Waters Corp (WAT) 2013 Q4 法說會逐字稿

Good morning and welcome to the Waters Corporation fourth-quarter 2013 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 the Waters Corporation fourth-quarter and full-year 2013 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 Corporate Vice President.

Today I will start with an overview of the business, then John will follow with details of our financial results, and Gene will conclude our prepared remarks with an outlook for our business in 2014. But before we start I'd 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 Q1, full-year 2014.

We caution you that all such statements are only predictions and that actual events or results may differ materially. For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see our 10-K annual report for the fiscal year ended December 31, 2012, in part one under the caption, Business Risk Factors, and the cautionary language included in this morning's press release and 8-K.

We further caution you that the Company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding possible future income statement results except during our regularly scheduled quarterly earnings release conference calls and webcasts. The next earnings release call and webcast is currently planned for April 2014.

During this call will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is attached to the Company's earnings release issued this morning.

In our discussions of the results of operations we may refer to pro forma results, which exclude the impact of items such as those outlined in our schedule entitled, Quarterly Reconciliation of GAAP to Adjusted non-GAAP financials included in this morning's press release.

Thank you, John. Well, I'm pleased to tell you that our 10% constant currency revenue increase in the fourth quarter was a strong finish to 2013 and resulted in full-year sales growth that was in line with the growth that we had anticipated early in 2013.

A look at the full-year -- stronger academic and industrial spending, significantly in overseas markets, offset less robust sales growth for new instrument systems primarily to our larger pharmaceutical accounts. These trends were reflected in our product line revenues in 2013 as high-end mass spectrometry sales to academic and biotech accounts were particularly strong while growth for core chromatography instruments recovered late in the year.

Throughout the year our recurring revenues grew consistently indicating increasing utilization of instrument systems in the installed base, a positive indicator for future new system sales. Across our markets pricing held up well in 2013 while gross margins were slightly off from last year's due to a combination of currency effects and product mix dynamics.

Through the year we judiciously managed our expenses while adding required field personnel to support customers in rapidly expanding regional markets. In addition, we supported several new product introductions for our Waters and TA divisions. Our slower than typical growth in operating income was largely due to the sharp decline in the Japanese yen.

So for the full year our adjusted earnings per share were up moderately to $5.04, an increase that's significantly less than typical given our history of generating operating leverage along with accreting EPS through our share repurchase plan. However, the effects of currency translation in 2013 largely explain the slower than expected growth in adjusted EPS.

Looking at the fourth quarter, constant currency sales in the Corporation were up 10% for both instrument system sales and for our recurring revenue. The strength that we saw in the quarter was balanced in terms of major geographical regions and across our product line. In comparison to our results earlier in the year, the most pronounced improvement was in the sales growth for Waters division instrument systems which were up close to 10%.

Geographically and for the Waters division sales growth in the United States was up 9%. In the quarter we saw a meaningful improvement in pharmaceutical spending and very strong industrial, chemical and food analysis seems. For the full year sales in the US were up at a mid-single-digit range.

Sales growth in Europe for the Waters division was up 5%. As we saw earlier in the year for Europe, academic spending was robust and grew at a strong double-digit rate in the quarter. Year-over-year European pharmaceutical sales were slightly down in the quarter due to a strong performance in the fourth quarter of 2012. However, looking at this segment from an orders growth perspective and sequentially from the third-quarter results the trends are encouraging and more reflective of the improvement that we saw in the US.

Waters division constant currency sales in Japan increased in the quarter due to continued government funded spending primarily for research focused applications. The strength in Japan was particularly driven by strong sales of high-end UPLC MS/MS instruments for academic institutions.

In the quarter our business to industrial and pharmaceutical firms continued to be under pressure. We are hopeful that new stimulative policies will revive the export driven industrial firms in Japan and consequently result in higher levels of scientific instrumentation demand.

Our quarterly sales growth in China returned to a solid double-digit rate as administrative delays that we cited in the third quarter were largely resolved and allowed us to return to a quarterly revenue growth more in line with the true business momentum in China. In the quarter shipments of instrument systems to governmental and academic customers drove our growth with end-use applications for life science research, food testing and environmental monitoring all showing strength.

Sales in India were down modestly in the quarter compared to the 2012 quarter, but shipment volumes were a little higher than in the third quarter of 2013. All in and in light of improving ordering trends, we continue to feel that demand in India has stabilized and hold out optimism that 2014 will be a better year. For the full year our business in India did grow modestly, in contrast to the contraction in sales that we experienced in 2012.

Our sales in Asian markets outside of Japan, China and India grew at a double-digit rate, an improvement over the growth we saw earlier in the year and a promising sign as we enter 2014.

