Waters Corp (WAT) 2015 Q1 法說會逐字稿

Good morning. Welcome to the Waters Corporation First Quarter 2015 Financial Results Conference Call. All participants will be able to listen only until the conference -- in 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 First Quarter 2015 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.

As is our number custom, I will start with an overview of the business. Then Gene will follow with details of our financial results and an outlook for our business in the second quarter and for the full year 2015. But before we start, 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 second quarter 2015 and for full-year 2015. 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 fiscal year ended December 31, 2014, in Part 1 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 our possible future income statement results, except during our regularly scheduled quarterly earnings release calls and webcasts. The next earnings release call and webcast is currently planned for July 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 results of operations we may refer to pro forma results, which exclude the impact of items such as those outlined in our scheduled entitled Quarterly Reconciliation of GAAP to Adjusted Non-GAAP Financials. That was included in this morning's press release, also. Doug?

Thanks, Gene. We had a strong and a very encouraging start to 2015. The strong business momentum that we saw in the fourth quarter of 2014 continued through the current quarter, with strength in our pharmaceutical life science end markets, and improving sales growth in China. The 15% organic growth rate that we saw in the quarter was geographically broad based, and also very balanced across our major product lines, with instrument system sales and recurring revenue both at mid-teens growth rates.

Looking at our operating divisions, Waters division constant-currency sales group grew at 15%. The strength that we saw in the quarter for this division partially included the benefits of a favorable basic comparison, and additional selling days in the quarter.

Similarly, our TA Instruments division enjoyed a strong start to the year, and delivered 14% growth. Currency translation reduced our overall constant-currency sales growth by 8% in the quarter, as a result of the US dollar strengthening against all major currencies.

A highlight of the quarter was the continued strong growth of our business in the broadly defined life science and pharmaceutical market, a trend that has benefited Waters overall growth for the past year or so. All meaningful application segments of our pharma business performed well in the first quarter, and contributed to the high teens sales growth for this market.

For research applications for a large biopharmaceuticals, to more classical small-molecule QC testing, demand for instruments, services, and chemistry consumables was robust. As we saw in 2014, the lion's share of our pharmaceutical growth came from smaller specialty and generic customers.

Our global chemical analysis business at the Waters division, including food, environmental, and industrial chemical markets, was up 10% in the quarter. This non-life science segment strength was also seen in our TA Instruments results that I'll describe in more detail shortly.

Geographically, and for the Waters division, sales in the US were up about 20%. In the quarter, we saw continued strength in life science spending, and solid increases in the US government and academic sales, which were up 7%.

Sales growth in Europe for the Waters division and at constant currency was up 13%. As in the US, we saw strong life science, government, and academic spending.

Turning to Asia, sales in China, our largest Asian market, were up 16%, with sales to life science and other private sector labs driving the overall sales growth. This marks the second quarter in a row of double-digit growth in China. This is performance more consistent with what we've seen over the long term.

Waters division constant-currency sales in Japan were flat with the prior year's -- with strong life science and chemical industry demand offsetting a decline in public sector spending, which was strong in the prior year's quarter. In India, Waters division sales were up at a strong double-digit pace. As we saw during 2014, the first quarter's growth in India was primarily associated with higher instrument, software, and service sales to the generic drug industry. Our sales in Asian markets outside of Japan, China, and India grew at a healthy mid-teens rate in the quarter.

Our TA Instruments division saw a 14% increase in sales this quarter. Geographically, TA shipments were strong in most regions, with the exception of Europe, where the division enjoyed robust growth in the prior year's first quarter. From a product line perspective, TA benefited from strong shipments of instrument systems, embodying technologies from businesses that the division recently acquired, as well as from its core thermal and rheology platforms.

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 consumables, grew 15%. At consumables growth was balanced across geographical regions, with continued strong uptake of acuity UPLC column offerings, including our recently introduced line of Cortex columns, and for new column chemistries tailored for protein separations.

The Waters division service business also performed very well in the quarter, and grew at a 16% rate, with extra business days in the quarter benefiting our service growth by a few percentage points. Extra selling days aside, the strength in the service business was geographically balanced, and was strongly correlated to general strength that we saw in our pharmaceutical life science end market.

Waters division instrument sales grew 15% in the first quarter. This growth was balanced between LC and LC-MS technology platforms, and highlighted by continued strong uptake of the acuity QD a detector, and positive uptake of new UPLC-MS systems launched in mid-2014 at the ASMS conference. Notably, our Xevo TQ-S micro tandem quadrupole technology.

