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Waters Corporation (NYSE:WAT)

Citi 2013 Global Healthcare Conference

February 27, 2013 10:20 am ET

Executives

John A. Ornell - Chief Financial Officer and Vice President of Finance & Administration

Gene Cassis

Analysts

Amit Bhalla - Citigroup Inc, Research Division

Amit Bhalla - Citigroup Inc, Research Division

Okay. Good morning, everyone. I'm Amit Bhalla from Citi's Life Science Tools and Diagnostics team. And with us for the next presentation is Waters. From the company, we have John Ornell, Chief Financial Officer; Gene Cassis, Corporate Vice President Business Development and Investor Relations; and also in the audience is Terry Kelly, President of the TA Instruments division.

Waters is a life science tools company specializing in liquid chromatography, mass spec, rheometry for applications in health care, environmental and food safety. What we're going to do today is John is going to take us through a few overview slides, and we'll have the remaining time to talk through some Q&A.

John, why don't you take us through the slides?

John A. Ornell

Okay. Thank you, Amit, and welcome, everybody. Before I start, I have to point out our cautionary language, to the extent we talk about future-oriented events, there are risks and uncertainties associated with those, and you need to refer to our 10-K.

As Amit said, Waters Corporation is in the analytical instruments industry. We participate relatively narrowly within the space. We have technologies in chromatography, mass spectrometry, thermal analysis and rheology. And those are technology areas that we have historically devoted our resources to. They tend to be a space to grow a little bit more quickly, we think, on average than the space in general. And over many years, we have, along with some of the other large players in the space, taken share away from those who haven't invested in those technologies quite as robustly as we have.

We're divided into a couple of divisions: the Waters division, represented by the top of the slide, participates in a $6 billion market segment of the overall analytical instrument space, comprising the liquid chromatography and mass spectrometry pieces of our technology; and the TA Instruments division, more involved in the thermal analysis, physical testing side of the market, participates in about a $0.5 billion segment. We would say that Waters has a leading share in mass spectrometry, a fairly dominant share in liquid chromatography. And TA Instruments has, for sure, a leading share, a #1 position we believe in the physical testing market.

As we look at the composition of these markets, we are largely focused on life science applications between pharma, biotech and government and academic, which are largely life science in their orientation, 3/4 of our business falls under the life science umbrella. We think, generally, that provides a bit more stability in growth than a number of the other segments of the business, and there's a lot of application areas here that are more QA/QC-focused than are in a lot of the other segments of the industry and thus, likewise have typically more stability in growth across decades that the corporation has been in business.

The government and academic exposure that the business has is about 17% last year. It's typically around 15-ish percent of our business across a multiple-decade perspective. Our instrumentation isn't generally oriented to that market segment in that we tend to place a lot of automation into our equipment, a lot of software features and functions that aren't quite as applicable to that market space. But it's -- I would say, generally, our instrumentation is designed to be operated in for-profit types of institutions and kind of migrates its way into government and academic as a side benefit.

The industrial, food and environmental segment of our business is one that has been a little bit lumpier in its growth across time. Here is where we have a bit more exposure to the industrial chemical side of the marketplace. Maybe in sum total, we have maybe 10% to 12% across the business associated with industrial chemical customers. The food is more along the lines of food safety. The environmental is again environmental testing around the world. These are applied markets that have grown pretty consistently for us across time in the high single-digit range. And we think that there's a lot of opportunity here, particularly in the United States, as we've recently had some level of interest in the government to bring into play in the U.S. some of the measures that are today towards in the EU and not here. So we think over time, we'll see the food safety market improve in the U.S. and continue to drive growth there.

If we look at the revenue mix in our overall business, almost -- about 1/2 of what we do is instrumentation and the related software, but the other half is what we would call our recurring revenue business, and this is comprised of our service business that's about 30% and the chemistry business close to 20% of what we do. It's the consumable that actually does the separation within the liquid chromatography experiment.

