John Lynch - Vice President, Investor Relations Christopher James O'Connell - President & Chief Executive Officer Eugene Gene Cassis - Chief Financial Officer Arthur G. Caputo - President-Water Division & Executive VP.

Jonathan Groberg - UBS Securities LLC Amanda L. Murphy - William Blair & Co. LLC Brandon Couillard - Jefferies LLC Doug Schenkel - Cowen & Co. LLC Matt Mishan - KeyBanc Capital Markets, Inc. Derik De Bruin - Bank of America Merrill Lynch Dan L. Leonard - Leerink Partners LLC Isaac Ro - Goldman Sachs & Co. Tycho W.

Peterson - JPMorgan Securities LLC Ross Muken - Evercore ISI Steve B. Willoughby - Cleveland Research Co. LLC Bryan Paul Brokmeier - Cantor Fitzgerald Securities.

Good morning. Welcome to the Waters Corporation Third 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. It is now my pleasure to turn the call over to Mr.

John Lynch, Vice President of Investor Relations. Sir, you may begin..

Thank you, operator. Well, good morning, everyone, and welcome to the Waters Corporation third quarter earnings conference call. Before we begin, I will cover the cautionary language. 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 2015. We caution you that all such statements are only predictions and that actual events or results may differ materially.

For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see our 10-K Annual Report for the 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 earnings release call and webcast is currently planned for January 2016. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is attached to the company's earnings release issued this morning.

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

Unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2014.

In addition, unless we say otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis, which at this time generally adjusts for the negative effect of foreign currency translation.

Now it gives me great pleasure to introduce Waters' new Chief Executive Officer, Chris O'Connell, as he participates on his first Waters quarterly earnings call.

Chris?.

Thank you, John, and good morning, everyone. Thank you for joining us today. I am thrilled to be at Waters and look forward to sharing my transition goals and some of my early experiences and observations. But since my first priority is to ensure strong quarterly operating results, I would like to start by reviewing Waters' third quarter performance.

I am pleased to report that Q3 was another strong quarter where our employees around the world executed and delivered positive results. Overall revenues were up 9% in the third quarter, a growth rate that demonstrates the continued strong business momentum we have seen throughout 2015; and through the first nine months of 2015, revenues were up 11%.

Our robust growth was led by strong demand for Waters Division core products and services in the broad-based life science sector. As we have seen in recent quarters, our pharmaceutical growth came from smaller specialty and generic customers as well as from clinical labs.

As I will detail in a few minutes, we also benefited from balanced geographical growth with particular strength in the U.S., Europe, India, and China. Now let's dive deeper by taking a look at the Waters Division performance.

Revenues for the Waters Division were up 9%, with sales to our broadly defined global pharmaceuticals segment up 10% in the quarter and 13% year-to-date. Globally, government and academic business was flat in the quarter against a strong performance in 2014, with strong growth in the U.S. offsetting declines in certain emerging markets.

Sales to the food, environmental, and industrial chemical markets also performed well in the quarter, growing at a mid-teens rate. From a product line standpoint, our (4:45) platform sales grew at a 10% rate in the quarter, including meaningful contributions from both the ACQUITY and Alliance families.

Demand was strongest for our benchtop LC and LC-MS instruments used in broad-based life science applications. The strong demand for LC-MS instruments, including our ACQUITY QDa Detector, demonstrates the impact of our goal to expand the adoption of mass spectrometry to the larger liquid chromatography market.

Growth for high-resolution mass spectrometry in the quarter was challenged by tough comparisons to prior-year. Looking forward, we are seeing building interest for our new Vion IMS QTof platform, introduced at this year's ASMS Conference. Our recurring revenues, the combination of service and chemistry consumables, grew 8% in the quarter.

Waters Service business was generally strong across all major geographies, with contracted service plan revenue driving much of the growth. On the chemistry front, the column portion of our broader chemistry business benefited from strong pharmaceutical demand in both research and quality control laboratories.

The continued growth of Waters ACQUITY installed base is an increasingly meaningful driver of growth for our chemistry product lines as we garner high attachment rates with our UPLC platforms. We will continue to (6:05) offerings to maintain our competitive edge and fuel our growth.

Staying within the Waters Division, I now want to cover performance from a geographic (6:14) in comparison to the (6:19) performance in the prior year. Growth was generally strong across most end markets, with pharmaceutical and academic sales up double digits. Our European sales grew 9% in the quarter.

Pharmaceutical sales were up in the mid-single digits while government and academic business grew at strong double-digit rates. And just as we saw in the second quarter, strong growth in Western Europe was partially offset by weakness in Eastern Europe. (6:44 – 6:53) including the government and institutions.

Sales (6:59 – 7:04) government and university customers as well as increased demand from chemical end markets. In India, we saw continued (7:08) double-digit sales growth driven by demand from generic drug companies for LC instruments, services, columns, and networked information systems.

