Douglas Berthiaume - Chairman, President and CEO Gene Cassis - VP and CFO Art Caputo - President of Waters Division John Lynch - VP of Investor Relations.

Ross Muken - ISI Group LLC Dan Leonard - Leerink Swann & Company Doug Schenkel - Cowen & Company Isaac Ro - Goldman Sachs Group Inc. Bryan Kipp - Janney Capital Markets Amanda Murphy - William Blair & Company Miroslava Minkova - Stifel, Nicolaus & Co. Tycho Peterson - JPMorgan.

Good morning. Welcome to the Waters Corporation Third 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 objections, please disconnect at this time. I’d like to introduce your host for today’s call, Mr.

Douglas Berthiaume, Chairman, President, and Chief Executive Officer of Waters Corporation. Sir, you may begin..

Thank you. Well, good morning, and welcome to the Waters Corporation third quarter 2014 financial results conference call. With me on today’s call is Gene Cassis, the Waters’ Chief Financial Officer; Art Caputo, the President of the Waters Division; and John Lynch, the Vice President of Investor Relations.

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

Thank you, Doug. During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the Company. In particular, we will provide guidance regarding possible future income statement results of the Company, this time for the fourth quarter and full-year 2014.

We caution you that all such statements are only predictions and that actual events or results may differ materially.

For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, please see our Form 10-K annual report for the fiscal year ending December 31, 2013, in Part 1 under the caption Risk Factors, and the cautionary language included in this morning’s press release and 8-K.

We further caution you that the Company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding 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 January 2015. During this call, we’ll be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly compatible GAAP measures is attached with the Company’s earnings release issued this morning.

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

Doug?.

Thanks, Gene. Well, I am pleased to tell you that our third quarter results exceeded our expectations. Continued strong demand from our global pharmaceutical customers contributed to faster sales growth rates in most regions of the world. Margins in the quarter benefited from higher sales volume and favorable product mix dynamics.

In all operating leverage in the quarter in combination with steady share repurchases, resulted in mid teens adjusted EPS growth. When you look at the third quarter, our constant currency sales were up 8% and our adjusted earnings per share grew 16%. That's clearly an improvement over the strong results we delivered in the second quarter.

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

Global government and academic business also picked up nicely in the quarter with growth in the U.S and Europe leading the way.

We anticipate the government funded instrument sales in the U.S and Europe will remain strong in the fourth quarter and see some opportunity for improved demand from government and academic labs and our larger Asian markets, especially for our more advanced mass spectrometry based instruments.

Our Waters Division industrial chemical and chemical analysis businesses declined at a mid single-digit rate in the quarter, due primarily to weaker demand in Asia and weaker cyclical demand for food safety applications. Coming into the quarter, we remain focused on monitoring business conditions in China.

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

Though customer interest continues to be strong, we do not expect to see a dramatic change in the fourth quarter and will incorporate a conservative short-term outlook in our guidance. Sales growth in the U.S was encouraging in the third quarter. For the Waters Division, sales were up 9%, the same growth rate as we delivered in the second quarter.

Growth was strongest in our pharmaceutical and governmentally funded segments and elsewhere in the Americas business trends continued to be very positive across most customer segments.

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

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

Our European Waters Division sales at constant currency were up 9% in the quarter. Pharmaceutical sales were up mid single-digits while our government and academic business accelerated and grew with a strong double-digit rate. Looking at our TA Instruments Division, global sales were up 3% in the quarter.

The slower sales growth can be explained by a strong mid-teens growth this division delivered in the prior year’s quarter making the comparisons difficult. Geographically sales in Europe and Japan was stronger this quarter, while more challenging business conditions in China and in smaller developing countries slowed TA’s overall growth.

Looking to the fourth quarter, we expect constant currency growth at a stronger mid single-digit rate for TA. Now, I'll talk some of our Waters Division product line dynamics that we saw in the quarter. Our recurring revenues, the combination of service and chromatography consumables, grew 9% in the third quarter.

