Waters Corp (WAT) 2014 Q3 法說會逐字稿

Good morning. Welcome to the Waters Corporation third-quarter financial results conference call. (Operator Instructions). 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. Well, good morning, and welcome to the Waters Corporation third-quarter 2014 financial results conference call. With me on today's call is Gene Cassis, the Waters Chief Financial Officer; Art Caputo, the President of the Waters Division; and John Lynch, the Vice President of Investor Relations.

And as is our normal practice, I will start with an overview of the quarter's business. And then Gene will follow with details of our financial results and then update you with our outlook for the fourth quarter. But before we get going I'd like Gene to cover the cautionary language.

Thank you, Doug. 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 the fourth quarter and 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, please see our Form 10-K annual report for the fiscal year ending December 31, 2013 in part one under the caption 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 regular scheduled quarterly earnings release conference calls and webcasts. The next earnings release call and webcast is currently planned for January 2015.

During this call we 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 and operations we may refer to pro forma results which include the impact of items such as those outlined in our schedule entitled, Quarterly Reconciliation of GAAP to Adjusted Non-GAAP Financials, also included in this morning's press release. Doug?

Thanks, Gene. Well I'm pleased to tell you that our third-quarter results exceeded our expectations. Continued strong demand from our global pharmaceutical customers contributed to faster sales growth rates in most regions of the world. Margins in the quarter benefited from higher sales volume and favorable product mix dynamics. In all operating leverage in the quarter in combination with steady share repurchases resulted in mid-teens adjusted EPS growth.

When you look at the third quarter, our constant currency sales were up 8% and our adjusted earnings per share grew 16% and that is clearly an improvement over the strong results we delivered in the second quarter.

For the Waters Division organic sales growth was 9% and benefited from stronger shipment volume to pharmaceutical end markets. Overall sales for our broadly defined pharmaceutical segment were up 12% in the quarter and 7% through the first nine months of 2014.

Global government and academic business also picked up nicely in the quarter with growth in the US and Europe leading the way. We anticipate that government-funded instrument sales in the US and Europe will remain strong in the fourth quarter and see some opportunity for improved demand from government and academic labs in our larger Asian markets, especially for our more advanced mass spectrometry-based instruments.

Our Waters Division industrial chemical and chemical analysis businesses declined at a mid-single-digit rate in the quarter due primarily to weaker demand in Asia and weaker cyclical demand for food safety applications.

Coming into the quarter we remained focused on monitoring business conditions in China. Earlier in the year delays in placing orders at governmentally funded institutions contributed to overall declines in China sales. In the third quarter we saw a continuation of this business trend and finished the quarter with a mid-single-digit decline in sales, although a modest increase in orders.

Though customer interest continues to be strong we do not expect to see a dramatic change in the fourth quarter and will incorporate a conservative short-term outlook in our guidance.

Sales growth in the US was encouraging in the third quarter. For the Waters Division sales were up 9%, the same growth rate as we delivered in the second quarter. Growth was strongest in our pharmaceutical and governmentally funded segments and elsewhere in the Americas business trends continued to be very positive across most customer segments.

Waters Division constant currency sales in Japan increased slightly in the quarter with strong growth in pharmaceutical and solid growth in industrial chemical accounts, somewhat tempered by declines in public sector spending -- and that is a trend that we saw also in the second quarter.

In India we saw a continuation of healthy double-digit sales growth as generic drug firms resumed adding new instruments and replacing old ones. In addition, our service business in India benefited from strong demand for validation services as drug firms there are actively taking steps to ensure regulatory compliance.

Our European Waters Division sales at constant currency were up 9% in the quarter. Pharmaceutical sales were up mid-single-digits while our government and academic business accelerated and grew at a strong double-digit rate.

Looking at our TA Instruments division, global sales were up 3% in the quarter. The slower sales growth can be explained by a strong mid-teens growth this division delivered in the prior year's quarter making the comparisons difficult.

Geographically sales in Europe and Japan were strongest this quarter while more challenging business conditions in China and in smaller developing countries slowed TA's overall growth. Looking to the fourth quarter we expect constant currency growth at a stronger mid-single-digit rate for TA.

Now I'll talk some about Waters Division product line dynamics that we saw in the quarter. Our recurring revenues, the combination of service and chromatography consumables, grew 9% in the third quarter. Waters' service business was generally strong across all major regions and the trend towards higher penetration for service contracts was apparent in the quarter's results.