So these businesses are typically very steady in their growth rates. They're more attached to the large installed base that's out there versus the instruments that are placed in any particular year. Last year, which wasn't a very good year for our business, we saw these revenues grow in the mid- to high-single-digit range where we experienced a slight decline last year in instrument placement as a result of a very difficult CapEx environment. So we have about half of our business that in good times and in bad typically provides a moderate amount of growth that overall tends to be a piece of stability to the overall sales growth of the business.

If we look over a 10-year period, Waters has experienced about an 8% top line growth in the compounded average basis. Currency has been a headwind then a tailwind, but not tremendously meaningful across that time frame. And we have made a few acquisitions across that time frame as well that might have added between 0.5 to 1 point on average across the duration of time.

Our acquisition strategy is one that is more of a bolt-on type of strategy. We make relatively small acquisitions, as you can see. Largely, they're entrepreneurial types of companies that don't have the capability of growing their businesses internationally. And we're typically able to leverage those to our existing sales and service organizations. And they become very accretive to our operations quickly, though they're not large enough to be overly excited about.

We have been able to grow our operating income a few points quicker than our top line. So the 8% growth we saw in sales is compounded; about 11% rate on the operating income line, as we've been able to expand our gross margins a bit. And we typically haven't needed to grow our SG&A at the same rate as sales, so we've generated a little bit of operating income leverage across that time frame.

Down at the earnings per share line, we've had very meaningful share repurchase programs in place. Our business generates a lot of cash, and we haven't deployed it on M&A, as I said, but instead, we've deployed that cash pretty consistently on share repurchase programs across the last decade. And we've removed probably 40% of the outstanding shares in the market across the last 10 years on a relatively consistent basis. And we look at this type of capital deployment to be what's in Waters' future as well in the market, as we speak, procuring our shares. And we have a target this year in the share repurchase program of about $325 million.

As I said, the diluted shares outstanding has come down meaningfully, and the financial leverage through this practice could be seen in the results.

As I had said earlier, 2012 wasn't a very good year for Waters. We had organic growth of 2%. We had consistency in our recurring revenues business, but there was a lack of desire on the part of many individuals to deploy capital last year. And for that reason, we saw our instrument growth -- our instrument sales decline by a few percent. In spite of -- the organic revenue was up to -- currency cost us 2 points; on a reported basis, we were flat. Our earnings per share, in spite of that, were up a couple of percent as a result of tightening the belt certainly on the spending side, where the pay programs that didn't get funded last year ended up providing some amount of compensation for the top line. Generated almost $400 million of free cash flow, and we deployed about $300 million of that on the share repurchase programs.

In spite of it being a poor year, we saw somewhat stable pharmaceutical demand. Outside of India, we saw our pharmaceutical demand growing in the mid-single digits. So in spite of it being a difficult year, the fact that the life science piece of what we did was stable, was at least some consolation in a difficult environment.

We saw a weaker industrial demand, certainly in the accounts where we are more GDP-focused. We saw, as I have said, a meaningful decline in India associated with the devaluation of their currency. And China continued to be a growth driver for us, about 11% of our business, and we see that continuing to grow double-digit as we move through 2013.

For the 2013 period, we're expecting our sales to grow at about 5%. Currency is moving around quite a bit, but it looks like it's going to be about neutral. Like the sales growth for the year, it's about 1% depressant to sales growth in the first quarter. We're expecting our earnings to grow in the high single-digit range, $5.30 to $5.40. We think free cash flow will be somewhere in the mid-400 -- $440 million, maybe $450 million. And our capital allocation model remains conservative with most of that cash being deployed on share repurchases.

So with that, I'll turn it over to Amit for questions.

Amit Bhalla - Citigroup Inc, Research Division

Thanks, John.

Question-and-Answer Session

Amit Bhalla - Citigroup Inc, Research Division

Let's just start with just a general question. How does this year, going into this year in your first 2 months of conversations with customers, feel compared to the same point last year?

