Douglas A. Berthiaume - Chairman, President & Chief Executive Officer Eugene Gene Cassis - Chief Financial Officer.

Paul Richard Knight - Janney Montgomery Scott LLC Doug A. Schenkel - Cowen & Co. LLC Ross Jordan Muken - Evercore ISI Dan L. Leonard - Leerink Partners LLC Steve B. Willoughby - Cleveland Research Co. LLC Jonathan Groberg - UBS Securities LLC Joel H. Kaufman - Goldman Sachs & Co. Matt Mishan - KeyBanc Capital Markets, Inc.

Derik De Bruin - Bank of America Merrill Lynch Miroslava Minkova - Stifel, Nicolaus & Co., Inc..

Good morning, and welcome to the Waters Corporation Second Quarter 2015 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 would like to introduce your host for today's call, Mr. Douglas Berthiaume, Chairman, President and Chief Executive Officer of Waters Corporation. Sir, you may begin..

Thank you. Well, good morning and welcome to the Waters Corporation second quarter 2015 conference call. With me on today's call is Gene Cassis, the Waters' Chief Financial Officer; Art Caputo, the President of the Water's Division; and John Lynch, the Vice President of Investor Relations.

And as is our custom, I will start with an overview of the business then Gene will follow with details of our financial results and an outlook for our business in the second half of this year. But before we start, I'd like Gene to cover the cautionary language..

Well, 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 third quarter and full-year 2015.

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

For details, a discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, please see our 10-K Annual Report for fiscal year ended December 31, 2014, in Part 1 under the caption Risk Factors, and the cautionary language included in this morning's press release and 8-K.

We further caution you that the company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding possible future income statement results, except during our regularly scheduled quarterly earnings release conference calls and webcasts.

The next earning release call and webcast is currently planned for October of 2015. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is attached to the company's earnings release that we issued this morning.

In our discussion of results of operations, we may refer to pro-forma results, which exclude the impact of items such as those outlined in our schedule entitled Quarterly Reconciliation of GAAP to Adjusted or non-GAAP financials, included again in this morning's press release.

Doug?.

Thank you, Gene. Well, the market dynamics that contributed to our strengths in the first quarter and largely continued through the second quarter of 2015 and resulted in a 10% growth rate in the quarter and 12% growth for the first half, both at constant currency.

Looking at our operating divisions, the Waters Division constant currency sales grew at 11% while our TA division sales were up 2%. Currency translation reduced our overall constant currency sales growth by seven points in the quarter.

Looking at the Waters Division and as we saw in the first quarter, the pharma business performed well in the second quarter, and sales were up 11% for this segment. As we've seen in recent quarters, the lion's share of our pharmaceutical health sciences growth came from smaller specialty and generic customers as well as from clinical labs.

Our global chemical analysis business in the Waters Division, which includes food, environmental and industrial chemical markets, was up by the highest single-digit rate in the quarter. Geographically for the Waters Division, sales in the U.S.

were up 10% with strong pharmaceutical and industrial chemical demand, with slower shipments in governmental and academic markets. Sales growth in Europe for the division at constant currency was up 5%, with weakness in Eastern Europe offsetting stronger pharmaceutical life sciences and industrial chemical results in the Western Europe markets.

We turn to Asia, sales in China, which, as you know, is our largest Asian market were up at a strong double-digit rate with sales to government and academic labs augmenting a continuing trend of strong growth from private sector labs. This marks the third quarter in a row of a very strong sales growth in China.

Waters Division constant currency sales in Japan were up 5% in the quarter with strong shipments to government and university customers as well as an increase in demand from chemical materials end markets. In India, Waters Division sales were up at a strong double-digit rate too.

The quarter's growth in India was primarily associated with higher instrument software and service sales to the generic drug industry. During the second half of this year and starting in the third quarter, prior year sales comparisons will become a lot more challenging in India for us.

And I noted earlier, TA Instruments are 2% increase in sales in the quarter at constant currency, which was over a very strong prior year's results. Through the first half of 2015, constant currency sales growth at TA stands at 7%.

In the quarter, TA acquired assets related to the ElectroForce Group from Bose Corporation, and the ElectroForce Group designs and manufactures dynamic mechanical testing systems based on a proprietary electromagnetic motor technology. Now I'd like to discuss some product line dynamics that we saw for the Waters Division in the quarter.

The division's recurring revenues, the combination of service and consumables, grew at 9%. Consumables growth at 9% benefited from strong uptake of ACQUITY UPLC column offerings.

In addition, we introduced and begin shipping a new sample prep chemistry called Oasis PRiME HLB, and this next-generation solid-phase extraction product will improve and accelerate workflows across a wide range of applications that require high sensitivity and reproducible LC and LC/MS analysis.

The Waters Division service business also performed very well in the quarter, also growing at 9%. The strength in the service business was geographically balanced and correlated to the general strength that we saw in our pharmaceutical end market. Waters Division instrument system sales grew at a strong 13% in the second quarter.

This growth was highlighted by continued strong uptake of LC/MS systems that features Xevo tandem quadrupole technology and our ACQUITY QDa mass detector. LC systems growth for both ACQUITY and Alliance platforms was driven by demand from pharmaceutical customers in the U.S. and India and generally strong demand in China.