On the chemistry front our Column business benefitted from strong pharmaceutical demand in both research and quality control laboratories. Our new line of CORTECS Columns has been very well received and we have recently expanded our high-performance Column offerings for biotherapeutics.

Waters Division instrument system sales grew at a high-single-digit rate in the quarter. Demand improved across most regions and especially for pharmaceutical applications and for governmentally funded and academic labs. Overall demand for research focused UPLC MS systems was up double-digits and particularly for proteomics and phenomics applications.

Our new UPLC QTof system, the Xevo G2-XS introduced earlier this year at ASMS, has been very well received across a wide range of life science applications.

On the tandem quadrupole front we just began shipping our recently introduced Xevo TQ-S micro late in the third quarter. This new instrument delivers a unique combination of performance and value in a compact bench top design and shipments in the fourth quarter expected to contribute nicely to our overall instrument systems growth.

In addition, third-quarter sales of our highest performance tandem quadrupole system, the Xevo TQ-S, significantly benefited from our new ionKey source technology. As you may recall, this technology integrates high-performance tile-based UPLC separations technology with our StepWave ion source to effect dramatic improvements in analytical sensitivity.

Sales for this technology have been particularly strong at select international drug firms for early- to mid-stage drug development applications and we believe that successes at these accounts will drive wider adoption.

Speaking about mass spec technology, I'm pleased to tell you that we acquired the assets of MediMass in July. This acquisition provides us with an ion source technology called rapid evaporation ionization mass spectrometry, or REIMS for short.

Though this new technology has value across a wide array of research applications and is complementary to other atmospheric pressure ionization techniques that we offer, we are very excited about the longer-term benefits of REIMS to our recently announced health science initiative.

This initiative, which we formally organized earlier this year, recognizes an important transition in medical research that demands a suite of usable advanced technologies, including research grade mass spectrometry, to attain a more comprehensive understanding of disease. This molecular-based understanding will result in more effective predictive diagnostic and therapeutic tools to cost-effectively manage human health.

For example, leading oncology researchers in North America, Europe and Asia, are envisioning technology such as REIMS not only for research and diagnostic workflows, but also for surgical procedures wherein careful extraction of cancerous tissue can be more effectively accomplished with a specialized REIMS probe integrated with a surgeon's scalpel.

This [ionide] concept currently under development exemplifies the long-term potential for innovations in mass spectrometry and improving medical outcome. More broadly our health science initiative is recasting Waters as a key player in next-generation medical research. Working with leading researchers across the globe we are developing new workflows to more effectively cross reference proteomics, metabonomic and phenomic data to better predict, characterize and diagnose disease.

Going forward we believe we established a strong basis and differentiated position to achieve market leadership in a rapidly growing and profitable business opportunity.

Return now to the recent quarter, on the chromatography front all major system offerings performed well in the quarter. ACUITY instrument system sales benefited from yet another strong quarter for ACUITY QDa mass detector shipments. And the primary application area for this new detection technology is in the area of small molecule drug research.

And in the third quarter we saw drug research customers purchase the QDa as a detection module for existing UPLC or HPLC systems as well as within new system orders. The sales ramp-up of the ACUITY QDa is on track to generate about $20 million in sales in its first calendar year on the market.

Now I'd like to briefly discuss the outlook for the fourth quarter. Against a strong prior-year comparison we expect constant currency sales growth in the mid-single-digit range. This level of growth will allow the Company to finish the year with a top-line performance that is consistent with our original guidance which, as you may recall, did not anticipate slower growth in China.

For the Waters Division we believe that the strength of pharmaceutical demand that we have witnessed for the past two quarters is sustainable and that our recurring revenue will continue to deliver predictable growth through the fourth quarter.

We're also encouraged by the success of our new product launches including the ACUITY QDa and our new Xevo mass spectrometry platforms. In addition, there are near-term and significant opportunities associated with the health science initiative that I discussed earlier.

On the M&A front and for the Waters division we continue to see opportunities to benefit our long-term initiatives in applications such as food safety testing, microbiology and clinical diagnostics by licensing and acquiring innovative technologies.

For our TA division we will likely continue a consistent and focused business acquisition plan. However, given our primary focus on driving organic growth we plan to continue to deploy the lion's share of our strong cash generation on our share repurchase program.

Finally on the leadership transition front, we continue to actively progress in the search for my successor. Our primary focus is to ensure a smooth transition and I look forward to sharing information on developments on this topic probably during the next few earnings calls.

