Waters Corp (WAT) 2011 Q3 法說會逐字稿

Good morning. Welcome to the Waters Corporation third quarter 2011 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 you may disconnect at this time. I would like to introduce your host for today's call, Mr. Douglas Berthiaume, Chairman, President and Chief Executive Officer of Waters Corporation. Sir, you may begin.

Thank you. Good morning and welcome to the Waters Corporation third quarter financial results conference call. With me on today's call is John Ornell, Waters' Chief Financial Officer; Art Caputo, the President of the Waters Division; and Gene Cassis, the Vice President of Investor Relations. And as it is our normal practice, I will start with an overview of the quarter's highlights. John will follow with details of our financial results and provide you with an outlook for the full year. 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 possible future income statement results of the Company, this time for Q4 2011. 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 current expectations, see our 10K annual report for the fiscal year ended December 31, 2010 in part 1 under the caption, Business Risk Factors. We further caution you that the Company does not obligate or commit itself by providing this guidance to update predictions.

We do not plan to update predictions regarding possible future income statement results, except during our regularly scheduled quarterly earnings release conference call and webcast. The next earnings call and webcast is currently planned for January 2012. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure is attached in our Company's earnings release issued this morning. In our discussions of the results of operation, we may refer to pro forma results, which exclude the impact of items such as those outlined in the schedule entitled reconciliation of net income per diluted share included in this morning's press release. Doug?

Thank you, John. Well, our sales grew at 13% in the third quarter and our adjusted earnings were up 15%. This growth in revenue is I think indicative of continued health in our end markets and the strength of our product offerings. During the quarter, we began shipping the new instrument systems that we launched at ASMS, while enjoying the continued ramp of the performance-leading platforms that drove our growth during the first half of 2011. Our key customer segments, including biopharmaceutical, chemical, and the combination of government and academic, all grew in the quarter. While geographically, growth was more balanced than we might have expected, with the Americas, Europe and Asia all delivering constant currency sales growth within a few percentage points of one another.

Overall, I think it was a very solid quarter. Within the Waters Division, constant currency sales to the pharmaceutical industry grew at about the same rate as the overall business, with no significant changes in drivers from what we saw during the first half of the year. Applications within pharma that are driving growth include regulated bioanalysis, biological pharmaceutical development, and QC testing. Business at CROs in the quarter was robust, while sales to our largest accounts were sequentially above the second quarter's results and up year-over-year. Global, government and university revenue growth was stronger in the third quarter than the second quarter and continued shipments of research products, such as our newly introduced SYNAPT G2-S, should benefit university revenues as we close the year.

Instrument sales to industrial chemical customers, a business that you should know that represents less than 10% of our overall sales, held up fairly well in the quarter with strength in Asian markets offsetting slower growth in Europe and the United States. You look at TA, the division delivered yet another double-digit sales growth quarter. Sales growth for TA was also geographically balanced, with strong growth across the division's product line. New business opportunities associated with high temperature and biological applications, along with broader adoption of recently introduced discovery platform instruments provide us with confidence that the division can continue to grow in future quarters, despite ongoing economy-related concern. Sales within our applied markets, dominated by food and environmental applications, grew at a double-digit rate in the quarter.

On the Food Safety front, during the quarter, Waters participated in the opening of the International Food Safety training laboratory, located on the campus of the University of Maryland and in cooperation with the University and the US FDA, together with Waters Corporation, it's the world's only permanent Food Safety lab that provides hands-on lab training and classroom lessons on regulatory standards, educating both international government agencies and food exporters. I think this is a great strategic investment for us and I think you can look for more of these kinds of things as we go forward. Looking at our sales geographically, constant currency sales growth in Europe exceeded our overall sales performance. Mass spectrometry sales to government and university labs, as well as strong food analysis business highlighted our European performance. In Asia, outside of Japan, sales were in line with our expectations, with China and India continuing to fuel growth despite strong growth in the 2010 comparison quarter.

Mass spectrometry system sales to government and university accounts were meaningful contributors to our growth in China, while LC and LC/MS instrument sales to pharmaceutical accounts were strong in India. In the US, we benefited from strong chromatography instrument shipments to pharmaceutical accounts, continuing the trend of H-Class adoption that we saw during the first half of the year. Sales to university labs were down, likely due to a combination of funding issues and ordering delays associated with the continued evaluation of middle-high end MS technology.