John A. Ornell

Yes. I think as we look at the start of this year versus history, we do about maybe 20%, 22% of our business in the first quarter of the year and closer to 30% in the fourth as a result of kind of a capital spend mentality where capital budgets are released some time in the first quarter, and then they're flushed during the fourth quarter. And I'd say this year, we've seen fewer accounts where people haven't released their capital budgets, where there's meaningful consternation about spending CapEx dollars. I wouldn't say overall that the environment feels dramatically better, but I do think that there's a number of accounts that have been a little quicker in releasing their CapEx budgets. And I'd say generally speaking, I think people are a little bit more accustomed to the kind of environment that we're living within. And I expect that we'll continue to see a little bit better demand for our instrumentation right out of the gate that we've seen continued through the quarter and through the year. If you look at our expectations for instrumentation growth, I mean, last year was down a few percent. This year, we're expecting to be up a few percent as we get to that 5% full year number. So we're really just kind of coming back on the instrument side to almost what we shipped in 2011. So I wouldn't say the expectation is overly robust. But against that, I would say we're seeing a better start, certainly as people feel I think a little better about life than they did coming into 2012.

Amit Bhalla - Citigroup Inc, Research Division

So is there a geographic variation or is there a geographic trend that's pushing or that's leading you to see that out of the instruments right out of the gate?

John A. Ornell

Yes, I'd say -- my comments regarding customers' willingness to spend a little bit more focused on some of the larger houses -- larger farmer accounts, where those types of budget releases are more meaningful and the CapEx lever is used a little bit more frequently than in other accounts. But that would also be true to some extent in some of the larger industrial chemical accounts. But I think from a geographic perspective, what's interesting is that right out of the gate, we talked about India coming on strong and growing double-digit, and that certainly didn't occur at any quarter last year. So I think within that region of the world, it's about 7% of our business overall. We feel pretty good that at least early in the quarter, we're seeing some indications that, that business is back to the type of growth that we would typically expect in that part of the world. The overall expectations for India for the year is that it will grow somewhere in the kind of the high single digit-ish type range. And at least early in the quarter, they've come out a little bit better than that.

Amit Bhalla - Citigroup Inc, Research Division

So why is that? Is it just -- is it a comp issue or are you seeing CROs changing their behavior? I know -- and talk about the rupee in that context as well.

John A. Ornell

Yes. We sell in India in U.S. dollars, and we've seen for the last maybe 1.5 years a general depression in the rupee. And we've seen a number of customers who have waited for the currency to improve, and they've basically lagged out the purchase of instrumentation. Service chemistry continues to do well in that region of the world, but we think the base of instrumentation in a lot of the CROs and in many of the generic houses has grown in years of -- and is now at a point where it needs to be replaced. So I think at this stage with so much time elapsing, I think people are just -- customers in most countries are just of the mindset that says, we've got to begin replacing some of this aged base. A lot of this equipment is used in QA/QC applications, and it wears out. And like a lot of other analytical equipment, this equipment that we sell operates under fairly high pressures. There's materials that are running through the flow paths that corrode it over time. And it just needs to be replaced as just as an automobile would be. You can get another 20,000, 30,000 miles out of your car. Likewise, you can get another few quarters out of your instruments. But at some point, it's penny-wise pound foolish, and I think customers recognize that. And we're beginning to see that installed base being turned over again.

Amit Bhalla - Citigroup Inc, Research Division

So compared to last year, the same customers were not doing that and using valuation -- or currency valuation as an excuse for this year to disengage...

John A. Ornell

That's correct. They're beginning to spend money.

Amit Bhalla - Citigroup Inc, Research Division

Okay. So they just waited too long.

John A. Ornell

Exactly.

Amit Bhalla - Citigroup Inc, Research Division

Okay, got it. Now I just wanted to touch on the other comment you made about the first quarter. You said you're guiding to 100 basis points hit in 1Q. Put that into the context to the recent moves in the euro and the yen, is that still the expectation?