Waters’ service business was generally strong across all major regions and the trend towards higher penetration for service contracts was apparent in the quarter’s results. On the chemistry front, our Column business benefited from strong pharmaceutical demand in both research and quality control laboratories.

Our new line of CORTECS columns has been very well received and we've recently expanded our high-performance column offerings for biotherapeutics. Waters Division instrument systems sales grew at a high single-digit rate in the quarter.

Demand improved across most regions and especially for pharmaceutical applications, and for governmentally funded and academic labs. Overall, demand for research-focused UPLC MS systems was up double digits and particularly for proteomics and phenomics applications.

Our new UPLC QTof system, the Xevo G2-XS introduced earlier this year at ASMS has been very well received across a wide range of lifescience applications. On the tandem quadrupole front, we’ve just began shipping our recently introduced Xevo TQ-S micro late in the third quarter.

This new instrument delivers a unique combination of performance in value and a compact benchtop design and shipments in the fourth quarter expected to contribute nicely to our overall instrument systems growth.

In addition, third quarter sales of our highest performance tandem quadrupole system, the Xevo TQ-S, significantly benefited from our new ionKey source technology.

As you may recall, this technology integrates high-performance tile-based UPLC separations technology with our StepWave ion source to effect dramatic improvements in analytical sensitivity.

Sales for this technology have been particularly strong at select international drug firms for early to mid stage drug development applications, and we believe that successes at these accounts will drive wider adoption. Speaking about mass spec technology, I'm pleased to tell you that we acquired the assets of MediMass in July.

This acquisition provides us with an ion source technology called Rapid Evaporation Ionization Mass Spectrometry or REIMS for short.

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

This initiative which we formally organized earlier this year recognizes an important transition in medical research that demands a suite of usable advanced technologies, including research grade mass spectrometry to attain a more comprehensive understanding of disease.

This molecular based understanding will result in more effective predictive diagnostic and therapeutic dose to cost-effectively manage human health.

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

This [ph] [ionized] concept currently underdevelopment, exemplifies the long-term potential for innovations in mass spectrometry in improving medical outcomes. More broadly, our health science initiative is recasting Waters as a key player in next-generation medical research.

Working with leading researchers across the globe, we’re developing new workflows to more effectively cross reference proteomic, metabolomic and phenomic data to better predict characterize and diagnose disease.

Going forward, we believe we established a strong basis and differentiated position to achieve market leadership and a rapidly growing and profitable business opportunity. Return now to the recent quarter, on the chromatography front, all major system offerings performed well in the quarter.

ACQUITY instrument system sales benefited from yet another strong quarter for ACQUITY QDa mass detector shipments.

And the primary application area for this new detection technology is in the area of small molecule drug research, and in the third quarter, we saw drug research customers purchase the QDa as a detection module for existing UPLC or HPLC systems as well as within new system orders.

The sales ramp up of the ACQUITY QDa is on track to generate about $20 million in sales in its first calendar year on the market. Now I’d like to briefly discuss the outlook for the fourth quarter. Against a strong prior year comparison, we expect constant currency sales growth in the mid single-digit range.

This level of growth will allow the Company to finish the year with a top line performance that's consistent with our original guidance, which as you may recall did not anticipate slower growth in China.

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

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

On the M&A front and for the Waters Division, we continue to see opportunities to benefit our long-term initiatives in applications such as food safety testing, microbiology, and clinical diagnostics by licensing and acquiring innovative technologies. For our TA Division, we will likely continue a consistent and focused business acquisition plan.

However, given our primary focus on driving organic growth, we plan to continue to deploy the lion’s share of our strong cash generation on our share repurchase program. Finally on the leadership transition front, we continue to actively progress in the search for my successor.

