later this year to extend or put a new program in place that will allow us to procure $250 million I would guesstimate right now and that's what is assumed in my share count. Given the current price in our access to capital it's likely that we will front end load that program a little bit just given where we are, but I'd say that's kind of what we had assumed in our projections

Thank you very much.

Your next question comes from Tycho Peterson, JP Morgan, your line is open.

Good morning. Hey, Doug, I think in your comments you talked a little bit about the UPLC selling cycle being prolonged a little bit. I'm wondering if you can talk about the instrument selling cycle in general and what you are seeing, are these kind of delays or cancelled orders and then maybe also use that as a segway to talk a little bit about the competitive dynamic in mass spec and pricing as well Juan you are assuming.

Tycho, what I really said is that the HPLC replacement cycle was longed out a little bit. I don't see that on the UPLC side. I think that's -- historically in particularly in the pharma-cycle, if they have a plan to replace instruments on a six or seven-year cycle they can stretch that out a year, a year and a half. We've definitely seen that in, most notably back in the early 90s. But we haven't seen that with UPLC it's really getting into the -- cracking the application. And that we see happening with regularity.

So I don't want you to misunderstand kind of what we said there. We do see a function of people longing out their replacement cycles.

Can you comment a little bit on the mass spec environment these days in terms of the competitive landscape and maybe pricing as well?

Well, as you know it's always been a competitive environment. There are some people who have traditional very well done better in some segments of the industry. I think that's been particularly true in pharmacokinetics and drug metabolism. And in recent years our strength has been both on the high-end with Q-Tof and Synapt as well as applied applications including industrial applications.

I think in general we wrapped up 2008 similarly I think thank you a good reflection on how we ended. There's certainly some question in the industry now about where some people are going with their mass spec lines, how it's going to wind up. There's open speculation in the industry about that but take that for what it's worth. I do sense that customers are right now more willing to consider varied suppliers of some of these quantitative bio analysis areas. We are certainly seeing a great deal of interest in our XEVO there. So I won't tell you that we actually booked a lot of business there in the fourth quarter so if the level of interest is reflective of an early stage then we should see more business.

On the pricing front, we always see some people at end of quarters kind of willing to trade-off price for an order. I'd say we have not -- you can tell from our margins that our pricing has remained very consistent. We haven't seen a deterioration in margin across our instrument platform.

And as I've said time and time again, the bulk of this industry, even in times like this, even in the fourth quarter, we didn't see the rationale for using price to influence those customers and I don't think price would have significantly influenced those customers to change the underlying dynamic.

By the way, you also saw us improve our accounts receivable performance in this, kind of the worse quarters you can imagine. Our cash flow and our receivables performance was the best fourth quarter I think we've ever had. So we are not seeing customers all of a sudden trying to long out their terms. Or if they are they are doing it to somebody else. We continue to remain kind of dedicated to running our business the way we've always run it.

Okay. And then just one last one on the outlook that you gave for TA. Can you give us a sense? It sounds like it's a different dynamic there in terms of the selling cycle for some of the chemical and plastic manufacturers. Do you get the sense this is going to be a prolonged multiyear contraction phase or how do we think about that vis-a-vis some of the other markets you typically serve.

I would say as you look in TA even in the fourth quarter which was a very difficult environment. They were down just 2%. So it wasn't dramatically different from what we saw with the Waters division. They've recently been layering on instrumentation offerings that have more of a life science application focus. In addition to differentiating themselves product wise compared to the competition. Implied in the guidance, they could be down mid sing, high single-digit programs at the low end of the range.

But early indications, at least with the fourth quarter and moving into the first few weeks of this quarter would indicate that, that seems to be at least a solid range that I'm comfortable right now as we speak are unlike to the go below.

Your next question comes from Isaac Ro, Leerink Swann, your line is open.

Hi, guys thanks for taking the questions. First of all, could you maybe gives us the overall rates globally for HDLC versus mass tech, I know that you gave us a lot of details but I'm wondering about the big picture for the quarter.

It's really not dramatically different. The growth rates for the instrument lines were all within a few percent of one another so we really don't have that right in front of us but it wouldn't be dramatically different any way.

Okay. And then just for a little granularity on the drug industry specifically, I think in the past you've said that overall drug industry is probably 60% of Waters sales and I'm wondering could you break that down a little bit maybe between a couple of bigger buckets like big pharma, generics, and maybe unprofitable smaller drug companies, something like that?