John A. Ornell

Yes, I would say versus original guidance from a currency perspective, we've seen the euro move from $1.30 to $1.35-ish and back down to $1.30. So the euro in sum total is maybe a little bit better than what we had originally guided to. I think the original guidance was $1.29, $1.30 or $1.31 as we speak. But across the quarter, it's been a little higher than that. So I would say there's been a little bit better scenario on the euro. About 30% of our sales is denominated in euro, so that's a little bit of a tailwind. But unfortunately, offsetting that is the yen. The yen is somewhere around JPY 91.5 [ph] as we speak. It's been closer to JPY 95 [ph] for a time. A lot of our sales are heavily weighted in the third month of the quarter, so what the yen does in March is going to matter. But I would say there's probably a little bit net negative movement in currency. I don't think it adds a point of pain to the top line. But the dilemma that we have is that we have many fewer natural hedges in our Japanese operation to offset the top line pain associated with the yen movement. We probably have a flow-through to op income that's closer to maybe 70% on the yen as a result of the fact that we don't have any manufacturing in that country. Whereas in Europe, we have a very meaningful presence in Ireland, and our flow-through from a dollars pleasure in the euro is probably closer to maybe $0.30, or 30%. So the Japanese yen movement becomes more meaningful to operating income than the euro. Now our business in Japan is about 10% of our overall business, but I would say maybe there's $0.01 or $0.02 within the quarter of incremental pain associated with where we think the yen is now through the end versus original expectations.

Amit Bhalla - Citigroup Inc, Research Division

But if you wrap it all together, that 100 basis points is probably more like 125?

John A. Ornell

Maybe something like that, yes. I don't think it rounds up to 2, but probably 125 and maybe another $0.01 or $0.02 of pain associated with translation versus original expectations.

Amit Bhalla - Citigroup Inc, Research Division

Okay, got it. And then talk a little bit about China and how the trends have been there since we last talked in the last earnings call?

John A. Ornell

Do you want to talk about China, Gene?

Gene Cassis

Sure. As we look at last year, certainly, one of the high points for us was a continuous and stable growth rate in our business in China across the year. We ended up with, I believe, high teens growth rate in China for the full year. And as we look at the trajectory that we're starting off with on the first quarter so far, it appears as if the momentum that we had last year is carrying into this year. So our expectation, based on our longer-term forecast and on the results that we're currently viewing, suggest to us that China again will be incremental to our top line in 2013. And it could conservatively adjust itself at 1 point plus to our growth rate. Just to help you calibrate, China is roughly 11% of our business, and it's now the second largest country market after the United States for Waters.

Amit Bhalla - Citigroup Inc, Research Division

Okay, perfect. I know you said in the presentation your academic/government exposure is only about 17% of revenue. But give us just your perspective, with sequestration right around the corner, of how you're factoring that into your guidance and what you're hearing from your customers.

John A. Ornell

Sure. I think as we look at government and academic, it really, as I've said, isn't the major focus for us -- of our business. And over many years, we've kind of built a franchise that has a lot more focus on the for-profit piece of the customer base. But government/academic, worldwide, 17% of our business; the U.S. is about 1/3 of that; Europe is about 1/3; and Asia is about 1/3. And I would say last year, the pressure that we saw in government/academic really came from Europe; that's kind of in the base as we speak. We saw a somewhat -- a modest amount of growth in government/academic in the U.S. last year, and we saw good growth in government/academic in Asia. And the expectation this year for government/academic from a total perspective is that it would be relatively flat. We're thinking that we don't see any more deterioration in government/academic in Europe. On the other hand, we do think that the government and academic piece of our U.S. business is likely to be under a little bit of pressure, but we think it's offset by a continued modest growth in government/academic in Asia. If we look at our government business in the U.S., if we try to get it down to what percent of your business is government U.S., it's a few percent of our business in sum total. And if you look at any agency by itself, maybe the biggest is $10 million of business that we do, for example, with the NIH directly, maybe it's double that if you look at NIH and NIH funded. And I would say generally speaking, the equipment that we're selling into that market space is high-end mass spectrometers. We don't do a lot of business on the lower end of our product line. They're buying from us where they have to. And I think, generally speaking, our expectation would be that as these government agencies and the academically funded agencies, as they prioritize what capital dollars they have, I don't think the mass spec is the first thing they'd cut out of their plan. So while we do expect that business to be under pressure, we don't see a major decline in our business there. And we think that an expectation of a modest decline overall in government/academic in the U.S. being offset by Asia, flat Europe is probably a reasonable point of line.

