Waters Corp. Q4 2008 Earnings Call

Jan.27.09 | About: Waters Corporation (WAT)

Waters Corp. (NYSE:WAT)

Q4 2008 Earnings Call

January 27, 2009 8:30 am ET

Executives

Douglas Berthiaume - Chairman, President and CEO

John Ornell - Vice President, Finance and Administration and CFO

Analysts

Ross Muken - Deutsche Bank

Doug Schenkel - Cowen and Company

Quintin Lai - Robert W. Baird

Tycho Peterson - JPMorgan

Isaac Ro - Leerink Swann

Derik deBruin - UBS

Chris Arndt - Select Equity Group

Operator

Good morning, and welcome to the Waters Corporation fourth quarter financial results conference call. All participants will be able to listen-only until the question-and-answer session of the conference. This conference is being recorded. If anyone has any objections, please disconnect at his 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.

Douglas Berthiaume

Good morning, and welcome to the Waters Corporation fourth quarter and full year 2008 financial results conference call.

With me on today's call as usual is John Ornell, the company’s Chief Financial Officer and Gene Cassis, the Vice President of Investor Relations. As is our normal practice, I will start with an overview of the business highlights and John will follow with details on our financial results and then provide you with our outlook for the first quarter and the full year 2009. But before we get going, I'd like John to cover the cautionary language.

John Ornell

During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the company. In particular, we will provide guidance regarding possible future income statement results of the company, this time for Q1 and full year 2009. We caution you that all such statements are only predictions that actual events or results may differ materially. For detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see our 10-K annual report for the fiscal year ended December 31, 2007, Part I under the caption 'Business Risk Factors.' We further caution you that the company does not obligate or commit itself by providing this guidance to update predictions.

We do not plan to update predictions regarding possible future income statement results, except during our regularly scheduled quarterly earnings release, conference calls and webcasts. The next earnings release call and webcast is currently planned for April 2009. 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 of operations, we may refer to pro forma results, which exclude the impact of items such as, so as outlined in our schedule titled reconciliation of net income per share included in this month’s press release.

Douglas Berthiaume

Thank you, John. In the fourth quarter we reported flat organic sales growth and a 9% increase in adjusted earnings per share during what was clearly a very difficult economic environment. Despite the lower than originally anticipated sales volume, the strength of our business model enabled us to maintain our operating profitability and we finished the year with record annual free cash flow.

Though we believe that sales growth in 2009 remains challenging for our business, we are confident in our ability to adapt to these rather difficult economic conditions, while we continue to make the critical technology of product development investments that'll help ensure our long-term strength in the marketplace.

The top line trends that we saw in the fourth quarter included a softening in demand by industrial chemical customers primarily in the U.S. and Western Europe and the loss of purchasing power experienced by our customers in many developing countries caused by the adverse effects of a rapidly appreciating U.S. dollar.

Somewhat offsetting these pressures, we saw stable growth in our recurring revenues and continued strong demand in China. Reviewing our business with industrial chemical customers, we estimate that around 15% of our sales come from worldwide chemical and plastic manufacturers. These companies are in many instances the suppliers of bulk materials used in many consumer electronic goods, automobiles, and in building construction.

Within these companies are products that are used primarily for new product development and in some cases for quality assurance. During most of the past couple of years, our business with these firms has grown nicely as they invested new technologies. This growth has been most apparent in our TA instruments division. In the fourth quarter we saw a downturn in instrument demand from these customers, as concerns about weakening economic conditions resulted in budgetary cutback.

But we are confident that researchers in these firms appreciate the advantages of our new technology instruments. We also expect that capital will be tight, so concerns about the deepening global recession at bay and times of a recovery and consumer demand begin to surface.

In the mean time we will focus our efforts on promoting the advantages of our technologies and improving both research and manufacturing efficiencies within Water. We will also position the advantages of our new instrument systems and facilitating environmentally friendly processes and in complying with product safety tests.

We look at the effects of currency. The strengthening U.S. dollar had a negative effect on our revenues in the fourth quarter. We transact about a third of our business in the European Union and the rapid appreciation of the U.S. dollar against the Euro, with the principle factor that drove the 4% reduction in reported sales due to currency translation. However, the appreciation of the dollar also affected our businesses in parts of the developing world, where we transact sales in U.S. dollars. Local currencies experienced even more significant devaluations than the Euro.

In these markets, including India, Korea some smaller Latin American and Asian countries budgets they were improved in local currencies became insufficient to purchase capital goods. Consequently we saw lower than expected demand for our products. We are hopeful that some of this business will materialize in 2009, as budgets are realized to reflect the new exchange rates.

Looking at some growth drivers in the quarter. Our business in China was very strong and broad based within applications there. The Government there continues to fund research initiatives and a large range of applications. In addition concerns about product and food safety issues such as the recently well publicized melamine contamination problems continued to drive new instrument sales. As our sales based in China continues to expand, sustaining rapid sales growth rates actually become more of a challenge. However, at this time we are encouraged that we'll be able sustain growth in China over the next few years as we see a long term commitment to modernization from both governmental and private industry customers.