Impressively, India growth was against a very strong performance in prior-year result. Shifting gears, I'd like to make a few comments on our TA Instruments division. Global sales for TA were up 2% in the quarter. Geographically, sales were strongest in the U.S. and China, with declines in Europe and Japan against tough comparisons.

Year-to-date sales at TA were up in the mid-single digits. Now I'd like to comment on what's ahead for our business. In just a moment Gene Cassis will provide financial guidance.

However, what's impressive to me is that our recent growth trends have been driven by strong and steady demand for our core products and broad-based solutions, including instrument platforms, services, and chemistries. These trends suggest sustainable growth.

I'm also excited about the impact we're seeing from recently launched new products, such as the Vion IMS QTof system that I mentioned earlier, as well as the ACQUITY Arc System introduced in the third quarter. In addition, I am encouraged by our promising new product pipeline under development.

Looking at TA (8:19) fourth quarter, our business (8:21) pipeline appears to be strengthening, and we expect moderately stronger and more geographically balanced sales growth as we close out the year.

On the capital allocation front, we plan to continue to prioritize focused investments that strengthen and expand our core product offerings and technologies. I expect that our investment in internal R&D programs will yield impactful new products for both Waters and TA Instruments divisions that will enhance our tradition of technological leadership.

Finally on the financials, Waters has a strong balance sheet and we anticipate continued strong free cash flow. As a central component of our capital allocation strategy, we anticipate continuing our well-established share repurchase program.

Before turning it over to Gene for a deeper review on the financials, I would like to share some of my initial perspectives as CEO and a few of my priorities during our transition period. First and foremost, I want to acknowledge and thank my predecessor and our current Chairman, Doug Berthiaume, as well as the entire Waters leadership team.

By any measure, Waters is a remarkable success, and Doug and the Waters team are to be commended for creating such a strong and sustainable franchise. The business is built on a strong foundation of customer focus and technological depth, and the organization represents a very special blend of expertise and passion.

I have seen this powerful culture in our meeting rooms as well as in our customers' laboratories. Throughout my first two months, the Waters team has demonstrated exceptional professionalism and enthusiasm for me and our exciting days ahead.

From my vantage point, our strong execution in the third quarter is evidence of the team's excellence and gives me confidence for continuing positive results. As for my transition, I am focused on a well-developed plan that is built around four priorities. My first priority is to lead the team in its efforts to deliver strong 2015 results.

This began by leveraging existing mechanisms to deliver Q3 and will continue throughout Q4 so that we can optimize results for 2015 overall. Second, I have embarked on a rigorous program to engage broadly in the organization. I am meeting with and learning from our senior leaders as well as a wide range of employees.

This has included every department in Milford, multiple sites in the U.S., and planned visits for our European operations later this month, as well as Asia in early 2016. Third, I'm accelerating my learning through a comprehensive briefing program to allow me to more deeply understand our technologies and our markets.

An important part of this is to understand our business from the eyes of our customers. I've already been in the field multiple times and will continue to be active and visible with key customers on a monthly basis. Fourth, I am focused on preparing for 2016.

Starting in September has given me the opportunity to actively participate in our planning processes as we set priorities and objectives for what we anticipate will be another productive year. Now I would like to hand the call over to Gene Cassis, Waters' CFO, for a review of our financials and further comments on our future outlook.

Gene?.

Thank you, Chris, and good morning. In the third quarter our revenues came in at $501 million, an increase of 9% before currency translation, which reduced sales growth in the quarter by 7%, resulting in 2% reported sales growth. Our non-GAAP earnings per diluted share were up 3% to $1.42 in comparison to earnings of $1.38 last year.

On a year-to-date basis, our non-GAAP earnings per diluted share were up 12% to $3.94 in comparison to earnings of $3.51 last year. On a GAAP basis, our earnings were $1.40 versus $1.34 last year. A reconciliation of our GAAP to non-GAAP earnings is attached in our press release issued this morning.

Looking at our growth geographically and before foreign currency effects, U.S. sales were up 13%, Europe was up 7%, Japan was up 1%, and sales in Asia outside of Japan were up 14% with strong demand in India and China. On the product front and within the Waters Division, instrument sales increased by 10%, and our recurring revenues grew by 8%.

In all, Waters Division sales were up 9%. For our TA Instruments division, as Chris had mentioned, sales increased by 2%. Now I'd like to comment on our third quarter's non-GAAP financial performance versus the prior year. Gross margins for the quarter were 58.7%, compared with 59% in the prior year's quarter.

Year-to-date gross margins are 58.5% versus 57.9% in the prior year's first three quarters. Moving down the P&L, SG&A expenses were flat as reported. However, factoring in the positive effects of foreign currency on expenses, SG&A grew in the quarter as we funded product introductions and additional field head count to ensure customer support.

