Waters Corp (WAT) 2011 Q4 法說會逐字稿

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

Thank you. Good morning and welcome to this, the Waters Corporation fourth-quarter financial results conference call. With me on today's call, as usual, is John Ornell, Water's Chief Financial Officer, and Gene Cassis, the Vice President of Investor Relations.

And as it's our normal practice, I'm going to start with an overview of the quarter's highlights and then John will follow with details of our financial results and provide you with an outlook for the first quarter of 2012 and for the full year. But before we get going I'd like John to cover the cautionary language.

During the course of this conference call we will be making 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 Q1 and full year 2012.

We caution you that all such statements are only predictions and that actual events or results may differ materially. For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see our 10-K annual report for the fiscal year ending December 31, 2010 under Part One 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 earnings release conference calls and webcasts. The next earnings release call and webcast is currently planned for April 2012.

During this call we will be referring to certain non-GAAP financial measures. A reconciliation to the non-GAAP financial measure to the most directly comparable gap measure is attached to the Company's earnings release issued this morning. In our discussions of results of operations we may prefer to pro forma results, which exclude the 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, 2011 was a second consecutive year of double-digit sales growth and even faster earnings growth for Waters. Successful new product launches and healthy demand from our pharmaceutical customer base have been key factors in driving our growth.

In addition, we continue to benefit from faster growth in developing countries and opportunities associated with our applied markets such as food testing and clinical diagnostics. In short, we have offered industry-leading products and enjoyed superior access to faster growing market segments, positions our organization has worked hard to achieve over a multi-year period.

I think it's also important to note that 2011 was a year of investment for Waters. During the year we continued to bring new systems to market across all our major product lines and expanded field personnel to support rapidly expanding customer bases in these developing regions. We're confident that we have an adequate foundation to grow top- and bottom-line results in 2012 while maintaining our reputation for industry-leading customer service and support.

If you look at the fourth quarter, our sales grew organically 8% and our adjusted earnings per share were up 13%. In all these results were a bit ahead of our expectations and represent the impact of continued strong business momentum.

For the Waters Division we saw strongest growth in our pharmaceutical and industrial chemical end markets. The pharmaceutical growth was particularly strong in Western Europe and in the US, indicative of a continuation of an instrument upgrade cycle that I cited earlier this year.

The combination of government and university shipments held up reasonably well during the quarter, most notably for the SYNAPT G2 system shipments that were delivered to academic institutions throughout the quarter. Going forward, as a result of continuing austerity measures, we expect less robust global sales to government agencies in Europe, Japan and the US. That's a segment that has recently accounted for about 5% of our worldwide sales.

A tough base of comparison limited the growth rate of our food analysis business in the quarter. You may recall we benefited from food safety-related business in late 2010, especially from sales resulting from dairy product testing in China. As a result of these strong results in the prior year quarter, our chemical analysis business, which includes food and environmental testing, grew more slowly in this quarter.

Within the Waters Division constant currency sales to the pharmaceutical industry grew faster than the overall business. Applications within pharma that are driving growth include biopharmaceutical development and QC testing. Similarly to what we saw in the third quarter, business to CRO's was robust while sales to generic manufacturers were adversely impacted by slower growth in India.

Instrument sales to industrial chemical customers, a business that represents less than 10% of our sales, held up fairly well in the quarter with strength in developing markets in Asia and South America offsetting slower growth in Europe and the United States.

Our TA division finished 2011 with a strong fourth-quarter performance that completed a year of profitable growth with yet another double-digit sales growth quarter. During the quarter the division benefited from sales of its new Discovery DSC and Discovery Hybrid Rheometer -- these are instruments saw balanced sales growth across major geographical regions.

In 2012 and beyond TA will expand its system offerings with more Discovery branded instruments while continuing to expand its applications footprints into biological and high temperature material testing opportunities.

If you look at our sales geographically, constant currency sales growth in Europe, as we saw in the third quarter, exceeded our overall sales performance. Expected weakness in European government and academic labs was more than offset by strength in our pharmaceutical and chemical analysis segments.

European pharmaceutical strength was largely outside of large multinational accounts and more focused on CRO and biopharmaceutical businesses. Within chemical analysis applications our European strength was most pronounced for food and environmental testing.

In Asia outside of Japan, our sales growth in China reflects the impact of large regulatory-related pharmaceutical and food analysis shipments in the prior year quarter. And with these factors backed out of the prior year result, business trends in China continued to be strong and in-line with our expectations.

Sales in India were somewhat lighter than we had expected as a significant evaluation of the rupee within the quarter resulted in some ordering delays. Underlying demand for new instruments, primarily for generic drug makers in India, remains strong and we anticipate seeing stronger ordering trends during the first half of 2012.

Waters Division constant currency sales in Japan were about flat for the quarter as relatively strong pharmaceutical sales were offset by declines in government and university sales. Though the general economic conditions in Japan are challenging, we feel that our competitive position is strong and that there could be an opportunity to grow our business there as we anniversary the terrible earthquake and tsunami that hit last March.