Our sales highlights, in the fourth quarter, were the strength of our recurring revenue lines. As you may recall, these products and services primarily addressed the needs of the large global installed base of HPLC and UPLC usage. Sales growth from these lines in the fourth quarter largely offset the declines we saw from instrumentation. Within our chromatography chemistry offerings we saw a very strong growth for our ACQUITY columns suggesting nearly total capture of the column business ACQUITY UPLC instruments. As the base of ACQUITY instruments continues to expand, we are encouraged that the ACQUITY columns will positively contribute to the growth in profitability of our company.

Looking at our business geographically a strong performance from China allowed for overall double digit growth in Asia. In Japan, we saw a marginal expansion in sales in the fourth quarter in what has been a though market environment for us.

Our business in the United States suffered from the effects of the economic downturn during the fourth quarter and most customer segments had negative sales results. Weakness in capital markets followed by concerns of a deepening recession contributed to the weaker demand in the U.S.

Globally, pharmaceutical sales were down slightly in the quarter compared to 2007; the weakness already resided in India combined with softer capital spending in the U.S. were key factors in suppressing revenue growth. In the quarter we did see large multisystem orders for ACQUITY from large customers and expect to see more large UPLC orders in 2009. Demand from CROs, smaller biotech companies and generic houses were not as strong as in earlier quarters and large pharma was about flat quarter.

Other customer segment dynamics have interest in the quarter include continued strong uptake for the instrument systems for food safety testing in Asia and for medical diagnostic applications.

Turning now to our major product lines, overall our LC and MS instrumentation platform saw similar demand trends in the quarter. The migration towards UPLC technology continued in the quarter while companies appeared to be longing out replacement of systems running legacy HPLC methods.

In the quarter we benefitted from initial shipments of our recently introduced Xevo Tandem Quadrupole Mass Spectrometer. Customers have been very receptive to the unique combination of high performance and the use of evaporation that this new system offers. Designed to leverage the advanced separation performance of UPLC, we feel that Xevo is the ideal platform for emerging applications such as food and environmental testing, and for classical [admi] and PK testing to support clinical trial studies.

Sales for high resolution mass spec including our Synapt platform were impacted by a tougher spending environment for large ticket instruments. After growing at a double digit rate through the first three quarters of 2008, our TA instruments division saw a modest decline in sales for the quarter due to a tougher spending environment in the chemical industry.

As I mentioned earlier today, many chemical firms especially in the U.S. significantly cut capital spending in the fourth quarter. We believe that we maintained or gained market share in the quarter and feel we have the strongest thermal and rheology product line in the industry. Also we saw very nice growth in our recently acquired microcalorimetry line and feel that growth in this life science directed business will offset continued weakness in the industrial segments.

Before passing on to John, I’d like to comment on our overall financial and operating performance in 2008.

For the full year, we achieved 20% adjusted earnings per share growth, accompanied by free cash generation at record levels. Our ability to post these results in light of an obviously tightening global economy and following the 2007 performance, where sales grew by 15% and where earnings per share also grew by 20%, clearly indicates the strength and resiliency of our business strategy.

Our new product flow was strong, particularly in mass spectrometry technology and our application focus in areas such as food safety testing, clinical diagnostics and life science research allowed us to solidify strong foundations in business segments with high growth potential.

Geographically, we continue to expand in our developing markets in Asia and Latin America. Then these markets would have made investments to provide better service and support and a rapidly growing base of customers.

Operationally, we managed to improve our profitability by controlling expenses and reducing manufacturing costs. We finished the year with a strong balance sheet, as we used our cash flow to reduce our net debt, execute a share repurchase program and continue M&A efforts. Our M&A activity, was consistent with our strategy and we added complementary product lines to our existing operating divisions.

In closing, I’d like to say a few words about 2009. I think it’s apparent to all of us that 2009 will be a challenging year, as it is not yet clear when we will begin a global economic turnaround. For at least the first half of the year, we have and we'll continue to take steps to manage our expenses to minimize the bottom-line effects of anticipated lower sales. Rest assured though, that we will continue to invest in new development programs and maintain our leading customer support structure to ensure we are well positioned to enjoy the rewards of stronger end markets when they materialize.

In the past, periods of slower growth were followed by recovery periods that suggested an underlying fairly continuous market demand for the instrument system technologies that we offer.

Now it is hard to say if there is a comparable precedent for the kind of weakness that we are seeing. However please understand that we are continuing to invest in new product developments and that we will maintain our leading customer support structure in order to ensure that we will be well positioned to enjoy the rewards of stronger end-markets when they materialize.

Thank you and here's John with a more detailed financial update.

John Ornell

Okay, thank you Doug. Good morning everyone. Now fourth quarter sales declined by 4% and non-GAAP earnings per diluted share were $1.07 this quarter [compared] to earnings of $0.98 last year. On a GAAP basis, our earnings were $1.01 this quarter compared to $0.96 last year. A reconciliation of our GAAP to non-GAAP earnings included in our press release issued this morning. One item of note here is a $6.5 million pre-tax charge for our patent litigation provision based on a recent judgment [Agilent Technologies]. This result has no impact on our future product sales or financial performance.

Reviewing Q4 sales results, sales were flat organically and currency reduced reported sales by about 4 percentage points this quarter. Now, looking at corporate sales growth regionally, without foreign exchange effects. Sales within the U.S. were down 10% this quarter, to resolve the weak instrument demand from industrial accounts and a strong prior period of comparison.

Within Europe, sales were up 5%; sales within Japan were up 2%; and sales in Asia, outside of Japan remained strong and were up 17%.