R&D expenses increased by 13% as reported due to our ongoing spending associated with new product development and incremental investments related to our health science initiative. On the tax front. Our effective operating tax rate for the quarter was 12.4%.

For the full year 2015 we expect our operating tax rate to be around 13.5%, and in this projection we have not assumed a reestablishment of the U.S. R&D tax credit.

In the quarter, net interest expense was $6 million and our average share count came in at 82.8 million shares or approximately 1.6 million shares lower than in the third quarter last year, this being a result of our ongoing share repurchase program. Turning to the balance sheet.

Cash and short-term investments totaled $2.3 billion and debt totaled $1.6 billion, bringing us to a net cash position of $680 million. As for third quarter share repurchases, we bought 665,000 shares of our common stock for $84 million. This leaves $520 million remaining on our authorized share repurchase program.

We define free cash flow as cash from operations less capital expenditure, plus non-cash tax benefits from stock-based compensation accounting and excluding unusual nonrecurring items. In the third quarter of 2015 free cash flow came in at $114 million after funding $25 million of capital.

Excluded from this amount is approximately $2 million of an investment associated with a major facility expansion. This brings our year-to-date 2015 free cash flow to $384 million, as compared to $324 million for the first three quarters of 2014.

Accounts receivable days outstanding stood at 76 days this quarter, an increase of three days from the third quarter of the prior year. In the quarter, inventories increased by $9 million as compared to the end of the second quarter of 2015. This increase reflects a normal seasonal pattern.

As we begin to think about our expectations for the fourth quarter of 2015, and in consideration of a challenging quarterly comparison and fewer selling days, we anticipate constant currency sales growth to come in at around 4% or 5%. Currency translation at today's rates would likely reduce sales growth by about 5%.

Moving down the P&L, we expect gross margin percent for the fourth quarter to sequentially improve from the third quarters and approach 60%. Operating expenses will continue to be carefully controlled, and will grow moderately from those in the prior year's quarter as we continue to fund R&D initiatives.

Moving below the operating profit line, net interest expense is expected to be approximately $7 million, and we expect our operating tax rate to come in at around 13.5%. Rolling all these figures together, we anticipate non-GAAP earnings per fully diluted share within a range of $1.89 to $1.99. This is for the fourth quarter.

Combining this fourth quarter outlook with the results of the first nine months of 2015, we now anticipate full year 2015 constant currency sales growth of about 8% to 9%, and adjusted fully diluted earnings per share in the range of $5.83 to $5.93.

Chris?.

Thank you, Gene. And with that, we are going to open up the phone lines for Q&A. In addition to Gene Cassis and John Lynch, Art Caputo, Executive Vice President and President of the Waters Division, is also joining us for the question-and-answer period.

We're rarely able to get to everyone's questions, so please limit yourself to one question and one follow-up. If you have additional questions, please contact our Investor Relations team after the call. And after Q&A, I will add a few closing comments.

So Ashley, if you could please tee up the first question?.

Thank you. The first question comes from the line of Jon Groberg from UBS. Sir, your line is now open..

Hi.

Can you hear me okay?.

Yeah. Hi, Jon..

Hey, Chris. Congratulations on joining Waters and for a solid start to your tenure there. Can you maybe just give us a little bit of an expectation? You highlighted some of the things you're engaged in initially and your four points that you're focused on.

When do you think is a reasonable expectation for us to have when you feel like you might fully have your arms around Waters and give an update on your strategic view for the firm?.

Sure. Thanks, Jon, a lot. I look forward to meeting you and everyone else. As I mentioned, I'm focused on a very rigorous onboarding process and obviously I had the chance to study Waters quite a bit in the time leading up to my starting. And as I mentioned, my first priority is to assure continuing strong operating performance.

Obviously, I'm also spending a lot of time understanding the industry and the competition, and really truly what differentiates Waters so that as we build a strategic plan, it will be truly distinctive and something that will enable future sustainable growth.

I anticipate a strategic planning process over the course of the next coming year, and as we engage, I expect that conversation to develop in terms of what we're able to say at what point in time. There are a lot of great possibilities for this company. The opportunities to grow are many.

I'm focused on leading the team to help make the best possible choices we can over that time period to assure the best returns for our shareholders..

Okay. And this is a quick follow-up. Obviously, the topic de jour is in pharma. You mentioned another solid quarter in your biopharma broadly defined, including spec pharma.

Are you seeing any, given some of the dislocations you've seen in some of those markets, are you hearing anything from customers or seeing anything in that end market that would make you a little more cautious as you move into 2016? Thanks..