Now I would like to turn it over to Gene for a review of our financials and an update on our outlook.

Thank you, Doug, and good morning, all. In the third quarter our sales came in at $493 million, an increase of 8% over last year's with currency translation neutral to sales. On a non-GAAP basis our earnings per diluted share were up 16% to $1.38. On a GAAP basis our earnings per share were $1.34 versus $1.14 last year. A reconciliation of our GAAP to non-GAAP earnings is attached to our press release that we issued this morning.

Looking at our growth geographically and before foreign currency exchange effects, US sales were up 8%, Europe was up 9%, Japan was up 4%, and sales in Asia outside of Japan were up 5%. Strong sales growth in India helped offset a 5% decline in China. Rest of World sales, notably including Latin America, were up 15%.

On the product front, and again in constant currency terms and within the Waters Division, instrument system sales increased by 8% and our recurring revenues grew by 9%. In all the Waters Division sales were up 9%. For our TA Instruments division constant currency sales, including instruments and service, increased 3% again off of a tough base of comparison.

Now I would like to comment on our third-quarter's non-GAAP financial performance versus the third quarter of the prior year. Gross margins came in at 59% versus 58.1% in the third quarter last year as mix dynamics and continued manufacturing productivity gains offset some currency headwinds.

SG&A expenses were up about 3% on a constant currency basis with the impact of currency translation being about neutral. R&D expenses increased by 13% before foreign currency translation. And a stronger British pound in particular added another 3%.

On the tax front we now expect our full-year operating tax rate to be around 14%. Applying this tax rate to our cumulative earnings pushes our effective operating tax rate for the third quarter to 13.1%.

In the quarter net interest expense was $7 million and share count came in at 84.4 million shares or approximately 2 million shares lower than in our third quarter last year, a net result of our share repurchase programs.

Turning to the balance sheet, cash and short-term investments totaled $1.95 billion and debt totaled $1.4 billion bringing us to a net cash position of $516 million. As for third-quarter share repurchases, we bought 735,000 shares of our common stock for approximately $76 million. In all we have approximately $843 million in repurchases remaining on previously authorized programs.

We define cash flow as cash from operations less capital expenditures plus non-cash benefits from stock-based compensation accounting and excluding unusual nonrecurring items. In the third quarter free cash flow came in at $106 million after funding $17 million of capital. Excluded from this amount is $2 million of investments associated with facility expansion.

Accounts receivable days outstanding stood at 73 days this quarter, down one day from the third quarter of last year. In the quarter inventories decreased by $4 million in comparison to the second quarter, so sequentially.

As we think about our expectations for the fourth quarter of 2014 and considering the strong quarterly comparison, we anticipate constant currency sales growth to moderate from the third quarter's rate and come in at the 4% to 5% range. Currency translation at today's rates would reduce sales by about 2%.

Moving down the P&L, gross margins for the fourth quarter are expected to sequentially improve from the third quarter of 2014. Operating expenses will continue to be carefully controlled.

Moving below the operating profit line, net interest expense is expected to be approximately $8 million and we expect our operating tax rate to come in at about 14%. Rolling all these figures together we anticipate non-GAAP earnings per fully diluted share within a range of $1.83 to $1.93 in the fourth quarter.

Combining this fourth-quarter outlook with the results of the first nine months of this year we anticipate full-year 2014 constant currency sales growth of about 5% and adjusted fully diluted earnings per share in the range of $5.34 to $5.44.

These results assume the following: a modest full-year currency translation headwind to sales of less than 1%; a negative currency impact of full-year EPS of about 3%; a full-year operating tax rate of around 14%; and finally a full-year share count of about 85 -- an average share count of 85 million shares outstanding. That is it for me. Doug?

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

(Operator Instructions). Ross Muken, ISI Group.

So maybe let's start on the pharma side. This was obviously a really strong print and the year-to-date numbers are obviously quite good as well. As we think about the components in terms of the pharma subsector, SERO, biotech pharma, small pharma, etc., where are you seeing the biggest upside surprise? And to what do you sort of attribute I guess that magnitude change as we've kind of progressed through the year, which it seems like it is kind of gotten better?

Yes, Ross, it has gotten a little bit better I think, it is fair to say. I would say clearly this quarter India's return in the generic drug marketplace has certainly been strong, so that is a segment that we certainly saw here. Our biggest pharmaceutical accounts are up mid-single-digits or a little bit better. So that is an encouraging outcome for big pharma who are of course relying on specialty pharma more.