Turning to the product front within the Waters division, instrument sales declined by 5% and recurring revenues grew by 7% this quarter. Within our TA Instruments division, sales declined by 2% versus the prior year.

Now we'd like to comment on our non-GAAP financial performance. Gross margin remained strong this quarter, came in at 58.9% versus prior year margins expanded by about 50 basis points. While currency translation reduced volumes this quarter, there was a beneficial effect on the gross margin rate as the British Pound declined significantly versus the Dollar and Euro this quarter, making the sales of our mass spec products produced in Manchester profitable. Additionally, all the cost productions continued to favorably impact margins this quarter.

SG&A expenses declined slightly compared to prior year, as a result of favorable foreign translations. R&D expenses declined modestly, likewise from favorable currency translation effects and also the timing of the project expenses. Income taxes came in favorable to plan this quarter, as a result of higher legal entity profits and tax payment jurisdictions, dramatic movements in key currency relationships across the quarter, reduced foreign exchange gains, lower tax offshore entities and offsetting losses in our U.S. legal entity. While these gains and losses amounted to a smaller balance for the entire company, they did significantly benefit the tax rate for the fourth quarter in 2008.

On the balance sheet, cash in short term investments totaled $428 million and debt totaled $536 million bringing us to a net debt position of about a $108 million. As I described in last quarters call our early October debt repayments actions reduced our cash and debt balances by about $490 million from ending Q3 levels providing a more conservative capital structure in these non-certain economic times. On the stock buyback front, we continue to purchase our shares in the open market and during the fourth quarter, we purchased 635,000 shares of our common stock for $26 million. But at full year 2008 we purchased 4.1 million shares for $235 million. We define free cash flow as cash from operations plus capital expenditures plus saving non-cash tax benefits from FAS 123(NYSE:R) accounting excluding any individual non-recurring items. For full year 2008, free cash flow was up 13% over 2007, a record high of $369 million after funding $69 million of CapEx, nearly back $7 million of FAS 123(R) accounting and excluding a $12 million payment associated with transition from pension plan to a 401(k) plan in the U.S. Comparable free cash flow in Q4 2008-2007 was $91 million and $87 million respectively.

Accounts receivables day’s sales outstanding stood at 63 days this quarter, three days better then Q4 last year. The inventories were down $3 million year-over-year and down more substantially in the quarter.

Now I’d like to turn to our outlook for 2009. We expect the difficult economic conditions which we experienced in Q4 will continue in 2009. We believe our recurring revenues will continue to provide a level of stability to our business and are likely to continue to grow at comparable rates to what we saw before. On the instrument front, we expect to see more resiliency from our larger base of life science customers than from our smaller base of industrial chemical customers, where customer spending may continue to deteriorate. Total instrument demand is expected to be down to mid to high single digits.

Overall, we are expecting organic sales to be between down 4% and up 1%. Foreign exchange translation will reduce 2009 sales by about 4% at current rates. Therefore on a reported basis, we are expecting sales to decline by 3% to 8% for 2009. Moving down the P&L, we expect gross margins to be down about 150 basis points versus 2008, where favorable effects of higher consumables volumes and favorable, currency effects from our U.K. based production are more than offset by less favorable manufacturing variances from lower production volumes and a higher proportion of service sales at a 50% margin.

Operating expenses are expected to decline at a rate above the good sales. We expect our operating tax rate to be in the neighborhood of 18%. Net interest expense is expected to be in the neighborhood of $15 million and our fully diluted average, outstanding share count for the full year 2009, currently estimated to be above 95 million shares.

Rolling all of this together, we currently expect non-GAAP earnings for fully diluted share to be in the range of $2.80 to $3.15 per share, where sales decline between 3% to 8%. In the Q1, we expect organic sales to decline here with the bottom of our 2009 sales range, while currency comparisons are most difficult early in the year and current exchange rates will reduce sales growth by 5% in the first quarter.

Expense comparisons are also more difficult early in the year as cost reductions are phased in as we move through the year. Considering all of these factors, earnings per fully diluted share for the first quarter, are expected to be between $0.56 and $0.62. Doug

Douglas Berthiaume

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

Question-and-Answer Session

Operator

[Operator Instruction] Your first question comes from Ross Muken, Deutsche Bank. Your line is open.

Ross Muken - Deutsche Bank

Good morning, gentlemen.

Douglas Berthiaume

Good morning Ross.

Ross Muken - Deutsche Bank

Can you walk us through on the instrument side, sort of the assumptions relative to life science instrumentation versus industrial instrumentation? Now I can understand how obviously on a related basis, you know clearly the demand in the life science end market is going to likely be somewhat stronger but I am trying to get a sense for how much especially given some of the recent announcements you know yesterday we obviously had the Wyeth, Pfizer news, you have seen pretty significant CapEx cuts at both bio-tech and pharma probably a bit more so than I think some of us had modeled and then obviously the CRO segments specifically both based on the weakness in the rupee and just general sort of over capacity in general seems to be kind of a good deal bit weaker than was expected so. Just help understand kind of what segments do you think specifically are going to kind of buoy that demand and how much better that industrial is it going to be?