In the United States we benefited from strong chromatography instrument shipments to pharmaceutical accounts, continuing the trend of H-Class adoption that we saw earlier in the year. Sales to combined university and government labs grew in the quarter and we fulfilled orders for newly introduced instrument systems. As we saw in Europe, our strongest growth in the US was for instrumentation for our applied markets including food and environmental testing.

Now I'd like to talk about some of the product line dynamics that we saw in the quarter. Our recurring revenues, the combination of service and chromatography consumables grew at a high-single-digit rate in the quarter. The growth in chromatography consumables was driven by column sales in developing countries including China and India, while the growth of our service business was geographically balanced.

Looking at our Waters Division instrument systems sales, growth was comparable for LCMS instruments and LC instruments in the quarter. Key new systems introduced at ASMS, including our SYNAPT G2-S and ACUITY I-Class UPLC, shipped throughout the quarter.

Our tandem quadrupole growth was highest for the ultra-sensitive Xevo TQ-S system and during the quarter we introduced a new single quadrupole mass detector, the cutie pack SQD2. This new component has been designed to offer greater versatility, ease-of-use and reliability for routine mass detection. In addition, it provides users with Waters' Universal source design to facilitate methods transfer from our Xevo and SYNAPT platforms.

On the chromatography front, UPLC instrument unit shipments again grew at a double-digit rate with H-Class dominating ACQUITY sales. Throughout the quarter we manufactured and delivered ACQUITY I-Class instruments, primarily as front-end technology for our new research mass spec platforms.

If you look back at full-year 2011, the big story for us in LC has been the H-Class. Growth in shipments and revenues has consistently exceeded 20% through 2011 off of a strong 2010 performance. We feel we are entering 2012 with excellent momentum for our entire ACQUITY line and feel that there remains for us a very attractive opportunity to displace HPLC and routine testing and expand the application reach of liquid chromatography by promoting the performance, ease of use and reliability of UPLC.

In 2012 look for us to continue to introduce new application tailored systems that offer more complete workflow benefits to customers. Generally these systems will combine advanced mass spectrometry, ACQUITY UPLC and our new UNIFI platform with application-specific chemistries and software applications. Examples of this approach can be found in the well received systems we commercialized in 2011 including our systems for regulated bioanalysis and biopharmaceutical characterization.

Financially we are very pleased with our 2011 performance. As I mentioned earlier, 2011 was a year of significant investment for Waters as we continued to introduce advanced instrument systems, to invest in the development and commercialization of our new UNIFI software platform, and to bolster our field operations in the developing world. While doing all of the above we managed to expand our operating margins and generate record free cash flow, about $0.25 of free cash flow for every sales dollar.

Looking at capital allocation, we primarily used our free cash to fund the continuation of our share repurchase program, a program that over the years has reduced our share count by a third and meaningfully grown our earnings per share without adding risk to future earnings growth.

In 2011 we continued on our targeted and relatively conservative acquisition plan. Our most recent acquisition enhanced the capability of our TA group to more quickly access business opportunities in high temperature materials testing.

This type of smaller acquisition is emblematic of our strategy and is a template for what we are likely to pursue in the upcoming years. Though we can never rule out a more transformational M&A plan, it continues to be difficult for us to identify larger targets that in the long run will be accretive to our long-term sales growth and profitability.

Looking at 2012, we currently see fundamental consistency to the underlying drivers of our recent growth. Early in the year we will be comparing our business to performance in 2011 wherein a strong top-line accompanied by conservative spending combine to create a tough base of comparison for operating income growth. However, as we ramped SG&A spending during 2011, the comparisons will likely become more favorable in the second half of 2012 allowing us to achieve higher operating leverage.

The macro economic uncertainties that have dominated recent headlines including concerns about the health of European markets and global governmental austerity programs are the primary factors in tempering our 2012 growth expectations relative to the results that we have delivered during the past two years. We feel that our strong product positions and our access to growing markets in Asia, Latin America and Eastern Europe position us well to weather through the uncertainties I've already cited.

Globally we will remain confident that the pharmaceutical industry will continue to require our products for research and regulatory compliance applications. And we're also confident that our application tailored systems strategy will allow us to both secure a competitive advantage and expand our business into new application areas. Now I'd like to turn it over to John for a more detailed review of our financials and the outlook.

Thank you, Doug, and good morning. Fourth-quarter sales increased by 8% and non-GAAP earnings per diluted share were up 13% at $1.56 this quarter compared to earnings of $1.38 last year. On a GAAP basis our earnings were $1.51 this quarter versus $1.36 last year and a reconciliation of our GAAP to non-GAAP earnings is included in our press release issued this morning.

Reviewing Q4 sales results in comparison to Q4 last year, sales were up 8% with foreign currency translation about neutral to sales growth within the quarter. Looking at our sales growth geographically and before foreign-exchange effects, sales within the US were up 8%; Europe's sales were up 14%; Japan was flat; and sales in Asia outside of Japan were down 1% against a strong base of comparison of more than 30% growth in the 2010 quarter.

On the product front and in constant currency within the Waters Division instrument systems sales increased by 7% and recurring revenues grew by 7% this quarter. Within our TA Instruments division, sales increased by 17% versus prior year.