Our TA Instruments division had a very strong quarter with double-digit sales growth primarily based on strong demand across the entire TA portfolio of products and for most large regions. Core thermal and rheology instruments provided a strong foundation for growth for the year and in the fourth quarter TA closed on two small acquisitions and is quickly integrating these product technologies into the TA lineup.

Now I will discuss some product line dynamics that we saw for the Waters division in the quarter. The division's recurring revenues, the combination of service and chromatography consumables grew at a high-single-digit rate in the quarter. Chromatography consumable sales were strong in the quarter and grew by 10%.

A portion of this growth can be attributed to a favorable base of comparison and an extra selling day in the quarter. However, the lion's share of the growth is associated with the continued rapid uptick of ACQUITY columns including our new line of CORTECS column.

Our service business also performed very well in the quarter and grew at a high single rate with balanced strength across all major regions of the world.

Looking at our Waters division mass spec instrument system sales, we continued to see strongest demand in the quarter for high-performance QTof technology systems, including Xevo and SYNAPT platform instruments. New SYNAPT G-2 SI, which we introduced at ASMS last June, continues to be well received for large biomolecule applications.

At the same time our UNIFI enabled Xevo QTof instrument is potentially defining a new market category for bench top accurate mass and rapid screening mass spec capabilities for both life science and applied market applications.

Sales of our tandem quadrupole system were flat in comparison to a strong quarter last year. Sequentially demand was up nicely from shipment levels in the third quarter and in 2013 we enjoyed our highest volume for tandem quadrupole technology instrument in our history.

In all 2013 was a strong year for Waters in mass spectrometry. We believe that we have secured a differentiated position in research Tof technology by uniquely coupling high resolution ion mobility capability and advanced software to deliver an easy to use and performance leading SYNAPT system.

On the chromatography instrumentation front I believe we delivered an impressive quarter from multiple perspectives. Importantly we saw a nice recovery in demand from our pharmaceutical customer base in classical small molecule applications to augment an already healthy trend in biomolecule applications. The improved demand was primarily for ACQUITY UPLC systems.

In addition, our chromatography instrument growth was further enhanced by higher sales volumes of application tailored systems including our proprietary UPC2 instrument and our advanced polymer characterization system. Both of these systems are quickly reaching a point where larger accounts will begin to incorporate multiple systems into their research workflows.

Most significantly we are excited and pleased with the recent introduction of a new detection technology that is attractive for existing and new customers alike. When we last spoke in October, I noted the introduction of the Waters ACQUITY QDa, a compact easy to use and cost effective LC detector incorporating quadrupole mass spectrometry technology and enabling chromatographers to augment their current instruments with molecular mass measurements.

The reception of this product among our existing base of users has been very positive. And the QDa was quickly recognized as providing a unique set of attributes. This positive first impression was quickly followed by a high interest to purchase, quickly generated purchase orders and instrument deliveries.

Interestingly, we found that about half of early orders for the QDa included the purchase of complete Waters systems rather than a mass detector upgrade to an existing instrument. We are confident that our late year introduction of this technology has provided our customers the opportunity to include this new system in their 2014 capital purchasing plans.

Thinking more broadly, this new detector is enabling a first of its kind LC system for both research and routine testing applications, much in the same way compact bench top GC MS technology transformed the gas chromatography market.

So in summarizing our fourth-quarter results, overall instrument system demand improved meaningfully from what we experienced through the first three quarters. The weak public sector demand in the United States and restructuring activities at some of our large pharmaceutical accounts continue to serve as headwinds. Global strength in public sector segments along with continued improvements in industrial demand contributed to a strong quarterly result and allowed our full-year sales growth to recover to a solid mid-single-digit level.

Throughout the year our recurring revenues delivered predictable and profitable growth. Our TA Instruments business continued to perform well, contributing positively to the top- and bottom-line of the Corporation. Sales growth in this position suggests that TA is doing a good job at attracting an increasing share of the improving advanced materials characterization market.

We see factors that suggest to us that market conditions in 2014 will be as good or better than those of 2013. US public spending for research is likely to improve with the issuance of an NIH budget; the gradual global economic recovery will hopefully continue; and China will continue to invest in scientific infrastructure.

In addition, India may return to more reasonable growth and we are encouraged that our technologically differentiated products, such as the SYNAPT G-2 SI and our new ACQUITY QDa, will contribute -- will continue to attract new orders even from a challenging pharmaceutical end market.

Before turning you over to John and Gene, I will say a few words about our non-operational plan. In short, please expect more of the same in terms of our capital structure and deployment of our free cash. On the M&A front we will continue to seek smaller complementary technology opportunities that fit our profitability and growth characteristics.

Our strategy remains focused on seeking assets that enhance our technology and market-leading positions within the broadly defined liquid chromatography, mass spectrometry and thermal analysis markets. The key deployment for our cash flow has been toward our share repurchase program and this will likely continue into the future.