Douglas Berthiaume

Ross, let me lead off and then John can fill in. I think in general what we are seeing for next year is essentially a continuation of the demand patterns we saw in the fourth quarter. We definitely saw in the industrial chemical side of the business demand rapidly fall-off, particularly in the TA instruments grouped that’s highly focused on that segment of the market. The life science piece is a more complicated picture. Its not I'd say nearly equates off a margin [at TA] big pharmaceutical companies that had been struggling with a number of their own issues even before the financial crisis. You’ve got big biotech companies who aren’t suffering nearly as much as average. Then you got little biotech companies that may be wondering where the next round comes from. Only and I'd say we think that the fourth quarter dynamics pretty much show what you are going to see next year. Yes, you've got a big merger with Pfizer and Wyeth in all likelihood coming. And we could see some effect of that on our business, but we don’t think it's huge surely both companies have not been robust purchases in the last couple of years combined Pfizer and Wyeth represent something around 2% of our worldwide revenues and of that about 1% or a half of it represent recurring revenues. And of the remaining probably half goes into regulated applications that are not likely to see major disruption. So, the amount of disruption that comes from that large pharma merger, we think is handleable within our overall guidance for 2009. So, that I think sets the picture. We think that the currency effects in places like India, Brazil and Korea will probably have a continuing effect early in the year, but we see some optimism that as we particularly in place like India get through the first quarter, they finish their fiscal years, there is more optimism that after that they can adjust to the currency picture and pick up demand. We see similar kinds of notions in other weak currency areas. So, we think it will continue probably through the first quarter but improving conditions thereafter.

Ross Muken - Deutsche Bank

So just on a relevant basis, I mean to get to that sort of mid to high single-digit decline in instruments, I mean is that sort of assuming that life science is sort of flat and industrial is going to be down double-digits. Is that sort of a safe assumption?

Douglas Berthiaume

Well I think one think we can say is that at least the large pharma piece of our life science business is thin, in a little bit of a recession of their own, if you will. So, I think there is probably likelihood to be a bit more stability and lack of incremental demand loss perhaps at least from that subset of the growth.

But I would say overall as we think about the mid to high single digit instrument decline, you’re looking at an expectation of the life science's piece to be closer to the mid singe-digit and possibly looking at the pure chemical industrial customers that would be perhaps in the mid teens levels of decline to put you in that range over all of minus 5 to minus 9. some of the governmental business that we do, we think will be more stable. Some of the food safety environmental pieces that what we typically log into, our non-life science business we think will be more stable as well. But I’d say the expectation is anywhere from, maybe flat to up a little bit for some of those customer sets to as bad as mid-teens or maybe a little worse for some of the chemical industrial customers.

Douglas Berthiaume

And Ross, I mean, just to kind of put flavor on it, neither of us would content to what we are portraying for next year; as the absolute worse for that business yet. But we think we are being conservative in the way we’re laying out 2009, where you know, with any kind of improvement in any segment. And then we think that there are some phases for believing that it could be better than this. We think that the financial, we’ve certainly saw an impact in the fourth quarter resulting from just the financial upset in the financial markets; of people wondering whether their credit lines would honored. We clearly see this side at the end of the fourth quarter; a little bit or relief on that front.

John Ornell

Exactly. And in the fourth quarter which I would say was a pretty bad quarter, we saw our instruments declining mid single-digit, not anything worse than that, but I mean, who knows, these are difficult times to predict.

Ross Muken - Deutsche Bank

And in terms of the recurring revenue growth, I mean it was pretty good in the fourth quarter. What is the sort of key metrics that you watch in understanding kind of the trajectory of that piece in the business? Is that you know a mix on the discovery side of sort of labor and you’re watching on employment and seeing whether or not we’re seeing either discovery labs closed or people let go from a scientist perspective? And then on the regulated side, you are looking at script growth and sort of manufacturing capacity and whether or not some of these players are taking down certain facilities. I mean what are the key things you are kind of keyed in on…

John Ornell

Well we are not…

Ross Muken - Deutsche Bank

In determining that trajectory?

Douglas Berthiaume

In terms of our service business, over 60% of that is done under longer-term contract.

Ross Muken - Deutsche Bank

Right.

Douglas Berthiaume

So, you know you've got a, of our business that we have the most visibility into, I'd say insurance. And then we track activity obviously early on from a week-to-week basis. So I think our service forecast don’t have a lot of variability to. They could vary a couple of points plus or minus but not a lot. On the chemistry side, where it has a similar degree I'd say. The other thing that’s sort of a little bit of a advantage to us, is that in 2008 we had a negative calendar dynamic in the first quarter, simply because of the way the calendar fell. We probably have three days better calendar dynamics in the first quarter this year. But even at that, we track the weekly run rate here and don’t see any current indication of major upset to our expectations. So, on the consumable recurring side I think we have pretty good visibility.

Ross Muken - Deutsche Bank

Thanks a lot Doug. I appreciate all the detail thanks.

Douglas Berthiaume

You're welcome.

Operator

Your next question comes from Doug Schenkel, Cowen and Company. Your line is open.

Doug Schenkel - Cowen and Company

Hi good morning.

Douglas Berthiaume

Good morning Doug.

Doug Schenkel - Cowen and Company

I think there is going to be some concern or consternation about the fact that your full year guidance is a bit back-loaded which, well, I said that I understand it's appropriate given the environment. I just want to see if there are any assumptions incorporated into your guidance for improved conditions in the second half, or are you really just reflecting easier comps year-over-year?