Sure. Thanks. In terms of the pharma business – and again, I'm new and getting to know these customers and hearing from them, and so I'll develop my instincts over time – but I just start by saying, I'm proud that we have a big core position in pharma. As you know, it's our core business. It's been our innovation driver for many years.

Some of the most sophisticated users are in the pharma segment and that leads to solutions in a variety of others. But one of my early observations, Jon, is that we're also seeing this sector change over time. Of course, the large established pharmaceutical companies have been doing better, have improved pipelines.

But we are far less reliant on that category of large established pharmaceutical companies than we were in the past. In fact, a lot of our growth now is coming from, as I mentioned in the comments, a specialty form of biotech generics and CROs.

We also have a nice trend, I think in our pharma business of geographic diversity, where we're seeing greater contributions from different parts of the word.

Really, underlying all of this are (21:38) a push for new analytical methods, as you know (21:41 – 21:46) opportunity to participate in every phase, from discovery to (21:48 – 21:57) model to continue to pursue as our main focus..

All right, thanks. Good luck..

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

Hi, Amanda? Are you there?.

Hello, Ms. Murphy, if you are on mute, please check your mute button and unmute your line..

Apologies for that. Sorry about that. Welcome, Chris. I just had a quick question on the QDa. That adoption has been quite impressive, actually. I'm just curious, number one, how much did that add to revenue and I'm not sure if you can quantify exactly but I think you had talked to a percent or so.

Is that still the case? And then I think that's been really sort of an add-on product, so I'm curious if you could give us a sense of how much of your install base has adopted that step platform at this point. Just trying to get a sense of how much run-rate you have there..

Sure. Thanks for the question on QDa and pointing out that this particular product, this mass detector that integrates into LC is a really neat product because, like I said in the script, it has mass spec capability to the broader LC base. We think we're pretty early in the process.

This product was just launched in the last year, and, as you know, product launches in this business sometimes really take multiple years to find their full effect; and so while QDa clearly did enhance our growth in the quarter, and has over the past few quarters, we're not going to quantify specifically what those numbers are.

We think we still have a long way to go on QDa and expect it to be one of our core drivers for next year.

Gene, would you like to add anything to that?.

No. I think that covers it very well, Chris..

Okay. Got it. And then on the recurring revenue side, obviously that growth has been quite strong as well and you've had some new products launched there. So in terms of thinking about that longer term, is that still going to be high single-digit growth for some time? I think it even got above that over the past couple of quarters..

It's a good question. And I tell you, as I've gotten in and studied the business model, I'm very impressed by this recurring revenue stream. And obviously that consists of our service and our chemistry. And I've already been diving deep and looking for ways to create as robust of a recurring revenue stream as we can.

One of the things that's driving our growth, as I mentioned in the prepared remarks, is that with our ACQUITY platform we see much higher attachment rates with our own chemistries than with the overall install base.

And so as ACQUITY continues to gain traction and we have more platforms of ACQUITY on the marketplace, I'd also point to ACQUITY Arc as another big launch for the year that's having a big impact. You know we expect to see steady and predictable contribution from the chemistries business.

And obviously, chemistries continues as a category to be a big focus of our innovation as well in what we're trying to do there. On the service side, you know we obviously continue to prioritize that area. The team has made some great strides in terms of putting even more focus on the services business with enhanced management focus.

And also if you look at developing markets or emerging markets like Asia and particularly China and India, our service business tends to be a lot more embryonic. And so another factor underlying our confidence in our service line is the increasing participation of the service business model in some of those geographies..

Got it. Thanks very much..

Thanks..

The next question comes from the line of Mr. Brandon Couillard from Jefferies. Sir, your line is now open..

Thanks. Good morning. Chris, I realize this might be a little bit early, but was curious if you could give us a sense of how you view the capital allocation at Waters and whether you think there's room for a dividend to become a greater priority in the future..

Thanks, Brandon. I think it is too early for a conversation like that. You know, my first priority has been to understand the capital allocation strategy. Obviously, I really like the focus of the company around deploying capital internally against R&D and organic growth opportunities.

And that's absolutely our first priority is to do everything we can to develop strategies and enhance our strategies to maximize the impact of our core business and the performance of our core business.

And as you know, one of the other capital allocation strategies has been the well-established share-repurchase program, which is steady as she goes and a continued focus of the company.

Obviously as I get into this, questions of capital allocation will be addressed and everything will start with first a question around our strategy and our long-term direction, and then all of the other factors of running our business to follow..

Understood. And a quick one for Gene is in terms of the fourth quarter guidance, can you qualify exactly what you're embedding for a budget flush effect here at the end of the year? And if you could quantify the impact of the fewer days, that would be helpful..

Yes, Brandon. You know the – I'll start with the effect of fewer days. Typically, it's much more meaningful for our recurring revenue business. And what we saw in the first quarter of this year, we had benefited from extra selling days. And we had between a 2% and 3% benefit to our top line during that quarter.