Biotech and specialty were probably, in the midline area of our markets, the strongest performers over and above the large integrated traditional pharma accounts. So generics and then specialty and bio and then big pharma as we would characterize it, probably in that order.

Thanks. And then maybe just turning to China, which has obviously been a huge focus and I think disappointing for many other than yourself. As you look at that market what are you keyed in on in any of the end markets in terms of giving you any signs of hope maybe of a stabilization or improvement?

Or where would you expect to see I guess the inflection first that may give you a better signal that at least some parts of that market may heal and improve versus other parts that are probably more structurally challenged going forward?

Well, in our business the piece that is most challenged is the one that is directly government funded and supported. The piece of the China business that's ex-pat, the large integrated companies, is doing just fine. So it is clearly a government dynamic that is affecting China.

And you know, it's pretty broad. It is not like a segment that is happening in research pharmaceuticals versus food safety or versus environmental. I would say they are all being affected. And I don't think one is being disproportionately singled out, where it's a cutback in healthcare spending or --.

I think it is just as general concern that is [capsulized] in this crackdown on corruption that I think has generally resulted in almost everybody in the approval chain taking longer to make sure all i's are dotted, t's are crossed and even when they are they go back for second and third checks.

So I think the encouraging thing is that our orders rate grew in the quarter. We are certainly still seeing the underlying demand there. And it is hard to believe that this whole condition can stay in the current condition too much longer. Now as we said, we are not anticipating a rapid turnaround in the fourth quarter, but I wouldn't be surprised to see some let up come soon.

Great, thanks, Doug, for the commentary.

Dan Leonard, Leerink.

As you think about your forecast for 2014 in China is coming in weaker, what is the primary offset that offsets that versus your view which enables you to make up for the weakness in China?

Well, I would say generally in terms of trade classes it is pharma that has continued to be a little bit stronger. We were probably always more optimistic than the analyst community, but it is probably even a few points stronger than that.

I also think this broadly defined healthcare initiative that we have talked about paying real premiums in the -- as the world continues to invest in genomics technology clearly, but also recognizing that proteomics, metabonomics, phenomics is going to be an important part of delivering meaningful diagnostics and therapeutics.

Really ramping up the investment in mass spectrometry particularly in the large-scale academic medical centers where we have had, boy, a huge amount of interest, a significant order rate and a drop sheet or interest level that's very significant. So I think that piece of the healthcare marketplace is very strong and you see that reflected in our results and in our expectations going forward.

That is helpful, thanks. And for my follow, Doug, you made some comments in your prepared remarks about a cyclical downturn or cyclical weakness in the food safety market. I was just hoping you could elaborate. Is that wrapped up in the China phenomenon as well or is there something different going on there?

It is definitely significantly affected by China and that we see in our orders in the quarter. But we have seen that food safety can be lumpy. If you look at it for the year, we will clearly have a good year in the broadly described food market. But quarterly you can find that Thailand booked a $2 million order last year and won't book again for another year or something like that.

So we find these lumps of business, some of which we anticipate and some of which kind of slip from one quarter to another, Dan. So, but calling it cyclical is probably a broad term that -- probably fair to call it more lumpy quarter to quarter.

Understood, thank you.

Doug Schenkel, Cowen and Company.

So the first one is on the healthcare in the clinical the end market, which I think you just talked about, Doug, and it did come up in the prepared remarks. So this is something we are hearing a lot more about from Waters.

It is not apparent that there is a lot of incremental investment at the R&D line or SG&A line related to that focus, although I'm sure there is some embedded in the numbers. I am just curious, can growth in this end market occur at a meaningful and sustained rate without a whole lot of incremental investment in product development and/or channel?

I'm just trying to think about how we model this really promising growth opportunity not just at the top-line but also at the operating line. And I guess while we're on this topic, could you just provide an update on what percentage of sales this accounts for right now?

Sure, Doug. I think in terms of the strategic approach to this market you are seeing two things. One of which is something that we've traditionally done and you have seen us to do for 25 years is we reallocate resources at both the R&D level and at the marketing level to focus -- we can move it as we think we've matured in one area and we can move resources into this clinical initiative.

As you can see from our growth in R&D, we have begun to increase R&D somewhat. But it has always been a hallmark of ours that we can redirect and then squeeze more out of our R&D spending than you might otherwise suspect.

The other thing, you heard me talk about the acquisition of MediMass and the REIMS technology and the iKnife. So we have not dipped our toes dramatically into the acquisition for product or for acquisitions sake. That is something that others are pretty good at and we kind of focus our acquisition on technology or specific missing elements of our product portfolio.