Douglas Berthiaume

I'd say, certainly as you look at the currency side, Doug, the currency starts off in the least favorable condition in the first quarter in the first half, and it gets more favorable as the year goes on. Secondarily, some of the actions that we've taken on the cost front, the hiring freeze, a wage freeze, it doesn’t have as much of an impact early in the year. We typically have our mirror process occurs in the April time frames. You will see the benefit, the unfortunate freeze situation there on the expense side coming through later in the year. And on the sales side, I mean we're just saying that still they are going to start off closer to the bottom of the range and not beyond that for the full year expectations. So, I don’t think generally we are looking at things to very dramatically improve as the year goes on to hit those full-year numbers.

Doug Schenkel - Cowen and Company

Okay. Thank you for that. I would say encouraging area was the commentary on ACQUITY. I was curious as to whether you are making progress in placing ACQUITY for QA and QC usage relative to where you were earlier in 2008?

Douglas Berthiaume

Yes, we think we are making a lot of progress in ACQUITY. It maps a little bit of course by the overall warm economic conditions, but I can report that we saw a major pharmaceutical company basically tell us that they are standardizing over the next several years totally on our UPLC platform and won't be buying significantly more amounts of competitive HPLC. Matter of fact that vendor made a specific point of coming in to my executive meeting to point out to me it was significant commitment that they were making, and how much they were relying on. So I received very good underlying evidence of the market swinging to the equity UPLC starting.

Doug Schenkel - Cowen and Company

Okay, and then on Xevo there was a another bright spot in your commentary could you provide any color on where you’re replacing those? Is that actually a strong point because it’s being targeted less at pharma and where you’re seeing placements being made, at I guess outside of pharma is what I mean?

Douglas Berthiaume

Yeah I’d say of the interest in pharma is interesting very high, of course you’re aware that there is some upset in the supplier base to that typical TK marketplace with vendors either changing ownership or having concerned in that and fully for that application base. So we’re seeing a great deal of interest in those accounts in terms of looking at Xevo it remains to be seen how that turns into market share in there. But we’re seeing a great response in food safety and the other industrial application areas. So it particularly how’d some of the less sophisticated users Xevo’s ease of use characteristics are really getting attention.

Doug Schenkel - Cowen and Company

Okay, and one last question and then I’ll get back in the queue. During the quarter you talked a little bit about moving in some more of your North American production over to Singapore I was just curious as to where that’s stood and if you are moving forward with that could you just share a little bit more detail on when the timing of the benefits would play out and I guess recently margin attacks implications?

Douglas Berthiaume

Sure, we've for the last four or five year now have been on a long-term strategic plan of taking advantage of Asia manufacturers. Both from in terms of direct cost reduction as well as the integrating much more of the Asian supply channel to get that incorporated into our product cost. And we see advantages for that over the long-term. We've taken the advantage of that with some of our HPLC production and our detective production. Long-term, we want to accelerate that, take greater advantage of it, that gives us product cost advantages and tax advantages.

We've been in the process of looking at some long-term relationships with the sovereign part of that as well as the supplier base. We're making progress, you'll see us increase our production in Singapore over this year and we think we were out to enhance our long-term tax market too. So I think on both fronts you'll see announcements as we move through the year to enhance our P&L.

Doug Schenkel - Cowen and Company

Okay, thank you very much.

Operator

(Operator Instructions). Please limit your questions to two question. (Operator Instructions). Your next question comes from Quintin Lai, Robert W. Baird, your line is open.

Quintin Lai - Robert W. Baird

Hi good morning.

Douglas Berthiaume

Good morning Quin.

Quintin Lai - Robert W. Baird

Looking back at the fourth quarter. When did you begin to seeing kind of this the rapid slowdown. And so, given that when you are forecasting 2009 or you forecasting at of that of December, the kind of the low point of the three months of the quarter or kind of the average for the quarter?

Douglas Berthiaume

I would say we are looking at conditions that we think exist right now. Which is basically been amalgamation of everything we saw and report. I won’t say that we looked at the week 13 run-rate and extrapolated that what we look at is a compendium of what we think pharma industrial chemical, as well as geography, as well as our product mix and we wrap all of that in and say this is what we think the current conditions or I’d say in general that reflects pretty much what we saw on average through the fourth quarter, I’d say we do think that there was some affect of kind of the peek of the financial crisis so people worrying about whether they could get capital in that put the damper on things in the November timeframe I’d say when the market crated, people were worried about whether the banking industry would survive worldwide. I’d say we saw customers get a little bit more optimistic as went through December. But I won’t say that reflected too much in their actual buying patterns. So if that’s true I’d say the first six months, we could see a somewhat more optimistic turn of events.

Quintin Lai - Robert W. Baird

Thank you for that. And then turning to the balance sheet and some of the cash flow expectation for 2009, the inventories I noticed were down, kind of from Q3 to Q4 and is that how you are going to manage the lower demand and I guess that then also, and through with respect the cash-flow? What are your expectations for share buyback and CapEx for the quarter John?