Our recently initiated agreement with PerkinElmer Corporation also positively contributed to our LC component shipments. If you look at our new product introductions, we had a very busy quarter at this year's ASMS Conference in St. Louis. We launched the Vion IMS QTof mass spectrometer and our REIMS Research System with iKnife Sampling.

Our new Vion IMS system combines the benefits of high resolution tandem MS analysis and ion mobility separation in a bench top configuration. By adding IM mobility capability, this instrument generates cleaner spectrum by removing interferences and provides collision cross section values for ions of interest.

These capabilities allow for new levels of sensitivity and resolution for researchers in applications that range from complex screening studies to metabolite ID and more classical OMEX experiments. The REIMS Research System with iKnife Sampling drew quite a bit of interest at ASMS.

A key feature of this system is the speed with which a researcher can determine chemical and biochemical differences and complex samples without the need for sample prep or a chromatographic separation.

REIMS or, as it's known, Rapid Evaporative Ionization Mass Spectrometry, is the technology that we acquired last year with our purchase of assets from MediMass. REIMS technology, in combination with capabilities in DESI and MALDI further extends our portfolio of surface ionization technologies.

During our April earnings call, while discussing our health science initiative, I explained how the combination of DESI and MALDI ion sources, embodied in our full spectrum molecular imaging system, provides actionable information about the specific location of molecules on tissue surfaces.

With our new REIMS capability, it's the speed of analysis that is advantageous. Researchers now can, for example, quickly determine fraud in food labeling or easily check for food adulteration by simply applying the ionize to a specimen surface.

Staying on the new product launches, in June, we introduced and began taking orders for our ACQUITY Arc system.

The ACQUITY Arc system is a modern platform, modular LC system, designed to bridge the performance capabilities of HPLC and UPLC systems, and facilitate method validation for improved workflows in labs running regulated legacy HPLC protocols.

So in summarizing the quarter's performance, I will point out that our top-line growth indicates a continuation of recent business momentum. We were very active on the new product introduction front, and we managed our expenses carefully to generate strong operating results.

And before turning you over to Gene, I'd like to say a few words about our planned leadership transition. On June 25, we announced that the Waters' board of directors appointed Christopher J. O'Connell as Waters' new President, CEO and member of its board of directors.

Chris comes to Waters from Medtronic, where he worked for 21 years, and where he served most recently as the President of their Restorative Therapies Group. This is a business with $7 billion in annual revenues and more than 16,000 employees.

Chris' appointment was the successful conclusion of a global search process that, as you know, spanned approximately two years and that surfaced a number of very qualified individuals.

We were looking for a new leader who could successfully continue Waters' proven and focused business strategy while creatively looking for ways to successfully pursue new opportunities to further grow our business and create shareholder value. In Chris, we feel that he meets these requirements and actually so much more.

The much more comes from the important fit that Chris' demonstrated management style and engaging personality have with Waters' established business culture, a culture that strongly focuses on customer needs, advanced technology development, and financial discipline.

Chris will be assuming his new responsibilities in early September, and I feel confident that Waters will continue to prosper under his leadership. But getting back to discussing our business, I'm very pleased with our overall business results in the first half of this year.

For the first six months, we have grown our diluted earnings per share by 18%, even with a stronger-than-expected currency headwind.

And in looking at the P&L, as well as the balance sheet so far this year, I feel that we're well positioned to deliver a full-year performance that's better than our original expectations, all while continuing to invest in our long-term growth strategies and while generating strong free cash flow.

Well, after about 20 years of hosting these quarterly conference calls, it does seem a bit strange to acknowledge that this is my last opportunity to address you in my current role. I want to personally thank our shareholders for their support over the years, and for their valuable insights that have helped us fine-tune our business plans.

I also want to acknowledge the efforts of the analysts who have covered, and continue to follow and report on Waters. Over the years, they've made great efforts to understand our business and explain our products, technologies and end markets to potential investors.

But most of all, I'd like to thank the employees of Waters for all the hard work and creativity that they have put into making our business such a success. I think therein lies the true Waters difference. And now I'd like to turn it over to Gene for a more detailed review of our financials..

Cash and short-term investments totaled $2.2 billion and debt totaled $1.6 billion, bringing us to a net cash position of $648 million. Regarding our debt, in the second quarter we amended our bank credit agreement, extending the maturity date to 2020 and increasing our borrowing facility by $200 million, from $1.4 billion to $1.6 billion.

As for second quarter share repurchases, we bought 605,000 shares of our common stock for $80 million. This leaves $604 million remaining on our authorized share repurchase programs.

We define free cash flow as cash from operations, less capital expenditures, plus non-cash tax benefits from stock-based compensation accounting, and excluding unusual non-recurring items. In the second quarter of 2015, free cash flow came in at $96 million after funding $24 million of capital expenditures.

Excluded from this amount is approximately $4 million of investments associated with major facility expansion. This brings our year-to-date 2015 free cash flow to $234 million, as compared to $218 million for the first half of 2014.

