Waters Corp (WAT) 2009 Q3 法說會逐字稿

Welcome to the Waters Corporation third quarter financial results conference call. All participants will be able to listen only until the question and answer session of the conference. This conference is being recorded, if anyone has any objections please disconnect at this time.

I would like to introduce your host for this 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 third quarter financial results conference call. With me on today's call is John Ornell, the Waters Chief Financial Officer, Art Caputo, the President of the Waters Division, and Gene Cassis, Waters Vice President of Investor Relations.

As is our normal practice, I will start with an overview of the quarter's highlights then John will follow with details of our financial results and provide you with our outlook for the remainder of the year. 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 possible future income statements of the Company at this time for Q4 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 important for the fiscal year ended December 31, 2008, part one under the caption business risk factors. We further caution you 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 earnings release conference call and webcasts. The next earnings release call and webcast is currently planned for January 2010. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measure, is the most directly comparable GAAP measure is attached to the companies earnings release issued this morning. In our discussions of the results of operations we may refer to pro forma results that excludes impact of items such as those outlined in our schedule entitled reconciliation of net income per diluted share included in this morning's press release.

Thank you, John. Well, we're encouraged by the moderately improving demand patterns we saw in the third quarter. And by -- I think by the enthusiastic reception to our new product introductions. The sense of optimism is somewhat tempered in the recognition that our customers overall spending levels have not yet enabled us to grow our top line, as these customers continue to deal with the effects of the global recession. However, it is our view that the weakest demand for advanced scientific instruments is most likely behind us and we believe we're poised to begin to see organic growth as we move into 2010. The Waters Division, to remind you our business accounts for approximately 90% of our sales, shipment volume in the quarter was about flat with last year's result. This is an improvement with comparison to the mid-single digit decline we saw in the first half of this year.

From a market segment viewpoint the declines we saw in the quarter for our economically sensitive industrial chemical segment, were more moderate and declined at a mid single digit rate in comparison to the double digit decline in the first half of 2009. Our third quarter sales to the biopharmaceutical customer base were consistent with the moderate declines we saw earlier in the year. However, this result is encouraging in light of our significant backlog build for new mass spectrometry instruments. Shipments to government and academic accounts were up in the quarter despite a similarly backlog build for high end mass spectrometry systems.

Geographically, sales growth in China remains strong and declines in India were less severe than we saw in the first in the first half of the year. In America, Europe and Japan revenues were generally balanced and stable in light of base border comparison dynamics. Government stimulus spending in the US did not significantly contribute to sales volume in the third quarter. But we think we will begin to see this governmental spending impact our fourth quarter results.

Looking at product lines for the Waters Division, our recurring revenue product lines, that is the combination of our chemistry consumables and services businesses, improved in the third quarter in comparison to the second quarter result, and grew in constant currency at a mid single digit rate. Instrument system sales for the Waters Division declined modestly in the quarter as customers continue to delay instrument replacements, and to focus their capital spending on research purchases. Sales of our [zevo] mass spectrometers and acuity chromatography platforms grew in the quarter and we continue to build a healthy order back log for our technogically leading SYNAPT G2, a high resolution MS platform that we showcased at this year's ASMS conference. Researchers around the world are looking at our G2 HDMS system as much more than an incremental improvement to other technology platforms that have been introduced over the past few years. Customer feedback from scores of demonstrations of the G2, positively confirms that new levels of sample information are enabled by this new platform. They complement and expand the technological capabilities of their labs.

The continued sales growth for acuity UPLC systems, even through these tough market conditions, indicates both its compelling performance advantage and an increased adoption level of UPLC technology for regulated methods. We're confident that our successful implementation of UPLC technology, our large and satisfied user base and our exciting future development plans, will allow us to maintain and grow our leadership position in this expanding segment of the chromatography market.

For our TA Instruments Division, a combination of strong growth in the prior years base and continued weakness in industrial chemical account spending resulted in the double digit decline in this business. However, within the TA Instrument product line, demand for advance systems used to monitor biological processes is ramping up nicely. As we anniversary the onset of the recession and continue to benefit from innovation new launches from TA's research and development team we feel we have a possibility to see better business results as we exit 2009 and move into 2010.

Earlier this year, we announced the acquisition of Barr Instruments, the world leader in supercritical fluid chromatography, a separation technology closely related to HPLC, that primarily uses more environmentally friendly carbon dioxide as the mobile phase. As I noted in July, customers are increasingly interested in reducing chemical waste, and running their labs in a more green manner. As far as SOC technology in combination with the dramatic solvent savings enabled by acuity UPLC, have allowed Waters to assume a leadership position in cost effective and environmentally friendly laboratory technologies. We continue to look for acquisitions like SAR and will stay consistent with our strategy of targeting companies that are close to us technologically, profitable and with topline potentials to be accretive for our overall growth rate. In the third quarter, acquired business added about 2 points of growth to our top line performance.