Now, talk about a few product line dynamics that we saw in the quarter. Our recurring revenues, that is the combination of service and chromatography consumables, grew at a high single-digit rate in the quarter. The growth in chromatography consumables was primarily driven by Acuity column sales, while our service sales benefited from expanding business in our developing regions, including China, India, South America, and eastern Europe. If you look at our Waters Division instrument system sales, growth was higher for LC/MS instruments in the quarter, with continued strong sales of tandem quadrupole technology systems and the benefit of initial shipments of SYNAPT G2-S instrument. You may recall we introduced the SYNAPT G2-S, which is a research performance or [foginal PO] top platform at this year's ASMS conference and had informed customers that first shipments were planned for September of 2011. For our tandem quadrupole systems, the Xevo TQ-S, and bench top detector system sales were in high demand during the third quarter, with food testing and clinical applications leading the way.

On the chromatography front, UPLC systems again grew at a double-digit rate with, H-Class dominating Acuity sales. During the quarter, we began shipping our new Acuity I class and we expect this enhanced UPLC technology to become the preferred front end in LC/MS instrument shipments in the upcoming quarters. As I mentioned earlier, customer demand for our new product momentum held up well in the quarter and consequently we delivered solid results. Financially, our margins and strong cash flow in the quarter are again indicative of the health of our business. During the quarter, we continued to invest in programs and new product initiatives to assure future growth while deploying our cash flow to aggressively repurchase our shares. As we close 2011 and look toward 2012, we see no reason to change our fundamental business strategy that has served us well for many years. That is a focused technology and product strategy, intent on expanding our market share by extending the application range of our technologies, broadening the global reach of our sales, and continuously striving to offer unmatched customer service and support.

If you look at the fourth quarter and the start of 2012, we currently see a likely continuation of the trends that have supported our sales growth through the first 9 months of 2011. The macroeconomic uncertainties that have dominated recent headlines certainly have and will continue to require us to carefully monitor market conditions while we manage our business. In addition, as we make our way through the fourth quarter and into 2012, our quarterly and full year comparison periods will have relatively high sales growth rates that reflect the recovery that we saw from the 2009 weakness. However, at this point, I'm pleased to tell you that customers are continuing to deploy their 2011 capital budgets and are discussing with us new instrument requirements for their labs in 2012. I think that's encouraging. Now I would like to turn it over to John for a more detailed review of our financials and the future financial performance.

Thank you, Doug, and good morning. Third quarter sales increased by 13% and non-GAAP earnings per diluted share were up 16% at $1.14 this quarter compared to earnings of $0.98 last year. On a GAAP basis our earnings were $1.10 this quarter versus $1.02 last year and a reconciliation of our GAAP to non-GAAP earnings is included in our press release issued this morning. Reviewing Q3 sales results in comparison to Q3 last year, sales were up 13% and this growth includes 4 points of growth from foreign currency translation. Looking at our sales growth geographically and before foreign exchange effects, sales within the US were up 8%; Europe's sales were up 13%; Japan was up 6%; and sales in Asia outside of Japan were up 8% against a strong base of comparison.

On the product front and in constant currency within the Waters Division, instrument system sales increased by 10% and recurring revenues grew by 8% this quarter. Within our TI Instruments Division, sales increased by 11% versus prior year. Now, I would like to comment on our Q3 non-GAAP reported financial performance versus prior year. Gross margin performance came in as expected at 60.3%, up 90 basis points from Q3 last year and consistent with last quarter's performance. SG&A expenses increased by 11% this quarter. Currency translation increased expenses by about 4% this quarter. R&D expenses increased by 14%, with currency translation responsible for 2% of this [sale].

Our full year effective operating income tax rate came in a little higher than expected at 16.6%. This is 40 basis points higher than our July expectation and is due to a modest shift in profits to our higher tax rate jurisdictions. Applying this new tax rate to our year-to-date income results in a 17.4% operating tax rate within the quarter to catch up to the new full-year 16.6% tax rate. EPS was reduced by $0.02 as a result.

On the balance sheet, cash and short-term investments totaled $1.2 billion and debt totaled $972 million, bringing us to a net cash position of about [$222 million]. During the quarter, the Company refinanced its 5-year, $1 billion bank facility that was set to expire at the end of 2011 into a new 5-year facility. As for share repurchases, we bought 1.8 million shares of our common stock for $144 million. This leaves $259 million remaining on the current authorized share repurchase program. We define free cash flow as cash from operations, less capital expenditures, plus any non cash tax benefit from stock-based compensation accounting and excluding unusual nonrecurring items.

For Q3, free cash flow came in at $111 million after funding $16 million of CapEx. Accounts receivable day sales outstanding stood at 71 days this quarter, down 6 days from Q3 last year. Currency effects decreased DSO 2 days this quarter versus prior year. Inventories were about flat this quarter, but remained elevated from year end levels. We expect inventories to decline in the fourth quarter, as inventory build associated with new products is relieved. As we now think about the fourth quarter, we have a less favorable foreign exchange environment than we did back in July when we last gave guidance and at current FX rates it's likely that the currency will be closer to neutral to sales this quarter, maybe adding just a 0.5 point of currency for the full quarter.