Accounts receivable days outstanding stood at 75 days this quarter, a decrease of one day from second quarter in the prior year. In the quarter, inventories increased by $15 million as compared to the end of first quarter of 2015, reflecting the normal seasonal pattern. Now I will discuss our 2015 full-year outlook.

For the second half of 2015, we generally anticipate that the drivers of our sales growth in the first half will continue. However, the combination of more challenging quarterly comparisons and fewer selling days in the fourth quarter will likely moderate our second half organic sales growth rate.

With these dynamics in play, we now expect to finish the year with 7% to 8% constant currency sales growth. Currency translation for the full year and assuming current exchange rates will reduce our reported sales growth by approximately 6%.

Moving down the P&L, gross margins are expected to come in close to 59% and potentially a little bit better than they did in 2014. We expect to manage our constant currency overall operating expenses to grow at a rate that's less than our constant currency sales growth rate.

However, we anticipate that R&D expenses will continue to grow at a higher rate due to ongoing new product development efforts and incremental spending associated with our health science initiative. Moving below the operating profit line, net interest expense is expected to be approximately $27 million.

Turning to share count, our full-year average diluted share count is expected to be reduced to around 83 million shares as a result of continued share repurchases. Rolling all of this together, full-year 2015 non-GAAP earnings per fully diluted share are now expected to be in the range of $5.75 to $5.90.

As we think about our expectations for the third quarter of 2015, our guidance anticipates constant currency sales growth to come in at about 7%. Currency translation in the quarter is expected to reduce our reported sales growth rate by approximately 7%.

This top-line performance is expected to result in non-GAAP earnings for fully diluted share within a range $1.33 to $1.43 in the third quarter.

Doug?.

Thank you, Gene. And at this point, operator, I think we can turn it over to Q&A..

Thank you, sir. We will now begin the question-and-answer session. One moment please for our first question. First question is from Mr. Jon Groberg of UBS. Sir, your line is open. Mr. Groberg, your line is open..

Is there anyone there, operator?.

Yes. We have Mr. Jon Groberg on queue, sir. However, we might have lost him. Moving to the next question from Mr. Paul Knight of Janney. Sir, your line is open. [audio difficulties] (23:09).

Hi, Doug. Can you hear me? [audio difficulties] (23:09 – 23:18).

Operator? Operator, [audio difficulties] (23:29 – 23:41)..

Hello. This is the operator. Can you hear me? [audio difficulties] (23:42 – 23:46).

Operator, we're hearing (23:47) line. Speaker [audio difficulties] (23:48 – 24:06).

Hey, Doug, can you hear me? [audio difficulties] (24:06 – 24:09).

I can but it's a continual echo. [audio difficulties] (24:10 – 24:13).

Okay. I'll call back. [audio difficulties] (24:14 – 24:18).

Are you getting an echo? [audio difficulties] (24:19 – 24:21).

Yes..

I don't know whether it's our phone or (24:28) using a different phone. I apologize. (24:29 – 24:42) Apologize. [audio difficulties] (24:43 – 25:19) So, we're [indiscernible] [audio difficulties] (24:20 – 26:23).

Doug? [audio difficulties] (26:24 – 26:46).

Hello? [audio difficulties] (26:48 – 26:51).

Doug? [audio difficulties] (26:52 – 26:58).

(26:59).

Okay.

[audio difficulties] (26:59 – 27:05) What's the number?.

Okay. (517) 623-4512. (27:10).

No, (27:11) you guys are back..

Okay..

There's no sound on the line now..

Okay..

The echo seems to have been gone..

Yeah..

All right. Proceeding to the next question from Mr. Doug Schenkel of Cowen & Company. Sir, your line is open..

Doug, are you there?.

Yeah.

Can you guys hear me all right?.

Yeah..

Yeah..

I don't know what went wrong with that line, but I guess we're all back..

I haven't heard somebody say my name so frequently since I was probably like 10 years old. It was a little scary. But Doug, I wanted to start by saying you will be missed, and we do hope to see you around town. Very good job over many years, strong execution, great leadership. Again, you will be missed..

(28:06) Thanks..

Maybe just to start with China, it's clearly been a period for the last few quarters where you've done quite well.

Is it possible to help us a bit more in deconstructing how much of this is the favorable comparison versus fundamental improvement? I guess what I'm thinking about is would you be able to walk us through sales and ordering patterns in, say, Q2 versus Q1 and Q4? And more specifically, would you be willing to share what growth assumption is factored into full-year revenue growth for China?.

Well, let me take the first part of it and Gene can take over the second part. Clearly, we did have a tough three or four quarters in China. We always thought that that with us was a bit more related to banking oversight.

We continued to see, what I call, the underlying dynamics remaining strong; the number of quotes, the number of major projects that the customers were initiating.

We're still staying at that very strong pace, but you couldn't get those customers to let the orders because they couldn't in any way confirm that the money was going to be there in the end. So, I would say that was a pretty strong dynamic in terms of the weakness that we saw a year, year-and-a-half ago.

We're, I'd say, substantially out of that period. You're never out of it totally, and you can always see this little blips in terms of tightening down on the available banking resources. But I'd say that's why we're perhaps more confident that we have never seen the underlying demand fade. We've continued to see it strong.