Our primary focus is to ensure a smooth transition and I look forward to sharing information on developments on this topic, probably during the next few earnings calls. Now I’d like to turn it over to Gene for a review of our financials and an update on our outlook..

a modest full-year currency translation headwind to sales of less than 1%, a negative currency impact of full-year EPS of about 3%, a full-year operating tax rate of around 14%, and finally a full-year share count of about 85 -- an average share count of 85 million shares outstanding. That’s it from me.

Doug?.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Ross Muken from ISI Group. Your line is open..

Good morning and congrats guys..

Good morning, Ross..

So maybe let’s start on the pharma side, this was obviously a really strong print and the year-to-date numbers are obviously quite good as well.

As we think about through the components terms of the pharma sub sector is [ph] [zero], biotech pharma, small pharma et cetera, where are you seeing the biggest upside surprise and to what do you sort of attitude, I guess, that magnitude change as we have kind of progressed through the year, which it seems like it’s kind of gotten better?.

Yes, Ross it has gotten a little bit better. I think it’s fair to say. I'd say clearly this quarter India's return in the generic drug marketplace has certainly been strong. So that's a segment that we certainly saw here. Our biggest pharmaceutical accounts are up mid single-digit to little bit better.

So that’s an encouraging outcome for big pharma who are of course relying on specialty pharma more. Biotech and specialty would probably in the mid line area of our market, the strongest performers over and above the large integrated traditional pharma accounts.

So generics and then specialty and bio and then big pharma as we’d characterize it probably in that order..

Thanks. And then, maybe just turning to China, which has obviously been a huge focus and I think disappointing for many other than yourself.

I mean, as you look at that market, what are you keyed in on -- in any of the end markets in terms of giving you any signs of hope maybe of a stabilization or improvement or where would you expect to see I guess the inflection first that may give you a better signal that at least some parts of that market may heal and improve versus other parts that are probably more structurally challenged going forward?.

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

And it’s pretty broad; it's not like a segment that is happening in research pharmaceuticals versus food safety or versus environmental.

I'd say they're all being affected and I don't think one is being disproportionately singled out where it's a cut back in healthcare spending or I think it’s just this general concern that is capsulized in this crack down on corruption that I think its generally resulted in almost everybody in the approval chain taking longer to make sure all i’s are dotted, t’s are crossed and even when they’re they go back for a second and third check.

So I think the encouraging thing is that our orders rate grew in the quarter. We are certainly still seeing the underlying demand there and it’s hard to believe that this whole condition can stay in the current condition too much longer.

And as we said, we’re not anticipating a rapid turnaround in the fourth quarter, but I wouldn't be surprised to see some let up come soon..

Great. Thanks, Doug for the commentary..

Thank you. Our next question comes from Dan Leonard from Leerink. Your line is open..

Thank you.

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

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

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

They’re really ramping up the investment in mass spectrometry, particularly in the large-scale academic medical centers where we’ve had, boy, a huge amount of interest, significant order rate, and a drop sheet or interest level that’s very significant.

So I think that piece of the healthcare marketplace is very strong and you see that reflected in our results and in our expectations going forward..

That's helpful. Thanks. And for my follow-up, Doug, you made some comments in your prepared remarks about a cyclical downturn or cyclical weakness in the food safety market. I was just hoping you could elaborate.

Is that wrapped up in the China phenomenon as well, or is there something different going on there?.

It's definitely significantly affected by China, and that we see in our orders in the quarter. But we’ve seen that food safety can be lumpy.

If you look at it for the year, we clearly have a good year in the broadly described food market, but quarterly, you can find that Thailand booked $2 million order last year and won’t book again for another year or something like that.

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

Understood. Thank you..

Thank you. Our next question comes from Doug Schenkel from Cowen & Company. Your line is open..

Good morning, and thanks for taking my questions. So, the first one is on the healthcare and the clinical end market, which I think you just talked about, Doug, and it did come up in the prepared remarks. This is something we’re hearing a lot more about from Waters.

It’s not apparent that there is a lot of incremental investment at the R&D line or SG&A line related to that focus, although I’m sure there is some embedded in the numbers.