Looking more broadly at our financial results for the first nine months of 2009, I am pleased by how well we have adapted to these most difficult end market conditions that we have ever experienced. Our global presence on the sales, product development, and product manufacturing fronts has allowed us to access funded laboratories, accelerate new product launches and optimize our production costs. At the same time we have effectively contained our expenses without compromising our level of customer support and leading company image, factors that have contributed to our strong market position. For these results I must thank the employees of Waters for their hard work and dedication during these very trying times. In the long run, we're confident that our end markets will rebound and I feel that our efforts to streamline our internal processes, and leverage our global structure, during this recent down cycle, has strengthened Waters and will allow us to deliver superior financial results with improvements in global demands. Before I turn you over to John for a look at our financials, I would like to say a few words about our outlook.

Historically, we have typically waited until our January call to discuss our next year thoughts. In general, I plan to follow that tradition today. However, as we are going through an unprecedented time of market turbulence, I feel strongly that the worst is behind us. And that 2010 is more likely to represent a transitional year in which we experience a period of improving demand for Waters products. As we have been formulating our budget for 2010, we are planning our top line will begin to grow again. Not at our historical rates, but grow nonetheless. We're also prepared for some stops and starts as the recovery takes shape. To that end, we will start the year continuing our current pattern of conservative expense control until we're certain that a somewhat smooth and sustainable business recovery is materialized. Philosophically we will strive to grow our operating income at a faster rate and our sales growth while we continue to drive faster earnings per share growth by deploying our strong cash flow for the continued repurchase share program. With that I thank you for your attention and here is John with a more detailed review of our financials and guidance for 2009.

Okay. Thank you, Doug. And Good morning. Third quarter sales declined by 3%. Non-GAAP earnings per diluted share for $0.81 this quarter compared to earnings of $0.79 last year. On a GAAP basis, our earnings were $0.79 this quarter compared to $0.71 last year. Our reconciliation of our GAAP to non-GAAP earnings is included in our press release issued this morning.

Looking at our Q3 sales results, sales were down 3% this quarter, with currency translation representing 1% of this decline. Looking at our sales growth geographically, and before foreign exchange effects, sales continued to be soft in the US and Europe where sales declined by 3% and 2% respectively. In Japan, sales were down 8% versus a strong base of comparison, and sales in Asia outside of Japan grew by 4% against a strong base of comparison. Turning to the product front, within the Waters Division, instrument systems sales declined by 6%. And recurring revenues grew by 6% within the quarter. Within our TA Instruments division sales declined by 17% versus prior year. Acquired businesses gathered about two points to sales growth overall.

Now I would like to comment on our non-GAAP financial performance. Gross margin came in at 59% this quarter. Which is down 30 basis points from Q3 last year. Gross margins came in stronger earlier in the year, and this quarter's slight decline is largely a foreign exchange dynamic associated with product mix. This quarter we got fewer high end mass spec shipments as we built a backlog of orders for our SYNAPT G2 system, which we expect to ship in the fourth quarter. SG&A expenses declined 5% this quarter compared to prior year, as a result of our actions to control expenses and currency translation expense. In R&D, expenses declined by 3% this quarter as a result of currency translation effects on our expenses in our UK R&D program. We currently expect our full year operating effective tax rate to be approximately 18.9%. This modest increase in our projected full-year rate is the result of anticipated shifts of income into our higher tax rate jurisdictions. The impact of this change resulted in the operating effective tax rate of 19.7 in the quarter, or a $0.01 reduction in earnings per share.

On the balance sheet, cash in short term investments total $578 million, and debt totaled $645 million, bringing us to a net debt position of about $67 million. On the stock buy back front, we continue to purchase our shares in the open market. And during the second quarter, we purchased 930,000 shares of our stock for about $48 million. We define free cash flow as cash from operations, less capital expenditures plus any non-cash tax benefit from FAS 123R accounting and excluding unusual items. For Q3 cash flow was $102 million after funding $23 million in CapEx. CapEx expenditures this quarter included $4 million facility costs, related to our TA Instruments site. Accounts receivable days sales outstanding at 71 days this quarter up three days from Q3 last year. Primarily the result of foreign currency translation. And inventories were down modestly from Q3 last year, as we continue to adjust our manufacturing plants (inaudible).