The other dynamic I think, Doug, is we've continued to see strong and building, what I call, expat business in China. So, we have a very strong business with American and West European companies that are continuing to expand to that domestic market. That has not fallen off.

It's the less than 50% of our business that comes through government's sponsored activity in China, that's what went through a somewhat down cycle, I think, principally related to this banking tightening, and we've seen that leven (31:02) off.

So, I think there's no question that some of the absolute strength that we're seeing is related to the fact that it was a relatively easy comparison. But I still think we're pretty confident about good strong conditions in China as we go forward.

Gene, you want to embroider (31:21) on that?.

Yeah. Doug, as you look at the prior year results, we did begin to see the business ramp in China during the second half of 2014. And that ramp resulted in a double-digit growth in sales in the fourth quarter.

So, as we look at the basis of comparison for this year, the basis for comparison does become a little bit more challenging in the fourth quarter. And what we see right now in terms of indicators of strength suggests to us that underlying demand has strengthened. Orders and sales were both up double digit in the quarter that we're reporting on now.

And, but we do expect that as we get into the later part of the year that the sales, the year-over-year sales growth will diminish a bit because of the improved – because of the more difficult base of comparison.

Now having said that, and if I think about the guidance that we've given for the full year, what we do anticipate that growth rate in China will be closer to the low double-digit through the second half of the year..

Okay. That's really helpful. And then just a couple of clean-ups and I'll get back in the queue. Did the PKI deal impact sales in the quarter or is that mainly just orders? Based on your wording in your prepared remarks, it sounded like it was probably the latter. And then, the other question is just on book-to-bill. I don't believe you provided it.

It sounded like orders were as strong as sales, but given the strength of instruments in the quarter I just wanted to see if there was anything of note there. Thank you..

Okay. No. Just in terms of looking at backlog build in the quarter, orders and sales were approximately the same in the quarter, so there was no meaningful difference there.

As we take a look at the PKI, I mean, what we talked – what we're – on the quarter that we just reported on, we did see orders and sales in that partnership and the trajectory that we're on gives us confidence in the original projection that we had for the full year and that is that the incremental benefit of this partnership will result in about 1 point to 100 basis point improvement for Waters' shipments this year..

Great. Thank you..

Thank you. Next question is from Ross Muken of Evercore ISI. Sir, your line is open..

Good morning, guys. So, Doug, I looked it up; since 1996, you've outperformed the S&P by 2400% -- not a bad showing, I guess. So you can leave quite happy. I guess as we look at the macro, industrial markets most of the indicators are kind of pointing south and then your business tends to be more insulated.

As we progress into the third quarter, particularly, on the equipment side, just because you've had such strong instrument sales, any areas where you'd point to a little bit of softening, you don't have a kind of basic industrial exposure, maybe on the chemical side where there's a little bit of caution? I mean, I wouldn't think it's playing in any of the traditional healthcare markets, and it seems like the emerging markets are fine.

So, I'm just trying to figure out if there's anything that's maybe a little bit at the margin trending, maybe downwards since everything sort of seems like it's quite strong..

Ross, I think you can point to the quarter that we just had. The business most affected by the industrial – the classic industrial market is the TA business. And TA had low single-digit growth. But for the half, TA was up 7% organically.

And so, yeah, I think you might see a little bit in the classic industrial chemical, the DuPonts and the Dows of the world probably seeing a little bit of weakness there.

For the Waters Division, though, the industrial category – in our world that includes environmental labs, the food and beverage, food safety – and the conditions there are pretty robust. So, I'd say, on the margin maybe you're seeing a little bit of a struggle in some of those industrial accounts.

But even at TA, I think it's more that we're in the tail end of their product cycle. You're going to see really an uptick in their new products next year. And yet, their organic growth is still hanging in there. I don't think there's any share loss there. So, it's a marginal thing. I don't think it's anything significant to be worried about.

Gene, do you....

No. No. I think that's well said..

Obviously, Doug, you're leaving the business in tremendous shape. It's having some of its best run on the new product side in some time. It feels like one of the last things from an end-market perspective you've focused on was sort of the diagnostic opportunity you've talked about the last few calls.

I guess, where do you see that going for the business? Are you happy with the progress you're making? Do you feel like some of the skill set of the incoming CEO will play well to that market, just given his background? I'm just trying to get a sense for, do you feel like that piece takes Waters to kind of the next level over the next 10 or 15 years?.

I think it's insightful that we clearly have talked a lot about this broad health science initiative.

But I think it's best for us to think about it in that context, that it isn't a diagnostic opportunity; it's really looking at almost the soup-to-nuts opportunity, as we work with some of these very large integrated healthcare systems and research centers that are making large investments on both the basic research side, the translational medicine side, then on the therapeutic and the diagnostic side.

So, I think what it's worthwhile to think about is that, we're looking at a broad range of products and technologies that are coming to bear in all of those fronts. And if we're successful, we'll see that working on the front-end with these thought leaders leads to opportunities in that whole string of downstream health science opportunities.