Regarding organic growth, we currently believe that 7% is a reasonable growth expectation for the quarter, given a difficult base of comparison and our current business momentum. Moving down the P&L, gross margins are expected to be about 61%. Operating expenses are expected to grow at about 4%, slower than previous quarters given an easier base of comparison and less FX impact. Net interest expense is expected to be approximately $5.5 million and we now expect our operating tax rate to be about 16.5%. Our fully diluted average outstanding share count is likely to be near 91 million shares outstanding and rolling all of this together, we currently expect Q4 non-GAAP earnings per fully diluted share to be in the range of $1.49 to $1.54 per share. On a full-year basis, this would bring our sales growth to 13%, with currency translation providing about 3% of this growth. Non-GAAP earnings per fully diluted share would be in the range of $4.75 and $4.80. Doug?

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

(Operator Instructions) Ross Muken with Deutsche Bank.

As we think about sort of the organic growth as we progress into 4Q, the 7% number implies a fairly strong macro environment relative to the comp. Most of the large industrials talked about CapEx slowdown into 4Q. Certainly it doesn't look like you saw it in the quarter, but as you think about sort of puts and takes on that 7% number, where are the businesses where you have the sort of least visibility and where, obviously ex-consumables, do you feel the most comfort in terms of the order rates that you've been seeing?

Well, Ross, maybe answer it this way. I do think you're right to point out that the comparable fourth quarter in 2010 was a strong quarter. So this comparison is somewhat more difficult than the third quarter. But we've tried to strike a balance between what we're seeing in our current business conditions and what everybody's talking about around us. The certainly the things that encourage us is the response to our new products, the fact that we've only recently launched the G2-S and the response has been very strong. We really didn't get much kick out of the new I class in this quarter because we really just launched it in midyear and really only started shipping it late in the third quarter. So 2 very important products are likely to continue to build momentum for us. The geographic balance that we saw in the quarter I think is very impressive.

If you had asked us at this point last quarter about Europe, we would have been somewhat more pessimistic about what we were going to get out of Europe and actually somewhat more optimistic than what we saw out of some of the smaller areas in Asia. As it turned out, that was a bit of a flip-flop. We know the dynamics in Asia, they are one-off sort of. We also originally thought that we would be having to take down backlog to achieve these numbers in the third quarter and we were not. It was not necessary for us to take down backlog. So all of those things kind of add confidence to what we are expecting in the fourth quarter. On the other hand, you've got the continuing soap opera of stuff in Europe that could significantly have an effect on government and university spending in particular. We haven't seen that so far. So that's a might-be. You certainly have fiscal pressures around the world, certainly looming in the United States. We don't think that's likely to be a fourth quarter issue that could well impact 2012 and so that's probably what's looming. We just don't see from our early indicators of quotes, attendance at seminars, that kind of thing, to see any near-term issues that dramatically would conservatize our view of the fourth quarter.

I guess relative to the assumption on 7%, relative to what we saw last year, how much are you sort of dependent on a budget flush and sort of your typical end of year kind of step-up and to what degree, if you could just remind us, did we see that last year?

I would say on that front, Ross, if you look at kind of the division of the business across the quarters, you typically see somewhere from 28% to 30% of our business in the third quarter largely associated with that flush that you described. We're looking at on the fourth quarter here being somewhat typical to maybe a little light versus history. So I would say that, yes, we're banking on kind of a traditional year-end budget flush, but not one that's outlandish versus history.

And I guess just 1 final point on this. And so to the degree that you think back to past slowdowns from a CapEx standpoint, again I'm just focused on the instruments, where and when do you typically start to see that show up in the order rate? Is there a lag between when you start to see economic indicators and/or customer budgets and/or customer revenues start to dip and then you see it 3 months later, 6 months later, 9 months later? Is there some sort of correlation or sign for you guys that you're kind of looking for to get comfort and sort of where the trajectory is going?

I think the only substantive thing to say is that we rarely see major changes in momentum this late in the year. Typically what's happened is that those budgets are pretty well set, particularly with big pharma, and they have taken the actions that they are likely to take for this year and they are focused on next year. So sometimes you can see large pharmaceutical accounts delay capital spending out of the first quarter into later on in the year. And frankly, that's probably with our largest customers what's become typical, that they are releasing less of their capital early on in the year and waiting to see how things evolve.

All right, great, thanks.

I think we need to move on to the next questioner.