I’m just curious, can growth in this end market occur at a meaningful and sustained rate without a whole lot of incremental investment in product development and/or channel? Just trying to think about how we model this really promising growth opportunity not just at the top line, but also at the operating line and, I guess, while we are on this topic, could you just provide an update on what percentage of sales this accounts for right now?.

Sure, Doug. I think in terms of the strategic approach to this market, you're seeing two things.

One of which is something that we’ve traditionally done and you’ve seen us do for 25 years is we reallocate the resources at both the R&D level and at the marketing level to focus, we can move it as we think we’ve matured in one area and we can move resources into this clinical initiative.

You can see from our growth in R&D, we have begun to increase R&D somewhat, but that's always been a hallmark of ours that we can redirect and then squeeze more out of our R&D spending than you might otherwise suspect. The other thing, you’ve heard of me talk about the acquisition of MediMass and the REIMS technology and the iKnife.

So we’ve not dipped our toes dramatically into the acquisition for product or for acquisition sake. That’s something that others are pretty good at and we kind of focus our acquisition on technology or specific missing elements of our product portfolio.

So we’ve done it with REIMS and MediMass, we did it with the TransOmics acquisition about 14 months ago. And we do it with partnerships, particularly with thought leaders in academia or in academic medical centers.

That's been a particularly rich source with cancer centers here in the United States, with thought leaders in China, some of the biggest thought leaders in the world there, and in Europe.

So, we’ve had very close relationships in those institutions and we can therefore leverage their brains and their willingness to work as partners in development of many of these technologies.

So, yes, we might find ourselves on the margin having to allocate more resources, but we think we can do it within our P&L models without dramatically affecting our results..

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

That said, I think it is fair to assert that many are surprised this is taking as long as it has, especially when you said in your prepared remarks you expect to have an update over the next few quarters.

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

Okay. I think it’s a very fair question and I’m sure, you are probably the only one interested in this question Doug, but I’ll focus on it. The process is one where the Board of Directors is assigned a subcommittee of the Board who is principally responsible for the process.

I participated with that committee as well as three other members of the Board including our lead Director. We have hired executive recruiters, and we have been proceeding through that kind of normal phase of going through phase one with candidates, getting names, betting their résumés, having initial interviews, then having second interviews.

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

I’d say, the process is kind of either on or off, and until we’re ready to announce a transition either internal and as the process goes along the opportunity for an internal candidate to step up becomes somewhat higher in probability or an external candidate.

And you know every day as these mergers happen in our space and people don’t want to work for a bigger company, the population of potential becomes richer.

And so we’re examining new candidates on that front kind of people who have more proven résumés and so I think the committee is very comfortable with the state of the process, with the richness of the shortlist that we’re working. We’re interviewing candidates on a weakly basis. But to some extent, I have always been comfortable with this window.

I have always thought that it was going to take longer probably rather than shorter. As you can see it doesn’t seem to be hurting our results and we’re -- the organization listens to that story, is comfortable with it. And I think the evidence is that it continues to deliver excellent results across the Board.

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

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

All right, thanks Doug. That’s really helpful and congrats on the quarter..

You are welcome..

Thank you. Our next question or comment is from Isaac Ro from Goldman Sachs. Your line is open..

Good morning. Thanks Doug. A question for you just on long-term product design. You guys had it done in franchise for many years. As you pointed out the results continue to be strong.

What is your philosophy around where the HPLC market is going from here and specifically what can you do to add value both in your pharmaceutical customers and in the research markets? We’ve had UPLC as a great technology for a while.

What do you think -- how do you think about adding value from here forward?.

Isaac, I think, maybe unlike some others in the industry we always believe that this is a very dynamic technology. Others thought 15, 20 years ago that you had to focus on cost reduction and the cost of ownership that the technology couldn’t deliver more bank for the buck in terms of speed, sensitivity or resolution.