Now I would like to comment on our Q4 and full-year non-GAAP financial performance versus prior year. Gross margin performance came in as expected at 60.8% comparable to Q4 last year. SG&A expenses increased by 2% this quarter, slightly less than expected as a result of less FX translation impact.

R&D expenses increased as expected at about 4% within the quarter and our full-year effective operating income tax rate came in a little lower than anticipated at 16%. This is due to a modest shift in profits among our legal entities favoring our lower tax rate jurisdictions. Applying this tax rate to our full year on a pre-tax income increased EPS by $0.03 this quarter versus our October expectation.

On the balance sheet, cash and short-term investments totaled $1.3 billion and debt totaled $991 million bringing us to a net cash position of about $290 million. As for share repurchases, we bought 940,000 shares of our common stock for $73 million, this leaves $186 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 Q4 free cash flow came in at $150 million after funding $17 million of CapEx and adding back $3 million of non-cash tax benefits from stock-based compensation. This result excludes $16 million of capital spending associated with a land purchase this quarter for our new site in Manchester, UK.

Accounts receivable days sales outstanding stood at 64 days this quarter, down three days from Q4 last year. And inventories declined by $35 million this quarter as new products shipped and expected volumes and the traditional heavier Q4 volume consumed inventories built up earlier in the year.

Overall we are pleased with our full-year 2011 financial performance as we grew sales 10% in constant currency. This performance was graphically balanced and on the back of a 10% organic growth year in 2010. Gross margins expanded by 30 basis points in 2011 and operating margin expanded by 1% as we leveraged our cost base around the world. And our non-GAAP fully diluted earnings per share for the full year were up 18% over 2010.

Cash flow was very strong this year too with free cash flow of $461 million after funding $68 million of capital spending and adding back $18 million of non-cash tax benefits from stock-based compensation. This result again excludes $16 million of capital spending on the new Manchester UK facility. Of this free cash flow $11 million was used on M&A and [$314] million was used to purchase 4.5 million shares of our stock under our share repurchase program.

As we now think about 2012, we continue to see stability in the majority of our markets and continued momentum in the acceptance of our new products. However, we may see pockets of weakness in our government and academic segment as the year plays out given the budgetary pressures many countries are facing, particularly in Western Europe and the US.

So we believe that it makes sense to begin 2012 with a more cautious growth outlook than what we have recently experienced and we currently expect sales to grow by 6% to 8% for 2012 before currency effects. Currency at today's levels is expected to reduce full-year sales growth by 2%. Reported sales growth then would be between 4% and 6%.

Moving down the P&L, gross margins are expected to be about flat with 2011 at about [60.5]%, operating expenses are expected to grow at a rate that is slightly less than sales as we continue to manage our operating expenses judiciously. Our net interest expense is expected to be approximately $24 million and we expect our operating tax rate to be about 16%.

Our fully diluted average outstanding share count is likely to be just under 90 million shares outstanding. And rolling all of this together, we currently expect 2012 non-GAAP earnings per fully diluted share to be in a range of $5.15 to $5.30 per share.

As we think about our expectations for the first quarter of 2012, please remember that 2011 started off extremely strong with 16% sales growth and 28% earnings growth. Against this challenging base of comparison we expect organic sales growth of about 5% in the first quarter of 2012. Currency translation at today's rates would reduce sales by 2% resulting in reported sales growth of about 3%. Non-GAAP earnings per fully diluted share are expected to be in the range of $1.05 to $1.10 for the first quarter. Doug?

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

(Operator Instructions). Doug Schenkel, Cowen & Company.

You again highlight resilience in the pharmaceutical end market both in the US and Europe. You attributed this to an ongoing replacement cycle. Could you just provide any color that's available on how balanced this replacement cycle is across LC and mass spec? And also how balanced this replacement cycle is across the different sub segments within pharma, meaning CRO's, generics and big pharma?

Okay, sure, Doug, I can give you a little bit of flavor on that. The quarter was remarkably balanced, I'd say, between LC and mass spec, very similar results. If you look within pharma, CRO's were the strongest players and our big pharmaceutical customers were flattish. So that's probably I think been a continuing dynamic, although we did see an absolute level of growth from our big pharma customers as you moved quarter to quarter through 2011.

I'd say the applications that were notable for their growth, first of all H-Class continues to be the strongest performer in the chromatography area, and we see some clear signs that that's penetrating into the pharmaceutical QC applications and that's penetration. So that's I think good news for us.

At the same time, some of our new systems offerings that are aimed at the bio area, biopharmaceutical QC in particular, which is a different animal of course versus the small molecule world, are doing very well. I think those are probably the notable dynamics.

And in H-Class specifically, you've done quite well there, there's a big installed base to go after in -- of the Alliance instruments within big pharma. How would you characterize what inning you're in in terms of replacing those instruments with H-Class?

Oh, I think we're still early in the game there. We're really only in the second -- 2011 was the second year of the H-Class introduction and I'd say we really only started penetrating those applications this past year. So I think we're early on and we're very optimistic about the long-term opportunity there.