(Operator Instructions) Jon Wood with Jefferies.

Doug, I understand your comments kind of on 2012 qualitatively in the prepared remarks. Can you just talk about how you guys are thinking about the budget next year? So I notice operating expense growth about 4% in the fourth quarter. Will you guys set up 2012 to deliver P&L leverage, if you guys experience an organic growth rate that's typically below what you guys see in a mid cycle environment? Just anything you're willing to offer on how you're planning the expense side for next year would be helpful.

Sure, Jon. I think you're right to look at kind of the fourth quarter dynamics and recognize that, particularly in this climate, we don't want to get carried away moving into the new year. So, Art's being pretty conservative with his organization in terms of their spending plans and that means that they would like to spend more and we're holding back a bit. We think that's prudent in this climate and gives us some opportunity so that we don't have a big mound of spending going into a year when if things slow down a bit we can't moderate to accommodate it. So, you know we're always planning to be able to leverage our bottom line to the extent that we grow expenses at a somewhat slower rate than we grow our top line. You can be certain that that's how we'll craft our budgets for 2012 and we typically craft our budgets so that we move incremental spending later on in the year rather than early in the year and that gives us the ability to titrate that back if conditions should evolve more slowly than we currently think. Hopefully that gives you a flavor.

Yes, that was very good. One quick last one for John. On the stock buyback side, any thoughts on 4Q? Looks like you stepped up 3Q rate quite a bit. What do we expect for the fourth quarter in terms of repurchase?

Yes, we definitely hopefully took advantage of what was a nice buying opportunity in the third quarter. The budget was to do the buyback a little more equally, with maybe $60 million to $70 million a quarter. We'll do at least that in the fourth quarter and see what else we might exercise beyond that. But I would say a base case of somewhere around $75 million is probably reasonable.

All right, great. Thank you.

Isaac Ro with Goldman Sachs.

It's actually Jeff in for Isaac. Looking back to the time period, knowing it's a little different now than back in '08, '09, how can you describe what you are seeing is different now in terms of your visibility and also looking at the expense structure, what have you done in the last 3 years that gives you a little bit more leverage if we do see a slowing as we start into next year?

Well, I think there are a whole bunch of differences between what we see now versus what was going on in 2008. Probably macroeconomic, economists are better equipped to tell you, but from my perspective, what happened in 2008 was much more sudden. What we are seeing now, if anything, looks like a lazy curve ball that's been coming in, it seems, like forever. If you talk about Europe or you look at the fiscal pressures facing the US. In 2008 we saw the rapid decline of the auto industry in the US and worldwide. It had a pretty dramatic effect, derivative effect through the industrial chemical worldwide marketplace. We saw our business kind of from the major chemical suppliers really go down, as they saw their business evaporate with the auto companies. We certainly just saw that rapid movement and people responding to that kind of stimulus immediately.

I think it's really different now because people have had one eye on a coming slowdown in government and academic, what happens, are we going to have a double-dip recession, et cetera. It's a much different mindset that companies have had and companies have been much more prudent as to their spending plan. So I think we've been living with that. It's not likely that you're setting up to fall off a cliff. Might be setting up to look at slower conditions than we currently see, but I don't see a dramatic movement from the kind of conditions that we're seeing. And as we say, as our early indicators are as we go into the fourth quarter, certainly we're not seeing that kind of worry, but we're seeing the constant concern, a cautiousness across the board with maybe the exception of some of our Asian businesses that continue to be pretty robust.

Then looking at the Asian businesses, I know the growth was coming off of a tougher comp. Could you maybe provide a little bit more color of how the growth in emerging market trend throughout the quarter, both sequential and geographic basis?

Are you speaking about Asia in particular?

Yes, Asia, anywhere, India, China, any of the smaller countries as long as you (multiple speakers)?

Yes, I know. I think the India and China business continued to be very strong, stronger than the average Asia business, interestingly. We're seeing some dynamics in the countries where we're facing local currency weakness. Frankly, we think we see some of that in India with Rupee weakness, but the business continues to be strong through that. It's really some of the smaller territories in Asia. We're reasonably strong, interestingly enough, in Japan, very strong in China and very strong in India. And I think we don't see any indications that the dynamics, including our product line and the customer availability of capital, is changing that.

I guess it's more on the lines of the purchasing power of some of the smaller countries are declining as their currencies have moved against them, kind of like we saw in '09 with India, is that correct?