We see that probably right now more in the first couple of phases in that, in the basic science and the beginning of translational medicine, in the big academic medical centers, both here and in Europe.

The diagnostic opportunities that have been very robust have been in areas like pain management, where there are – seems to be growing by leaps and bounds. So, there's no question that Chris O'Connell has superior insight into that whole marketplace from a different technology point of view.

But just recently, we secured a significant order in the OMIX area in Europe, and it turns out Chris O'Connell has a very intimate relationship with the leader of that institution. So, we're finding more and more the overlap and the connection, the geographic knowledge, that Chris has in the application universe.

So, we're very happy with the way that's all coming together.

That help?.

Thank you so much, Doug..

Thank you. The next question is from Mr. Dan Leonard of Leerink. Sir, your line is open..

Hi.

I guess to the high level, I'm curious in the EPS guidance revision, why it wasn't a little bit higher, given the big uptick in your organic revenue growth guidance?.

You want to take that?.

Yeah. Let me make sure I got your question, Dan.

Your question is about the guidance?.

Yeah. You took EPS guidance up at the midpoint by a percent, yet revenue guidance was up at a much healthier clip, from mid-single digits to 7% to 8% for the full year..

Well, yeah, I mean, we -.

So, I'm wondering what's going on..

We talked about the full year at 7% to 8%, and the guidance before was mid-single digit. I think that we fully recognized that a lot of the growth that we've enjoyed, especially in the last quarter, is from – Asia was a significant driver of that growth, and we know that the bases of comparison become a little bit more challenging in the second half.

And we had very strong first quarter. And in part, we benefited from three extra selling days in that quarter, and that becomes a headwind for us in the fourth quarter, where we have fewer selling days.

So, I think that, as you begin to look at those two factors, and still understand that the fourth quarter is a little bit a ways off, and it probably makes sense to, if anything, err a little bit on the conservative side. I think we're very comfortable with the top line and the bottom line.

I'd just like to mention that the bottom line, the EPS guidance that we provided, also factors in a little bit more headwind from currency than we had anticipated the last time we gave guidance..

Okay. That's helpful.

And then my follow-up, how meaningful are areas like pain management, therapeutic drug monitoring more broadly, and drugs of abuse testing? How meaningful is that as part of your business, because it seems like that's an area that's coming under increasing reimbursement scrutiny in the U.S.?.

Well, it's a growing part of our business. It's – right now, the whole health sciences area of our business is not quite 10%..

Right..

So, it's fair to put that into that context, and pain management is a piece of that.

I'd say the pain management piece and therapeutic drug monitoring, all-in, is a significant part of that health science initiative in the United States, and it's a growing piece outside of the United States – not a big piece of Asia, but a growing piece in Western Europe..

Okay. That's helpful context. Thank you..

Thank you. Next question is from Mr. Steve Willoughby of Cleveland Research. Sir, your line is open..

first, just regarding the strong pharma demand that you've seen in the past couple of quarters, I was just wondering if you could comment on where you're seeing that come from.

Is it more – do you see more coming from replacement demand or new system placements? Because I'm trying to just gauge how much – what the legs look like for this type of strong growth from pharma, and then I have a follow-up?.

Well Steve, it's interesting, because the growth is not coming from our classical big pharma accounts. Those accounts are low-single digit to flat. So, most of our growth is coming from specialty pharma, generics, big and small biotech accounts. And I'd say most of that is new initiatives, the volume-based. It's not significant.

You always have some replacement and maintenance business that goes on – and throughout that. But I'd say the prime initiative here is more forward-looking spending..

And the one thing that I would add, Steve, is that the recurring revenues, the service and the chemistry business that we have, is disproportionately weighted to the pharmaceutical side of our business because of the number of samples that are running in applications like quality control.

So, what we're seeing in terms of strong demand on the chemistry side and on the service side is indicative of high utilization rates of instruments in the installed base, and that's very encouraging. That shows you that there's an underlying demand based on the requirement to one run more samples that I think does have legs to it..

Okay. Very good. Thank you. And then just as a quick follow-up to, I believe with Dan's earlier question, Gene, I think last quarter, you were assuming roughly $0.43 of an impact from FX in your guidance.

You alluded to a slightly larger FX impact, and just was wondering if you could quantify what your assumption is now for the EPS impact from FX in the full-year guidance?.

Well, I think if we look over the year-over-year comparison, we had about a $0.13 impact of – from FX in the second quarter and about $0.21 for the first half of the year.

The guidance that we gave assumes another $0.13 in the third quarter and probably something closer to the first quarter of impact in the fourth quarter as we begin to anniversary some of those strengthening – I'm sorry, weakening of foreign currencies..

Okay. Thanks very much, guys. I appreciate it..

You're welcome..

Thank you. Next question is from Mr. Jon Groberg of UBS. Sir, your line is open..

Great.

Can you hear me this time?.

Yes..

All right. I hope I don't break the phone system again..

Be careful, Jon..

So, first of all, Doug, let me offer my congratulations as well, and good luck with what comes next for you. And I'm sure we'll continue to hear from – from all the good things that you're doing.

So, I just, one, wanted to clarify on the health sciences, I think you said, so clinical, translational – however guys define that, you're saying it's just under 10% of sales.