I think the most clear example that that was wrongheaded was ACQUITY and UPLC that brought substantial new benefits to the user of chromatography.

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

I think you’ll continue to see benefits in that kind of technology, as well as just improved speed, improved separation products. One of the benefits that Waters brings here is our substantial capabilities in separations technology in the column technology.

And that’s resulted in these things like ionKey and being able to configure chemistry in more novel delivery packages that prove useful for the consumer.

You look at UPC2 technology, the use of supercritical fluids for bringing an additional tool to the benchtop and to be fair, we thought the UPLC2 was going to earlier on play a more dominant role, but I’ll tell you this past quarters UPC2 grow at a substantial rate, and we think that the future for UPC2 in any number of applications is going to significantly improve the toolkit for analytical chemists and will contribute to our growth rate substantially.

And I haven’t even talked about data and the ability of novel new software and application protocols to bring the kind of benefit particularly in this healthcare initiative as we look at diagnostics and the research market place.

So, no one has invested the kind of resources that we have in providing novel both chromatography and mass spec analysis capabilities into the healthcare marketplace and you’ll see that continue to push the market place forward.

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

It’s very helpful, Doug. Just as a follow-up to that, the reason I asked the question is, obviously with the transition in management coming up there is I think some curiosity about long-term innovation in the business.

So, if we total up all the things that you talked about between ionKey and UPC2 and software and diagnostics, I mean, if we look three and five years down the road, do you think those initiatives will combine to be let's say more than 20% of your business? Or just trying to think about where it’s going over the long-term? Are these initiatives together going to be critical mass such that you have a whole new leg to the business or at least a new complexion to the total exposure of your product line?.

Well I think what you’re going to see is this melding of pharmaceutical and clinical care.

Right now kind of the pharmaceutical business is to take care of drug development kind of and then hand it over to clinical care specialists and that kind of discreet markets more and more the combination of genetics and phenomics in drug discovery and drug development and clinical care are merging together.

And I think the combination of those things is something that works in our favor because we are important players in certainly all elements of that in particularly a growing presence with our healthcare initiative.

So, I think it will be a little bit tough to discern how much is kind of in a more traditional Waters modality and how much is kind of new work with cancer centers and diagnostic initiatives.

But clearly we think a disproportionate amount of growth over the next five years is going to come out of these new partnerships and clinical care initiatives that result from phenomics and treatment modalities that are going to emerge..

All right. We’ll look for those. Thanks a bunch..

Thank you. Our next question or comment is from Paul Knight from Janney Capital. Your line is open..

Hi, guys, this is actually Bryan Kipp on behalf of Paul. Thanks for taking the questions. I guess to start, I was a little surprised on the strength in European academic. I expected you coming off of a soft comp, but I expected some incremental acceleration here, but the strong I think you guys said double-digit growth was ahead of my expectations.

So I just want to get some color there. And what are you guys hearing from customers on the ground in that government academic sector in Europe? Because I've also heard some budget numbers were released that weren't adhering to the EU restriction regulations on GDP ratios for next year.

So just thoughts on whether it was flushing as well or commentary would be very helpful..

Well, I’ll ask Gene to handle some more color, but I think the -- its interesting that in Europe you’ll hear us talk about broad base throughout this discussion. But clearly it was broad based in Europe. I mean almost every geography in Europe delivered good results this quarter. So it wasn’t just a U.K. initiative or German initiative.

It was kind of throughout Europe we saw this kind of response and it was -- some of it was pent up, some of it was clearly as a result of the new products that we’re bringing into the market. And our sense is that, this is not a one quarter dynamic. Gene, you want to go into the details..

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

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

Okay. And just a couple follow-ups to that.

Would you say sentiment is still pretty strong then on outward looking for your customers? And then, I guess the other kind of two quick ones I have, follow-up is -- your orders were strong in China at the end of 2Q, you’re citing strength in orders again 3Q, maybe a modest improvement in 4Q on revenues from China.