I probably see some of that, although it hasn't been consistent. We've seen some customers complain about their costs going up because of weaker currencies and then they bounce back the following quarter. So, I think to some extent these countries are still investing in the kind of food safety laboratories and regulated and pharmaceutical businesses and I think they are finding the way to invest. Just on another front, the emerging -- well, not emerging, the growth markets in Latin America also continue to be strong, Mexico, Brazil, and actually some of the smaller South American countries. Brazil has really come on in the last couple of years, and boy, we look to the next 5 or 6 years in Brazil and that could well become what India and China have done in the last 3 or 4 years.

Thanks a lot, guys.

(Operator Instructions) Tony Butler with Barclays Capital.

Just, Doug, I just want to make sure that I understand your characterization of expenses in Q4. This is more pre-emptive, is that correct? And I'm sorry just to slide a second in on an end market with pharma. Amgen didn't make comments they had fired some people in exploratory a couple of weeks back. Pfizer is moving some folks from Groton up to Cambridge. Just as it pertains to the pharma customer, if I may, Doug, are there any changes that any of the field, any of Art's folks are seeing today that you think lead you to believe that there's any change in that dynamic that may lead to some reduction in the early part of '12 or at any other point in time, or is it just status quo? Thanks very much.

Tony, I think any quarter, particularly with the number of pharma companies that we're doing business with, you see some of that going on. And I got to say every quarter we've seen some of it, with whether it's AstraZeneca or Pfizer moving to reduce resources in Sandwich several quarters ago. I think what we're seeing is the net balance of all of those things so far has resulted in increased investment. Today or yesterday Novartis talked about restructuring some business in Switzerland. I think principally because of the strength of the Swiss franc. But they reiterate that there's not much of that that's hitting their laboratory or their R&D resources. I think that's probably the most consistent dynamic that we see, is that net-net the large pharmas have in major ways gone through their restructuring, they have addressed a lot of their R&D spending in the last 4 or 5 years, as they saw this looming issue of products going off patent.

They still do some of it around the edges and the fringes and your comments about Amgen I'm sure part of that. But for the most part, we've seen new initiatives and new investments more than make up for it. And I think that's what we've seen so far and kind of indications are more or less along those lines as we go forward. In terms of the fourth quarter, we're always at this point of the year cognizant of the budget structuring that's coming for next year. It's hard not to be a little bit more cautious with an eye to everything going on in the world. So, maybe we are a little bit more cognizant of not putting increased heads on the ground that don't pay for themselves very quickly and we did have a good comparison in terms of the expense load in the base versus this year. But we're not doing, I wouldn't say, anything heroic to manage expenses in the fourth quarter. We just probably have a little extra dose of prudencey that goes into that mix.

Thanks, Doug.

Amit Bhalla with Citi.

Hi, this is Adam in for Amit today. I was just wondering, you mentioned in your commentary that you saw slower growth in industrials in Europe and the US. I was just wondering if you could provide a little more color on that.

Let's see, I think we characterize that kind of overall characterization of our industrial accounts. I think it's safe to say that TA does the bulk of their business in industrial accounts and they had a good quarter with those accounts. But in the Waters business, you're talking about environmental accounts, the classical large chemical accounts, the DuPonts, the Dows of the world, and that business was a little bit slower all-in than the rest of our business. But not tremendously so. But it was slower than the residual of the business.

And then I also had a question on guidance for full year fiscal '11. So it looks like it came down from $4.80 to $4.90 that you had said on second quarter call. I was wondering what the difference is, if it was all FX-related or if there was something else that I maybe missed in the commentary.

Yes, FX is about a 1.5 point or so of reduction versus where rates were initially. So there's a few cents, $0.04 associated with that. We've just tweaked back our organic expectation to 7 from just over 7, $0.02. Tax is $0.01. So there's about $0.08 or so midpoint to midpoint that is different from where we were before largely due to FX.

Okay. Thank you very much.

Derik De Bruin with Bank of America.

So I guess a couple of questions. As the patent clip sort of hits, are you expecting, or I guess [necessary] expecting, could you see a decrease in demand for drug manufacturing, QAQC, big pharma and is that going to be offset by increased demand from your generic customers? And I guess I've had a question from clients basically asking if -- how's the pill count going to change? And are you positioned to -- are you as strongly positioned in the generic markets to meet the increased pill count likely there as you were in the big pharma markets, has that changed? Could you talk about the dynamic of where you are in the big pharma accounts, how the manufacturing is likely to change and where you are in the generic account?