How fast is that growing currently?.

Well, it's pretty much -.

It's in double digit..

Yeah. I think we're comfortable with saying it's a good double-digit grower currently..

Okay. And then, Doug, I guess, maybe two questions on just the leadership transition that I think are relevant.

I mean, one, what do you think that your employees are going to be most excited about when it comes to Chris joining the team? And two, you have to look out there, as I'm sure you do, and there's been some pretty hefty multiples paid in the space for, what I would call, trophy assets and especially those that have some good long-term growth drivers like in the biopharma space, and given your position in that space, I'd put you in that category.

So, I guess, how did you think about – how did you think about whether or not the right move was not to explore maybe another value creative opportunity as opposed to moving forward with the plan that you did from a CEO standpoint?.

All right, Jon. Let me take them in reverse order. You've followed us for as long as anybody and you know that from time immemorial, people have talked about Waters could be acquired by someone else and fit into their portfolio. And we've always pretty much ignored that talk and focused on what was right for our business and our customers.

And from the point a view of our board and our management team, there was – we never believed and still don't believe that there's anything that a bigger, larger, more diversified company brings to us that would help us as opposed to continuing to pursue these initiatives on our own.

So, from our perspective, we can well imagine why somebody might drool over the opportunity of adding Waters to their portfolio. It didn't do much for our strategic advantages. So, you can say, okay, but at some price, any company can be acquired. We all know that. So, I can tell you that no one has seriously tempted us along those lines.

So, I think you can never say what'll happen in the future. But I and the board believe that the future for Waters is incredibly bright. You probably know that I never think our stock is fairly valued. I think it's always undervalued.

And so, the opportunities to prove that – when we were trading under $100, people thought we were maybe as far as we could go. And when we're at $130, who knows – people probably think the same thing. But I look at our opportunities.

I look at what we can grow over the next three, five years, and I think our shareholders are going to be very fairly rewarded by continuing down this path. And I don't think you have to look too far at the companies who have been acquired over the last three or four years. I mean, I'm going back to Millipore.

When the body of politics thought that they got such a great price for their business, you look at the market today and if they had held on there as individual companies, they'd be trading at much higher prices than they settled for in the acquisition world.

I don't think you have to look too far to some of those companies that still haven't closed yet to say, gee, I wonder what their future was as stand-alone businesses rather than settling for what looked to be a strong premium.

So, I'll get off my soapbox, but I don't see anything that's likely to change our perspective in the near term absent somebody just deciding to really open their purse strings. And having said that, now I forget about your first part of the question..

That was really helpful.

The first part was what do you think, because again, Chris, coming kind of from the outside, doesn't really have a lot of exposure to even investors as we've spoken to those who've known Medtronic for a while, so just kind of what do you think employees or maybe investors are going to most appreciate about Chris?.

Well, I think it's interesting because in going through the gamut of the recruitment process, Chris talked to, certainly, first, me, and then the succession planning committee and the search firm and the rest of the board, and then the rest of the senior management group.

Never had I imagined it would be so universally positive about the credentials of somebody coming into this job particularly as we all know the incumbent is so highly valued. So, Chris did an outstanding job of selling himself to the organization. And starting out, Chris had no real appreciation for Waters or our background and history.

Since we made the decision, Chris has had the opportunity to broaden that association. We've gone down a level or two in the organization, had some dinners. And the organization has been kind of universal in their initial reaction that Chris seems to be a Waters' cultural fit.

And, look, you do the best you can, and I'm sure Chris has done the best he could. He clearly has knowledge of this whole healthcare environment, he's well-traveled, he understands the Asian markets from the perspective of Medtronic. But that perspective isn't that different from our perspective.

So, I'm sure Chris isn't going to be a Doug Berthiaume clone. I don't want him to be. The company doesn't want him to be. He'll bring his own expertise and his own desires and strategic abilities. But I think he clearly, to the best of our ability and his, conforms to what we think the initial perspective of the CEO of Waters is going to be.

He values the same kinds of things. He brings the same cultural values to the table. And I just think he's going to be a great fit..

Great. Thanks, Doug. Congrats again..

Thank you. Next question is from Isaac Ro of Goldman Sachs. Sir, your line is open..

Hi, guys. Thanks. It's actually Joel Kaufman in for Isaac.

Just taking it back to the pharma end markets, could you maybe parse out the growth rates year-to-date in QA/QC versus what you're seeing in R&D?.

Yeah. It's been balanced, Joel, but the one thing is that we've had a very growth in India. I think you've heard that in the first quarter call as in the second quarter call. And the growth there is generic pharmaceutical demand and it's mostly quality control related.

But as you begin to look across our pharmaceutical end market and begin to segment our business out by small molecule applications, large molecule applications, it's been very balanced actually.

But QDa has been a wonderful product in terms of helping us in the small molecule world, and for people who have been primarily and only focused on looking at what's happening on the large molecule front. This brings us back to a reality that small molecules continue to be important, and we're seeing that with our QDa demand.

So, I'd say that if you factor out the exceptional growth that we've seen in India during the first half and then begin to look at the pharmaceutical demand, it's pretty – it's been pretty balanced across the whole spectrum starting from discovery through QA/QC..