On the new product front, we started off 2015 with new launches by both the waters and TA Instruments division at this year's Pittsburgh conference in March. Highlights of the conference included our full-spectrum molecular imaging system, and our GlycoWorks RapiFluor-MS labeling technology.

Our new-full spectrum molecular imaging system embodies a convergence of MALDI and DESI ionization technology with high-performance ion mobility and Q-TOF mass spectrometry. New research work flows are enabled with this system, with advanced software which more easily provides researchers with actionable information on the location and distribution of key chemical compounds and tissue samples.

Our GlycoWorks labeling kits represents a major advance in glycan analysis. Glycans are sugar molecules bonded to protein backbones, which can meaningfully affect the biological activity of protein-based biopharmaceuticals. The structure, frequency, and location of these bonded sugars are variable in the biosynthesis of protein-based drugs, and consequently are important to characterize as part of drug discovery, development, and quality manufacture.

Our new GlycoWorks kit is being received by leading researchers in this field as a breakthrough technology that is exclusive to Waters. Our early customers are experiencing more comprehensive analytical results in a fraction of the time required to perform what they had perceived to be the best LC-MS methodology.

We believe that this technology is well suited to improve the quality testing of new biologic drugs, including the QC testing of bio generics or biosimilar drugs, and may likely set a new standard for required regulatory testing. In addition, this new work flow is designed to be carried out on [tailit] ACQUITY UPLC system outfitted with our innovative QDa detector.

Another first-quarter 2015 development that's important to mention is an agreement that we have entered into with PerkinElmer Corporation. Under this agreement, Waters will manufacture and supply chromatography components for PerkinElmer that PerkinElmer will in turn sell and service as PerkinElmer-branded LC systems to non-life science market segments.

In addition, Waters also has agreement to supply PerkinElmer with Empower workstation software for LC and GC applications, for new as well as existing installations. We expect that this new initiative will afford Waters an opportunity to profitably grow our 2015 sales by an additional 1% or so.

On the January call, I outlined for you our health science initiatives, and some of the longer-term plans that we have to position Waters as a technological leader in emerging fields of mass spectrometry-based disease, characterization, and diagnosis. You may recall my discussion on REIMS technology and its potential future usages for diagnostic and even surgical applications. I also mentioned that pursuing this type of opportunity represented a new type of investment for Waters, one that potentially expands our business reach beyond more classical bioanalytical research segments.

I'm pleased to tell you that during the first quarter of 2015 we have continued to expand the funding of this strategic program. In fact, at this year's ASMS conference in St. Louis, you will begin to hear about some initial product offerings that will further indicate the trajectory and potential of this exciting initiative.

In summarizing this quarter's performance, I will reiterate that we are pleased with the breadth and depth of the demand for our products and services. In addition, we demonstrated an ability to drive both operational and non-operational leverage in growing our earnings per share by more than 30%. Free cash flow in the quarter, a metric that you know I follow closely, was impressive, and we generated about $0.30 of free cash flow from each dollar of sales.

Before turning it over to Gene, I would like to say a few words about our non-operational plants. In 2015, we expect another year of strong free cash flow, and anticipate continued capital deployment toward our share repurchase program. On the M&A front, it's likely that we'll continue to target smaller bolt-on businesses.

On the leadership transition front, we continue to make steady progress on the search for a CEO replacement. From the start of this process, we have focused on achieving a best match fit between the experience set and track record of a potential successor, and the unique drivers of Waters performance. These drivers include commitments to technological leadership, to financial discipline, and to the maintenance of close customer relationships. Please stay tuned for updates on this front, and know that the successful completion of this transition process continues to be a high priority for me and for our Board of Directors.

In closing, 2015 is off to a strong start, with all segments of our business performing well. In the upcoming months, we plan to introduce a series of exciting new products, which will benefit our third- and fourth-quarter sales. We are encouraged by the broad geographical and product line strengths that have helped us deliver superior results in recent quarters, and look forward to successfully executing our business plans throughout 2015.

Now I'd like to turn it to Gene for a review of our financials.

Thank you, Doug, and good morning all. At $460 million, our first-quarter revenues increased 15% before currency translation. Currency translation reduced sales growth in the quarter by 8%, resulting in 7% reported sales growth. Our non-GAAP earnings per diluted share were up 32% to $1.21, in comparison to earnings of $0.92 last year.

On a GAAP basis, our earnings were $1.15, compared to $0.82 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 effects, US sales were up 20%. Europe was up 10%. Japan was flat, and sales in Asia outside of Japan were up 20%, with strong demand in India and China. Rest of world sales were up 12%.

On the product front, and again in constant currency within the Waters division, instrument system sales increased by 15%, and our recurring revenues grew by 15%. Consequently, the division sales were up 15%. For our TA Instruments division, constant-currency sales including instruments and services increased by 14%.