As we look to the fourth quarter, we currently expect economic conditions to marginally improve as we move through the end of the year and into 2010. Four fewer selling days in Q4 will likely flatten out growth of our recurring revenue businesses in the quarter but an easier base of comparison and marginally improving economic conditions should provide for better instrument sales performance. At this time, we expect overall sales before currency effects to be about flat in the quarter with currency at today's rate adding about 4% to sales growth in the quarter. We expect gross margins to remain strong and tight expense control will continue to contain SG&A growth in Q4. On the tax front, we currently expect a Q4 non-GAAP effective tax rate of 18.9%. In Q4 last year, we had a non-GAAP effective rate of 13.5%, which provides a difficult base of comparison this year. Free cash flow continues to be strong and will allow us to continue our share repurchases into the fourth quarter. We expect to exceed our original free cash flow budget of $300 million by $10 million to $15 million for 2009. For Q4 then, we currently expect non-GAAP earnings for fully diluted share to be in the range of $1.07 to $1.11 per share. For the full year, earnings per fully diluted share are expected to be between $3.40 and $3.44. Doug?

Thank you, John. I think at this point we can open it up for question and answer.

Thank you. We will now begin the question and answer session. (Operator Instructions) One moment please for the first question. (Inaudible) first in line with Robert W. Baird. You may ask your question.

Hi, Good morning. And congratulations on a nice quarter.

Thank you.

You kind of mentioned during the call -- a backlog of the high of end mass spec. Has the G2 begun to ship now? And could you tell -- talk a little bit about that backlog and your capacity to meet that backlog?

Yes, sure. The direct answer is the G2 has not begun to ship as of yet. We've fully anticipated it will start to ship in the next few weeks. The interesting thing, is that even though we don't have any G2s out in actual customer hands right now, the initial response has been as strong for a new introduction as we have ever seen. So the backlog build is something we totally expected because we knew we weren't going to be able to ship this until the fourth quarter. And the third quarter build and this order rate is very encouraging. So, watch this base for further notice but, we're very high on the initial reaction to the G2.

So then the guidance that you gave for the fourth quarter really only assumes just about a month and a portion of a month of shipment for G2 then?

That's right. Although, you -- we anticipate shipping a fair amount of G2, we have -- as you appreciate the manufacturing process fees, a bolus goes into production and then they all go on test kind of at the same time, being brought up to shipment status. So while it is true we will only get the equivalent of a month or month-and-a-half, that truly reflects a lot of instruments that were kind of in process for most of the quarter. So I wouldn't have you believe that what we wind up shipping in the fourth quarter is going to be a small amount. It is not going to reflect total full quarter output but it will reflect a pretty representative sample.

And then, with respect -- you put out a press release a couple weeks ago about the FDA adopting AQUITY for food testing. Is this similar to what you saw in maybe emerging markets where governments may be standardized and then with those regulations, maybe the suppliers then have to then start to think about conforming to what the regulatory officials are using?

Well, I think it is an excellent question. Because, as you probably know, the whole area of food safety regulations, is in a nascent stage. And the -- it would be wrong to think it is anywhere near like where the FDA is for testing drugs. And there is a lot of things on the table now about how those regulatory agencies will evolve in the short term and who will be responsible for all these regulations. But certainly it is a very encouraging first step that the regulatory authorities are looking at our state of the art technologies and kind of looking at that as a basis for what they can embody in the regulations. And I would say we're at the early phases of that regulatory process, but we're encouraged by it.

Thanks again. I will jump back into the queue.

Pete Lawson with Thomas Weisel Partners. You may ask your question.

Doug I wonder if you could talk through your ability to maintain operating costs into 4Q and into 2010 and drive the operating margin line.

Certainly, Peter. I think it is a fair question. Because, a lot of companies, us included, kind of responded to the initial signs of the downturn last year, with significant constraints on spending. And it is a fair question to say how long can you restrain spending and expect to service your customers. I think the operating answer, is you should expect us to see constrained spending through the fourth quarter. And through the first quarter. I think as we move into the second, third, and fourth quarter of next year, again, somewhat dependent on the response to our new products. If we're right about the response, if we're right about the amount of capital that our customers will have available, you will begin to see that spending take on more normal characteristics. But, I assure you that early on, we're going to keep a pretty strong governor on that until we're more convinced about the outlook for 2010. As I said preliminary planning we're expecting an improvement next year. We're not expecting a v-shaped recovery. So, we're going to continue to be cautious until we get a little further into the year.

John, I wonder if you could give us some kind of breakdown on the effects on gross margins this quarter, the moving parts and expectations for 4Q.

Yes, the biggest issue with margins this quarter was really the fact that our high-end mass spec business as we said really built backlog versus shipments this quarter. So from that perspective, we ended up capitalizing some of the variances -- favorable FX variances associated with production in pounds. And you will see that turn around and come back to the P&L in the fourth quarter as we ship those units. We had a little bit of a difficult base of comparison in the quarter as well. Q3 last year was actually our highest quarter for gross margins. It was a very good high-end mass spec shipment quarter. So the basic comparison was a little more difficult as you look at it from a year-over-year perspective. And I would say that for the fourth quarter you would -- we expect to see an improvement on a year-over-year basis. As the G2 begins to ship in some volume towards the end of the quarter.