Thanks. Then just a follow-up in Japan, I think you guys grew there low-single digits in the first half of the year.

Could you just maybe provide your expectations for the back half and maybe how the comps shape up in the back half of the year?.

Yeah. On Japan, yeah, our expectation is that the results that we've seen year-to-date are probably indicative of what the results will look like for the full year. There's been some interesting dynamics in Japan in that you had an interesting year last year in terms of looking at governmental spending.

You had a favorable comp on governmental spending, so it looked optically very strong in the quarter that we just reported. We had a strong pharmaceutical first half of 2014, though a little bit softer. But I don't think it's indicative of a change in demand as it is to just some of the details of the basis of comparison.

In general, we're expecting the performance that we've seen in the first half of the year to continue through the second half of the year..

Yeah. I think, in general, we think of Japan as being a mid-single-digit grower. It can bounce around the mid-single digits. But I think our long-term expectations revolve around that expectation..

Great. Thanks..

Thank you. Next question is from Matt Mishan of KeyBanc. Sir, your line is open..

Great. Thank you for taking my questions..

I'm sorry. We didn't hear the name..

Matt Mishan..

Matt?.

KeyBanc. Yep..

Okay..

Thanks, Gene. Hey, Doug. Just hearing your thoughts on the value of companies taking out that you think would be like greater in the marketplace maybe as like stand-alone a couple years later.

Does that make you more interested in being an acquirer?.

Not particularly. Depends – but it all depends on the assets, Matt. I still – my general rule of thumb that some people debate and some agree with is that we're perfectly willing to consider adding to our portfolio as long as it's in an area that we think we know something about, that we can manage and it doesn't dilute the existing business.

I just don't – when we think that we have the opportunity to grow in the high-single digits organically, that buying something that dilutes that for the short-term pleasure of cutting out administrative costs doesn't appeal to us.

It does to some, but in the end you're going to look at those serial acquirers and say, gee, where's the evidence that adding assets to them took their 2% or 3% organic growth rate and doubled it or tripled it. And as you know, it's hard to find great evidence of that.

It's not hard to find evidence that they can cut costs for some period of time and grow their earnings in a very-low-interest-rate environment. And who knows, maybe that'll turn out to be the wisest business strategy that we've ever seen. But it's not something that has ever particularly appealed to me.

And so I think, as long as we see the opportunity to continue to do what we do and deliver superior results, we think it's the better strategy..

Okay.

And then, can you remind us of your NIH exposure and any thoughts you have on some of the legislation making its way through Congress? And also, with some of your newer products, you think you can punch above your weight a little bit if that legislation goes through?.

I think the NIH opportunity is very marginally, potentially positive to us, but Gene will tell you why.

Gene?.

Well, I think our exposure is – roughly 1% of our sales are related to that spend level, and it's heavily weighted towards our higher end mass spectrometry product. So, it tends to be a relatively small percentage of our business, and it tends to be somewhat lumpy, just given the high ASPs.

So, as Doug said, it's a – it's likely to be a marginal positive. We're encouraged that some of the technologies that we've introduced during the first half of this year, as we move into what is historically – third quarter is usually a bigger quarter for U.S. governmental spending.

We think we have a pretty good pipeline of customers that are interested in some of our more recently introduced technologies..

Okay. Thank you, and great quarter..

Thank you..

Thank you. Next question is from Derik De Bruin of Bank of America Merrill Lynch. Sir, your line is open..

Derik..

Great. Hi.

Can you hear me?.

Yes..

Yes..

First, how should we think about R&D spending going forward? Do you think – should we model it higher than constant currency growth rates in the out years? And what is the overall impact for M&A for the full year in constant currency growth? Thank you very much..

I think, clearly, this year is going to see a spike in R&D growth compared to what's happened historically. And that's specifically related to the health science initiative and things like REIMS and DESI. You're likely to see another year of higher-than-average R&D growth, but I don't see that extending deeply into the future.

It's not going to mitigate in the next couple of quarters. But we don't see – we see a number of initiatives, that are going on right now, that will keep that tail rising. Now, having said that, down the road we could initiative something else and have to rationalize it and incorporate it into the budget.

But with our current momentum, I'd say, yeah, 2016 is likely to see a somewhat higher R&D rate. But I think then it begins to mitigate..

Great.

And the M&A impact for this year?.

Yeah.

I think the question, Derik, was the impact of M&A for this year?.

Yeah. Thanks, Gene..

2015, we expect that M&A will be a very small part of the growth story, maybe we're looking at 20 or 25 basis points..

Great. Thank you very much..

You're welcome..

You're welcome..

Thank you. Our next question is from Ms. Amanda Murphy of William Blair. Ma'am, your line is open..

First, you guys have definitely had a number of new product launches this year.

Would you be able to add a little bit of insight, or maybe some more specifics, regarding the potential growth impact for this year and potentially next year as well, regarding these new product launches?.

I think your question, if I could just rephrase it to make sure we heard it correctly, was that you're trying to understand the impact of new product launches on this year and next year? Is that...?.