So we have done it with REIMS and MediMass, we did it with TransOmics acquisition about 14 months ago, and we do it with partnerships, particularly with thought leaders in academia and academic medical centers. That has been a particularly rich source with cancer centers here in the United States, with thought leaders in China, some of the biggest thought leaders in the world there, and in Europe.

So we have had very close relationships in those institutions. And we can therefore leverage their brains and their willingness to work as partners in the development of many of these technologies. So, yes, we might find ourselves on the margin having to allocate more resources, but we think we can do it within our P&L models without dramatically affecting our results.

Okay, that is very helpful. And then I guess my second question is on the succession plans. When you initially announced the plan to find a successor, you were clear in providing a window of about two years. So there is still a decent amount of time left in that window and you've been clear it possibly could stretch.

That said, I think it is fair to assert that many are surprised this is taking as long as it has, especially when you said in your prepared remarks you expect to have an update over the next few quarters. Could you just provide a bit more clarity on how this process is proceeding?

And then I guess secondly, I would think the longer this goes on the greater the risk that organizational uncertainty could become more of an operational concern. Do you agree? And if so, how are you managing this? Thank you.

Okay, I think it is a very fair question and I am sure you are probably the only one interested in this question, Doug, but I will focus on it. The process is one where the Board of Directors has assigned a subcommittee of the Board is principally responsible for the process. I participate with that committee as well as three other members of the Board including our lead director.

We have hired executive recruiters and we have been proceeding through that kind of normal phase of going through Phase 1 with candidates, getting names, getting their resumes, having initial interviews, then having a second interviews.

I would say that the process is not particularly troublesome from our perspective. Yes, we have had some candidates that we thought were going to be very good and might've proceeded very quickly. And then either they dropped out of the process for their own internal reasons or towards the end of a process we got cold feet and have moved on.

I would say the process is kind of either on or off. Until we are ready to announce a transition, either internal -- and as the process goes along the opportunity for an internal candidate to step up becomes somewhat higher in probability or an external candidate. And every day these mergers happen in our space and people don't want to work for a bigger company, the population of potential becomes richer.

And so we are examining new candidates on that front, kind of people who have more proven resumes. And so, I think the committee is very comfortable with the state of the process, with the richness of the short list that we are working, we are interviewing candidates on a weekly basis.

But to some extent I've always been comfortable with this window, I've always thought that it was going to take longer probably rather than shorter. As you can see, it doesn't seem to be hurting our results. And we are -- the organization listens to that story, is comfortable with it, and I think the evidence is that it continues to deliver excellent results across the board.

So, yes, maybe as the process winds along you worry about continued performance, but I don't think there is any sign that that performance is eroding. It is quite the opposite. The performance is improving. So -- and there is no indication that we will be bereft of senior leadership as this process goes along.

We will continue to run it the way we have run it for 20 plus years. And sooner or later we will have a good quality successor in place. And we are not uncomfortable with the particular level of uncertainty that exists today.

All right, thanks, Doug, that is really helpful and congrats on the quarter.

Isaac Ro, Goldman Sachs.

A question for you just on long-term product design. You guys have had it done in franchise for many years. As you pointed out the results continue to be strong. What is your philosophy around where the HPLC market is going from here?

And specifically what can you do to add value both in your pharmaceutical customers and in the research markets? We have had UPLC as a great technology for a while. What do you think -- how do you think about that adding value from here forward?

You know, Isaac, I think maybe unlike a some others in the industry, we have always believed that this is a very dynamic technology. Others thought 15, 20 years ago that you had to focus on cost reduction and cost of ownership that the technology couldn't deliver more bang for the buck in terms of speed, sensitivity or resolution. I think the most clear example that that was wrongheaded was ACUITY and UPLC that brought substantial new benefits to the user of chromatography.

You look at our introduction of ionKey technology as a separation device particularly for use in the mass spec arena. And early on our drug company users are astonished by the kind of user-friendliness and benefits in terms of chromatographic results that result from that.

I think you will continue to see benefits in that kind of technology, as well as just improved speed, improved separation products. One of the benefits that Waters brings here is our substantial capabilities in separations technology, in the column technology. And that has resulted in things like ionKey and being able to configure chemistry in more novel delivery packages that prove useful for the consumer.