In closing, I believe we have a great business and a proven long-term strategy, a commitment to the continuity of this proven business model has allowed us to both maintain market leadership and strong returns over the last 20 years.

As we look toward the future and consider our capital allocation, research priorities and management development plans, we plan to proceed in ways to best ensure that the core tenets of our strategy will be preserved and consequently our customers, employees and shareholders best served.

Now here is John for a review of our fourth-quarter financials.

Thank you, Doug, and good morning. Fourth-quarter sales grew by 10% before currency translation. Currency translation reduced sales growth by 2% resulting in 8% overall sales growth. Non-GAAP earnings per fully diluted share were up 7% to $1.70 this quarter compared to earnings of $1.59 last year.

On a GAAP basis our earnings were $1.65 this quarter versus $2 last year and a reconciliation of our GAAP to non-GAAP earnings is attached to our press release issued this morning.

As I just mentioned, before foreign currency translation sales were up 10%. Looking at this growth geographically and again before foreign exchange effects, sales within the US were up 10%, Europe was up 5%, Japan was up 3% and sales in Asia outside of Japan were up 15%.

On the product front and in constant currency within the Waters division instrument system sales increased by 9% and recurring revenues grew by 9% as well this quarter. Within our TA Instruments division total sales increased by 16% versus prior year.

Now I would like to comment on our Q4 non-GAAP financial performance versus prior year. Gross margins came in as expected at 59.5% and continue to be negatively impacted by foreign currency translation versus prior year.

SG&A expenses were up 6% this quarter driven largely by sales greater than forecasted generating higher variable compensation expenses in several geographies. And R&D spending was up by 8% driven by heavier project expenses on new products.

On the tax front a higher sales performance was weighted towards our higher tax rate geographies and brought our full-year tax rate to about 14.5% versus our previous expectation of about 14%. Within the quarter the effect of applying this rate to our full-year pretax income reduced our earnings per share by about $0.04.

In the quarter net interest expense was $6.9 million and share count came in at 86 million shares, 1.9 million shares lower than Q4 last year, as a result of our continuing share repurchase programs.

On the balance sheet cash and investments totaled $1.804 billion and debt totaled $1.323 billion, bringing us to an net cash position of about $481 million. As for Q4 share repurchases, we bought 755,000 shares of our common stock for $75 million. This leaves $348 million remaining on our 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 $133 million after funding $23 million of CapEx. Excluded from this CapEx amount is $8 million of spend associated with major facility construction. Accounts receivable days sales outstanding stood at 69 days this quarter, down two days from Q4 last year. And in the quarter inventories declined by $16 million.

So for the full year 2013 sales grew by 5% pre-currency effects while currency translation reduced sales by 2%. Non-GAAP earnings per fully diluted share were up 2% to $5.04 per share versus $4.93 last year.

2013 saw significant currency headwinds from the Japanese yen. All in, currency translation reduced earnings by $0.27 versus prior year. Without this currency effect the 5% sales growth would have resulted in approximately 8% growth in non-GAAP earnings per fully diluted share.

And now here is Gene with the current financial view of 2014.

Thank you, John, and good morning all. Looking ahead to 2014 our outlook generally assumes a continuation of the market conditions we saw in 2013. Specifically, we are envisioning stable increases in our recurring revenue sales in combination with a modest increase in the growth rate of our instrument shipments.

This growth in instrument sales is associated with an assumption of a continued improvement in the overall global economy and from our new product initiatives. We feel these factors combine to support a mid-single-digit organic sales increase for 2014. Currency at today's rates and in light of our sales and cost footprints should be about neutral to our revenue and operating income growth.

Moving down the P&L, gross margins for the year are expected to be about equal to those in 2013. Volume-related manufacturing efficiency gains may likely be offset by increases in costs associated with the start-up of our new UK mass spectrometry center and potentially with higher initial manufacturing costs for new products planned for introduction in 2014. At the projected sales growth rate operating expenses are expected to grow at a rate that is slightly less than sales.

Moving below the operating income line, net interest expense is expected to be around $28 million. We currently expect our operating tax rate to be between 15% and 16%. This projected change in rate is higher than our 2013 rate and assumes that United States R&D tax credits that reduced our 2013 rate by more than 1% will not be extended into 2014.

We plan to continue our share repurchase program throughout this year at a rate that we expect will result in an average diluted share count of about 85 million shares. Rolling all of this together and on a non-GAAP basis, full-year 2014 earnings per fully diluted share are projected to be within a range of $5.35 to $5.55.

Now looking at the first quarter of 2014, we are estimating that sales will grow at a slightly slower rate than for the full year. This expectation is due primarily to a strong first quarter in 2013 and accordingly a moderately more challenging base of comparison. Currency at today's rates is about neutral to sales and the stronger euro being offset by weakness in the Japanese yen.