Correct. Yeah, primarily on revenue, correct..

Corrrect..

Well, if you look at our full-year, high-single-digit growth rate expectations, certainly in the Waters division, the – I'd say it's kind of a classical year, in terms of the effect of new products versus continuing new products. If you just look at the products launched this year, you're talking principally, so far, products in the mass spec arena.

Of course, you have things like the QDa that were launched previously that is still in the early phase of the cycle. So, I would say that we're in a representative year. It was a strong launch of capabilities, but it's – I'm not prepared to say precisely what the new product effect was..

I think, as you look at the growth rate that we're enjoying this year, there's clearly a positive market dynamic. Over the years we've been a pretty good proxy for the strength in health sciences and pharmaceuticals. And I think what you're hearing from us, as you've heard from some other companies in our space, is that's a healthy market.

And I think we are getting at least our just share of that market health..

And there's no new product introduction that stands out as dramatically affecting this growth rate. Let's say you've seen products across the consumables space with the glyco product and the mass spec triple quad area has been healthy, the single quad with the QDa. It's pretty broad based. (1:07:34).

Well, if I could just ask one additional follow-up on that. You guys definitely touched on China and on India, and how the strength is – or the growth has been incredibly strong. Would you be able to elaborate, actually, a little bit more specially on India? Is it – and I guess like, even in terms of – not just revenue, but even on the expense side.

I know that you mentioned that with SG&A, you're expecting – well, I guess that is more my question, in terms of, what would be the potential impact on SG&A as you continue to expand in India?.

Well, if I understand the question, our India business is a very well-run business. So if you look at its level of profitability, it's certainly very well run and above-average level of operating profits.

And what's happened in India in the last couple of years is they ran through a period of very weak currency, a kind of political uncertainty and in the past – and a period when a number of generic drug manufacturers ran into regulatory issues, some of them quite serious.

And in the past 12 months, the result of trying to cure those regulatory issues has been that they've turned to us for significant help in both the software area, the service area or qualifying their instruments and doing extra work. We still see the effect of that currently.

We also see an improvement in the political environment and a somewhat stabilizing of the rupee. So, all of those things have kind of moved positively. I'd say, again, we have a very strong position in India. I think they're coming out of a period when those generic drug manufacturers were kind of treading water in terms of their capacity.

And we're pretty optimistic about their long-term business plans to add to capacity and capabilities.

So, l'd say, while, yes, we've come through a period where we had pretty soft businesses, so easy comparisons, I think we're going to through a period when the underlying demand is still pretty strong and the profitability of this business is very good. So, I think....

Well. Excellent. Thank you for the detail, guys. And once again, congratulations on a great quarter. Thank you..

Thank you. And operator, I think we can take one more to make up for our echo start, but we're well passed the 9:30 difficult stopping date. So, I think one more would be appropriate..

Okay. Our last question is from Ms. Miro Minkova of Stifel. Ma'am, your line is open..

Good morning. Thank you for taking my question, and congratulations on your retirement, Doug. Let me start with just the guidance for the fourth quarter. Considering that it's still kind of early on, and you probably don't have a great visibility on the pipeline, but you are implying like basically flat revenue growth in the fourth quarter.

Gene, maybe remind us, how many fewer selling days you have and what is the breakdown between the fewer selling days, the tougher comps in India, China and the balance between the underlying demand that you're seeing?.

Okay. So, Miroslava -.

Well, the selling days – go ahead, Gene..

Yeah. There's three fewer selling days in the fourth quarter -.

Compared to the fourth quarter last year..

...quarter of last year. And typically, Miroslava, those affect most dramatically the recurring revenues. So, then the recurring revenues are roughly half of our business.

If I take a look at what's the positive effect was of a similar – of selling days moving in the other direction in the first quarter, it was probably 2% or 3% points on the 15% total growth that we had in the first quarter.

So, as you begin to take a look what the assumptions are for the rest of the year, we talked about the third quarter having a top-line growth rate of 7%, and the full-year guidance pretty much assumes a 3% or 4% growth rate in the fourth quarter..

Okay. Thanks very much for the color.

And maybe if I could ask you on the ionize – the REIMS product that you unveiled at ASMS, just curious as to if you gotten any earlier – any early feedback from potential clients on the reception of the food testing application? And how – any expectation for this product for the next 12 to 18 months?.

I'd say the initial reaction to the food tasting – the food safety application is very positive. But I would caution you to say that we're still in the early phases of putting that technology in the hands of these customers. And as you know, the applications there widely vary.

So, whether you're talking about milk products or you're talking about meat products, you're typically talking about different situations with different customers. But I would say rarely have we seen an initial level of interest with the ionized applications in food safety. It's a very strong. But you're not seeing that currently in our order rate.

We do think that that's coming..

Okay. Great. Thank you very much for your time today..

You're welcome..

Well, thank you all for both taking the time today and over the years. I do appreciate your jobs and how you've done it and how you've treated me and Waters over the years. So, I'll look forward to you being just as insightful and kind in your treatment of Waters over the next 20 years. Thanks again and I look forward to hearing about it. Take care..

And that concludes today's call. Thank you for participating. You may now disconnect..