Great, thanks for taking the questions.

Jon Groberg, Macquarie Capital.

I just had two quick questions. The first, Doug, is I guess maybe if you could provide a little more color geographically around how you expect things to play out in 2012. Obviously you ended the quarter where Asia, ex-Japan, is down a little bit. I know you were up like 32% last year, but maybe just talk geographically about how you see things playing out.

And then, John, I was just wondering if you could -- you mentioned kind of flattish gross margins. I know currency probably is a little bit of an issue there. Can you maybe just talk about kind of organically what's happening on the gross margin line? Thanks.

Sure. I think in terms of -- the way to think about our outlook geographically is you think about what we call the emerging areas, we continue to use that terminology -- Latin America, Asia, Eastern Europe, we strongly believe that those areas are going to grow above our corporate average in 2012. That's been true in the past; it's likely to be very true in 2012. We've got the applications, the organization and the momentum going there and I think that's very credible.

We think the area of slower growth is still likely to be Western Europe. There's enough uncertainty around elements in Western Europe. Even though we're coming off a very good quarter, we're still a little cautious about Western Europe going forward and Japan. We're hopeful that we see some relief, just structural relief in Japan, but we're going to wait to see that. The US I think is probably going to be around the corporate average. So that breaks out. John, do you want to cover the --?

Sure. On the gross margin, the thinking there is that we've got a little bit less volume leverage at a top-line growth that's 6% to 8% instead of the 10% we just came off of. We plan on having a higher mix of ToF-based products in the mix which tends to pull the margin down a little bit. And as you said before, Jon, FX is a little bit of a head wind. So there's small amounts of tenths of a point movement plus or minus the kind of net to a rather flat position versus 2011.

Quintin Lai, Robert W. Baird.

Again looking into the 2012 guidance, you talked a little bit about maybe a cautious look on the academic side. What are you seeing on the pharma side, Doug? Continued uptake -- is it new products or is it also just replacement of some of the -- changing out the aging instruments as well?

Well, Quintin, we have some natural benefit from products that were introduced in the second half of 2011 getting full bore in 2012, as well as focused application systems like the regulated bioanalysis system which combines the I-Class with the TQ-S and the system for biopharmaceutical QC, all of which were introduced kind of during 2011 and should provide is incremental growth in 2012.

I think if you look at applications or broad areas of our business for next year, we think the broad scale pharma business is likely to grow at about our corporate average. We think the application specific areas like food safety, food testing, clinical are likely to grow a little bit above average and the government and academic business is going to grow below average. That's kind of the mix of our plan for 2012.

Then with respect to kind of new product introductions, you launched the TQ-S I guess 2 now and last year you introduced I-Class early on in the year. Is it now that new products just get launched when they're ready or off the cycle of waiting for big conferences like ASMS?

Well, I think generally you'll find that major LC introductions are still made around Pittcon. And major -- particularly higher end mass specs are introduced around ASMS. So that's first quarter for Pittcon, late second quarter kind of for ASMS.

That's still traditionally -- now you may introduce a system and not be shipping it for a couple of months. You typically don't want to wait much more than two or three months before you're ready to ship it because you're getting expectations and you're maybe cannibalizing your existing product line. So I think that's pretty much par for the course in the industry and it's just the introductions don't necessarily closely follow first shipments.

Thank you.

Nandita Koshal, Barclays Capital.

I guess my first question would be on the competitive dynamics. This is an issue that we get asked about a whole lot and I was wondering if you could talk about any market share dynamics in your key technology end markets about LCMS, please?

Well, it's always dangerous to talk about change in market share dynamics based on one quarter. So I think there's nothing that I would feel comfortable about saying as a result for the fourth quarter. If you look at the full year and you look at our organic instruments growth that was north of 10%, I think it's pretty -- I'm pretty secure in saying I think overall we've picked up market share in 2011.

I think H-Class continues to penetrate into new labs and new applications that we didn't serve before. So I'm pretty comfortable with that. I think the introduction of our new mass spec systems has clearly garnered us new business. But I think in general -- I think that mass spec business continues to be very competitive. Nobody's getting out of the business. And so I think it continues to be a pretty vibrant competitive area for all of us suppliers.

Thanks, Doug. I guess I was wondering with the consolidation that we've seen in the industry and more LCMS full suite of offerings coming from competitors, I was sort of wondering if that has changed anything.

Oh, I'd say certainly coming from consolidate -- I don't see any major dynamic going on as a result of consolidation, certainly not at this point. I'd say the competition that we're looking at, particularly in the mass spec arena, come from the same places we've seen it for the last five years using the same competitive tools. And I don't see very much in the way of shifts resulting from consolidation there.

I really appreciate the commentary. And maybe one quick one for John on the gross margins. I know you mentioned the ToF's in the mix; but, John, could you talk a little bit more about just the instrumentation system? We see some amount of slowdown on the instrumentation side and mix shifts towards the recurring revenues. What sort of benefit can we see from maybe improved attach rates on consumables or revenue pickup from your service investments last year? Thank you.