Now I'd like to comment on our first quarter's non-GAAP financial performance versus the prior year. Gross margins came in at 58.9%, up from 56.4% in the first quarter of last year. This improvement can be attributed to a combination of factors, including higher sales volume, positive mix dynamics, and successful ongoing engineering efforts aimed at reducing product manufacturing costs.

Moving down the P&L, SG&A expenses were up 9% on a constant-currency basis. The impact of currency translation reduced SG&A by about 9%. R&D expenses increased due to our ongoing spending associated with new product development, and increased incremental spending related to our health science initiative.

On the tax front, our effective operating tax rate for the quarter was 14%. For the full year 2015, we expect our operating tax rate to come in at around 14%. In this projection, we have not assumed a re-establishment of the United States R&D tax credit.

In the quarter, net interest expense was $7 million, and share count came in at 83.8 million shares, or approximately 2.1 million shares lower than in the first quarter last year. This is a result of our share repurchase program.

Turning to the balance sheet, cash and short-term investments totaled $2.1 billion, and debt came in at $1.5 billion, bringing us to a net cash position of $624 million. As for first-quarter share repurchases, we bought 710,000 shares of our common stock for $85 million. This leaves $684 million remaining on our authorized share repurchase programs.

We define free cash flow as cash from operations less capital expenditure, plus non-cash benefits from stock-based compensation accounting, and excluding unusual non-recurring items. In the first quarter of 2015, free cash flow came in at $138 million after funding $21 million of capital.

Excluded from this amount is approximately $2 million of investments associated with major facility expansion. Accounts receivable days outstanding stood at 78 days in the quarter. The quarter inventories increased by $11 million, reflecting normal seasonal patterns.

Now I will discuss our 2015 full-year outlook. While we had a stronger top-line growth rate in the first quarter than we had expected, contributing significantly to this strong start was continued strength in our pharmaceutical life science end markets. In addition, we benefited from stronger shipments of TA instrument systems and continued positive sales momentum in China.

We estimate that additional selling days in the quarter in comparison to the first quarter of last year added about 3 or 4 points to sales growth, predominantly augmenting our recurring revenue product lines. In the upcoming quarters of 2015, we anticipate that continued growth in sales to our broadly-defined pharmaceutical life science customers, solid recurring revenue growth, and stable to improving business trends in Asia, will allow us to finish the year with mid-single-digit sales growth before currency translation. Currency translation for the full year, and assuming current exchange rates, is now expected to reduce our reported sales growth by approximately 6%.

Moving down the P&L, gross margins are expected to improve slightly from last year's, and come in at or around 59% for the full-year 2015. We expect to manage our constant-currency operating expenses to grow at a rate that is less than our constant-currency sales growth rate. However, we anticipate that our R&D expenses will grow at a higher rate, due to continued investments in new product development and incremental spending associated with our health science initiative.

Moving below the operating profit line, net interest expense is expected to be approximately $31 million. Turning to share count, our full-year average diluted share count is expected to be reduced, and end up at around 83 million shares outstanding as a result of continued share repurchases. Rolling all of this together, non-GAAP earnings per fully diluted share are now expected to be in the range of $5.67 to $5.87.

As we think about our expectations for the second quarter of 2015, our guidance anticipates that constant-currency sales growth will come in at or around 7%. Currency translation in the quarter is expected to reduce reported sales growth by the same rate, or about 7%. This top-line performance is expected to result in non-GAAP earnings per fully diluted share within a range of $1.20 to $1.30 in the quarter. Doug?

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

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instructions)

Jon Groberg, UBS.

Thanks, and congratulations on a very solid and an impressive quarter, guys.

Thank you, John.

I think to start off, Doug, obviously you have extra selling days, easy comps, and those things; but can you maybe talk about some of the bigger opportunities that you're seeing out there that you think are really sustainable, that have legs, beyond the easy comps and the days? I don't know if it's biosimilars. I don't know if it's some of these new initiatives that you think are just getting off the ground. Could you maybe talk about some of the ones that you're more excited about that you think will have durability beyond just the factors --?

Sure, John. I think there are a couple of basic things that probably aren't what you're getting at, but let me reiterate. We're clearly seeing a recovery in Asian markets that depressed sales growth in the 2013 and early 2014 period. Now pretty clearly we are seeing a recovery in the India generics markets. This marks the second quarter of improving conditions in China, and for the most part we think those are sustainable going forward. We clearly saw some depression of that in prior years. I think we're in a benevolent cycle at this point.