An increase and our effective tax rate will adversely impact the first-quarter's earnings. Last year in the first quarter the rate included the recognition of both a 2012 R&D tax credit as well as one in 2013. The 2012 credit was only passed by Congress early in 2013.

So rolling all these factors together, we expect the first-quarter earnings per diluted share to be in the range of $1.05 to $1.15. Thank you. Doug.

Thank you, Gene. And, Amy, I think now we can open it up for Q&A.

(Operator Instructions). Jon Groberg, Macquarie.

Thanks for the question. Doug, I'm just thinking a little bit -- I'm sorry, I was bouncing back a little bit between calls. But I know you highlighted the strength of QDa and I'm just trying to think as we move into 2014 here, new products overall, what else can we expect and what would you expect their contribution to be to the top-line kind of over the next 12 to 24 months?

Well, I think, Jon, we have got a number of things that we are aiming for -- essentially the Pittsburgh conference and ASMS, which is the middle of the year. But of course the QDa, we really only saw their results in the fourth quarter and so you will wind up seeing three quarters of incremental growth from the QDa in 2014, which we expect to continue to provide some momentum there.

We are not prepared to discuss the mass spec introductions that are coming at ASMS, but I think you can tell from our history to expect some new innovations showing up at ASMS. We're also seeing continued momentum coming out of our introduction of the UPC2, which had good results in 2013 and we think we have many years of momentum that are likely to come out of the UPC2 product line.

And finally TA, which has substantially refreshed their product lines over the last year and a half, as well as incorporating the series of their small acquisitions over the past 12 months, we think we can get incremental growth out of the TA product lines too. So that is all very encouraging I think.

Okay and maybe just a follow-up tying into the end markets. Are you seeing any end markets in particular more receptive to buying some of these new products as opposed to the ones that are maybe still a little bit more conservative?

Well, I think what we saw as we came through the latter part of 2013, I think the key word is broad-based. We saw excellent response across most of our major product segments and saw an improvement in the broad-based pharmaceutical market.

Granted it wasn't so much big pharma that that came from as much as specialty pharmaceuticals, biotech. But I would say we are certainly seeing a good response to our technologies across the applied markets as well as the broad-based life science markets.

Okay, great. Thanks a million. Congrats.

Daniel Brennan, Morgan Stanley.

Just wondering if you can dig and a little bit more on pharmaceutical trends. Doug, John and Gene, maybe just give us some color. I know, Doug, on your wrap up you mentioned there was still kind of a headwind, although they did improve this quarter. So kind of what are you seeing from kind of your large pharma in terms of restructuring kind of trends in spending, whether it be geographically or just any anecdotal color to help us. Thanks.

I would say we are continuing to see slow momentum out of the large integrated pharmaceutical companies. We still see a lot of restructuring going on there. I would say looking for silver linings, the response to the QDa across big pharma in the early stages has been very good. We haven't seen them move en mass to the technology, but I would say we are very hopeful about the response in big pharma to the QDa and what it can mean across their applications.

But clearly the strength that we've seen in the broad-based pharmaceutical life science market has been really outside of the big pharma accounts. Particularly strong in CROs, particularly strong in biotech. So that's what we saw coming out of the latter part of 2013, Dan.

Great. And then would you characterize your 5% organic as kind of a conservative guide given the improvement in NIH funding, TMIs globally improving and some of the trends that you are seeing with your customers?

Well, I would say we are trying to be as realistic as possible as we always try to be in looking out 12 months. I think clearly we saw a bit of an inflection in the fourth quarter and that's very encouraging coming late in the year as to what that might portend for 2014. But one swallow doth not a summer make.

So we want to put probably a little bit more behind us before we take that kind of growth to the bank. So we are trying to walk that line. We'd clearly like to over deliver on our forecast, that has been hard in some years past and maybe we are set up to reverse that trend. But I think we've got to put a little more experience behind us.

Ross Muken, ISI Group.

I'm curious what your thoughts are -- I know you made some comments on India but in general just of the emerging markets. We've obviously seen a little bit of wobble to start the year just given some of the currency movements. And then specific to India, I am curious how much of it is sort of folks coming back online versus sort of a steadying out in the rupee versus just easing comps to kind of give us a little bit of recovery there?

Ross, I think India has clearly got a mixed bag of all those things. You've got these companies trying to restructure their financials based on a weaker rupee; you clearly have weaker bases because of the lower growth in 2013. You've got regulatory issues that I think they thought were behind them but I'm sure you saw the FDA issues with Ranbaxy just this week. So they are probably not all behind in India.