I guess I'd say generally, Nandita, that we're looking at growth rates for 2012 that are relatively comparable for instruments and recurring revenue. So if there's going to be a mix shift in the year it's going to be rather small. So I wouldn't think it would result in more than a 10 basis point change from flat. So I would say it's possible but not likely to be that significant.

Thank you.

Ross Muken, Deutsche Bank.

On the Asia ex-Japan business, obviously a tough comp in the quarter. As we sort of move into Q1 with the Chinese New Year a little bit earlier this year, do you have sort of comfort in sort of stabilization acceleration in that business based on the order patterns we sort of ended the quarter with ex some of those one-time headwinds from last year. Are we seeing any confirmation of that in Q1 so far?

I'd say as we look at the base of comparison and the pace of business in Asia, we're pretty comfortable that we're back to a more traditional growth rate in that region of the world. We've got year-end spend in India that we expect to see come through and the basic comparison in China is easier. So the expectation is for meaningful growth coming out of that region of the world pretty early in the year.

Were you at all surprised by the magnitude of the strength in late December? I know the world was sort of an odd place from the summer through the early fall to winter just from an uncertainty perspective. But it seemed like we've seen some decent follow-through in the month of December in terms of re-acceleration. Were you kind of surprised by that on the capital equipment side at all?

I wouldn't say we're terribly surprised. I think the fourth quarter -- always when completing the year you want to finish strong. But there was nothing remarkable, I don't think, that went on in the fourth quarter. I know there was some cautiousness on the part of observers of the industry but we didn't -- the quarter was well balanced interestingly. It wasn't like we saw late strength in any particular area that pulled out the quarter. I think the balance is kind of what's notable in the results.

And just lastly, John, what are the rates you're using for the FX count? Because we're getting for Q1 as well as the year, even our current rate, something a bit less of a headwind than what you provided.

Yes, I'm using the euro at somewhere around $1.28, $1.29, the yen somewhere around JPY77 and the pound around $1.53. There are a basket of other currencies throughout the world that we do consider; these are the major currencies, but there are Canadian dollar, Aussie dollar, there's other places that need to be considered. And I'm coming up with kind of a weak 2% effect in the first quarter, pretty full to a 2% effect for the full year, Ross.

Okay, great. Thanks, John.

Dan Leonard, Leerink Swan.

What scenarios for government funding are in your forecast? Do you assume something like an 8% cut to the NIH budget or are you assuming something less than that? If you can just walk me through that.

The NIH budget isn't all that important to our run rates, Dan. John, what's the amount that's directly --?

$15 million or so direct. It's a percent of our business, 2% at the very most, if you try to roll in, that's best we have.

And government spending overall, yes, it's not that. But it's clearly an area of cautiousness, particularly it's an area not only in the US, but in Japan and in Western Europe. So we're anticipating that that is going to be slower next year than we saw this year. And it's probably going to be more flattish than anything else.

Okay. And then just one quick follow-up. What are your expectations from your generic customer base given that we're in the peak year of the cliff here? Do you expect they're going to continue buying as usual or did you see anything like a big bump in orders in advance of the generic Asian cliff that maybe will present a tough comp?

Well, I think you're really going to -- we think about the generic business kind of in two pots, a big pot being in India and another big pot being almost everywhere else, some of it within big pharma companies, some is independent stand-alone generics.

Clearly in India we saw a slowdown in the fourth quarter that our accounts tell us is solely due to the weakness in the rupee and the need to recalculate their budgets and redo their capital. They're highly optimistic about returning to a significant growth phase as we go into 2012. We've seen that kind of behavior before and we believe that that's going to happen.

If you look at the rest of our generic business, it was a good year in 2011. I see no indication on the part of those accounts that they've stopped investing for the future. And I think we're pretty confident as these accounts look at the productivity capabilities in UPLC that this is another area where the move to UPLC is likely to continue and offer us growth opportunities going forward. So overall I'd say generics look good for 2012.

Okay, thank you.

Amit Bhalla, Citigroup.

I wanted to get a little bit more color on the industrial chemical business segment. You talked about Europe and US having slower growth. Can you put some numbers around that and give us some detail about how you're thinking about that segment in 2012?

Yes, I think we're a little bit cautious as we think about Western Europe and maybe a little bit of impact associated with a lower GDP in that region of the world. So we've seen across this year relatively strong growth in our industrial business including reasonable growth in that geography. We think we might see that business in Western Europe slow down.

I think offsetting that to some extent is we have some pretty good confidence that with the TA division there's a number of products that are recently introduced and others that are coming that will continue to drive growth, at least in their portion of that industrial segment. So seeing it move to mid-single-digit growth from a double-digit growth or a high-single-digit growth is probably a reasonable way to think about that business as we think about a 6% to 8% business overall.

I'm not including in that food safety and other applications that I think will grow faster. But the segments that go to the Dow's, DuPont's, the 3M's and there equivalent counterparts overseas are likely to be under a bit more pressure we feel in '12 as we move forward.

I think the good news is that those accounts generally are in good financial condition. They've improved their balance sheets, improved their earnings. So that might be an area where the results exceed our expectations coming up.