If you talk more about the applications we serve, and the condition of the markets, there are a couple areas -- certainly the health science initiative and all that it promises, from research into biomarkers to research into the phenomics dynamics and how it affects health.

We're seeing a significant amount of investment that we are intimately involved in, in the early stages of that, that we think have a lot of legs in term of the investment cycle, but also can lead down the road into the whole personal medicine and diagnostic space, that being on the ground floor of helping develop those discoveries will lead us further down the path into the down-stream diagnostic opportunities that is part and parcel to the foundation of the whole health science initiative.

We had a very strong quarter in that whole health science area, so it's already showing promise. You'll hear us talk more and more about our emerging technologies that Gene pointed to, and the investments that we're making in REIMS Technology, in the iKnife that get us further down that health care path, closer to actually treating some of these disease states in the future -- in essence, broadening our ability to service customers somewhat outside of our traditional analytical laboratory.

You're certainly seeing the signs of actual progress with biosimilars and biogenerics. We're certainly seeing a great deal of interest in our new glyco-protein products that we've just talked about. There clearly is emerging appreciation of the importance of characterizing these molecules. Rarely have we seen the kind of initial interest in a new product as we have seen with this GlycoWorks application that we've recently introduced. Those are a number of the areas that we -- that evidence the enthusiasm that we're talking about now.

That's great. If I can have two quick follow-ups, can you Doug, one on the leadership transition -- is there any change -- given your comments, is there any change to your expectation that you'll have something by August? The other one is given the FX regime, I know some of your competitors have actually been raising prices are trying to. What's your plan around pricing? Thanks.

In terms of pricing, we don't anticipate any radical change. Certainly we balance pricing regularly, and we certainly look at pricing when we introduce a new product, to try to make sure that we stay in sync across all geographic regions. But we present as a local Company in all of the areas of the world that we do business. When currencies move against us in this phase, we've got to find ways to stick with it and improve our business. When they move for us, as they clearly do in cycles, we don't radically change our pricing in those local markets. That's been our practice over a 40-year period, and it's not likely to change.

In terms of the transition in leadership, you can clearly assume that we're being very careful, methodical, and examining carefully how we execute this transition. I continue to be optimistic that we'll do it around the timing that I've talked about. I've always said that this timing was a guideline. It wasn't meant to be a rigid hurdle rate.

I'm not going anywhere come August 1 or August 15, whatever that two-year deadline is. In almost any circumstance you're likely to hear my voice for a while post-August. At this point, it's certainly possible that we'll have something done by August, but I wouldn't bet the ranch on it. It may stretch longer than that. I continue to say we have high-quality candidates; but until we're ready to actually sign on the bottom line, I'd continue to say watch this space for further notice.

Thanks a lot.

Tycho Peterson, JPMorgan.

Hi, thanks. Doug, I want to try to get your latest thoughts on the pharma cycle. I know in the past you had talked about a two-year cycle where you can see seven to eight strong quarters, and then maybe seven to eight weaker quarters. Can you talk about where you think we are in the cycle right now, your visibility into that customer base, and can you do better than mid-single growth in pharma this year?

Tycho, I think partly it is an unfortunate characterization. When people say pharma, they think the top 10 or 12 integrated pharmaceutical companies in the world. That group of customers has, as you know, faced a lot of hurdles. They've gone through the mergers and acquisitions phase. If anything, I think we've probably come through the worst periods of reorganization and cutting spending in that group. That's gone on for well over five years. But I think we'd say we don't see the worst of that in the future. We think the worst of that is behind us.

On the other hand, I think the broader life science community is clearly the more dynamic piece of this market. It was last year; I think will continue to be when you talk about generics, biosimilars, the innovative biotech market place, the emerging diagnostic discovery companies, and the discovery working arm in arm with the therapeutic pharmaceutical customers.

We continue to see very robust conditions in those market places, surrounding the classical large-scale ethical pharmaceutical companies. Combined, we're very optimistic about the opportunity of that broadly defined market place to sustain the high single-digit growth rates that we're aiming at.

Okay. I just want make sure I understand some of the nuances around guidance. You beat by $0.19. You raised by $0.09 to $0.10 overall. Then the top line looks like you're guiding for the back half of the year to be flat organic. Is that the right way to be thinking about it? Is the lack of more up side to the bottom line reinvestment in FX?

Gene can start off, and then I will give you my tinge on it.

All right. Hi, Tycho. We certainly had a nice start to the year. But we also know that since we gave guidance last, foreign currency dynamics have presented us with a stronger head wind. In the first-quarter results, we delivered about $0.20 more than we had originally anticipated; however, if you just look at the effect of foreign currency, again applying it to the full year, you had an additional about $0.10 worth of head wind is what we're dealing with.