I think I'll ask Art to comment on the second. But the pill count is almost certainly to go up as a result of that dynamic and our market share in generics is very high. So, to the extent that generics are investing to cover that increased demand, I'm highly confident that we'll get more than our share of the potential business. As it relates to patents -- products coming off patent price, if a big pharma hasn't seen this cliff coming at them for the last 10 years and we've been dealing with it for that length of time in the restructuring. Now, maybe when they get in the middle of it, it's more an issue of do the things they have in plans in the new products that they hope to come into play, if those don't come to fruition and they have to deal more significantly and it affects their R&D, then of course they could cut back further. I think -- I believe that they have substantially addressed this problem in the past 5 years as an industry. I don't expect that you're going to see, just because a cholesterol drug comes off patent in a year or so that, that specific action is going to be reflected in management actions then. If they haven't taken those actions by now, there's no way to make up for it when that tsunami hits. But, Art, do you want to comment on --?

Yes, most of what you said, Doug, is exactly the case. The added element is that many of these companies as of a few years ago really started to emphasize expanding off of the traditional small molecule drug development and have added large molecule drug development eyeing the biopharmaceutical marketplace to support their business. And that in itself is also a very strong offsetting factor. So, when you -- the pushes and shoves net-net is, and I think you can see it in our results today, it's this response that, that industry has developed over the last few years that I think is giving us the ability to maintain our business in the large accounts and find additional opportunities in the generics. And even now, the generics are starting to take a close look at their future and saying that a small molecule pipeline might run out. We need to start looking at the biopharmaceutical segment as well and they are beginning to gear up to understand what they have to do to do business there. So, if you take these factors, it's still very active and vibrant and we're up to our necks in working with these companies, not only looking at currencies, but working with them to establish the future.

Excellent point. Okay?

Just 1 follow-up question, if I may, and it's a quick one. I guess are you better positioned in the generic markets with Acuity than you were in big pharma, the QAQC labs. Have they adopted the Acuity more generally?

Yes, the Acuity initially -- of course when a generic Company incorporates a drug coming off patent, their first and most economic, economically prudent direction is to replicate exactly what had been happening. But the other element that has made Acuity so successful in the generic world is that as soon as a drug comes off patent more than 1 generic Company starts chasing it. And whoever can get to market first in the generic world usually takes a dominant position on that new drug in their portfolio. So, Acuity has proven to be 1 of the major tools that they use to accelerate their development work to enter the market with the drug that's come off patent. So we've seen an outstanding response in the generic market and it's actually, to be frank, the generic companies had adopted Acuity at a much faster rate than the big pharma accounts early on in the introduction of that product.

Great, thank you.

Jon Groberg with Macquarie Capital.

Just one question for you, Doug. As I sit here I look at the new products pipeline, the new product portfolio that you currently have, I should say, and then compare it to the past, it seems like it's about as full as it's ever been. And I'm just curious what the pipeline looks like and how you're thinking about R&D and how you maintain this momentum, I guess, in what could be a little bit more of a difficult environment over the next couple of years. Thanks.

I think it's an insightful question, Jon, because I think we clearly are different from a number of players in the tool space in that we kind of live and hopefully not die by our ability to continue to bring new capabilities that customers want to the marketplace and that's how we've maintained our strong growth rate over the years. It hasn't been through consistently deploying a lot of capital on high cost acquisitions. And I think you -- we're proud of that record and what we've been able to deliver in terms of novel, innovative capabilities to this worldwide marketplace. I think you see it in the G2-S, the I class, the whole Acuity revolution that Waters really brought to the marketplace these last several years. I think you're going to see the emerging investment that we've made in data come to the market.

We've begun to bring that, but our unify platform, which was a major investment for us over the past 5 years and actually continues to be, is going to I think pay a lot of dividends as it becomes harder and harder for many competitors to make that kind of investment, which encompasses the broad fields of both chromatography data and mass spectrometry. You're certainly going to see TA fill out their new discovery platform across the various models in the whole thermal area, as well as to take advantage of the bolt-on kind of high temperature acquisitions that they have made. That is probably the one area where we've been more active, in the small bolt-on acquisition space. So we think that the plat -- the R&D pipeline for the next several years is very rich and, I mean if you think about it, the G2-S has really only started shipping this quarter. The I class is really not either and it's just a few units shipped in the third quarter, so you got almost a full year of implementation of those products as we go into 2012. So we're optimistic about our opportunities to make hay with this new product offering.

Great. Thanks a million.

Steve Willoughby with Cleveland Research.

Two quick ones. First, I know you guys mentioned you made a small acquisition in the TA business last quarter. Just wonder if you could comment on how much revenue that added this quarter. And then secondly, given last year there was timing shifts on the new product launches, so just wondering how shipments of the new product launches compared to your expectations going into the quarter?

In terms of the shipments of expectations, they were just about right on our expectations. The interesting thing was that our original model had us taking down that original backlog. And in fact, particularly with the G2-S, we did take some of that backlog down, but our order rate was robust enough so that we didn't really ship graded our order rate in the quarter. I think that's a strong indicator of the strength of the business.