Amit Bhalla - Citigroup Inc, Research Division

Okay. And the other end market I wanted to touch on is the applied. I think you're forecasting 3% to 4% growth in that end market, but it's clearly like a tale of 2 sub-end markets, industrial chemical versus food and environmental. You touched on that a little bit. Can we dive deeper into the dynamics that are driving the 2 different directions within that end market?

John A. Ornell

Do you want to do that, Gene?

Gene Cassis

Sure. Yes, I mean the -- well, on the slide that John presented, we speak of our industrial segment as being 25% of our business. And it's roughly evenly divided between the industrial chemical industry and what I mentioned as applied markets. And for Waters, those applied markets include largely food testing and environmental testing. So you're looking at a low-teens percent of our business that fall within those applied markets. On the industrial chemical side, we're actually starting the year off with a pretty decent demand. I mentioned that Terry Kelly from TA Instruments is here in the audience with us. And the results of business so far and the outlook suggests that we will see growth in the industrial base this year. And so it's not all gloom and doom on that front. On the applied markets, we're actually thinking that this will also be a strong year for us, maybe with the potential to grow in the high single digits. The applied markets, historically in terms of sales trends, have been lumpy. You typically get a nice infusion of business when a new governmental regulation is passed and then like everything else, that becomes part of your base. And the next year, you're looking back at it and saying it's a tough base of comparison. Looking at the base from 2012, we had a relatively weak performance in Europe that I think presents us with an opportunity for improvement in 2013. We think that there's potential opportunity for more regulatory testing requirements in some East Asian markets, including Japan, interestingly. We think that China is a continuous source of growth for applied markets, as the population there becomes more sensitive to requirements for safe drinking water and as markets like softdrink bottling markets really insist that there's more quality control of the drinking -- of the water going into the process before the final product is made. So in general, we're probably a little bit more bullish about overseas environmental and food safety testing regulations. Long term, we think the greatest potential is in the United States, as John mentioned, as the United States is now importing more food than ever in its history. There's more pressure to do more testing for incoming material in the United States.

There's a question in the audience?

Amit Bhalla - Citigroup Inc, Research Division

Okay, let's wait for a mic.

Unknown Analyst

While you're discussing the trends, could you just step back and remind us how much of the current and future growth do you think is because of the cyclical versus secular changes? And if there are secular changes such as food testing, for example, help us size it as it relates to your company.

Gene Cassis

Well, what's embedded in our guidance really isn't any meaningful impact from most cyclical behavior. I mean, if we take a look at the guidance that we have for this year, the midpoint of the guidance you can assume is pretty close to what our expectation is for the pharmaceutical industry. The other aspect of our guidance that I think you should bear in mind is that, that half of our business that's recurring by its nature it's very amenable to trending. So getting a few points of growth to the corporation from the recurring revenue, representing 50% of sales, is probably not something that's a meaningful stretch. So what it boils down to is in order to get to this year's expectations, having 3 or 4 points of growth of instrumentation off of the year where instruments declined a couple of percent is really what's required to get us there. And some of these opportunities that we talked about a little bit in terms of new product launches that are not in our mix yet, are some of these cyclical? I think that would be mostly icing on the cake. So it would be over and above what we have embedded into our official guidance.

Unknown Analyst

I was more referring to the secular changes of any kinds that you're excited about that will affect the next 3 to 5 years rather than...

Gene Cassis

Looking at it from that perspective, I think that we're very optimistic that food safety can be a much bigger part of our mix. The other thing is that the trends that we see in drug development that include a higher percentage of drugs in the pipeline being biologically synthesized, we think it will result in a significant transformation of laboratories that do the final quality control testing of those drugs. We are of the belief that the market today in terms of total shipments of pharmaceuticals is dominated by small-molecule, organically synthesized therapies and that over time, you're going to see more of a shift to biologically synthesized active ingredients that are likely protein-based. And frankly, what's required in terms of quality control testing and impurity characterization is going to require a different type of instrumentation than within laboratories today. So we're also optimistic that as we begin to see more specialized therapies based on genetic information that that's going to have an impact on the way clinical trials are run, but it's likely also to be very positive for our business in that you're going to have to just look at the efficacy of a different -- of drugs against different populations of patients. And -- so if anything, you're likely to see clinical trials involving more patients and then more selectivity of patient grouping by genetic makeup. So long term, I think we're very bullish that the trends that are happening within our major market, which is the pharmaceutical market, will contribute to our growth. And then just easy to see is that there are massively underserved populations in the world that can benefit greatly from currently available therapies. We don't think that the quality control requirements for these countries are going to be less than what they are today, so that's a positive. And in the developed world, I think we can easily see that we have aging populations, and it's likely that the per capita consumption of pharmaceuticals will increase because of that and because of requirements of cost control. I mean, for all the complaining that you might hear about of the cost of pharmaceuticals, it's still a heck of a lot cheaper to put drugs into someone than to put them in the hospital.