When do think those orders will be pulled through? Is it more of a 6 to 9 tail? And I guess, I’ll leave it at that, there is plenty of other people in the queue..

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

So, that’s where the Nitty hits the Gritty I’d say in this process. And until we see a more broad based sign of that, again this is largely in the Beijing area in the government controlled segment, but we haven’t seen that loosen up yet..

The color that I’d add to that is that we probably saw the biggest change in trajectory in the first quarter, and for the last two quarters we have seen a level of stability in demand.

I’ll bite at a lower level than traditionally we’ve seen in that marketplace, but we have a backlog build and so I think there is some reason for some cautious optimism as we go into the fourth quarter that we’ll see some of these shipments in revenues be recognized..

Okay..

Thank you..

You are welcome..

Thank you. Our next question or comment is from Amanda Murphy from William Blair. Your line is open..

Hi, thanks, good morning. Just a question on the LC business also. Obviously you built a very strong franchise and the results clearly reflect that. I'm just curious, I know there have been some new competitive entries there.

So perhaps you could talk about kind of the competitive landscape and maybe pricing as well, just given obviously the market is becoming or has been quite attractive.

Have you seen any changes either on the competitive or pricing front? And then going forward how do you kind of view Waters' position from a competitive standpoint?.

Sure Amanda. I think to be fair, we face competitive offerings regularly in this industry. And I do think it’s fair to say that many in the industry have been playing catch up to come up to par with our kind of offerings. So it’s not surprising that people make a fanfare about their latest product offering.

It’s a little unusual to have such a fanfare post pick on where most people plan to deliver their new products. But it’s a normal occurrence to us. I think you can see from our results that pricing is not suffering. Our margins, we’re strong in the quarter.

We don’t see and frankly we -- we’ve been asked this question year-in and year-out about price sensitivity. We have to compete, but very rarely do we see our overall price strategy suffering as a result of new product introductions by anyone. There have been low cost competitors, low priced competitors out there from time and memorial.

They will always exist, but they don’t typically have a significant impact on us. And I don’t know, if they’re having significant inroads in the LC market place then God bless them, then market must be even stronger than we think it is for us to be delivering almost 10% growth than them taking share.

So, I’ll leave that to you to decide whether that’s happening..

Got it, okay. And then just on the bench -- you've obviously -- well, you talked a little bit about getting some traction with the new benchtop mass spec platform that you launched recently. Maybe you could talk about that particular opportunity.

Have you thought about how to frame that in terms of size? What it could add ultimately for Waters’ over time?.

Yes, I’ll take a stab at that Amanda. We did talk about strength on the sales line for our new QTof offering, but we just began shipping the tandem quadrupole offering late in the third quarter.

I think you can appreciate that within mass spec commentary tandem quadrupole sometimes called triple quadrupole mass spec commentary represents the largest market segment. And our new Xevo TQ-S micro really hits the heart of that market place.

And we expect that in the fourth quarter you’ll see us ship against a backlog that we’ve built and show some nice strength in applications ranging from DMPK applications through the applied market. So, all through this year we’ve had nice strength based on systems with the QDa.

We’ve had very good strength on QTof offerings at the high end, and now I think as we enter the fourth quarter we’re going to be looking at the largest segment of the UPLC MS market and I think have a very strong offering..

Okay. Thanks very much..

You are welcome, Amanda..

Thank you. Our next question or comment is from Miroslava Minkova from Stifel. Your line is open..

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

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

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

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

When you look at the launch of the QDa detector clearly is a new product, new capability initiative that’s -- but really mostly aimed at small molecule analysis and mostly in more traditional drug applications. You look at the introduction of our ionKey again aimed at drug development applications be both in biotech and in large pharma.

You’ll look at the strong service requirement which cuts across all of those and our service business in spite of companies that want to service all instruments in a company and those initiatives come and go.

Our service business continues to be very strong as these companies continue to value the constant uptime of their instruments and what Waters’ brings in that. So, I’ll start getting redundant, so it’s everything, it’s really across the board..