Yeah, I think if you look at, if you look at our overall life science business we've always said it's about three quarters what have we do because 15% is government and academic that has a very heavy life science focus, of the remaining 60% that you describe as being commercial life science businesses, about 15% of that is our top 15 pharma accounts.

And we've talked about them being under -- having been under pressure and continuing to be under pressure. About another 20% is kind of the specialty pharma accounts still significantly large accounts that have historically done very well and we think will continued to well. Maybe another 20% between the generics, the CRO's, the generics have continued to do well, the CRO's have been under a bit of pressure and included in that is biotech. The larger biotech. Some of the smaller venture oriented biotech, really less than 5% of the overall pie. So the ones that you worry about the most are ones are 3% to 5% perhaps of our business overall and it tends to be rather varied. You look at who you sold to one particular quarter it's very different the next quarter. It's not a small set of customers that we are relying on repeat business quarter by quarter on.

Great. And then just lastly have you guys had any visibility on repatriation of cash and if so how would you guys seek to do that and use the cash?

With the new administration I guess there's an opportunity for a number of various things to be looked at. I think it's a little early to the comment on that. But I mean certainly some type of AJCA type of program perhaps. We would be looking for to the extent that there was an opportunity to bring cash back at a reasonable toll gate tax rate we will certainly consider that. We did it the last time around in 2004-ish time frame and we were able to bring back $500 million then. If that window opened we would be very interested in walking through it.

Your next question comes from Derik De Bruin, UBS, your line is open.

Good morning.

Good morning, Derik.

I'm just curious, based upon the comments you made on analysis it's down 2% organically in 4Q not down dramatically from other LCS businesses. And it sounds like there wasn't going to be that much difference in 2009. So I'm just curious, with the first quarter guidance of minus 8% organic, minus 5% FX to get the business down 13% in Q1 that has to be down double-digit mid-teens.

Let me correct something. What we said what our organic growth rates for the full year will be anywhere from up 1% to down 4%. And we said for the first quarter that the organic growth rate is more likely to be closer to the minus 4% than the plus 1%. On top of that you're right you have to add five-point of currency so you are going to be down in the mid to high single digits which is consistent with what we said for the full year.

Okay. Okay. That wasn't clear. Okay. That works. I guess the other question is in certainly the back half, I mean obviously your FX impacts come off in the back half of the year. Do you think that minus four to plus one is conservative enough given as you pointed out there might not be historical precedence to this market environment?

Well, it's, the answer is yes because that's what we've portrayed. Certainly you could craft a scenario that says the second half doesn't get any better. I think we still believe that there's real opportunity to do better than we've outlined. Some of it's internal. Some of it is that we've got new products that will contribute as the year goes along. Some of it is market share but we think we are prepared to again improve our market share. So even if the market is consistent we are better positioned than most of the others who we compete with to take market share.

And a third part of that is we think customers in the second half are going to be better positioned to buy. I think the financial world is likely to be better off than it is now. Granted there is some non-zero likelihood that it won't be.

I think in management terms while we feel the need to layout a full year picture, one that is consistent with our overall view, we are really managing month to month and quarter to quarter. And we have taken those steps we think that keep our P&L and our business logically structured in these tough times, but we haven't taken actions that is we think really cut into the meat of the business.

If our view turns out to be too optimistic we will have to look at whether we need to take more restructuring actions. Right now we don't feel that. We think we are logically conservative in our mix. But we've got to stay nimble.

I appreciate that. I'm 'm just looking at a point, that in better markets for the first quarter of 2008 you guys guided to 10% organic revenue growth and you did 6%. For Q4 '08 you guide to do 6% and you did 0%. I'm just wondering if you are in a situation right now where -- is it even possible to grow these businesses in positive organic growth territory given from what every economic indicator we can see that things just seem to be getting progressively worse.

I think it's a fair question. I think the fourth quarter was pretty bad. If 2009 gets substantially worse than the fourth quarter across our customer base then you're right. I think, I think we called our results as soon as we could in the fourth quarter. I'm not aware of anybody else who called any downturn.

So it will be interest to go see how our competition -- whether they do their forecasts or not in the fourth quarter. But, everybody has to call it the way they see them at the time and we think we're approaching 2009 in a logical basis but it obviously remains to be seen.

Derik, we are saying that our range does incorporate worse times than we saw in the fourth quarter. We read the news too and we see that it looks like certain markets have going to be more difficult and we think we have baked that into the minus 4% organic growth scenario. As you know all of the crystal balls right now are a little bit more cloudy than they historically have ever been.