In the guidance that we have presented for the remainder of the year, we've taken these two factors into consideration -- a little bit more head wind on the FX side, but acknowledging that we did have a stronger start to the year than we had anticipated. I would also say that as we go through the year, the largest quarter is the fourth quarter. We had a particularly strong fourth quarter last year. It probably makes sense to be a little bit more conservative on our outlook at the end of the year. Hopefully, when we are talking to you again in July, we will have a higher level of visibility on business momentum towards the close of the year, and be able to modify our outlook appropriately.

I think Gene covered it pretty well, Tycho. I think we clearly had a very strong first quarter, even when you discount it for the base and for the extra selling days. No matter how you estimate that effect, we're still around a 10% organic rate, even if you cleansed it. It's pretty impressive. If you look at our trailing 12-month results, we're at that 8%, 9% organic growth rate. All of that's very encouraging. But we're still being careful, I'd say, early in the year to not get too much ahead of ourselves. I think it's fair to say that our current conditions could lead to better results, but we want to be careful early in the year.

One last one, Doug. Can you comment on the 20% US constant-currency growth. That really stood out. You obviously had an easier comp, but was that all pharma or a TA recovery? What drove the 20% here?

Certainly the life science market was, since by far, the biggest market is that life science market. That grew at that high double-digit rate. But interestingly, all of the markets contributed double-digit growth rates. I think I'm right.

Yes, and the other thing, Tycho, is that in the quarter in the US as well as globally, the strength of the recurring revenues was pretty encouraging for us. Again, we understand that it's thought that revenue line benefits most from extra selling days; but even accounting for that, at a minimum you're looking at what is now a pattern of high single-digit growth rate for our recurring revenues on a constant-currency basis. That's something that's very encouraging as we project out for the remainder of the year.

As Gene mentioned that, it's something I'd like to emphasize. It's interesting that in the service and support market place in the last four or five, maybe plus years, a number of competitors have emerged to try to address the broader service market, and essentially take share from us by servicing Waters gear around the world. I'm sure you're familiar with all of the players who advertise that they can service and support Waters and everybody else who is in the analytical laboratory.

I think it's telling that our strategy is clearly not to do that. We focus on our business. We train the best service people. We support our instruments. What that's led to is a service business that continues to grow at the double-digit pace; and in this past quarter, grew even much stronger than that. I think it's a very telling dynamic that the customer support for our strategy, and the importance of that service dynamic tie directly to our business, is far and away the fastest grower in the service business. All we do is support our own installed base. It's a very interesting dynamic that we will continue to track.

Okay. Thanks guys. I'll let you hop on to other questions.

Isaac Ro, Goldman Sachs.

Good morning, guys. Thank you very much. Gene, I had a question for you. We, I think, have gone around this topic a little bit; but if you could give us the growth rate you saw in your biopharma end markets versus your academic and government this quarter? It seems like it must have been a huge number, given the strength of the organic growth rate for the total Company.

Yes, the biopharmaceutical growth rate was in the high teens for the quarter, Isaac. Looking at our government and academic spend, all in -- again, these numbers are at constant currency -- it was at a mid-single-digit rate. But that mid-single digit includes much stronger performance in the United States and in Europe; and it was somewhat offset by weaker performance in Japan, and still not that robust a spending on the public's side in China. All in, we ended up with mid-single-digit government and academic, but there was a definite geographic pattern to be gleaned behind that number.

That make sense. A follow-up to that. I think in the past you said that the majority of your biopharma revenue tends to come from the production side versus R&D. Given that high-teens number you offered, is that consistent again here, where the implication would be that most of your growth you're seeing was really on the production side?

Oh, no. Well, it's interesting. There's another geographic story there. We had very strong performance, as Doug and I mentioned, in India. Given that that is primarily a generic drug market for us, that was clearly production related. But as we begin to look a little bit more broadly at this pharmaceutical space, boy, we saw strength from discovery through development. It was very broad-based, and it was very broad-based geographically, too. I'd say that the long-term trend of half of the business related to production and production-related activities, that that 50-50 mix is not too far off. I would say that we saw strength in both of those broadly defined segments in the quarter.

Got it. Last one, if I could sneak it in. If we take all that in context with what we've seen so far elsewhere from your competitors, it does seem like you took a little bit of market share this quarter, at least in biopharma. Would you agree with that statement?

It's always difficult to talk about market share quarter by quarter. Our experience tends to tell us that yes, market share shifts do occur, but they tend to occur over a longer cycle. I think clearly in the quarter we benefited from our heavy weighting towards life science pharmaceutical and the underlying strength of that market. I think that we're a little bit more leverage, we're a better derivative of that end market than maybe some other players in the space.