Thank you. And then just on the backlog you have talked about. Can you give us some reference how large that backlog is versus historicals?

Yes, it represents a couple to a few points of growth, that have built into the backlog that is different than what we have seen historically.

Okay, thanks so much.

Ross Muken with Deutsche Bank. You may ask your question.

It is actually Mike in for Ross here. There has been a lot of noise made about one of your competitors on a new UPLC launch. Have you seen any change on the competitive landscape since that product has gone to market?

Hi, Mike. There have been a number before competitors who have been who have been contending for some period about their competing ultra performance chromatography instruments. I would say for the most part, we have seen very, very few if any of those actually show up in the market place. You know people have talked about launching it. As far as I know no major chromatography competitor is actually officially shipping product yet so it is hard to see in real terms, what the competitive dynamics are. We have always contended that sooner or later some instruments would actually begin to show up. It has certainly been more of a case of later rather than sooner.

And I think it -- interestingly, with -- as you know, we spent a lot of time with customers in our building here. Going through technology seminars. Going through evaluations of what is going on in the market place. In just in the last two weeks we have had major pharmaceutical customers in our building here. And, have been hearing universally about how much -- how strongly they feel about our AQUITY technology, and the fact that any competitive instruments are likely to take a long time getting through evaluations and getting through approval processes. Whereas AQUITY has all gone through that process over the last -- well, since its introduction now five years ago. So, we are still feeling very good about it. We -- in current conditions, we're not seeing any competitive instruments actually be sold. That could change but I think it is a future event not a current event.

And again on the AQUITY front, though, you did mention that you're seeing increased UPLC adoption. Could you give more color in terms of where the increased adoption is coming from and whether there is actually trends showing broader use of the total platform.

I'm sorry, Mike you got clipped a little bit. Could repeat that question.

I am just curious about whether you're seeing improved broader trends of the AQUITY platform into different market areas.

Well, you know, it is interesting with AQUITY. It -- to refresh you, traditionally AQUITY has been most successful in the research and into the early development stages of company processes. It has been very successful as a front end for mass spectrometers given the physics involved here. What we are seeing - and a number of placements were made into methods development labs, kind of the people who set the standards for downstream instruments in things like biopharmaceutical labs. We're now seeing a clear uptick in interest in the regulated applications leading into QA, QC laboratories that have a very high volume of usage of instrumentation. We have always kind of known that this is going to be a -- the secondary applications, because these labs are slower to convert. But, what we're seeing is, the productivity that is now proven with AQUITY, the environmental friendliness, the savings in solvent consumption, all are adding and we're now seeing the very clear beginning of that adoption curve in the regulated applications.

Great. Thanks.

Tycho Peterson from JPMorgan.

This is Sung Ji Nam in for Tycho Peterson. Thanks for taking the questions. As we look toward 2010, could you comment on kind of what the key drivers are for the recurring revenue portion of your business. You kind of commented on the instruments given the new product cycle. But could you comment on kind of how we should think about what the key drivers are for recurring revenue as we look ahead. Thanks.

Yes, I think clearly we saw this year some inventory reductions, across the world in our customers who used -- who are major users of our chemistry. We also saw frankly, some customers move off longer term service contracts, trying their best to save money, wherever they could. Both of those dynamics we see clear evidence of them letting up and in fact reversing as we go into the last part of this year and into next year. We're seeing customers come back on service contracts. As they realize that they are better off getting regular service out of their installed base, rather than pay higher time and materials charges, it is kind of penny-wise and pound foolish there.

In the chemistry side, we believe that we're even currently seeing, a modulation of that inventory effect. I don't think we're seeing people rebuild inventories but we're seeing probably the end of the inventory reduction phase. Particularly in some of our areas that have traditionally held higher inventories like India, we saw some pretty significant inventory reductions early in the year. And we have seen that modulate as we move through the year. I think those two dynamics are likely to lead to better comparables in 2010. I think with economic activity, we will see some baseline improvement, and usage of chemistry. But at this point, we're not going to bank too much of that early on in 2010. That's an area as I talked about where we will probably have to prove to ourselves that is underway before we build that into our budgets.

Great. Thank you. Also just a quick question with regard to your combination LCGCMS. Is that an interesting opportunity for you guys kind of in items of where you might put additional investment or -- could you kind of comment on that, talk about that business?

Well, we are the -- GCMS piece of our business, has always been a relatively small and focused piece, with our very high-end -- inorganic mass analyzers. So it is a meaningful but not terribly significant part of our business. And overall, you should expect us to be principally focused on LCMS applications.

Great. Thank you very much.

Marshall Urist with Morgan Stanley. You may ask your questions.

Hello?

Hello.