The Anter acquisition added about $0.5 million or 1.5 point or so of growth to the TA Division.

It really just happened late in the quarter and was diminimus.

Okay. Thanks very much.

Quintin Lai with Robert W. Baird.

The H-Class seems to be continuing to progress nicely. Have you been able to parse out, is it an upgrade cycle from old alliances out there, market share? What are the trends are you seeing, Doug?

I'll let Art chime in here since he's driven this thing.

Yes, the H-Class which, as we've spoken about in the past, was really designed to pick up on our original Acuity market position. And so the H-Class is, as I would describe it, is probably half and half. Half the people who are buying H-Classes are representing people who are buying traditional HPLC systems, both either Waters or competitive units and they are buying the H-Class with the idea of utilizing that as a future protection on their existing HPLC methods. What we found is that they probably within a 1-year, 1.5 period really become active on trying to upgrade their separations to true UPLC.

The other half of the H-Class sales are in fact purely us moving that technology into areas that were competitive areas. I would have to say that coming in with that technology forces the customer to wonder if they are keeping up with the times in terms of their future capability. That product now has broad, very broad-based approval across the marketplace. And so word of mouth has gotten out there and I would say that we're in many of the sales that we probably would not have been exposed to in the competitive environment. So it splits about half base business transition. The other half is genuine new business for us.

Great, thank you.

Peter Lawson with Mizuho Securities.

Sorry, I joined the call late. Apologies if this has been asked. Just around the Novartis cut, what's your take on that? And they seem to be the largest spender within pharma. Does that hurt you for (multiple speakers)?

Well, yes, that was just announced, so it's a little hard to tell exactly what the dynamics are going to be, but their public remarks are that it's certainly not focused on their R&D spending remains to be seen how much it really can affect them. We did respond to it a little bit before, that -- I'm sorry, I'm getting--

It's 1% of our business principally that's going to be potentially impacted in some fashion. We really don't know what that impact's going to be, but it's up 1%, so it's not likely to be all that meaningful.

Got you. Thank you.

Does that answer your question, Peter?

Yes. No, that definitely helps frame things. Then on academia, just the impact of these grant extensions, do you think that could dampen the [academic] spending in 4Q and apologies if it's been asked?

Yes, the whole issue of academic spending we talked about. We're not seeing a dramatic change in the academic environment currently. We're all speculating on what the effect of government funding of grants, what the fiscal, coming fiscal pressures will mean, what it means in Europe versus the US. But best we can say is that the academic environment is not a tremendously large piece of our worldwide business. We're not seeing direct impact of drawn out grant times so far. I would say we roll it into the overall dynamics for 2012. It's one of the considerations, but it's probably not one of the more significant ones.

Thank you, Doug.

Doug Schenkel with Cowen & Company.

This is Shawn for Doug. Another one on a hypothetical situation where organic growth might slow next year. How do you feel about your ability to pull the levers that you did in the last downturn? And I know you talked about your operational cost structure and strategy, but what about specifically your ability to buyback shares pretty aggressively as you did the last time around?

Well, we think we have plenty of dry powder as it relates to a stock buyback if there was kind of a secular reduction in stock values because of marketplace fear or something like that. I think we've shown that we can balance our operating expense spending with demand dynamics in any meaningful period. If the bottom falls out of demand in any 1 quarter, as it did in the fourth quarter of 2008, you can't catch up with those fall off the cliff dynamics in any 1 quarter, but you certainly saw that in 2009 we maintained very good earnings growth in spite of flat demand. So in that kind of environment, I'm confident that we can balance our spending over a broader timeframe. Can't overnight, but we also think that we're kind of being prudent as we go into a period that has some question in it. So we feel reasonably good about our flexibility, as long as -- and we do not foresee the kind of dynamics that happened in 2008, frankly. We could see a period of fiscal uncertainty and we could see some demand questions, but we don't see anything dramatic like happened in 2008.

Great, thank you. And one more quick one, if I could. You mentioned a good quarter for your CRO business. Just wanted to know if you could provide a little bit more detail on whether this is a dynamic driven by 1 or a few larger players, or if it was more broad-based.

More broad-based. Sometimes it's hard to get -- we speculate on the macro dynamics of this. We think that in this period when large pharma is outsourcing more business to CROs, then CROs are gaining a little bit more negotiating power in terms of the economics and saying you've got to leave more up to me and how I invest for productivity and they are looking to things like our Acuity to drive more productivity. So we think it's indicative of those kinds of dynamics. And frankly, I think they are favorable to us.

Thank you.