Certainly TA you might consider is a little bit of the canary in the mine shaft. They have a high preponderance of business in those industrial accounts, particularly polymer application. And there's no real signs of slowing there. So that might be an area where we prove to be a little more conservative than the actuals.

And just a quick follow-up, John, on the SG&A. Can you just talk a little bit about the cadence for the year? Should it be flat throughout given the investments you've already made or are there any particular quarters where we should expect any bump-ups in the absolute SG&A spend for 2012?

No, I don't think there's anything from a base of comparison that that's difficult. I think you'll see SG&A track the sales growth minus a half a point to maybe a point and a half with a difference in growth rate if you will across the year. So I would not expect to see major deltas by quarter as we think about the four quarters of '12 versus '11.

We did ramp up SG&A a little bit across 2011, so the comparisons are a little bit tougher in the first --

Later in the year.

-- quarter and easier in -- later in the year.

Yes, but not dramatically so.

Okay, thanks.

Tycho Peterson, JPMorgan.

Good morning. Just following up on some of the pharma questions earlier, obviously, you saw some momentum here in that business; you talked about it growing faster than the overall business. Given where we are in the QA/QC adoption cycle for ACQUITY, why couldn't that continue to outgrow the overall business? I think your comment before was that could be closer to flattish for the year for large pharma.

No, I said large pharma -- let me repeat myself. Large pharma overall in the fourth quarter was flat growth. But we did show incremental revenue from those large pharmas -- we are talking the top 15 to 20 accounts -- sequentially during the year. So fourth quarter was the biggest quarter in the year, but it often is. And pharma all in for the fourth quarter grew at the corporate average. So those are the facts.

H-Class for both the quarter and the year was the fastest growing LC in our business and the fastest growing applications for H-Class were in small molecule QC. So just so we understand our factual situation.

Now, we think H-Class is going to continue to grow faster in those applications. It's really a question in pharma as to where the balance of that business comes in next year. R&D spending across the base of big accounts, generics and other biotech accounts. So right now, we're saying that that's likely to be at the corporate average next year. If we see stronger penetration in the H-Class across small molecule world, that is likely to be a benefit. But that's what we've got modeled in our expectation for 2012.

And are you seeing interest from customers from first standardizing on H-Class? I know you had some customers previously standardize on ACQUITY before we launched H-Class. So just wondering if you're seeing that as well.

I'd say we're seeing customers standardize on ACQUITY UPLC technology; we have some very clear examples of that. That may mean that they're using I-Class in research applications with mass spec and they're using H-Class.

We're still seeing a kind of powerful story for these accounts who have traditionally used HPLC in their quality control who like the idea of buying H-Class, being able to use it for their traditional methods with their traditional chemistries as they take a longer time to upgrade to true UPLC applications.

What's interesting is we really are seeing them migrate to UPLC applications. It's all a question of the pace and the momentum that that builds. But I think the evidence is pretty strong that that's the direction they're going in.

And then you guys recently announced the partnership with Tecan for clinical assay platforms, obviously using your existing technology. But just talk a little bit about how you're thinking about the clinical opportunity going forward. You've obviously touched on it in various parts of the mass spec business previously.

Yes, I think the clinical applications are an interesting area. I'd say in the last several years we've devoted more time and attention to clinical applications than we have historically. We've been particularly successful I'd say in providing systems for clinical monitoring in the anti-rejection immunosuppressant marketplace. We've seen good success in vitamin D analysis.

And as we've gotten more intense in those areas and we've built our organization up, we've looked at more opportunities to utilize particularly the power and the broad spectrum capabilities of mass spectrometry to penetrate into areas that more traditionally used other diagnostic tests.

So I'd say we're investing pro rata more in that area, we think there are many opportunities. It's a very broad category, you know monitoring of pain medications, forensic analysis. When we talk about clinical it's a broad area and I'd say overall you'd see that area of our business grow faster than average over the next five years.

Okay, thank you.

Jon Wood, Jefferies.

John, can you walk us through the cash assumptions in your modeling for '12? So specifically operating cash flow, CapEx, both the base level and whatever you're going to do on the micro mass facility and then your base assumptions for share repurchase, please?

Sure. Well, we think our net cash flow is going to be somewhere in the $500 million of free cash flow, if you will, after CapEx. CapEx is probably going to be somewhere around $75 million, that does not include capital that we'll deploy on the Manchester facility which is likely to be somewhere between maybe $30 million and $35 million depending on how quickly construction begins.

As it relates to the share repurchase program, the guidance that I've provided contemplates share repurchases at about $70 million or so a quarter across the year -- in equivalent buckets across the year. So about $280 million to $300 million or so in free cash flow procured evenly across the quarters for the year.

Okay, great. And then the little acquisition you guys did in the third quarter, the contribution there, it basically rounds to zero, correct, on kind of the growth rate for '12?

Yes, yes.

De minimis.

Yes.

And then, Doug, any comments just on the acquisition pipeline as it stands today. Are there more Anter type acquisitions in the pipe or is there a mid-sized deal you see six to 12 months out? Just any commentary you can give us on --?