John Ornell

Yeah, I’d say as we look at next year, we are looking to generate similar cash from ops it might be done a little bit. But we think we can continue to manage the balance sheet that was in the working capital side. We have talked before about the facts that we had set a facility that we were putting in place this year its going to be about a $35 million to $40 million increments on CapEx where historical defense of CapEx is more likely to be close to may be $80 million to $90 million for the full year given that one off event and you’re likely going to see cash flow be in the neighborhood of maybe 300 to 325 as a result of that on a relatively slow year. As it relates to deploying that cash we do work continuously and have an interest to continue on the M&A front consisting with our history of looking out to build on types of product line acquisitions, we need to do that, so that’s likely to consume some amount of cash in 2009, however we certainly at this stage we believe we'll have plenty of cash to continue on the buyback offerings. Thinking about the buyback being comparable to what you saw last year when we talked about it being between 200 and 250 million came right of the middle of that. You are likely to see us continue on that front. The present authorization from the program that was put in place a couple of years ago still has a $100 million left on it, so you’re likely to see something coming from the board later this year to extend or put a new program in place now as to procure $250 million I would guesstimate right now and that’s what is still in my share accounts.

Given the current price and our access to capital, it's likely they will frontend low debt program a little bit just given where we are, but I'd say that’s kind of what we assumed in our accounts.

Quintin Lai - Robert W. Baird

Thanks so much.

Operator

Your next question comes from Tycho Peterson, JPMorgan. You're line is open.

Tycho Peterson - JPMorgan

Hey good morning.

Douglas Berthiaume

Good morning Tycho.

John Ornell

Good morning.

Tycho Peterson - JPMorgan

Hey Doug I think in your comments you talked a little bit about the UPLC selling cycle being prolonged a little bit. I am just wondering if you can talk about the instruments selling cycle in general and what you are seeing, and what are these kind of delays or cancelled orders and then maybe also use that as a seg way to talk a little bit about the competitive dynamics these days and in mass spec and maybe on pricing as well on what you are assuming?

Douglas Berthiaume

Tycho what I really said was that the HPLC replacement cycle was longed out a little bit. I don’t see that on the UPLC side. I think that’s historically in particularly in the pharma cycle. They can, if they have a plan to replace instruments on a six or seven year cycle, they can stretch that out a year, year and half we would have definitely seen that in well most notably back in the early 90's but we haven’t seen that with UPLC, its really getting into the, cracking the application. And that we see happening with regularity. So, I don’t want you to misunderstand kind of what we’ve said there. We do see a function of people longing out their replacement cycles.

Tycho Peterson - JPMorgan

Okay. And then can you comment a little bit on the mass spec environment these days in terms of the competitive landscape and may be pricing as well.

Douglas Berthiaume

Well as you know, it’s always been a competitive environment. There are some people who have traditionally done better in some segments of the industry. I think that’s been particularly true in pharmacokinetics and drug metabolism. And in recent years our strength has been both on the high end with Q-Tof and Synapt, as well as applied applications in food and industrial applications.

I think in general, you know, we wrapped up 2008 similarly. I think that was a good reflection on how we ended. There’s certainly some question in the industry now about where some people are going with their mass spec lines, how is it going to wind up. There’s open speculation in the industry about that but take that for what its worth. I do sense that customers are right now more willing to consider varied suppliers in some of these Quantitative Bioanalysis areas, which certainly is seeing a great deal of interest in our Xevo there. So, I won’t tell you that we've actually booked a lot of business in the fourth quarter there. So, if the level of interest is reflective of an early stage, then we should see more business.

On the pricing front, we always see some people in end of quarters, kind of willing to trade off price for an order. I’d say we have not, you can tell from our margins that our pricing has remained very consistent. We haven’t seen a deterioration in margins across our instrument platforms and as I've said time and time again, the bulk of this industry, even in times like this, even in the fourth quarter, we didn’t see the rationale for using price to influence those customers and I don’t think price would have significantly influenced those customers to change the underlying dynamics. By the way, you also saw us improve our accounts receivable performance and this is kind one of the worst quarters you could imagine. You know our cash flow and our receivables performance was the best fourth quarter I think we've ever had.

John Ornell

Yeah.

Douglas Berthiaume

So, we're not seeing customers all of a sudden trying to [long] out their terms or if they are they are doing it for somebody else. We continue to remain kind of dedicated to running our business the way we've always run.

Tycho Peterson - JPMorgan

Okay. And then just, one last one on the outlook that you gave for TA. Can you just give us a sense, it sounds like it’s a different dynamic there in terms of kind of the selling cycle for some of the chemical and plastic manufacturers. I mean do you get the sense that this is going to be a prolonged multi-year contraction phase or how do we think about that due to the some of the other markets you typically served?

Douglas Berthiaume

Yeah, I'd say if you look at the TA, even in the fourth quarter which was a very difficult environment, they were about just 2%. So it wasn’t dramatically different from what we saw at the Waters division. They've recently been bearing on instrumentation offerings that have more of a life science application to focus in addition to differentiating themselves product-wise versus the competition. And so, implied in the guidance is that they could be down, mid-single, high-single digit perhaps at the low end of the range. But early indications, at least from the fourth quarter and moving into the first few weeks of this quarter would indicate that, that seems to be at least a solid range that I'm comfortable right now as we speak. They were unlikely to build the wall.

Operator

Your next question comes from Isaac Ro, Leerink Swann. Your line is open.

Isaac Ro - Leerink Swann

Hi guys, thanks for taking the question. First of all, could you just maybe give us the overall growth rate globally for HPLC versus mass spec. I know you gave us a lot of details, but I'm wondering about the big picture for the quarter.