You look at UPC2 technology, the use of supercritical fluids for bringing an additional tool to the bench top. And to be fair, we thought that UPLC squared was going to earlier on play and more dominant role. But I will tell you this past quarter saw UPC2 grow at a substantial rate. And we think that the future for UPC2 in any number of applications is going to significantly improve the toolkit for analytical chemists and will contribute to our growth rate substantially.

So -- and I haven't even talked about data and the ability of novel new software and application protocols to bring the kind of benefit particularly in this healthcare initiative as we look at diagnostics and the research marketplace. No one has invested the kind of resources that we have in providing novel both chromatography and mass spec analysis capabilities into the healthcare marketplace. And you will see that continue to push the marketplace forward.

I am sure I've forgotten two or three important things that we are also working on, principally in the hardware and the core pumping/injecting/detecting arena. I mean I am very excited about it and I think you can tell that we think we are still perched on a future that's very strong growth because of all these initiatives.

Very helpful, Doug. Just as a follow-up to that, the reason I asked the question is obviously with the transition in management coming up there is a think some curiosity about long-term innovation in the business. So if we total up all the things that you talked about between ionKey and UPC2 and software and diagnostics, if we look three and five years down the road do you think those initiatives will combine to be let's say more than 20% of your business?

Or just trying to think about where it is going over the long-term. Are these initiatives together going to be critical mass such that you have a whole new leg to the business or at least a new complexion to the total exposure of your product line?

Well, I think what you are going to see is this melding of pharmaceutical and clinical care. Right now kind of the pharmaceutical businesses take care of drug development kind of and then hand it over to clinical care specialists and they are kind of discrete markets.

More and more the combination of genetics and phenomics in drug discovery and drug development and clinical care are merging together. And I think the combination of those things is something that works in our favor. Because we are important players in certainly all elements of that and particularly a growing presence with our healthcare initiative.

So I think it will be a little bit tough to discern how much is kind of in a more traditional Waters modality and how much is kind of new work with cancer centers and diagnostic initiatives. But clearly we think a disproportionate amount of growth over the next five years is going to come out of these new partnerships and clinical care initiatives that result from phenomics and treatment modalities that are going to emerge.

All right, we will look for those. Thanks a bunch.

Paul Knight, Janney Capital.

Hi, guys, this is actually Bryan Kipp on for Paul, thanks for taking the questions. I guess to start, I was a little surprised on the strength in European academic. I expect that you're coming off of a soft comp, but I expected some incremental acceleration here. But the strong I think you said double-digit growth was ahead of my expectations. So just want to get some color there.

And what are you guys hearing from customers on the ground in that government academic sector in Europe? Because I've also heard some budget numbers were released that weren't adhering to the EU restriction regulations on GDP ratios for next year. So just thoughts on whether it was flushing as well or commentary would be very helpful.

Well, I will ask Gene to handle some more color. But I think it is interesting that in Europe you will hear us talk about broad-based throughout this discussion. But clearly it was broad-based in Europe. I mean almost every geography in Europe delivered good results this quarter.

So it wasn't just a UK initiative or a German initiative, it was kind of throughout Europe we saw this kind of response. And it was some of it was pent up, some of it was clearly as a result of the new products that we are bringing into the market. And our sense is that this is not a one quarter dynamic. Gene, you want to fill in some details?

Yes. I think you did a pretty good job, Doug, but I would just add some color that a lot of the strength that we saw in our European markets centered around our new QTof mass spectrometry offerings. And I think it is somewhat of a product specific or a system specific strength that we had in that business.

So, a combination of funding levels and a very competitive position based on new product launches primarily in high-end mass spectrometry [will] grow the European government and academic growth.

Okay, and just a couple follow-ups to that. Would you say sentiment is still pretty strong then on outward looking for your customers? And then I guess the other kind of two quick ones I have, follow-up is -- your orders were strong in China at the end of 2Q, you are citing strength in orders again 3Q, maybe a modest improvement in 4Q on revenues from China. When do think those orders will be pulled through? Is it more of a six- to nine-month tail? And I guess I will leave it at that, there is plenty of other people in the queue.

Just -- I think it's hard to tell given the strength of the concern on the part of customers with this whole corruption crackdown and concern. I think it's a good sign that we are able to actually book these orders, but it is still tough to get through the payment processes and the bank clearances in order to get revenue recognition.

So that is where the nitty hits the gritty I would say in this process. And until we see a more broad-based sign of that -- again, this is largely in the Beijing area in the government controlled segment. But we haven't seen that loosen up yet.