Yes, I would say more on the Anter or slightly larger size, but not medium-size. The ones we're talking about range on the revenue line from $5 million in revenue to maybe $15 million to $20 million in annual revenue. And we're tending to be more successful on the smaller ones and they've done very well over time for us. So we'd like to continue it and we like the risk profile. And we'd love to do a $50 million one that was just as good, but those are harder to find.

Okay, very good, thanks.

Peter Lawson, Mizuho Securities.

Doug, the slightly less than expected EPS guidance for 2012, was that mostly driven by the top-line uncertainty or in those difficult comps in one -- in the first-half or the negative effects from FX on the P&L?

I'm sorry, I didn't get the full gist -- slightly lower guidance for 2012, is that --? I'm sorry I didn't get the implication.

Yes. And what are the moving parts there? The top-line uncertainty, the difficult comps in the first half or negative effects from FX on the P&L?

Yes, the biggest change we see -- two dynamics I'd say. We're a little more cautious about the university and government piece of the business worldwide and the significant change in foreign currency year over year. And the foreign exchange, a 2% change, while we're relatively well hedged compared to a number of companies worldwide, there's no question that a stronger dollar does negatively affect our results. An estimate of how much that affects us next year is probably in the $0.10 range versus 2011. Is that right, John?

$0.10 versus a flat currency scenario. So it's about a nickel per point roughly. That can vary depending on which currency, but I would tell you that if we were talking about 6% to 8% growth with no currency impact our earnings would be a dime or so higher than what we're describing.

Thank you, that's really helpful. And then the CRO strength, was that US strength or emerging market?

That's worldwide. I'd say we saw real strength in Western Europe. But generally it's a common dynamic in our business that the CRO's were strong.

And then just use of capital. Is there a high likelihood of expanding that buyback program and the potential pacing of the existing buyback?

Well, it's been true for about nine years now, so I see no reason why it's not likely to be true. It would be unusual in the extreme for us to do significantly less than that. If there were a large meaningful acquisition on the horizon, which we don't see, that would change things. But absent an unusual transaction we would continue to deploy cash to buy back our stock.

Thank you so much.

Derik De Bruin, Bank of America.

I just want to dig in a little bit on the academic stuff. So, John, you said -- or Doug, you've basically said that you had strong G2 sales to your academic customers in Q4. Were the orders placed -- everything fell off the map on September it sounds like for a lot of the companies. Were the orders placed for the G2's that you shipped in Q4, were those placed prior to September or were they after September? I'm just trying to see if we're seeing order growth in the academic markets late in the year.

They're some of each, Derik. There's no doubt though that we ended -- we went into Q4 with a very meaningful backlog on the G2. We booked orders in the fourth quarter as well that we were able to satisfy and we booked orders in the fourth quarter that are now in backlog leading into Q1. So just the fact that the product was slow coming out of manufacturing that we did build up a meaningful backlog both in the second and third quarter for that product though in particular.

So for the last two years you've grown R&D over 9%. How should we think about R&D growth for 2012? It sounds like -- you've done some major product introductions, I would expect to see some moderation.

Yes, I'd say we're going to continue to spend on R&D as we need to. I would say that it's likely to be closer to growth in sales than SG&A. It's possible in a quarter or two that you'll see us growing a bit faster than sales overall.

We're not looking at changing in a meaningful way the percent of R&D that's -- or some sales that R&D represents. But there will be some new products that will require some project expense that's a little bit lumpy that you'll see across the quarters, but you're not talking millions of dollars, you're talking $1 million perhaps in one quarter that's a little bit out of place versus prior year.

A growth rate in one particular quarter that approaches 10%, for example, would be a pretty high expense in that quarter. So I don't think in sum total there's a lot of variability you'll see in our R&D spending as you think about this year versus history.

Great. And then just one final question. So I thought one of your more interesting product introductions in 2011 was the UNIFI system and just trying to integrate your CDS with your mass spec system. And how has that been received by the market? And I would assume that -- the bioanalytical is kind of the first launch with that. I assume that there's other ones coming with that. And I guess can you just talk a little bit about your -- what you're kind of seeing for uptick?

Yes, I think what you've seen us do first with UNIFI is launch it on specific application systems. So regulated bioanalysis and biopharm. When the UNIFI platform kicks in as a major dynamic is when it's launched as the full service upgrade to our Empower both single system and network system applications. That won't happen in 2012.

So you're going to continue to see it operate as a powerful software platform on specific niche products this year. The reaction has been very good, but I wouldn't have you believe that it has a major impact on our software business in 2012.

Great. Thanks, Doug.

Isaac Ro, Goldman Sachs.

Hi, guys, this is actually [Justin] in for Isaac. Thanks for taking the questions. Looking at the academic government piece, you guys seem to be a little bit more cautious heading into 2012 than you were in 2011. I think one of the things you highlighted this quarter that was weak was Japan. Is the addition of Japan being another weak geographic area the source of the incremental concern or are you guys just kind of taking a more cautious approach?