John Ornell

It's really not dramatically different. The growth rates for the instrument lines were all within a few percent of one another. So we really don’t have that right in front of us, but it wouldn’t be dramatically different anyway.

Isaac Ro - Leerink Swann

Okay. And then, just for a little granularity on the drug industry specifically. I think in the past you've said that overall drug industry is probably 60% of Waters' sales. And I'm wondering, could you break that down a little bit, maybe between a couple of bigger buckets like big pharma, generics, and then maybe unprofitable smaller drug companies, something like that?

John Ornell

Yes. I think if you look at our overall life science business, we've always said it's about three quarters of what we do, because this 15% of government and academic that has a very heavy life science focus. Of the remaining 60% that you described as being commercial life science businesses, about 15% of that is our top 15 pharma accounts. And we've talked about them having been under pressure and continuing to be under pressure. About another 20% is kind of the specialty pharma accounts still, significantly large accounts that have historically done very well and I think will continue to do well may be to another 20% between the generics CROs, the generics have continued to well but CROs have been under a bit of pressure and included in that is biotech, the larger biotech. It a little smaller, the differential owing into biotech are really less then 85% of the overall pie. So that the ones that you worry about the most are 3 to 5% perhaps of our business overall and it tends to be rather varied you look at who you sold to one particular quarter its very different the next quarter its not a small set of customers that we’re relying on repeat business quarter by quarter.

Isaac Ro - Leerink Swann

Great, and just lastly have you guys any visibility on the repatriation of cash and then so how would you guys think to do that and use the cash?

Douglas Berthiaume

Well with the new administration I guess this an opportunity for a number of various things to be looked at I think it’s a little early to comment on that but I mean certainly some type AJCA type of program perhaps we’d be looking for to the extent that it was an opportunity to bring cash back at a reasonable appropriate tax rate will certainly consider that, that we could have last time around at 2004 time frame and that we were able to bring back half a billion dollars then so with that window open we’d be very interested in walking through it.

Operator

Your next question comes from a Derrick Brown, UBS. Your line is open.

Derik deBruin - UBS

Hi, Good morning

Douglas Berthiaume

Good morning, Derrick

Derik deBruin - UBS

I’m just curious to know just based upon on the comments you just made on some analysis slide down 2% organically in 4Q not a dramatic difference from the other LC/MS instrument businesses on and it sounds like there isn’t going to be that much difference in 2009, so I’m just curious that the first quarter guidance of minus 8% organic, minus 5% FX, you know, you get the business down 13% year-over-year in 1Q. That’s got to be down double-digit, mid-teens…

John Ornell

Yes. Derik, let me just correct something. What we’ve said is that our organic growth rates for the full year will be anywhere from up 1% to down 4%. As I said for the first quarter that the organic growth rate is more or likely to be closer to the minus 4% than the plus 1%.

Derik deBruin - UBS

Got you, okay.

John Ornell

And then on top of that, you’re right, you have to add 5 points of currency. So you’re going to be down in the mid to high single digits, which is consisted with what we've said for the full year.

Derik deBruin - UBS

Okay. Okay. That wasn’t clear. Okay. I guess, the other question is certainly the back half, I mean your, obviously the FX impact come off in the back half of the year, but I just think do you think that minus 4 to plus 1 is conservative enough given, you know, as you pointed out, there might not be historical precedence to this [free] market environment?

Douglas Berthiaume

Well, the answer is yes because that’s what we have portrayed. You know, there is certainly you can craft this scenario that says the second half doesn’t get any better. I think for, we still believe that there is real opportunity to do better than we've outlined. Some of its internal, some of it’s, we've got new products that will contribute as the year goes along. Some of it is market share. But we think we’re prepared to again improve our market share. So even if the market is consistent, we are better positioned than most of the others who we compete with to take market share. And the third part of that is, we think customers in the second half are going to be better positioned to buy I think the financial is likely to be better off than it is now. [Granted] there is some non-zero likelihood that it won’t be.

I think in management terms, well we feel the need to layout a full year picture, one that is consistent with our overall view. We are really managing month-to-month and quarter-to-quarter. And we have taken those steps we think that they keep our P&L and our business logically structured in these tough time. But we haven’t taken actions that we think really cut in to the needs of the business. If our view turns out to be too optimistic, we will have to look it whether we need to take more restructuring actions.

Right now we don’t feel that, we think we are logically conservative in our mix, but we have got to say (Inaudible).

Derik deBruin - UBS

No, I appropriate that I am just looking at the point that in better markets for the first quarter of 2008, you guys guided 10% organic revenue growth and you did 6 for 4Q in ’08. You guided the 6% organic revenue growth and you did zero. I am just wondering if you are in a situation right now where is it even possible to grow these businesses in positive organic growth territory. Given from whatever you have economically indicated we can seem to think things to be just getting progressively worse?

Douglas Berthiaume

Well, I think it’s a fair question, I think the fourth quarter was pretty bad. If 2009 gets substantially worse than the fourth quarter, across our customer base, then you are right. I think we got our results as soon as we could, in the fourth quarter. I'm not aware of anybody else who calls any downturn so it will be interesting to see our competition [couldn’t] whether they do their forecast or not in the fourth quarter. But everybody's got to call us the way they see them at the time and we think we’re approaching 2009 in a logical basis but it obviously remains to be seen.