And we think that the effect of fewer selling days in the fourth quarter will be comparable, so a couple of percent. If I think about the potential impact of budget flushes in the fourth quarter, I think we've been conservative on that front. We've been looking more at the momentum of our business coming into the fourth quarter.

The whole issue of budget flush has been a bigger focus when you consider our large cap pharmaceutical segment of our business. And as Chris had mentioned earlier in this call, that's becoming a less meaningful percentage of our business.

So I think when you consider the guidance for the fourth quarter, I would not bake into that the assumption that we are assuming that we are going to have a meaningful flush..

Super. Thank you..

Anything else?.

No. That's good..

Next question comes from the line of Mr. Doug Schenkel from Cowen & Company. Sir, your line is now open..

Okay. Good morning, guys. And welcome, Chris. My first question is on, really, operating spend. Earlier in the decade in periods of uncertainty Waters occasionally held back on investment in commercial infrastructure until visibility improved.

In the midst of what has been a strong period of revenue growth that goes back through eight of the last nine quarters, I'm just wondering if you've been able to reinvest in your commercial reach, and maybe even opportunistically pull forward investment in areas that would position you better to take advantage of some of the growth opportunities that you see heading into next year.

It's clear that R&D investment has been ramping. But it's less clear at the SG&A line, at least on a reported basis, recognizing that there is some pretty pronounced FX impact there.

So just wondering how you're feeling about your current commercial infrastructure and how we should think about investment there heading into the end of the year and beyond?.

Sure. Thanks, Doug, for the question. And I'll give you a couple perspectives and then see if Gene would like to add anything. And you're right; I think you asked the question well.

Our first focus is to ensure that we have top line organic growth momentum, and when we're in that period and we have good visibility to continuing momentum we want to make sure we're making the proper investments; and as you point out, we have been increasing our investment in R&D.

That's a combination between investing in our core business, our core product lines where we've got a strong pipeline, as I mentioned, but also applying investment to some potentially exciting new growth areas like the health sciences. From an SG&A standpoint and sales force, I'm still obviously getting my arms around the commercial organization.

It's a very efficient, very experienced commercial organization that's impressive in terms of its depth of expertise and the credibility it has with our customers.

I've seen that first hand as I've gone out into the field and I come from a strong commercial background myself and, obviously, will be very focused on making sure that our team in the field has everything it needs to succeed in the changing environment.

In the quarter, certainly I would say there was a bit of a catch-up on some of that spending and in growth investments in the commercial organization. Obviously, we try to balance getting modest SG&A leverage over time. In the quarter, SG&A spending grew on a constant-currency basis about the level of revenue.

But for the first nine months in total, SG&A grew at a slight discount so (32:05) of the year, but we're also making sure that we catch up on that spending and make sure that our team has everything they need to sustain the top line as we head into the next year.

Gene?.

Thank you, Chris. I think that sums up the situation where we are today.

I just wanted to add that if you begin to look at our expectations for the full year, I think what you'll find is that the typical SG&A leverage that we generate from this business that is characterized by growing our top line one or two points faster on an organic or constant-currency basis than our SG&A, I think that will materialize as we look at full year 2015..

Doug?.

Great. Yes, thank you. And then maybe if I could just ask one more. The commentary on the pharma end market was really encouraging. Heading into Q4 and next year, the comparisons in this end market clearly get a lot tougher. It's great to hear that it doesn't sound like you're seeing any change in the underlying dynamics of that market.

That said, it does seem like your growth is increasingly dependent on smaller specialty and generic labs. These might be more dependent on equity market conditions. And just mathematically the comparisons are pretty tough.

Recognizing that it sounds things are – like things are very good, do you think it's prudent for us to be thinking that there should be some moderation in growth in this end market relative to what we've seen over the last year-and-a-half to two years? Thank you..

Sure. Doug, just maybe a couple more comments, and without repeating some of the themes earlier, but I think you picked up well on our intent and really the reality of our pharma end market transforming over time to a much broader base in terms of some of those smaller players geographically. And of course you're right.

It will be a tougher comparison next year. But we're not letting tougher comparisons get in our way of continuing to plan for success in these markets. And we're going through that planning process now. We obviously have a nice combination of new products in the market.

But also, as mentioned earlier, that strong recurring revenue stream is a key stabilizing force and a follow-on to a lot of the products that have been successfully introduced and, of course, to continue to emphasize the new product potential.

Our team is working hard to be very responsive to the changing needs of this marketplace and the broadening of that marketplace, as we mentioned earlier.

And you know, what I'm trying to learn is just all the different dimensions of this pharmaceutical and broader life science end markets, consisting of large players, the smaller specialty biotech and generics companies, as well as the lab opportunities. So it's a good question. I look forward to a continuing dialogue on this with you..