Next question comes from Marsall Urist, Morgan Stanley, your line is open.

Yeah, hey, good morning. So about your assumptions about gross margins for next year, could you talk about what are your expectations for organic gross margin improvements and then offsets of currency and volume declines to get to that 150 bit number?

Yeah, we are looking at a little bit of a mixed dynamic on the service versus instrument, service has margins closer to 50% than closer to 60 on instruments. So it's about 40 or so basis points of service mix as we look at service growing next year and instruments declining. Also the FX pain next year is estimated to be somewhere in the neighborhood of 50-ish basis points.

We also think that there will be a little bit of negative manufacturing leverage next year, 20 or 30 basis points. And then there's a little bit beyond that, there's just a number of different things including some new product launches that typically go out at slightly lower margins that we've baked in as well. I think it's a relatively conservative picture. It incorporates certainly the lower end of the sales range as we think about next year. And it doesn't really incorporate anything significant as it relates to incremental volumes from Singapore later in the year.

Okay. Great. And then on acuity in the quarter, can you just talk about what the actual growth rate was year on year for acuity?

No. We don't separate that out for obvious competitive reasons.

Okay. Great. And then last question just quickly on the expense side, you talked about expenses down in line with sales. How much more flexibility do you have there or are you comfortable in still being able to invest in the business if as everyone is talking about the lower end of the range turns out to be the case or worse than that?

I think what you can assume is that we are taking all the actions short of major people action. We are limiting discretionary spending. Limiting discretionary travel and meetings. We've got salary freezes on. We've got headcount replacement freezes on. All of those actions that you take to keep your house heated in the wintertime when times are tough.

We haven't taken any significant restructuring action. We don't think that they are appropriate in this climate. We think, this is not a forever problem that we are facing and we want to keep structure to keep our sales and service and support group intact. So we are not without other things that could happen if the world deteriorate further. But we think right now we are on the prudent side of the spending equation.

Okay. Great. Thanks.

You're welcome.

Your last question comes from Chris Arndt, Select Equity Group. Your line is open.

Hi, Doug. I was wondering if you could comment on the mix of HPLC's that you sell in units between your traditional HPLC and your acuity product?

Well, Chris, what I'm willing to describe is that the mix is changing towards UPLC of course. Where we continued to have nice growth in 2008 of UPLC and HPLC is beginning to shown declines. And that's what we'd expect. We are putting -- in some people's view HPLC is becoming an obsolete technology and we are going to move extensively into UPLC in the years ahead.

I mean just ballpark is this the fourth inning of the shift to acuity or is it the sixth or seventh inning?

I think the reality is that we are still dealing with a lot of regulated applications. So what you are seeing is a lot of residual impact from that dynamic of replacing -- it's easy to replace one or two HPLCs than it is to convert all over to UPLC. What we are seeing however, is like one anecdotal that I described, is that some major pharmaceutical companies are now willing to set up so that they are making that total commitment to UPLC. And I think more and more of that is going to happen. So I'd still say we are probably in the early innings, second or third innings, but I think the slope is getting better for UPLC.

I think the other thing, just to toot our own horn, is we are hearing our customers say in this one particular case, the only thing they consider that's truly UPLC out there is acuity. That it's, that the competition still significantly lags behind the quality of our technology.

Let me just add one thing. On the acuity front as most of you may have heard, I don't know, there's a worldwide shortage of Acetonitrile currently and Acetonitrile is the most popular solvent for use in liquid chromatography. The shortage of Acetonitrile is basically due to the fact that it's a by product of Acrylonitrile production and Acrylonitrile is substantially aimed at industrial application that is are dwindling. So you can't increase your supply of as Acetonitrile.

A lot of customers are on forced reduced usage of Acetonitrile and they are showing a great deal of interest in how much acuity can save them on the Acetonitrile usage front even in regulated applications where they would have to revalidate their applications. So I think that's kind of an unplanned for dynamic that we are seeing, every day we are seeing customers increase their level of interest in acuity because of that also has natural green implications. We are seeing that very high interest in Europe because of reduced solvent usage and inherently a green benefit. So a lot of reasons why we are very optimistic about acuity.

Thank a lot.

You're welcome. Thanks very much for taking the time. I know that you have a lot of demands on your time these days and we appreciate your sticking with us through the call. We'll talk to you next time at the end of the first quarter. Thanks again.

This does conclude today's conference.