Let's see, operator, I think we can take maybe 3 more questions. I'm cognizant of coming up on an hour here, so maybe we'll take 3 more questions.

Steve Unger with Lazard.

Quickly, just did LC for research purposes, did those sales grow year-over-year?

Yes.

They did and was that higher or lower than the Company average?

About the same.

About the same. And that's without the I class contributing meaningfully?

That's correct.

And then just on the fourth quarter, I know you have a tough comparison in general with the strong quarter last year. What geographies are the hardest compares? Is it China, is it India or is it the US?

I think it's all 3.

It was pretty broad-based. I know we had a very strong fourth quarter in China specifically, but Asia in general, but the overall growth was pretty good across the board. So we're looking at a challenge in each of these environments, probably the largest of which is in Asia.

In Asia, okay, great. Thank you.

Yep.

Tycho Peterson with JPMC.

Doug, a few minutes ago in your comments you talked about UNIFI and part of the strategy seems to be to move toward more enterprise-wide sales rather than kind of seat-specific licenses. Are you starting to see that happen and to what degree do you think that would also impact instrument sales? Can software drive instrument purchases for you guys?

Simply put, I think the answer is yes, but you'll want to--

Yes, the way UNIFI is being rolled out, in our enterprise-wide business we have a very high share position with our current power system. As we rolled out UNIFI, our strategy was to initially roll it out in the form of workstations, meaning specific applications, handling small laboratory systems, largely focused from an application standpoint. And so the current releases of UNIFI, initially we put it out in a biopharmaceutical system designed for that application. The most recent intro a few months ago was for the regulated bioanalysis market space. As we get into next year, we begin to expand into more generalized position.

The year after that, we will roll into the enterprise-wide marketplace. The reason why the enterprise-wide marketplace is the last on the list, it's -- we find that our customers will not quickly move off their existing enterprise system. It takes them time to reevaluate it, revalidate, and move forward. And while this is upgradeable, we're giving them front time before we actually bring it to marketplace to see how it operates. So the whole strategy, because of its greater, much higher complexity compared to our previous launches, we have chosen to roll it out in this fashion. We believe that will give us the greatest impact. But the ultimate game will be it will be a replacement for the enterprise-wide system. We don't see that happening yet for another couple of years.

And then can you talk to the competitive dynamics in the UPLC market? Obviously post the dionic steel by Fischer -- by Thermo, but also Shibatsu making a little bit more of a push here. Are you seeing any more aggressive pricing or any changes in the competitive dynamic between them and Agilent as well?

I would say it's been a competitive -- most people have now come to the marketplace with some higher pressure systems. We haven't seen any dramatic changes in the competitive environment from the recent introductions, haven't suffered any deterioration in pricing as a result of that and I would say it's not a lot of news.

Last 1--.

I'm sorry. I think we've got to go on. We're running out of time here and I want to take a few more questions from people who haven't had a chance.

Dan Arias with UBS.

Just on the H-Class, I'm wondering at this point whether you have a sense of the percentage of customers running HPLC methods on the system versus those that have made the technology transition to UPLC?

Sure. Art, do you want to take that?

Our estimate is roughly somewheres between a third and a half of the customers that buy into the H-Class buy it with the idea of transferring their HPLC method, but with the opportunity to begin exploring improvements in productivity by shifting to UPLC. This is the primary advantage of that platform and how it's been positioned in the marketplace. So, roughly a third to a half begin on LC. We usually see within a year or so now, we begin to see that development moving forward. The other half, other half to two-thirds of the people who buy H-Class jump right into a UPLC application.

Operator, I think we can take one more question.

Dan Leonard with Leerink Swann.

Hi, this is actually Julian in for Dan. I was wondering if you could provide any color on what you're seeing on the food safety front, specifically in the US. Are you seeing any sort of pickup in demand following the legislation passed earlier or at the beginning of the year and what you expect from this market going forward. Also, I guess maybe any trends internationally, if noteworthy.

Yes, we had a very good quarter in the Food Safety, the broad food, including the Food Safety. I would say we still think that the promise in the US as it relates to the new regulation is largely to come, not in our current run rate. We think our strategic investments in this area with the new training lab at the University of Maryland and the opportunity to build on that around the world really becoming interesting. We have a lot of interested sovereign locations recognizing the need to train their people, both within the government sector, as well as when the industrial sector in these emerging food producers and food exporters. It's been very encouraging and I think bodes very well for continuing to have that area of our business grow at a faster clip. Hello? Hello?

At this time, there are no other questions.

Okay. Well, thank you all for staying with us. I know we went a little bit longer, but seemed like there was that interest. So we'll hope to talk to you again in another quarter. Take care.

Thank you for your participation. You may disconnect at this time.