Hey, guys. So, question on -- I apologize if this has been asked before, but I was wondering if you could give us a little more granularity around exactly what the FX sort of head wind was in GM for the quarter. And how we can think about that developing. I know you talked about qualitatively. But any numbers would be helpful.

If you look at the gross margin pieces, the significant pickup we had seen earlier in the year in the first half was largely currency. We talked about it being two-thirds to three-quarters depending on the quarter. And principally all of that favorability turned around this quarter as the mix of business moved away significantly from the high-end mass spectrometry shipments. We also had a higher proportion of our European sales that were UK based. Our UK business actually did very well in the quarter at the expense of some other geographies, so the margin mix unfortunately with that was negative. So all of the favorability that we had with foreign exchange really turned around in the quarter. A lot of that like I said was inventory and its going to come back around and provide maybe about a 50 basis point type of a benefit by the time we get to the fourth quarter. On a full-year basis we're still pretty much on plan as it relates to where we thought we would be from a gross margin perspective. It is the build of the G2 and the slight mix change, where we had more UK business in the mix in the third quarter this year that turned the FX dynamic around for the quarter.

Okay, great, thanks guys.

Rob Hawkins with Stifel Nicolaus . You may ask

Could you maybe go a little downstream for us and talk about what the strategy is for the food testing QA, QC, approach to your Asian markets. How has this lower end strategy -- what changes do you expect in the landscape there.

I'm sorry when you talk about the lower end strategy --

What I am talking -- I guess not Proteomics as more the line QA, QC testing for the food service business.

Okay. The food testing/food safety business has been a pretty robust area for us for awhile now. As you remember, the Asian and European segments of that probably have led the way with stronger regulations for imported foods as well as things focused on genetically modified organisms. So we have been at the forefront of the food testing area in those geographies for awhile now. You will recall that last year, the melamine issue in China was very hot right now, and right through the end of the year. And we did a substantial amount of business because we're able to quickly get to market with a test for melamine. So, it is a robust area. It is nowhere near as big world wide today as the biopharmaceutical applications. But, it is growing. It is growing in those areas of the world. And, it shows great promise to be a faster growing application in the United States.

The United States is struggling with how to regulate this area. Who is going to be responsible for regulating it. But clearly, there are regulations that are going to be here. We are very active in the whole area in trying to make sure that our views are considered in this. And I happen to feel like we're in an excellent position to take advantage of this evolving market place. But I think that's going to be an area that is going to be the next two or three years as you will see that expand. The serve market will still be larger outside the United States.

I'm sorry, I guess I'm having trouble connecting the dots between what the FDA announcement is and then maybe how you connect from some of the higher end things you have been doing and then, downstreaming the technology or taking that and, dumbing it down into what you have already kind of built out in Asia from a food strategy standpoint. I mean that is part of the strategy or is it more bringing Asia up to the -- up to a higher level.

Rob, the FDA has acquired a great number of the acuities principally for drug testing.

I'm sorry. Okay. I misunderstood.

And, you know, obviously our commercial accounts view that and say, boy, if the regulators are beginning to see what can be evaluated using UPLC technology, it has a follow-on effect down the road for those industrial accounts having to adopt faster that technology. And I think that's something that we anticipate will lead in the QA-QC market to a faster adoption rate because the regulators are looking hard there.

My apologies. I misread what the comments were. Then, just real quickly, I may have missed these comments, what is your take on the NIH awards and what this -- and a lot of these Proteomics awards and what this may mean relative to new products.

Are you referring to stimulus spending, Rob?

Yes, I am.

I think a number of us in the industry are kind of looking at extraordinary quote rates for stimulus possibilities. And, if you ever thought those quotes were all going to come to fruition, we would all be probably celebrating with alcoholic beverages right now. I think it remains to be seen. We think that there will be some significant orders placed on stimulus spending. But it's still largely a fourth quarter, first quarter, second quarter event. There is no question that the quote activity has been extraordinary. It measured in the tens and hundreds of millions of dollars. I personally don't think all of that will come to fruition. So you have to look at people who are trying everything but the kitchen sink in those submissions. But, there is enough quality in there that it would be wrong to think that some significant business isn't going to come out of it. But we're not -- we prefer to think about it in terms of the low single digit effect on our growth rate probably in the fourth and first quarter.

Thank you I will jump back in the queue.

Don Groberg with Macquarie. You may ask your question.

Thanks for taking the call. Just a quick question, can you maybe comment, Doug, on replacement sales. I know that has been a business that has been down. Doesn't sound like it has gotten much better in this quarter. Is there any reason to believe in terms of what you're hearing from customers or anyone else that some of this could come back in 2010?