Okay. Thanks. All very helpful..

Next question comes from the line of Matt Mishan from KeyBanc. Your line is now open..

Great. Thank you for taking my questions. And welcome, Chris..

Thank you..

I guess my question about sustainability of demand was just asked. I'll ask in a different way maybe.

Heading into 2016 is there a new product pipeline that's maybe a little bit more robust than it was this year that could help you keep more consistent growth going into next year?.

Thank you, Matt. Appreciate the question. And we've touched on a couple elements of this, so maybe I'll try to wrap it into a more complete answer on the product side. Like I mentioned, we're getting nice performance out of our core base. I think one of the neat things from my perspective is it's not just one product here, one product there.

If you look at our core chromatography business, we're really getting a nice portfolio effect right now of ACQUITY, Alliance and then some of the new products. The QDa was mentioned, the ACQUITY Arc, which is kind of a mid-range system.

We're getting nice performance out of our super critical fluid separations and extraction business, and a number of these, including some of the newer launches like Arc and QDa and then Vion, when it really hits the marketplace, will be product launches that will have a bigger impact than just in one quarter or one year.

And without getting too specific, the team is very focused and I am really trying to reinforce the continuation of the steady drumbeat of new technologies and separations in mass spectrometry, in chemistries that continue to enhance the performance of the systems but also to enable the development of new work flows and applications for more specific needs in the marketplace.

So that's probably how I'd sum up the product strategy at this point after two months. And look forward to learning more and continuing to demonstrate the great innovation machine that I think we have here..

Okay. Great.

And then just one last quick one for me; if renewed, what would the R&D tax credit add to EPS?.

Maybe, Gene, why don't you answer that one?.

Oh sure. I think that the R&D tax credit has the potential to benefit EPS by $0.02 or $0.03..

All right. Thank you, Gene..

You're welcome..

Next question comes from the line of Derik Bruin from Bank of America Merrill Lynch. Sir, your line is now open..

Hi. Good morning. And welcome, Chris.

A couple of questions; so what was the impact of FX on the gross margin and to EPS?.

Gene, why don't you get the details on the gross margin there?.

Yeah. Thank you, Derik. When you look at the effects of foreign currency translation, historically we've focused on the euro, the yen, and sometimes the British pound as the major currencies that influence our business.

I think one of the things that was surprising in the quarter that we're reporting on now is that we had some pretty significant moves of currencies that are secondary currencies for the company, including the real of Brazil, and the Australian dollar, Canadian dollar all moved against us.

And we had a much more meaningful impact reflected in the gross margin line because we really have no cost of goods sold and we have very efficient distribution operations in those countries. So we had approximately 190 basis points of FX headwind.

Now, fortunately, that was offset by gross margin tailwinds associated with higher shipment volumes and favorable product mix. So it was actually pretty meaningful.

It's interesting that gross margins did not come out too far from where we anticipated, but the way we arrived there was a combination of much more significant FX headwinds offset largely by favorabilities on mix and volume..

Great. That's very helpful, Gene. And just one final question; could you give a little bit more color about China growth, net market and booking? Thanks..

Yeah, Derik, maybe let me just make a quick comment on China and then see if Gene wants to add anything else. But I'm very interested in the China business.

I'm very impressed, to be honest, with the size of the China business and the length of time that Waters has been present in China, the credibility that we have there, and the foundation, as I mentioned in the prepared remarks, on both private and government business.

And as you may know from my background, I've got a lot of experience operating in China. I tend to take a long-term view of China. I'm pleased that in the quarter we had strong growth, double-digit growth, and the one thing we all know about China is not everything is on a straight line.

But for us to become the preeminent global company in this space we will prioritize a leading position in China. Underlying demand approximated the sales growth and we continue to see relatively stable demand out of China. I'm going to be in China in early 2016 and look forward to diving a little deeper and understanding this market even better.

But I am encouraged by the franchise we have in China and, for that matter, in some of our other big emerging markets like India.

Gene?.

I think that summarizes it very well, Chris..

Thanks..

Good. Thank you..

The next question comes from the line of Dan Leonard from Leerink. Your line is now open..

Thank you.

I was hoping perhaps you could elaborate on trends in Japan by end market, and also remind us of what your business mix looks like in Japan by end market?.

Thanks, Dan. Japan, let me make a quick comment on Japan. And again I have not had the opportunity yet to visit Japan, but I will early in 2016. Japan represents about 8% of Waters' sales overall. It's more of a modest growth business, moderate kind of mid-single-digit type of business, a very well-established, loyal customer base.

Very profitable businesses, as many Japanese businesses are in the instruments and device world, and as mentioned before, we had good business in the government and academic markets there in the quarter. So I think it's a very stable situation and a position of strength.