But I would say we are cautiously optimistic that we will see better results in 2014 than we saw in 2013. And it's the sum total of all of those factors. We don't see -- contrary to losing market share we think we are holding our own to cautiously gaining some market share in a tough market. So that is the India story.

The emerging markets is definitely not homogenous. We see areas in Asia that you'd characterize as emerging as generally very strong. Our performance, outside of China and India, in Asia was very good. And China, if you consider that emerging, continues to avoid -- coming out of 2013 we had just as many discussions with major opportunities in China as we had going into the year. So we see no underlying factors in China that suggest a slowing there.

In the areas of the Middle East, Israel, Saudi Arabia, Turkey, very good performance. So continuing signs of those emerging economies investing in our kinds of technology. (Inaudible) to say, I'm sure I'm being redundant, but these broad-based results that we saw and kind of building confidence is happening across the developed areas and most of the developing world.

I would say Brazil continues to raise question marks, it's a big economy and we've seen some delays in Brazil. But it's not a big part of our emerging market. So outside of that I would say generally it is all positive.

Great, thanks for the color.

Brandon Couillard, Jeffries.

John can you quantify the impact of currency mix and amortization on the gross margin in the fourth quarter?

John, do you want to answer --?

Yes. Currency had about a 50 bps hit in Q4, about 70 bps for the full year.

And amortization?

The UNIFI we are talking about?

Yes.

Yes, UNIFI was about 35 bps in Q4 and about 50 bps for the full year.

Great, that is helpful. And then could you elaborate on the impact of the Japanese stimulus funds in the fourth quarter in terms of revenue contribution? And should we expect a tailwind from that program into the first half of the year?

Yes. If I take a look at the -- this is Gene, the factors that drove growth in Japan were heavily weighted towards government and academic spending. In fact, as we look at the first quarter we are expecting some new tax policies to potentially get some of the pharmaceutical and industrial chemical spending to a higher level.

So it is not clear the government spending on research will be as pronounced in calendar year 2014 as it was in 2013. However, the base of comparison that we have on pharmaceutical and industrial chemical spending is favorable this year and we see both the economic stimulus policies by the Abe government as well as potential tax reform as being a positive to the non-governmental spending in Japan.

Super, thank you.

Dan Leonard, Leerink.

Wondering how your communication that half of the QDa were full system sales as compared to bolt-ons. How does that compare verses your expectations? And do you think that is sustainable?

I would say it is probably twice as loaded towards full systems, Dan, than we anticipated. We thought early on, particularly in a tough capital market, that customers would be more inclined to find available capital money to satisfy the detector, but probably not the full system. And what we found was clearly a little surprising to us that even though this wasn't a system that we had available so that they could budget for it this year, they were very strong in finding end-of-the-year money in order to purchase.

And your views on the sustainability of the QDa to pull through full LC sales?

We don't think -- it is a mixed bag. We certainly believe that there is a major opportunity to have accounts upgrade their detector, installed detector base to this new technology. But at the same time it looks like early on there's going to be a strong desire to bring in full system.

So I think what we are likely to see and what we could well be seeing is these accounts are buying three or four and bringing in full new systems in order to get to the experience on it and to expose it to their broader laboratory environment. And once that happens then they may proliferate it into their more existing systems. That could well be what we are seeing at this stage of the game.

Got it, thank you.

Paul Knight, Janney Capital Markets.

Doug, when do you think the diagnostics market is meaningful? And where do you feel your, I guess, competitive position is as you kind of look at in the years ahead?

Paul, I think long-term we are very optimistic about the opportunities of our technology to serve emerging needs in the diagnostic marketplace. As you know, we kind of satisfy it on a niche basis today with immunosuppressant drug monitoring and vitamin D and pain management applications and of course neonatal screening.

And mass spec has made some inroads -- you see in the rapid microbiology area, there has been some success there. But it is still kind of a niche oriented marketplace for LC and particularly for mass spec. We are investing early funds in several areas. We are doing some things on a cooperative basis with some thought leaders in this area that we think will pay off, probably not early on in 2014.

But as we look out past 2014 into the broader area of things that are in classical diagnostics or broader than that in the kind of metabolomics and proteomics area looking at Biomarkers, looking at early on indicators of disease, we are seeing broad scale interest there across many, many thought leaders. And it is blurring the identification of what is truly a diagnostic application versus what is an early on biomarker application.

So I think that is coming, but I think you are going to see the classical R&D and discovery applications certainly being serviced in 2014; getting into the actual clinic probably comes later on.

And last, in the ultrahigh pressure marketplace I think there is some that try and grab a niche by having lower pressure formats. Does that really matter in ultrahigh pressure that you can offer more of a dynamic range? Or is it just a game of getting the most atmospheres?