Longer term, Doug had mentioned that over the last four quarters our growth rate has been at the high-single-digit level. I think you can look at the growth rate of the industry as a whole and some of our competitors, and you can make the assessment as you wish on that front.

Got it. Thanks for much, guys. Appreciate it.

You're welcome, Isaac.

Bryan Brokmeier, Maxim Group.

Hi, good morning. In your prepared remarks you attributed the strong margin to volume positive mix dynamics, engineering efforts, improved manufacturing costs. How much of the margin expansion would you attribute to each of those?

It's actually pretty well balanced on that front. The results of the quarter where you saw a nice 200-basis-point improvement in gross margins compared to the prior-year result -- it demonstrates how what the positive sensitivity is of our gross margins to volume. But I'd say in the quarter we had nice contributions from volume, from product mix. Part of that mix includes a nice strong performance from our TA group that has a wonderful profitability profile. I'd say, looking at those factors, probably volume and mix were the biggest components. On top of that, we ended up benefiting from some of our cost improvement efforts.

Okay, thanks. Despite the really strong revenue, SG&A was flat year over year. Was all of that through cost containment, as well, or were there any delays in needed expenses, or delays in additions to your head count that we'll see cause an increase in expenses over the next few quarters?

Actually, if we look at the business in constant currency, we were able to grow the top line 15% in constant currency, with 9% SG&A growth rate, so it's impressive leverage. But we did grow our SG&A, again in constant currency, by 9%. What you're also seeing is the effect of a weaker euro, and recognizing that we have a meaningful spend in Europe. We also saw benefits from the pound on that front, too, some costs. As you begin to look at the actual SG&A growth, the main reason why it was flat is because we benefited on the operating expense side from the lower yen and from the lower euro and from the lower pound.

Okay, great. Thanks a lot

Derik de Bruin, Bank of America.

Hi, good morning.

Good morning, Derik.

There's been a lot of noise and potential consolidation activity being discussed in the spec pharma space and the generic space. I know Teva is one of your largest customers. When you save all the combinations and possibilities going on in the spec back in that market, do you -- is there any one particular area combination that would make you nervous? Is there any potential impact in terms of how people deploy their fleets of LCs in that? I'm trying to think of how you see all this -- how you think all the generic and spec pharma consolidation is going to play out to your business?

Derik, I think it is true that when the large ethical pharma companies went through that binge of merging, they ultimately cut R&D, and that ultimately certainly had a short-term effect on demand. We clearly saw a blip down after a big merger of those big ethical pharmaceutical companies.

The ones that you're talking about with Teva and Mylan and Perrigo, much less likely to see a significant impact, because those are driven off production. Most of our sales to those customers are pill count, so you're not going to see a significant change in pill count; and unlikely to see a significant impact related to those kinds of companies.

Great. Then one quick follow-up. Was there any significant bulk purchases during the quarter? I know you've got some stuff with the UK's Phenome Centre. I know there were some potential grants that are pending for that. Was there any unusual volume purchases in the quarter in mass spec or LC?

No.

Great, thank you.

Paul Knight, Janney Capital Markets.

Hi, Doug. You seem very excited about GlycoWorks. Could you talk a little more about it? Is there anybody you see on the horizon that could offer anything comparable? I guess quantifying it, was it a lot of your growth, or is it just rolling out now?

Paul, it's really just rolling out now. I have Art sitting next to me, who if I let him speak, he would have you convinced it's going to change the nature of the western world. He might break in here any minute, anyway. But we are extraordinarily excited about it. I think we -- I think I said it's certainly unusual that we have seen the amount of customer reaction to the introduction of this product. The reaction of our field force, who -- it's a premium-price product, and they might even be telling us we're under-pricing it, it is so strong and so good in the customer's eyes. However, it was just introduced at Pittcon, so we didn't see any real economic impact of it in the first quarter. But I will unleash Art in here and let him chime in on how he feels about this.

Okay.

I will try not to be too extravagant for Doug, here. I think the reason for our optimism on this particular chemistry -- and keep in mind that most of our innovations and impacts in the market place originate as chemistry. UPLC originated as a chemistry advance. This particular application, predominantly in the biopharmaceutical life sciences arena, where our customers are producing biologically-based drugs, glycan testing is a pervasive requirement. It's done from research through development and through the production process, and it's an FDA requirement.