I think it is an excellent question. And there is no questions that -- it is what we consider replacement business, that has been the most under pressure during this timeframe. Companies that just sit at their normal cycle was replacing on six or seven or eight years, it would stretch that out a year in many, many cases. Now that cost them in through put. Cost them in higher repairs and maintenance, but there is no question that they can do that for a short period of time. I think the best way to characterize it is if you go back to the early 90s, particularly in the last healthcare governmental scare, we saw particularly our pharma customers go through a very similar dynamic, long out their replacement cycles and look at really putting off making capital improvements. Then once that got behind them, we clearly saw pent-up replacement demands begin to shake itself through. And we saw a period of three or four years of catch-up replacements in those applications.

I see no reason to believe that we won't see some similar kinds of dynamics. Whether it happens early in 2010, or it has to wait a little bit longer, I don't think that the physics has changed. These instruments are going to wear out. They need to be replaced. We will see the down time begin to tick up on them. And the demand for new technologies begin to click in. So, I think we well could see some of that next year, and as we go into 2011.

Okay. Great. Last question, if you think about the portfolio of technologies that you have and the cash that you're generating. I know a lot of that is going to buy back shares. Is there any reason to think -- are there any technologies or adjacencies or things that you might be looking at to also put that cash to work in?

Well, we're always looking. I think the compelling kinds of things that we look at tends to be smaller, rather than larger. And so while it is never impossible, that we wouldn't deploy our capital in a larger framework, in general, that hasn't been the case and there is nothing we look at today that says, wow, if we deployed a major sum of capital in a particular area, that in a reasonable timeframe, it would accelerate our growth rate or accelerate our returns. We continue to look at some of these smaller niche oriented that do exactly that. They have the potential to accelerate our growth rate, be accretive to our earnings. Improve our return on capital. And do that. And what is leftover with our stock where it is today, there is no question that our stock is a very good investment. Continues to be immediately accretive, and is some place that is a good place to spend your money, I think it continues to be a very good investment for us.

Perfect. Thanks.

Quintin Lai with Robert W Baird. You may ask your questions.

Thanks for the follow-up. Just some clarification. So on the fourth quarter guidance when you talked about -- is that zero percent organic off of Q4 and 4% FX, is that right, John.

That is correct.

And then acquisitions, what should we be expecting?

Well, acquisitions will be a couple of points. But, days in the quarter will take away a couple of points. So you're still back to kind of the zero, if you will, including all of that.

Okay. Okay. So that -- so constant currency zero.

Correct.

Okay. And then FX add 4. So net 4.

Correct.

Got it. Got it, great. And then, with respect to your comments on 2010. Historically Waters has been in that kind of high single digit, low double digit organic. So I know this is maybe a little early to talk about 2010 guidance but is that kind of implying that you're budgeting now to assume low single digit, mid single digit type of organic revenue growth in 2010?

Yes, I think it would be fair to say that is the neighborhood we're looking at starting out the year Quintin. Excuse me.

I'm sorry to interrupt you.

Now I say that -- and there is a reason why we normally don't want to do this until we finish the fourth quarter and we're a little bit further ahead. And that's because there are a number of factors that could make that look conservative. We have got a very conservative base this year. That we have come off. We have a very strong new product year in front of us. We have got low interest rates. We have got a very much improving FX scenario. But we still have some companies that are in tough shape. How much capital will they have? That's a long winded mealy-mouthed way of saying there are upsides and there are downsides but having said all of that I think that mid single digit area, doesn't feel bad to us at this point, as we look forward.

Thank you so much, guys.

Doug Schenkel with Cowen and Company, your line is open.

Hey, guys this is [Briggeman] for Doug. Thank you for taking the questions. Most of them have been answered but quickly on geographies. First in the US to follow-on Rob's stimulus question. You mentioned some backlog with the SYNAPT and you expect stimulus beginning in Q4. Is there a similar backlog dynamic there? Are you getting ready to ship maybe multiple products heading into the fourth quarter?

The only real backlog dynamic we have, Doug is the G2. That we clearly knew we were launching to the market, taking orders, and would not be shipping until the fourth quarter. So that's the only product that creates a significant backlog dynamic for us moving from the third to the fourth. As it relates to stimulus spending, I'm not quite sure what your question was. What was that.

I guess based on the orders you said -- there are some big numbers out there for orders. Are those kind of beginning to come through and I guess begin to start in the fourth quarter?

Well, what I said was we're seeing quotes. So these customers who are putting in for grant money request a quote for you and they will say what will it cost me for a G2 configured in a certain way, and we monitor those quotes. And so they go principally to NIH labs and to university and academic areas. And those numbers frankly are huge. We're quoted millions and millions of dollars of quotes on those. And many of those are likely to come through, we know that not all of them will come through. So they are not in backlog as such. They haven't actually been reduced to an order or commitment to buy. But they are one step previous to that. We always monitor our quote rates, and typically they run in a consistent manner. The stimulus spending has resulted in this huge bolus of quotes and it remains to be seen how many of those quotes actually get reduced to order and to shipments. But --

Okay great. Thanks for the detail on that. I just wanted to push a little bit. Appreciate it. And [OUS], you talked about a good quarter for the UK and, potentially restocking in India. And looked like Japan might have been down. Can you maybe just a one-liner on a couple of those different end markets and maybe if things are turning in different regions or continuing in certain directions?