Well, I think what you are probably hearing, Paul, is competitors trying to position themselves against the market leaders. And so, if Waters has a particular position that is carved out in the UPC, UPLC arena, and others can't get there they will try their best to say it doesn't matter or we can do almost as good.

I think what we find is that customers are looking for the best performances to fit their application. And we don't sell high pressure in and of itself; we sell an instrument that best performs with the chemistries and the software that we bring.

So in some applications you absolutely can get the absolute best performance by utilizing the highest specs of a system and in other applications it's the chemistry and the software and service that most bring them into our realm. Art, you want to expand on that?

Yes. The reality of the situation is that having been first to come out with a very intensified position in the [ultra] performance area, if you look across our product line we cover the complete gamut of just about everything that anybody is thinking about from all forms of mixing, all forms of pressure, all forms of interfacing.

And so, from our standpoint this is all focused on solving specific problems. And most of the competitive positions against us pick one or two of those areas and try to emphasize it. If you go broadly our position in the marketplace has not been affected much at all in the last 10 years since we introduced the products.

Okay, thank you.

Isaac Ro, Goldman Sachs.

Just wanted to ask a question on pricing. Could you maybe try and quantify how much pricing contributed to growth in 2013 versus 2012? And as a follow-up what is baked into your assumption for guidance this year?

In a classical sense pricing is a push, Isaac. We introduced new products and to the extent that they establish a different price point, that certainly has a mix dynamic we would call it. But if you look at the prices of existing products, they are essentially equal across the years.

Got it. And then for this year, same sort of (multiple speakers)?

You should anticipate the same dynamic. Margin -- and you can see that in the margin dynamics. The margins are stable X the currency dynamics that we have talked about.

Got it. And then on the tax rate, just given the unusual cadence there you had last year, can you shed a little bit more color on the cadence this year? You didn't talk about first quarter, but maybe for the rest of this year?

Isaac, we're expecting the tax rate to be between 15% and 16%. And the base of comparison is going to be most dramatic in the first quarter because we started last year off at a rate that included two US R&D tax credits. We are also not sure if we -- we don't discount the possibility of seeing an extension by the US Congress into this year but we haven't factored that yet into our assumptions.

So if tax law stays the same, Isaac, you should see the rates stay stable right across the quarters. Unlike last year when the change in the law mandated how we recorded it differently in the first quarter versus the rest of the year.

Got it, that is helpful. And they just last one if I could, Doug. Any update from the Board on succession planning? And specifically wondering where you guys are in narrowing the field of candidates and whether or not that list includes internal candidates at this point? Thank you.

Yes, sure. As I think everybody knows, the Board has established a successor planning committee that is meeting regularly, has retained an executive search firm. But we are still early on in the process. There is no fast burning fuse on this.

And so, I would say the Board is moving and a very confident but measured pace. And I wouldn't expect you to hear anything dramatic on this anytime soon. The Board is definitely considering all possible strategic candidates, both internal and external. And it will probably be the middle of the year before we are prepared to announce any update on this.

Okay, fair enough. Thank you.

Amit Bhalla, Citigroup.

I guess, Doug, I wanted to just understand a little bit more about performance in the quarter to the extent maybe you could characterize how much of a backlog drawdown you had and how much of a pull forward in sales you had in this quarter versus what you are expecting from the first quarter of 2014?

Sure. The simple answer is that if you look at our sales growth rate versus our orders growth rate, our orders growth rate was a little bit stronger than our sales growth rate. And backlog dynamics did not materially influence our fourth-quarter results.

So it is really still an open question as to whether the orders and the underlying strength that we saw in the fourth quarter, how much that portends for the future. And you can make a case that it is a stronger case for the future than we have seen. But, as I've said, we are going to be a little cautious in how we approach 2014.

And a follow-up. I guess on the gross margin side I was hoping maybe Gene or John could talk a little bit more about the dynamics between the UK facility and the volume gains for 2014, just trying to understand why gross margin won't tick up more.

And I guess I have one more for you on China. The big players -- GE, Siemens, Phillips -- have all talked about the slowdowns there. Do you look at that in any sort of lag factor as potentially impacting the business later in 2014 for you? Thanks.

The China question I think is a logical one for people to ask. I think, like a lot of areas, the fact that GE faces different dynamics in their infield in the United States or in Western Europe certainly comes as no surprise to you versus us. It is a different business; it has different dynamics behind it. We are in a totally different segment of the marketplace.

We think, and of course we try to monitor this with how much funding is available and what the underlying request for new applications are. I would say if anything we see increasing demand in China rather than decreasing demand. And yes, at various times we see this little funkiness with the release of funds. But I would say we see no current signs or underlying signs of reduced demand across our major served marketplaces in China. And on the other question, Gene, do you want to --?

Yes, on the gross margin front, Isaac, the --.

Amit.

Amit.