The color that I would add to that is that we probably saw the biggest change in trajectory in the first quarter. And for the last two quarters we've seen a level of stability in demand, albeit at a lower level than traditionally we have seen in that marketplace. But we have a backlog build and so I think there is some reason for some cautious optimism as we go into the fourth quarter that we will see some of these shipments and revenues be recognized.

Okay?

Thank you.

Amanda Murphy, William Blair.

Just a question on the LC business also. Obviously you built a very strong franchise and the results clearly reflect that. I'm just curious, I know there have been some new competitive entries there. So perhaps you could talk about kind of the competitive landscape and maybe pricing as well, just given obviously the market is becoming or has been quite attractive. Have you seen any changes either on the competitive or pricing front? And then going forward how do you kind of view Waters' position from a competitive standpoint?

Sure, Amanda, I think to be fair we face competitive offerings regularly in this industry. And I do think it is fair to say that many in the industry have been playing catch up to come up to par with our kind of offerings. So it is not surprising that people make a fanfare about their latest product offering. It is a little unusual to have such a fanfare post Pittcon where most people plan to deliver their new products. But it's a normal occurrence to us.

I think you can see from our results that pricing is not suffering. Our margins were strong in the quarter, we don't see -- and frankly we have been asked this question year in and year out about price sensitivity. We have to compete, but very rarely do we see our overall price strategy suffering as a result of new product introductions by anyone.

There have been low cost per predators, low-price competitors out there from time immemorial, they will always exist, but they don't typically have a significant impact on us.

And I don't know -- if they are having significant inroads in the LC marketplace then God bless them and the market must be even stronger than we think it is for us to be delivering almost 10% growth and them taking share. So I will leave that to you to decide whether that is happening.

Got it, okay. And then just on the (inaudible) you've obviously -- well, you talked a little bit about some getting some traction with the new bench top mass spec platform that you launched recently. Maybe you could talk about that particular opportunity. Have you thought about how to frame that in terms of size? What it could add ultimately for Waters over time?

Yes, I will take a stab at that, Amanda. We did talk about strength on the sales line for our new QTof offering, but we just began shipping the tandem quadrupole offering late in the third quarter. I think you can appreciate that within mass spectrometry tandem quadrupole, sometimes called triple quadrupole mass spectrometry, represents the largest market segment.

And our new Xevo TQ-S micro really, really hits the heart of that marketplace. And we expect that in the fourth quarter you will see us ship against a backlog that we have built and show some nice strength in applications ranging from DMPK applications through the applied markets.

So all through this year we have had nice strength based on systems with the QDa, we have had very good strength on QTof offerings at the high end and now I think as we enter the fourth quarter we're going to be looking at the largest segment of the UPLC/MS market and I think have a very strong offering.

Okay, thanks very much.

Miroslava Minkova, Stifel.

Congrats on a very strong quarter. I wanted to go back to the pharmaceutical rebound. It seems like it is two quarters in a road now and I was wondering if you could help us understand the drivers behind the rebound.

Is it a replacement cycle that is occurring after several years of subdued demand? Is it the new instruments that you have launched? How would you characterize it and how sustainable do you think it is looking out?

Well, Miroslava, I think it is all of those. I think that is the interesting part about the strength in the pharma market for Waters.

Clearly in the India piece, which is largely aimed at generic drug manufacturers, you have had a multiple quarter period of slow growth going back prior to this year due to regulatory concerns, due to macroeconomic and political concerns. So that's pent-up replacement demand, it is regulatory that is driving that market.

When you look at the launch of the QDa detector clearly is a new product, new capability initiative that's really mostly aimed at small molecule analyses and mostly in more traditional drug applications. You look at the introduction of our ionKey, again aimed at drug development applications, both in biotech and in large pharma. You look at the strong service requirement which cuts across all of those.

And our service business, in spite of companies that want to service all instruments in a company and those initiatives come and go. Our service business continues to be very strong as these companies continue to value the constant uptime of their instruments and what Waters brings in that. I start getting redundant, so it is everything. It is really across the board.

I would just like to add one thing, that if you look at the change in trajectory for pharmaceutical demand, one could look at it and say it really started in the fourth quarter of last year. Even the first quarter of this year, if I look at pharmaceutical demand in North America and Europe, it was at a mid-single-digit rate. But the other -- clearly the last four quarters we've had results that are pretty similar to what we delivered in this most recent quarter.