But Gene, do you want to add anything more on Japan?.

Yeah.

Chris, I think that summarizes it well, but I would just say that in the second quarter – I'm sorry, in the third quarter, we had a tough base of comparison in the pharmaceutical segment of our Japanese market in that in the prior-year we had some very successful large orders for informatics systems that did not, obviously, repeat in the third quarter.

So I think that the underlying demand in Japan is actually healthier than the 2% constant-currency growth rate suggests, and we're very encouraged by the strength of government and academic spending as well as our industrial and applied market spending in Japan, and that is encouraging for the fourth quarter..

And then for my follow-up, and maybe this question is six months too early, but Chris, can you talk about how much you might be willing to dilute the margin structure of Waters with either organic or inorganic investments?.

Yeah, I think that type of question is certainly premature in my process to understand our overall P&L and our investment strategy for the future. Again, I'm trying to focus on the fundamentals of understanding what makes this business go, and make sure I'm doing everything I can to ensure continued strong performance.

You know, a strategic look at the business will increasingly become a focus. Our goal is to develop a very sustainable, robust business that's delivering for the long term. I know that's not saying too much but I look forward to engaging in all those topics in the future..

Got it. Thank you..

Next question comes from the line of Isaac Ro from Goldman Sachs. Your line is now open..

Good morning and thank you, guys. Chris, just want to start with a question about your prepared comments on the end markets. I thought you said that EU academic was up double digits. Is that right? And if so, could you just put come color on that? It's obviously well above trend..

Sure. Yeah. We did say that. The European – on a constant currency basis, the European business was up 9% with strength in that particular area. And obviously, we're seeing a lot of demand for many of our research products in that area. And maybe Gene can say a little bit more about what's happening in that sector in more depth..

Yeah. I would say, Isaac, that the business that we have in academia is weighted towards our higher-end mass spectrometry product offerings, and it tends to be a little bit more lumpy.

So one of the things about the third quarter performance is that we were comparing against a favorable base of comparison in the prior year, and that's somewhat the nature of our performance in that sector..

Okay. That's helpful. And maybe just a bigger-picture question for Chris. Obviously Waters has a great track record as a company for being pretty efficient, everything from margins to cash flow into the great tax rate. So if you bring a different set of experiences from Medtronic.

I'm curious if, in your short time so far, if you can point to any areas where you think that the operations of the company could be more efficient just based on your prior experience at a bigger company?.

Sure. That's a great question and one that we'll increasingly answer over time. But you're right. One of the great strengths of Waters is the very strong financial discipline. I think what you'll find is that I'll continue that tradition.

That's one of the commonalities that Doug and I share and the management team and I share, and I think in many ways the company has done a really good job weathering FX and other issues plus investment needs to deliver sustainable growth and strong margin performance. And obviously, I want to continue that.

With that, I will always be looking for new opportunities to free up investment for revenue growth drivers, particularly R&D as well as sales force. Those will be two of the bigger priorities. And I do see little pockets of opportunity over time.

It's probably premature for me to comment on exactly what those are, but there are definitely some efficiencies that we can drive in all parts of the P&L as we grow and scale this business..

Got it. Thank you..

Next question comes from the line of Mr. Tycho Peterson with JPMC. your line is now open..

Thanks. Chris, maybe just following up on the comment on your prior experience with Medtronic, obviously, there you ran businesses that faced more end-market challenges and secular headwinds. Clearly that's not the case with Waters, where end-market dynamics have been strong.

So can you maybe talk a little bit about what in your operational background you can bring to the growth story at Waters, and then, along those lines, we haven't heard a lot about the Health Science Initiative, but clearly there are investments in the distribution channels and manufacturing we need to think about.

Can you maybe talk a little bit about maybe milestones we can track, and should we assume at some point this gets broken out as a separate P&L line item?.

Sure. Thanks for the question, Tycho. I appreciate it. I think your characterization was reasonably accurate in terms of the differences in the end markets within medical devices versus this space, and obviously I'm continuing to try to understand what those are.

And you're right; we are blessed at Waters with great end markets and strong positions that are in general more stable and more recurring than some of the markets I've participated in. Although, certainly I had some businesses before that had mixes of capital and service and consumables as well.

I think, overall, what you'll see from me in terms of reflecting from my background as I come into Waters is a very strong focus on innovation.

I grew up in a company that was all about some of the same principles in terms of being extremely responsive to unmet needs in the marketplace for innovation, where innovation can make a difference in terms of improving our customer's performance. And so I'm very interested in innovation and how to bring some of those lessons forward into this space.

The priority for that, as I mentioned before, is in our core business to ensure we're doing everything possible to drive the core business but there are some very intriguing opportunities down the road. You mentioned health sciences.