Oh I'm sorry, Amit, I am sorry. On the gross margin front, we typically get manufacturing leverage on the instrumentation side. And in prior years and when we have a typical growth rate in our instrument sales we'd usually talk about 20 bps worth of leverage on the manufacturing side.

As we begin to look at what we hope is conservative guidance for 2014, we are thinking that that sort of better absorption of fixed cost will likely be offset by some potential higher costs on the UK side as well as some potential mix dynamics. so it's those factors that are driving our assumption of a flat gross margin.

Looking at the effect of foreign currency, if you look at it on the top-line you are likely to see that stronger euro kind of offsets the little weakness in the yen. And again, as you are looking at gross margins be cognizant that it's really the yen and the pound that are the most important currencies to look at because we have a disproportionate amount of cost of goods sales that are pound denominated and we have a pretty low cost in Japan, [better] yen-based.

Amit, I think it is important to note that when we talk about the differential cost of our Manchester facility, what our Manchester folks have been residing in for the past 17 years, to call it manufacturing sites that Charles Dickens would have thought was not adequate would be probably being fair.

I mean, what they have produced in the kind of facilities that they have lived in has just been amazing. And we finally bit the bullet and have brought them into what we think of is the 21st Century. But that is coming across and it will take us a year to kind of leven those expenses. So that is why we are careful about describing bringing those costs, it will take a while to grow into.

Great, thanks a lot.

Doug Schenkel, Cowen and Company.

My first question is looking at the incremental margin of about 30% in Q4 which was on a really strong revenue growth number; this is arguably a little bit lighter than what one might have expected on that type of revenue growth. I think you could say that is even more true given the extra day in the quarter and that can have I think a favorable impact at the margin line especially if you have a strong instrument performance.

So with all that in mind, could you address any concern related to the margin performance as some might argue that this performance could be indicative of you approaching peak margins? And I think this is especially relevant given that your 2014 guidance seems to imply that you are expecting incrementals only in the 20s on mid-single-digit top-line growth.

Yes. Hi, Doug. The answer to that question is really based on the fact that the overage that we had in the fourth quarter put a fair number of our incentive plans in marginal payout situations from no payout as we made our way through the third quarter. So what you are seeing is an incremented spend in Q4 that is really making up for amounts that would have been accrued across the quarters had we anticipated that we would have reached this type of growth earlier in the year.

There is no doubt that Q4 was much stronger than even our internal forecasts. And fortunately for those in some of these geographies there is a payout versus nothing. And you are really seeing the impact of all of that, like I said, all in the fourth quarter versus spread across the year. So I think from that perspective you can understand how that surprise on the top line just translated to a little bit heavier spending down the P&L.

On the tax front, another area that took a little bit of the wind out of the balloon as well, again the overage was more a factor of production in the US, better experience with some of the mass specs that were coming out of the higher tax rate jurisdiction so it moved the tax rate a little bit as well and took away some of the leverage all the way to the bottom-line you might have expected.

And I wouldn't say really any of that is indicative of the ability of the business to leverage itself going forward. These are just plans that generally payout at a mid-single-digit rate, we have them factored into the guidance going forward.

And I think we are being hopefully a bit conservative on the leverage that we are looking at for next year and I would say if we are lucky enough to do a little bit better than the mid-single-digit you are more likely than not to see that create the type of leverage that you historically have seen from us is that may materialize as the year goes on.

Okay. So, that is really helpful. And I guess if we use that as a launching point into my follow-up, it seems like the guidance for incrementals, at least embedded into guidance for 2014, are a little bit lower than I would have expected. Again, that may just be a function of trying to be conservative as you head into the new year.

But if you look at, again, and this is nothing new, your high capital mix as a percentage of revenue. Visibility is clearly inherently challenging for you quarter to quarter, it always has been. It does seem like visibility has been a little bit more challenging than normal the last several quarters.

I think it would be useful to maybe just talk through to the extent that there are some efforts that you guys have made over the last several quarters to improve visibility, if those are progressing and how relevant are those as we think about your outlook heading into 2014 in what looks like a wider range at the EPS lines than I believe what we have seen from you for a little while. Thank you.

Sure, Doug. I mean I think visibility in our business, as in most of the life science tools people, is challenged because we work with such slim backlogs. And for all of us, most of our revenue is produced by orders that are generated in the quarter. So you are really challenged by looking at what you think is going to happen from quarter to quarter rather than some of the large industrial players who work with multi-quarters of sales are in their backlog.

And so, clearly as we look at 2013 we went from flat to low 1% kind of growth coming in the first quarter, gradually increasing, we saw 4% kind of growth in the third quarter and then very strong fourth quarter. So you are talking about, and clearly we influenced that, we think we are doing better than most. I don't think most people are going to produce 10% organic growth and the people we are seeing so far are about a third of that.