I’d just like to add one thing, that if you look at the change in trajectory for pharmaceutical demand, one to look at it and say it really started in the fourth quarter of last year.

Even the first quarter of this year if I looked at pharmaceutical demand in North America and Europe that was at a mid single-digit rate, but the other, three of the last four quarters we have had results that are pretty similar to what we delivered in this most recent quarter..

Okay. Thanks for the comment.

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

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

As we look at the fourth quarter we’re estimating that the effective foreign currency primarily based on what's outputting with the yen is going to result in some place between $0.02 and $0.03 worth of pain in the fourth quarter. So, that’s about the extent of it, Miroslava..

Okay. Thank you so much..

You are welcome..

And Carolina, I think we’re approaching the bottom of the hour. So, maybe we can take one more question..

Okay, thank you. Our final question or comment comes from Tycho Peterson from JPMorgan. Your line is open..

Hi, thanks guys. A question on REIMS, I know you highlighted this at ASMS.

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

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

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

Okay. So, Tycho as it relates to the iKnife, this is a very intriguing technology.

It’s something that we’ve been working with Imperial College and the original developers who actually came out of Hungary but has been working together for a number of years now where our Manchester mass spec operation has had a close relationship with Imperial College and have developed this technology that’s we think proprietary that enabled a surgeon to while he’s working on cancerous tissue to send that molecular sample immediately to a mass spec to be told whether he is in good tissue or in cancerous tissue.

That’s the theory and particularly in cases like breast cancer and then neuro cancers where the importance of taking all tumor but not more than tumor is clinically imperative. The initial research results are very interesting shall I say. It’s important to note that this is a research initiative now.

Its being developed principally in London but the amount of interest that’s coming out of all of our academic cancer centers I must say is compelling where almost every one who has looked as this is interested in pursuing it. I want to emphasize that this is a future initiative. This is not available for sale today. It’s going to take development.

We’ve got to make some decisions over a multi-year period of how this thing comes to market? How it gets sold? What the relationships are? That’s going to come subsequent to this year.

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

Very interesting user friendly capabilities that we think could well be enabling. Those less regulated applications could come to market soon, probably in 2015 while the most clinical applications are likely to come later.

So was that enough, Tycho?.

Yes, now that’s helpful. And then for the follow-up, maybe for Gene. I know you don't really want to comment on 2015, but if I looked at Street's modeling about 90 bps of operating margin expansion.

Given I guess, Doug what you just talked about in terms of development for iKnife, is that a reasonable assessment on the operating side for 2015? I'm just trying to understand how much we need to think about next year being a year of reinvestment, if you will..

Well, I think we typically talked about ’15 on my January call. But when we talk about the Waters’ model in general, we always try to talk about the opportunity to get a little bit of operating leverage and a top line growth of mid single-digit typically as the point where we start to be able to see some operating leverage.

So, at this point I wouldn’t suggest that you think about the year 2015 much differently than you have previously..

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

Okay, great. We’ll leave it at that. Thank you..

All right. Well thank you all for putting up with us this long. Before concluding the call I’d just like to reiterate. I think why we’re so excited. You clearly saw in this quarter us focus on the broad-basedness of our capabilities, broad based geographically. So almost everywhere except for China we saw our businesses produce very strong results.

If you looked at our product lines, chemistry, service, instruments, LC instruments, mass spec instruments we saw our business perform well. And finally just look at the phase of our P&L, you’ll see the sales growth, margins improving at a faster rate than sales, you’d see SG&A held under control, but its not stifling the growth of the business.

We’re clearly investing more in R&D than anywhere else in the P&L. The buyback continues on the margin to affect better EPS growth. So, manifested very simply in that going back to the breadth of our business capabilities, I think the outlook is very promising.

So, whether it’s this management that will be with you for a while longer or the next one, I think the stewardship is in good hands. So thanks a lot. We’ll update you on our next call..

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