Okay. Thanks for the comment. And for Gene, sorry if I missed it, but could you please -- could you quantify the impact of currency on 4Q EPS? And I am wondering if you could give us some insight into how you think it -- at current rates it might play down into 2015 again on your bottom line?

Well, I'm not going to speculate on 2015 at this point. In looking at the third quarter just the way currency moved through the quarter afforded us a pretty neutral impact of currency on the quarter that we just reported.

As we look at the fourth quarter we are estimating that the effect of foreign currency, primarily based on what is happening with the yen, is going to result in someplace between $0.02 and $0.03 worth of pain in the fourth quarter. So that is about the extent of it, Miroslava.

Okay, thank you so much.

And Caroline, I think we are approaching the bottom of the hour. So maybe we can take one more question.

Tycho Peterson, JPMorgan.

A question on REIMS, I know you highlighted this at ASMS, but can you talk a little bit, now that you own the technology, about regulatory plans for the iKnife, anything on pricing? Does this add any sort of consumable stream? And then going back to Doug's question earlier, do you need to make any sort of channel investments here?

Sure, I will handle that. Gene wants to interject something here.

Yes, on the last question that we got on FX, when I talked about $0.02 or $0.03 that was versus prior guidance. If I look at the full year impact of currency on the fourth quarter it's close to $0.06. So I just wanted to make sure that that was clear.

Okay. So, Tycho, as it relates to the iKnife, this is a very intriguing technology. It's something that we have been working with with Imperial College and the original developers who actually came out of Hungary. But have been working together for a number of years now where our Manchester mass spec operation has had a close relationship with Imperial College. And have developed this technology that's we think proprietary, that enables a surgeon to while he is working on cancerous tissue to send that molecular sample immediately to a mass spec to be told whether he's in good tissue or in cancerous tissue. That is the theory.

And particularly in cases like breast cancer and neuro cancers where the importance of taking all tumor but not more than tumor is clinically imperative, the initial research results are very interesting, shall I say.

It is important to note that this is a research initiative now. It's being developed principally in London, but the amount of interest that is coming out of all of our academic cancer centers I must say is compelling where almost everyone who has looked at this is interested in pursuing it.

I want to emphasize that this is a future initiative. This is not available for sale today, it is going to take development. We've got to make some decisions over a multi-year period of how this thing comes to market, how it gets sold, what the relationships are, that is going to come subsequent to this year.

But this technology, not only useful for surgical applications, but this REIMS technology could be very useful and we are working with some large food companies on food safety, of being able to tell adulterants in milk or whether a particular meat sample is horse meat or hamburger.

Very interesting user-friendly capabilities that we think could well be enabling. Those less regulated applications could come to market soon, probably in 2015, while the more clinical applications are likely to come later. So was that enough, Tycho?

Yes. No, that is helpful. And then for the follow-up, maybe for Gene. I know you don't really want to comment on 2015, but if I look at the Street's modeling, about 90 bps of operating margin expansion. Given I guess Doug what you just talked about in terms of development for iKnife, is that a reasonable assessment on the operating side for 2015? I'm just trying to understand how much we need to think about next year being a year of reinvestment, if you will.

Well, you know I think we typically talk about 2015 on our January call. But when we talk about the Waters model in general we always try to talk about the opportunity to get a little bit of operating leverage. And our top-line growth of mid-single-digit typically is the point where we start to be able to see some operating leverage. So at this point I wouldn't suggest that you think about the year 2015 much differently than you have previously.

Agreed. We don't think that this iKnife initiative -- maybe we have to reallocate some resources to support it, but we don't think it dramatically affects the traditional Waters P&L model.

Okay, great. We will leave it at that. Thank you.

All right. Well, great, thank you all for putting up with us this long. Before concluding the call I would just like to reiterate I think why we are so excited.

You clearly saw in this quarter us focus on the [broad-basedness] of our capabilities, broad-based geographically. So almost everywhere except for China we saw our businesses produce very strong results. If you looked at our product lines, chemistry, service, instruments, LC instruments, mass spec instruments, we saw our business perform well.

And finally, just look at the face of our P&L, you see the sales growth, margins improving at a faster rate than sales, you see SG&A held under control, but it is not stifling the growth of the business. We are clearly investing more in R&D than anywhere else in the P&L. The buyback continues on the margin to effect better EPS growth.

So manifested very simply in that, going back to the breadth of our business capabilities, I think the outlook is very promising. So, whether it is this management that will be with you for a while longer or the next one, I think the stewardship is in good hands. So thanks a lot, we will update you on our next call.

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