I think the UK is the significance of our mass spec portfolio. Our mass spec business has been headquartered in Manchester in the UK. So the customers in the UK tend to get early looks and then at they are very responsive to our new product. Not only the G2 but the full DIVO product line. That has been encouraging because as you know the UK isn't generally in very strong economic conditions right now.

Right.

So that has been strong. I think some of the other areas have been strong. But the large other countries in Europe haven't been particularly strong underlying dynamic. That being France, Germany, there have been actually negative growth. So all in, Europe has been okay but it has been a little bit skewed towards the UK.

Outside, -- in India we clearly saw slow conditions start around this time last year. The strength of the Indian currency or I should say the weakness of the Indian currency plus the economic turmoil, resulted in a lot of insecurity in India. We're beginning to see that turn, I think, in the third quarter. We think that that gets better quarter by quarter. Because certainly the generic shipments coming out of India plus the potential for other drugs going off patent means the underlying dynamics in India are still pretty secure and will return to a pretty strong growth environment.

China continues to be very strong. One of our strongest areas in the world. And that's -- even considering that we saw some melamine business begin to really ramp up at this time last year. Melamine really hit in the fourth quarter, so we're going to have some very tough comparisons in the fourth quarter, with China. But I think absent that kind of one-time blip, China continues to be diverse, remarkably strong. We're in excellent competitive shape across our product lines in China.

Even in Japan. Japan was a flattish kind of quarter but we may be seeing initial signs that Japan has some opportunity for growth. Not taking it to the bank. But, there is some encouraging early signs in Japan.

That's great. Thanks a lot. One quick question then I will get off. With regard to the AV [PhsyX] divestiture, are you seeing maybe a potential opportunity there for some market share pick up in the mass spec business and just maybe a comment on that move.

Well, frankly we're always trying to gain market share. That goes without saying. The -- any time a business like that, changes hands, of course customers may be disrupted. You never know. I am sure that they are trying their hardest to keep everything smooth for their customer base. But facts are, you often times face a little disruption when you change owners. We think much more important, is the fact that our technology is as strong as it has ever been, we are always planning to make this year a very strong introduction for us across many of the applications. The competitors have been stronger in traditionally and I think we're in the best position we have been in in a long time to make significant inroads in that. So I don't think that is specifically related to that competitive situation. It is just more a statement of where we think we are in our product cycle.

Just doesn't hurt. Okay thanks guys, appreciate it.

Isaac Ro with Leerink Swann, your line is open.

Good morning, thank you for taking the question. If I could just ask at the start here, wanted to see if you could maybe talk about what your seeing in the broader pricing environment within pharma and specifically you said we should maybe consider any disruptions in demand, either through sort of changes in the budgetary process within those customers and/or the availability of used equipment in the market place. I know it is historically a small market, but I am wondering if there is potentially a short term disruption there as alot equipment is made available in the secondary market place.

Well I will turn it over to Art but in general, we haven't seen too much -- number one, we are the price leaders. We have always been the price leaders. And as you can see from our gross margins, there has been no disappointment coming as a result of significant price competition coming into our infield. But, Art really runs that segment of the business. We will ask him to comment on specifically, has any price dynamic coming into play in the major segments of our infield.

Yes, interestingly enough, we will see customers hold off and defer before we will usually see them back off too much on price. They equate price and capability. And so we, fortunately for us, particularly in a regulated market they don't seem to be willing to make the tradeoff or take a risk for a lower price. In the end they have a feeling that they will have to end up rebuying it if they make a mistake, you're better holding offer and going with what their test specified. Very little risk taking we see on behalf of customers in the way of trying to take shortcuts. They will keep the equipment they have and extend the utilization. Then when they have to replace they will replace.

Your second part of that question, Isaac was on the secondary market. People selling used equipment. Was that the gist of your second part?

Yes, I know it is historically a smaller market, but I am just wondering the extent to which you see any changes in the availability of that channel in terms of meaningful volumes of products.

Art, you seeing much of that?

The only thing I would say is that, to the extent of some of the larger accounts, particularly in the pharmaceutical industry, probably the only manifestation of that is if they close one plant they will that I equipment and move it to another plant so they will just shift assets around. While there is some secondary market to be honest, it is not enough for us to even -- we really don't see it and therefore, we find customers are usually reluctant to cope with the ordeal of having to figure out how to handle warranty and serviceability and [tracability]. So it is something we don't run into very much.