So I do think we are doing better. But it's tough to string that -- what do you string next to that and say the first quarter is going to be 12% growth? We think that is unlikely. Maybe we saw some end of the year budget flush in some of our customers. We clearly saw a strong response to our new product so we are encouraged about that.

But we think we are being rational and logical as we say the first quarter is probably not as strong as the fourth quarter. Where is it on that continuum? And certainly versus the first quarter of last year we think it is better. We will put a couple of quarters behind us and we will have greater confidence in how we proceed.

But at this point in the year, as we look out a full year, we think where we are is a proper mix between the encouragement that we saw in the fourth quarter and the possibility that we will see a blip or two as we go through this year.

Dan Arias, UBS.

Maybe just one for me, a bit of a bigger picture question for Doug. Doug, when you think about the mass spec deal for this year, do have a view on what technology or workflow area you think the industry might focus on? 2012 seemed to be a bit of a QTof year. Last year it looks like there was a triple quad focus. Is there anything or anywhere that you think is sort of ripe for attention in 2014?

I think outside of the single quad area or the QDa that we are very optimistic about; it is really a chromatographer's platform. I think it is going to be a continuation of the high-end research grade instruments, Dan. I think the interest in proteomics and metabonomics, this whole area of translational interest in getting molecules, either diagnostic molecules or therapeutic molecules, we are seeing from the cancer centers and from other therapeutic centers a huge amount of interest.

So they are looking for the most powerful technologies they can get. And they are very interested in both the physics of the high end as well as the software. So I would say that is the area that I would look to sustaining high interest.

Okay, thank you.

Peter Lawson, Mizuho Securities.

Just what worries you about the underlying business strength as you go from Q4 to Q1?

Well, I guess I see more silver linings, Peter, than I see looming dark clouds. I think that I wish the large integrated pharmaceutical companies had some more strength to them. So in a macroeconomic sense I don't see a lot of momentum coming out of big pharma. But I see a lot of continuing strength almost everywhere else in the life science arena.

So I don't see certainly any short-term issues coming out of China; just the opposite. We see more interest coming out of China. I'd say India is still -- I think we're going to have to wait until later on in the year to see a real bounce in India; not likely we are going to see an early-on return to growth in India.

But we continue to see good conditions in the United States and I think improving conditions in Western Europe. So I think that overall is more silver lining than dark cloud.

operator, I think since we are well past the bottom of the hour, we can probably take one more question before we let people go.

Derik deBruin, Bank of America-Merrill Lynch.

Just two quick ones. Can you tell us about the TA deals you did and how much that is going to contribute to 2014? And also, John, is this your last call?

I believe it is.

John, you can take care of both of those.

Yes it is, but I am -- and I'm going to let Gene talk about 2014's impact from TA. But, yes it is, thank you.

Hi, Derik. I think as you look at TA business and the 2014 Outlook, probably companies that we acquired before 2013 are going to have the biggest impact on the top-line growth. So these are the assets that we acquired that involve high temperature DSC as well as bio calorimetry.

The most recent couple of introductions are probably going to contribute less than a point of growth to the TA business this year, but potentially more significantly in 2015. So there is a little bit of a lag.

If I think about the growth that TA had in 2013, we probably got a couple of points of growth over the full year from those high temperature applications in bio calorimetry. But you had a very stable business in rheology and thermal analysis that had a nice growth foundation for that business.

That was a couple of points for TA, Derik, di minimis for the total Company.

Yes, correct. Yes.

So first of all I'm just going to say, John, it is been a pleasure working with you the last 13 years. I can't believe it has been that long. But good luck. And then I will go back to something more mundane on this is -- and I guess can you quantify, just given the pickup in pharma, I mean how much do you think was budget flush related? And I guess it sort of goes to the question of sustainability of the pharma business. You sort of alluded that; I'm just wondering if you could quantify how much flush could be from pent-up demand you thought there could be in the quarter.

Derik, I don't -- typically when we talk about budget flush we are talking about big pharma and we are talking about the fact that their capital plans are getting finalized later in the years and they are cautious early on in the years and then they find themselves with money to spend at the end. We didn't see that from big pharma. So -- and we don't think that much of what we saw in the fourth quarter was kind of big pharma funding through biotech joint ventures or things like that.

So, while you always think that you could be seeing an end-of-the-year dynamic, as we look at what actually happened in our fourth quarter we can't say particularly in our big US accounts that we have seen much of that. So, we are cautiously optimistic that this is more sustainable than a one-time event that dramatically influenced the fourth quarter.

Great, thank you.

All right, well, thank you all for taking the time to be with us. We certainly think we ended the fourth quarter on a high note. And we will look forward to updating you on our next conference call. Thank you. Bye-bye.

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