Amit Bhalla - Citigroup Inc, Research Division

And Gene, just building on that and given that we have Terry in the audience, maybe you could talk a little bit about the TA product portfolio and how it's been refreshing and positioning itself for the applied market trends that you're just talking about right now.

Gene Cassis

Well, it's interesting that -- TA has been a part of Waters for more than 15 years. And when the company first came into the Waters' fold, it was heavily a U.S.-based company that's a spinoff of DuPont that had a customer set that was largely the polymer manufacturing and polymer characterization industry. So the Dows and DuPonts of the world, the 3Ms, these are all big customers. But if you took a look at the geographical footprint of the business, it was heavily weighted towards domestic demand. Over the 15 years, I think that management at TA in combination with the management of Waters, effectively used the international infrastructure of Waters to be able to set up international operations for TA. And so as we look at TA today, its geographical footprint is not too dissimilar from that of Waters. So one of the ways that the TA Instruments' top line has increased three- or four-fold times over what it was a few years back is by a more logical geographical distribution of the business while maintaining share in the United States and in Western Europe. The other thing is that -- I had mentioned that TA was heavily involved in polymer characterization. And over the last decade, we've made a number of smaller acquisitions that we've layered into the TA Instruments division. And the division itself has done a wonderful job of integrating these businesses and making them accretive to the top line and the bottom line almost immediately. And as a result of these acquisitions, we've expanded the customer set footprint of TA into applications outside of the classical polymer characterization. First, by adding rheology technology, we went into fluids testing, so lubricants, foods, fuels, all opened up to us as a result of that. Now that's still mostly industrial chemical, but it's still at least expanded us within industrial chemical. And more recently, we've made acquisitions in biocalorimetry. And what we're finding now is that the TA Instruments is approaching 20% exposure into the life sciences, where the same fundamental measurement that was used to characterize polymers is being used to look at the rate and the strength of protein binding or protein folding. And it has become a key tool in drug discovery, understanding the fundamental biochemistry that defines the disease by looking at protein-protein interactions; so again, expanding the footprint. Over the last year, we've made some acquisitions that have expanded us into ceramic testing and high-temperature metal testing; again, using the same kind of instrumental output that we're very familiar with from the early polymerization -- polymer characterization days, but now moving into things, areas that involve artificial joints and the ceramics and metals that are used there, more into the semiconductor industry; again, high-temperature applications. So it's been actually a very nice story. And the top line growth rate for the TA Division overall has been a low double-digit growth rate, and their contribution to the operating profit of the company has been accretive to the overall company's performance. So it's been a nice story. And you know what? There are more acquisitions, there are more bolt-ons that we've identified, so we can continue to see expanding the footprint through acquisitions. And on top of that, the core product offerings, the differential scanning calorimetry, thermogravimetric analysis, rheology systems, we think our performance is second to none in the industry. And we're able to charge a price premium for that based on our superior performance, so it's actually a very good story.

Amit Bhalla - Citigroup Inc, Research Division

Terry is nodding his head, so he agrees.

Gene Cassis

Yes, yes. I'm watching his facial remarks, and I don't think I've said anything that is untrue or not flattering, so...

Amit Bhalla - Citigroup Inc, Research Division

Except for not taking up his targets yet.

Gene Cassis

Oh, that's right.