Understanding the glycan profile of a biological is of extreme importance. The existing technology that laboratories conduct today takes more than a day to prepare samples. It's costly. Keep in mind, there are millions of samples run per year. The technology we have is exclusive and proprietary, and it reduces the analysis time down to roughly hours, or an hour, compared to a full day. It enables you to detect by both fluorescence and mass spectrometry, so it provides a lot more information, keeping in mind this is a critical assay to characterize of glycan content. It affects the quality of these drugs.

There are two attributes to this. One is it greatly improves the productivity of the assay, number one. Number two, it improves the quality and the content of the information you get. Considering that we just launched this, there is standing room only, and we've actually had to re-book seminars. The early responses from the primary users of this technology has been outstanding. We are excited about it.

What's even more exciting, besides it being a renewable, repeatable chemistry business, is that we're seeing that a lot of our analytical products, particularly our QDa, which is our bench-top mass spectrometer, when combined with the chemistry, is a very attractive analytical tool for those in the research and development side of the equation

For us, it's in its early stages. We are in a development phase, but the early acceptance of this is quite exciting. I don't think we've seen a chemistry product since the introduction of UPLC that has had raised such an excitement level, in what is a fairly attractive segment of the market place right now, where this type of requirement is necessary. That's the essence of the opportunity, and the additional response is outstanding.

Does that cover it, Paul?

Yes. Thank you very much.

You're welcome.

Doug Schenkel, Cowen and Company.

All right. Good morning guys, and thanks for taking my questions. My first question has two parts, and is specific to China. I think you indicated China revenue grew 16% year over year in the quarter in the Waters division. Commentary has clearly been really encouraging. The first part of the question is when you say growth is improving, are you pointing at growth relative to a favorable comp, or do you believe that China is actually improving, as measured relative by demand over the last couple of quarters.

The second part is, does your full-year guidance still embed the assumption that China revenue grows at mid-single-digit levels, or is there some change to that, given strong Q1 performance?

Doug, this is Gene. We are impressed with having mid-teens growth rate in China now for two quarters in a row. If I take a look at the drivers of growth in that country, it's a little bit more weighted towards the for-profit customer. We're still seeing a little bit slower than historical demand from governmentally funded laboratories. We are somewhat encouraged by what we're hearing about governmental spending plans during this next fiscal year.

I would say that as we begin to look at the combination of India and China, and make assumptions about how those businesses will impact our full-year 2015 outlook, we're at least at a high-single-digit level given the strong start that we have this year. So far, early indications for demand in the second quarter look like a continuation of the trends we saw in the first quarter. I'd say that in looking at the geographical components that make up our full-year guidance, we're probably a little bit more bullish on Asia in general, and India and China in particular.

Okay. That is really helpful. Another multi-parter, this time on the pharma end market. To clarify as a follow-up to a few earlier questions, what percentage of sales did say top-20 accounts account for today? I think that's probably down around 10%, which is considerably lower than it was last time we went through anything resembling a consolidation period.

The second question, second part, is can you talk a little bit about what you're seeing in terms of replacement versus new customer placements within the pharma end market? The third part is, how correlated do you think biopharma growth is right now with the strong equity market conditions that exist in terms of financing these companies right now?

I'll start off. But you have to remind me, Doug, what exactly was the first question that you started with?

Sorry. Top 20 pharma as a percentage of total sales?

Your estimate is right on. I think as you know, if I go back a decade, our top 15 accounts represented about a quarter of our business. Now you're looking at around 10% of our sales from our top 15. It is kind of interesting, because those top 15 are actually companies that are the result of mergers that have occurred in this period. In some ways it's even more dramatic.

When we talk about the top 15, it talks about the amount of business that we transact directly with those accounts. But I have to say that those accounts also are more frequently over the years have used outsourcing. Some of the money that we are getting from CRO accounts, from small specialty pharmaceuticals, some of the funding may actually be coming from some of those large multi-nationals. That's another factor to consider.

Looking at the replacement versus new, one metric to consider is just looking at the number of HPLC versus UPLC systems that we're selling. Over the last few quarters, the growth rate in our alliance-based HPLCs has been comparable to the growth rate that we've seen in ACQUITY. That's an indicator that you're seeing both a strong replacement cycle, as well as expansion of the business.

I think in general, Doug, you can look at the strength that we're seeing in the biotech, the innovative piece. The Gilead's of the world, et cetera, and say most of that's growth driven. You look at the large pharma in India for instance. Some of that -- certainly in the big pharma, that's a fair amount of replacement, because we know they have delayed in a multi-year period, and we've talked about pent-up replacement demand. We're seeing some of that. We still think that there is more to come. I think yes, we're seeing pretty good replacement demand in the big pharma world, but a lot of the novel life science segment is just growth in their applications.