John Ornell

And Derik we are saying that our ranged does incorporate worse times, we just saw in the fourth quarter, so I mean we read the news too and we see that certain markets look like they’re going to be more difficult, we think we’ve baked out into the minus 4% organic growth scenario, but as you know all of the crystal balls right now are a little more clarity than they’ve historically ever been.

Operator

Your next question comes from (Inaudible) from Morgan Stanley. Your line is open.

Unidentified Analyst

Yeah, hey guys. Good morning.

Douglas Berthiaume

Good morning.

Unidentified Analyst

So how about your assumptions about gross margins for next year. Could you talk about what are your expectations for certain organic gross margin improvements and then offsets of currency in volumes declines to get to that 105 EBIT number?

John Ornell

Yeah, we’re looking at a little bit of a mixed dynamic on the service versus instrument component and service has risen closer to 50% than closer to 60 on instruments. So it’s about 40 or so basis points of service mix as we look at service growing next year and instruments declining. Also the FX pay next year is estimated to be somewhere in the neighborhood of 50 basis points. We also think that there'll be a little bit of negative manufacturing leverage next year 20 or 30 basis points and then there is little bit beyond that there is just a number of different things including some new product launches that typically go out at slight lower margins that we baked in as well. I think it’s a relatively conservative picture. It incorporates certainly the lower end of the sales range as we think about next year and it doesn’t really incorporate anything significant as related to incremental volumes from Singapore later in the year.

Unidentified Analyst

Okay. Great and then on ACQUITY in the quarter, can you just talk about what the actual growth rate was year-on-year for ACQUITY?

Douglas Berthiaume

No, we don’t separate that out for obvious competitive reasons.

Unidentified Analyst

Okay great and then last question just quickly on the expense side, can you talk about expenses down inline with sales. How much more flexibility do you have there, are you comfortable in terms of still being able to invest in the business, as everyone is talking about the lower end of the range turns out to be the case or worse than that?

Douglas Berthiaume

Well I think what you can assume is that we’re taking all the actions short of major people actions, we're limiting discretionary spending, limiting discretionary travel and meetings, we've had salary freezes on, we’ve got headcount replacement freezes on. All of those actions that you take to keep your house heated in winter time when times are tough. We haven’t taken any significant restructuring actions, we don’t think that they’re appropriate in this climate. We think you know this is not a forever problem that we are facing and we want to keep structured to keep our sales and service and support group intact. So, we’re not without other things that could happen if the world deteriorates further. But we think right now we are on the prudent side of the spending equation.

Unidentified Analyst

Okay, great. Thanks guys.

Douglas Berthiaume

You’re welcome.

Operator

Your last question comes from Chris Arndt, Select Equity Group. Your line is open.

Chris Arndt - Select Equity Group

Yeah. Hi Doug. I was wondering if you could comment on the mix of HPLCs that you sell in units between your traditional HPLC and your ACUITY product.

Douglas Berthiaume

Well Chris, what I’m willing to describe is that the mix is changing towards UPLC of course where we continued to have nice growth in 2008 of UPLC and HPLC is beginning to show declines. And that’s what we’d expect for putting in some people’s view HPLC is becoming an obsolete technology and we’re going to move extensively into UPLC in years ahead.

Chris Arndt - Select Equity Group

I mean just a ball-park, is this fourth inning of the shift to ACUITY or the sixth or seventh inning?

Douglas Berthiaume

Well, I think the reality is that we are still dealing with a lot of regulated applications. So, what you’re seeing is a lot of residual impact from that kind of dynamic of replacing. It’s easier to replace one or two HPLCs than it is to convert all over to ULPC. What we're seeing however is like one anecdote that I described is that some major pharmaceutical companies are now willing to setup so they are making that total commitment to UPLC. I think more and more that’s going to happen. So, I'd still say we are probably in the early innings, second or third innings but I think that slope is getting better for UPLC. I think the other thing just to choose our own [one] is that we're hearing our customers say in this one particular case, the only thing they consider this truly UPLC out there is ACQUITY. That the competition still significantly lags behind the quality of our technology. And let me just add just one thing on the ACQUITY front, and most of you may have heard I don’t know. There's a worldwide shortage of acetonitrile currently and acetonitrile is the most popular solvent to use in liquid chromatography. The shortage of acetonitrile is basically due to the fact that it’s a by-product of acrylonitrile production and acrylonitrile is substantially aimed at industrial applications that are very dwindling. So you can increase your supply of acetonitrile a lot of customers on forced reduced usage of acetonitrile and they are showing great deal of interest in how much ACQUITY can save them on the acetonitrile usage front, even in regulated applications where they would have to revalidate their applications. So, I think that’s kind of an unplanned-for dynamic that we are seeing everyday. We are seeing customers increase their level of interest in ACQUITY because of that. It also has natural green implications. We are seeing that very high interest in Europe, because of reduced solvent usages and inherently a green benefit. So, a lot of reasons why we are optimistic about ACQUITY.

Chris Arndt - Select Equity Group

Okay. Thanks a lot.

Douglas Berthiaume

You're welcome. Well, thanks. Thanks very much for taking the time. Notice, you've got a lot of demands on your time these days and we appreciate you sticking with us through the call. We'll talk to you next time at the end of the first quarter. Thanks again.

Operator

This does conclude today's conference. Thank you for attending. You may disconnect at this time.

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