Amit Bhalla - Citigroup Inc, Research Division

So let's talk about the competitive landscape. I wanted you to just touch on competition within the consumable side of the business and then competition on LC and MS. What are you seeing out in the field?

Gene Cassis

Yes, okay. Well, you mentioned on the consumable side. I mean, the biggest dynamic that we have on the consumable side is the gradual uptake of UPLC technology into markets that are not just pure research-oriented markets. For those of you who may not be familiar, about 8 years ago, Waters commercialized a new technology that we called the UPLC. And although many people first associate this with the new instrument, fundamentally, UPLC is a column particle technology where the classical particle diameter used for HPLC was 5 microns or larger. For the UPLC application, the particle size is reduced by about a factor of 3, and so the particles are less than 2 microns. Having these smaller particles affords a lot more surface area to do chemical separations, and smaller particles also allow you to pack a column with less crevices or volumes inside the column, wherein the separation that happens on the surface gets re-diluted out into these cracks and crevices. So you can more tightly pack a chromatography column. So the end result is that you're able to resolve chemically things that you just couldn't resolve by HPLC. And what we've seen over the past decade is a nice filling out of our research-focused segments in the chromatography market with UPLC. What we have yet to see is a real transformation in quality control applications using UPLC. A lot of the methodologies used to do a final quality control testing of drugs are based on monographs that have been well accepted and employ HPLC, and people have been very hesitant to change. We think that changes in the drug industry, specifically these changes that I mentioned before about moving from chemically to biologically synthesized drugs, will create an opportunity for us to more meaningfully move into the quality control applications with UPLC technology. So I'd say that looking at the competitive landscape for the consumable, we do very well in regulated methods. I don't think we've ever been a powerhouse in government and academic laboratories using chromatography columns because historically, we've been on the more expensive side. People do not acquire a Waters column because it's the least expensive on the marketplace. They acquire a Waters column because they know if they buy a column from us, developed in that theology on that column, that we're going to be able to reproducibly supply that column for decades. And we have a track record that shows that. So consequently, in laboratories that are more short-term focused and looking at a short-term research area, that same rationale doesn't always apply. They would buy Waters columns if they just needed the horsepower for the separation. So I don't think there's been any major changes in terms of market share. I think what we've seen is some of our competitors in chromatography have also recently introduced small particle packing materials. Most of those small particle packing materials are not fully porous particles. They have a solid core glass with a porous shell around the glass, so it has performance attributes that are different than what we're offering.

Amit Bhalla - Citigroup Inc, Research Division

What are your attachment rates right now?

Gene Cassis

Our attachment rates for instruments that are being purchased through one UPLC separations we think are someplace in the 75-ish percent range. And it's not too different from what we've seen for the last few years. One of the things that's a little bit -- that makes the calculus a little bit more difficult to work out is that we've more recently been commercializing UPLC instruments that are capable of running HPLC columns so that people can transition. So if I look at our H-Class UPLC, we believe that about half of them are being used to actually run a UPLC separation and half of them are being used as just a high-quality HPLC. So in those cases, the attach rates aren't the same.

Amit Bhalla - Citigroup Inc, Research Division

Okay. Since there's no other question in the audience, I just want to -- last one for you, John. Can you just give us an update on what you're seeing in the pricing environment and what you factored in for 2013 into your guidance?

John A. Ornell

Yes, we typically ask for a little bit of price on the service side of the business that's -- people understand that that's label-oriented. So we typically raise prices there, a small amount at the beginning of each year, and we've done that. That appears to be sticking. That's typically contractual, and that's in place. Also, the tail end to last year, we had a small increase in some of the chemistry columns and not much movement on the instrumentation. I'd say when we introduce new instruments, we tend to raise the price with the performance, but we don't typically raise prices on instrumentation every year. The good news is that this isn't really a price-competitive market, so we haven't seen anything different competitively as it relates to pricing. So a small amount of price increase on some of the recurring revenues that you'll see come through and stability on the instrumentation side, and that's what we've experienced today.

Amit Bhalla - Citigroup Inc, Research Division

Great. Well, with that, we're out of time. So thanks a lot, Gene and John. And the next session in this room is going to be the panel on neuromodulation.

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