You have always seen a little bit of it kind of in parts of the market that we generally don't play very strongly in. Some of the low-end academic situations. Some of the more traditional industrial accounts, particularly the lower -- the less global accounts. But frankly we're not really seeing it, as I said, pop-up in any of our traditional Waters customer base.

Okay. Thank you. And then just secondly, wanted to maybe get a better appreciation for the advantage you have with AQUITY for the chemistry portfolio that you have and maybe highlight if you could, a few of the areas where you made investments, maybe more recently and that you think kind of gives you a material advantage over a new entrants in the coming quarters.

Well, let me see if I hit it right and then Art can embellish but a key strength of our AQUITY platform, has always been that the whole technology was driven by a proprietary chemistry configurations. And that we designed really the instrumentation, coming from the invention of the chemistry. And so, we have seen that there is a very high level of tying of the chemistry to our instruments. The instruments in the field are almost totally using proprietary Waters chemistry in their applications. When we launched AQUITY five years ago, we basically will one flavor of chemistry. In the five years we have dramatically expanded the flavors and the configurations of that proprietary AQUITY chemistry. And that has led to certainly the highest growth rates in our consumables business are on AQUITY and for every new AQUITY that we place, there is almost that guarantee razor and razor blade that now goes along with it, with the AQUITY model. So we're continuing -- we have launched new AQUITY flavors in 2009 we're going to launch more in 2010. And that continues to be a very significant part of our AQUITY strategy. Did that cover the flavor of your question?

Yes, yes that was great. Actually a little more color there would be great in terms of maybe if you could talk about what, in pharma specifically, is there an [appreciatable] percentage of chemistries that are entirely proprietary or customized to that giving customer and to that extent does it create that much higher a switching cost for them.

No, there is nothing really proprietary to a particular customer. Our chemistries are all broad purpose, useable and by any customer in most any application. They are tailored to a specific application, you may want a particular activated chemistry for our particular compound that you're looking for but that could be used by anyone in the customer base.

Okay thank you very much.

Operator I think we probably have time for one more -- two more questions.

Certainly. Derik De Bruin with UBS, you may ask your question.

Hi, this is Dan in for Derik. John, I was wondering if you could break out the FX impact on EPS for the quarter.

There was -- it didn't even round to a $0.01, so it was zero.

Okay, great. And then -- with the close of the Pfizer deal, do you have any comments on the resumption of quote and order activity, if any, and whether this has been in line with expectations and also historical norms for deals of this size?

You mean resulting from the merger?

Yes.

We don't have specific data to -- I mean I would say we are not seeing any dramatic difference from what we have seen historically. They always go through a period of confusion, of who is going to be their boss. Frankly, we have seen -- continued -- historically in the last couple of years sharing has been probably stronger, coming off a base, than Pfizer had been. And, we probably will see a continuation of that currently.

So --

I don't think we have seen a dramatic fall off. I think we would anticipate that the future combined entity probably is a somewhat better environment than the past nine months.

Perhaps a comment on outside the large pharma accounts what you're seeing with some of the smaller customers and CROs.

Did you say large pharmas or --

Outside of large pharma, contract resorts organizations and smaller accounts in general.

I would say this quarter we saw probably a little bit better activity in the smaller specialty, CRO business than in big pharma. But, it is not so dramatically different that it is worth highlighting too much.

And a lot of big pharma softness was associated with G2 backlog, too.

But with those accounts- it is safe to say there was some sequential - because I know you had said it what was fairly weak or at least weaker than large pharma last quarter so sequentially it was improved.

Yes.

Okay, thank you.

Chris Arndt with Select Equity Group, you may ask your question. Please check your mute button. We're not able to hear you.

Thank you, if you already addressed this I apologize. Could you comment on the -- how the consolidation activity in the pharma industry has affected recent results and how you expect it may effect results going forward.

That is essentially the question that just got asked concerning Pfizer and sharing. We have seen some slowdown in business as a result of it. Nothing that we haven't seen in the past. And we say that, in general we think the next 12 months should be marginally an improvement in that climate versus the last 12 months. But frankly we have seen good activity on the part of the targets, in these areas. Less growth probably -- less strength out of the parent organization. So, you wrap up the lousy economic conditions and kind of hard to tell which is the chicken and which is the egg here. But I think we feel like the future is likely to be marginally improvement on what we have seen in the last 12 months.

Okay. And, I expect that what you seen in the CRO industry has been relatively slow. Is there any change in that? Or do you have a comment on the CRO customer base?

No. I think that CRO business has been flattish. We have probably done better than those accounts feel like they are doing. They are under a lot of pressure. And, I think long term that CRO business starts to curve upwards although it may take awhile. But, right now, that business is pretty flat.

Okay. Great, thanks.

Okay. Well, I want to thank everyone for taking the time. And we appreciate the quality of the questions and we will look forward to talking to you again next quarter. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.