I'd say it's just generally a more cautious worldwide approach given the fact that we're almost certain to see government budgets be more conservative going forward not only in the United States but certainly in western Europe and in Asia. So it's a broader dynamic rather than specifically Japan.

In Japan we've had tough conditions, particularly in our segments where government spending, if anything, was tilted more towards the effects of the tsunami and the earthquake rather than at the more classical broad-based R&D applications. So we might actually see a little bit of benefit in Japan, but that remains to be seen.

And then kind of looking at it from the first half of this year and the second half versus what your outlook is for 2012, is it fair to say that your outlook is more cautious than what you experienced in the back half of this past year or is it kind of continuing the third-quarter/fourth-quarter run rate for the academic demand throughout '12?

Well, I'd say our outlook for the first half is influenced more by the strength that we saw in the first half of our business last year, particularly the first quarter. Our fourth quarter -- again, there's a bunch of dynamics going on there, but our absolute growth rate in the fourth quarter was a little bit lower than our full-year growth rate.

And so that -- we're not expecting our run rates to change significantly as we go into 2012. But we are a little bit more cautious, particularly on the university and government side of our business, combined with tough comparisons in the first half. I'd say that's the most notable structural difference in our outlook.

I guess what I'm asking is, from the fourth quarter what you saw in US -- or global academic government to what you're expecting for the full year for 2012? Are you expecting a sequential deceleration?

We're thinking that government academic could be flattish perhaps for 2012 and that's versus being up low- to mid-single-digit in 2011. So, yes, we are thinking that it's possible that government agencies and the spend promoted by governments will be a little bit more pressured in '12 versus '11.

Okay, thanks a lot.

Den Arias, UBS.

Just wondering if this year we should expect some new products on the chemistry side for I-Class? And if so what that might do for pricing or for margins on comps?

I wouldn't say anything unusual. We're always introducing new flavors, but I wouldn't have you believe that a new platform introduction is imminent to affect that growth rate significantly in really application specific columns that are aimed as much at stimulating system sales as they are consumable sales.

And then, Doug, I know you've commented on pharma quite a bit, but I guess just briefly -- a lot of what we're hearing on biopharma in '12 is related to the prioritization of late stage projects towards trials maybe at the expense of some early-stage stuff.

But presumably this is not a new phenomenon. So I guess from your perspective is there anything different about what you're hearing in the way that you're -- or the way that you're viewing '12 versus '11 relative to project preferences?

Well, I think certainly what -- one of the strongest application areas that we've seen in the second half of '11 is in biopharmaceutical QC. And that's, as you know, a much different animal than the typical QC applications for small molecular weight drugs. It's in some ways more art than science there, but it's getting more refined and clearly demanding more advanced technologies like higher-end LCMS.

So, we've been very gratified to see that our offerings in that biopharmaceutical world have been very well received. I think that is highly likely to continue through 2012. But I also think that, particularly with monoclonal antibodies, a lot of research going on, a lot of that research pound for pound takes more higher-end analytical instrumentation than small molecule drugs. So I think that general dynamic works in our favor.

Okay, thanks very much.

And I'm being told that we probably have time for one more question. So we'll take one more and then let you guys get back to the markets.

Sung Ji Nam, Cantor Fitzgerald.

I just have two very quick ones. John, going back to gross margins, longer term is there further head room for growth aside from volume leverage? Or is it largely driven by product mix at this point?

Well, we've ended up over time with a manufacturing strategy that has moved products into Ireland, has moved products into Singapore and across many years we've been able to take advantage of that both from a product cost perspective as well as a tax rate perspective. And I would tell you that right now that program is pretty much complete. The businesses are growing with volume, but there aren't large numbers of products that continue to be ramped up to move into those lower cost jurisdictions.

All of that being said, when the business grows in the high-single-digits, you're right, there's still volume leverage to be had. And thinking about the business having 10, 20 basis points of gross margin expansion through the leverage of a fixed base of manufacturing costs is still true. We're a little cautious in stating that flatly this year just given the fact that the lower end of our range perhaps doesn't provide all of that and FX is a bit of a headwind this time.

So I wouldn't say that the gross margin expansion party is over. Certainly large leaps in the expansion are as a result of product transfers, but small incremental movements with volume we should continue to see as time goes forward.

Great, thank you. And, Doug, you mentioned in terms of the I-Class platform primarily going as a front end to your research based on mass spectrometers. What component of that is that coming from -- product replacement of your legacy UPLC platform? And over time I would -- my question is what percentage of your overall legacy UPLC platform do you anticipate to be replaced with this I-Class platform?

I think that's a very fair question. I think currently you'd say that I-Class is probably replacing classic ACQUITY. And over time you're probably going to see most of that research grade ACQUITY translate from classic ACQUITY more to the I-Class. I think that will take a while. Certainly we're pricing the I-Class at a premium to the classic UPLC and we think that makes the most sense right now. But over time those systems are likely to come together.

Great, thank you.

You're welcome. Well, thank you all for being with us and we appreciate the high quality of your questions and the interest and we'll look forward to talking to you all again at the end of the first quarter. Take care.

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