Okay. Thanks for all that. That was great color. Appreciate it.

You're welcome.

Steve Beuchaw, Morgan Stanley.

Hi, good morning. Thanks for taking my questions. First on the expanded relationships with Perkin, thanks for the commentary there around your expectation for that to contribute about a point of growth. I wonder if that point of growth that you referred to, is that a proxy for how this evolves over the medium term, or does that reflect the -- let's call it early days of that relationship? Then maybe Gene or John, could you give us a sense for how that revenue gets booked, and how that revenue flows through the P&L, what might be the impact on margins?

Steve, in terms of what it could mean, I think the point's probably a fair estimate. It might be on the conservative side. I don't think it will be less than that. But we're early days of this relationship.

The very interesting thing, and the reason why we were enthusiastic about entering into this deal, is that we are dealing with customers that almost universally we haven't dealt with in the past. These are customers that PE has serviced as a broad range supplier. They go in and outfit an industrial laboratory with a whole series of technologies. Those customers typically want to deal with perhaps only one supplier. PE has not traditionally been one of the major suppliers of HPLC or UPLC, so I think it became more and more expensive for them to maintain a development program.

The fit between Waters and PE turned out to be a nice fit of the various requirements. We get this volume without having to support it very much on an SG&A basis. The margins are very good, and it doesn't cost us barely anything on the SG&A line. I think we're reasonably optimistic that this can grow a little bit faster if we're right about the fit. Gene, do you have anything?

No, I think you characterized it well. This is a situation where I truly believe it's a win-win situation. Our colleagues at PerkinElmer wanted to really have high-performance workhorse instruments to supply to their customer base. If I look at the portfolio of products that we are providing to them, I think they fit that category very well. Also, these are products that have been very effectively cost-engineered, and are manufactured in Singapore largely for us, too. That's another advantage, in that it increases our footprint in a very cost-favored and tax-favored production site.

Then one quickly on TA. How did the business track through the quarter from your point of view? Was it as strong exiting the quarter as it was for the full quarter? Then I'll jump back in queue. Thanks so much.

TA had a very solid first quarter. I mentioned earlier in response to a question is that not only was the sales growth great, but you also saw nice improvements in the profitability of the business. Looking at the division, the growth benefited from new technologies that we had acquired over the past couple of years, as well as from the core business in rheology and thermal analysis. I'd say that looking across the quarter we saw pretty consistent results across the quarter, and are pretty encouraged as we go into the second quarter and look towards the remainder of the year.

Great, thanks so much everyone.

Operator, I think we're past the bottom of the hour, so we'll take one more question and then wrap it up.

Okay, sir. Our next question comes from Mr. Steve Willoughby of Cleveland Research. Sir, your line is open.

Thanks, guys. Just a couple of housekeeping questions first. I understand for your guidance for the full year the increased FX impact. Am I also correct to assume that your tax rate guidance is going up slightly? Secondly, the extra selling days you had here in the first quarter, is there an offset to that in the back half of the year? You did 15% organic growth and then guiding to 7%. Obviously it would relate to a pretty meaningful slow-down in organic growth in the back half to get to that mid-single-digit guidance for the full year?

I'll start with the second question and then move to the first question. You're absolutely right. As we look at the second half of the year, the base of comparison becomes a little bit more challenging in that we had a very strong second half in 2014. Looking at the number of days, we do have fewer selling days in the fourth quarter. But I'd say that one of the things about a fourth quarter is that you do have the December 31, and requirement that people do allocate their capital spending.

Actually, there's probably a little bit more of an advantage to the selling days in the first quarter, in that as people release capital budgets, you might be able to get a little bit more towards the end of the quarter. But you're absolutely right that we're going to be more conservative in our outlook for the fourth quarter due to a combination of the stronger base of comparison and to the fewer selling days.

Looking at the tax rate, the tax rate that is embedded in our forecast is 14%. We had a tax rate last year that was a point better than that -- the difference being that last year, the US R&D tax credit was enacted, and we were able to take advantage of that. If that happens again this year, our tax rate should be roughly the same as it was in 2014.

Okay. Gene, just one quick follow-up on the tax rate. Is there any update regarding your tax structure in Singapore?

It continues to move in a very positive direction. There is a feeling that the long-term benefits that the Singaporean government is looking for, and our desires there are very well aligned. I see nothing that makes me uncomfortable about a continued very favorable relationship that results in a favorable tax position over the next multi-year period.

Okay, very good. Thanks guys.

Thank you, and thank you all for being with us on this first call of 2015. We'll look forward to updating you after the second quarter. Thank you all.

That concludes today's conference. Thank you for participating. You may now disconnect.