Obviously I have a personal understanding of more regulated markets, and I'm certainly not afraid of these markets; in fact, I'm quite excited about them. But we're going to approach some of these market opportunities in a very measured, very thorough manner. We've got a lot of work to do to characterize these opportunities, to build plans.

And as we do that, we will look for opportunities that enhance and grow our top line and our margin structure over time. So this whole area of health sciences is very interesting, and as you know we're already serving some of these segments in terms of neonatal screening, (50:09) drug monitoring.

And so the question over time from a strategy standpoint is just one of degree and emphasis, and we'll have an opportunity to talk more about it. At this point any thoughts on breaking out these revenues or establishing new structures around that is premature..

Okay. And then as a follow-up, I think you noted an uptick in industrial. Clearly the data points from the true industrial companies have been pretty poor this earnings season. Can you maybe just talk about where you're seeing the strength? Was that really just on the applied side? And your visibility into that channel..

Yeah. Maybe I'll make a couple of broad comments there and Gene can comment further. But the industrial markets or the applied markets of food and environmental and the chemical industries is a really intriguing set of markets.

From my standpoint, it's impressive how Waters has taken some of the core technology originally developed for primary use in the pharmaceutical sector and created new applications to serve those markets.

And there are some interesting long-term trends, particularly in food security, food safety, food authenticity, and a good stable business in the chemical industries sector as well with a wide range of applications that we're in today and we can develop for tomorrow in a very efficient way.

So we've been able to serve these markets, in my early view, in a very efficient manner both from a R&D investment but also from utilizing our well established sales force to call into these areas. So I think we're getting some pretty good performance out of them right now.

Gene?.

Yeah. The only thing that I would add after that good summary, Chris, is that if we look at that segment of our business, one of the components there is food analysis. And what we have seen in the quarter that we just – that we're reporting on here is that we had a particularly strong performance for food safety testing.

And I'm not sure it is that we're yet seeing the full impact as the U.S. begins to move more deliberately down the pathway of mandating more testing, but it's certainly encouraging at this time..

Okay. Thank you..

Next question comes from the line of Ross Muken from Evercore ISI. Your line is now open..

Good morning. So I just want to touch back on sort of the emerging markets.

Can you just give us a sense versus prior periods how you would kind of characterize the current environment? And what would you need to see on the currency side, for instance in places like India, to get more concerned with what that could do to the demand trajectory? I mean it's obviously been a broader market issue, and obviously your business has proven to be a bit more resilient, so just sort of some context from the historical basis on that, maybe, Gene.

And then on the – actually start with that and then I'll ask my follow-up..

Yeah. Just a quick start to that, Ross; this is Chris. The emerging markets are a big focus for the company. Obviously, we're getting quite a bit of business out of there, and to your point exactly, the underlying demand in China and India and the emerging markets, with some exceptions.

I mean we haven't mentioned Brazil specifically, which was a challenge in the quarter, so there are some emerging markets that are not operating as robustly right now.

But certainly India and China are examples where the currency situation has not yet manifested itself in a fundamental change in demand, and so we're monitoring that closely but also doing the things to be successful on a fundamental basis for the long term.

Obviously, other emerging markets like Brazil have been a little bit more disruptive and we're watching those closely and looking for ways to improve, but Gene, do you want to comment on that?.

Yeah. The only thing that I would add, Chris, is that in some of the larger emerging markets we do transact our instrumentation business in U.S. dollars. So it somewhat limits our exposure to some of these dramatic shifts.

But in terms of spare parts and some of our services, those are denominated in local currencies, so that has been a component of the FX headwind that we encountered this quarter..

And maybe can you just remind us of the emerging market comp in sort of the key, maybe the key ones in China, India as we enter 4Q and then give us a bit of a sense of how the jump-off into 2016 compares to what we had in terms of the jump-off from 2014?.

In terms of emerging market basis of comparison as we look at the fourth quarter, I'm very impressed with our performance in India in the third quarter because we grew double digits off of a double-digit quarter in the prior year.

If I begin to look at the dynamics in China, we had a very successful third quarter result, but we are facing a more challenging base of comparison in the fourth quarter. I remember last year we began to see the business ramp in the third quarter, but our sales growth really came in at a double-digit rate in the fourth quarter.

So our assumptions embedded in our guidance is to see a little bit of slowing in our China growth associated with a more difficult base of comparison, but we are very encouraged by the trajectories that we have in India and think that that has some sustainability going into the fourth quarter..

Great. Thank you..

Good. I think we have time for a few more questions.

So why don't we get the next one?.

Next question comes from the line of Steve Willoughby from Cleveland Research. Your line is now open..

Good morning, and thanks for taking my questions. I have two for you. Chris or Gene maybe a little bit of a bigger picture question. Just in thinking about the revenue growth in your service business, it's been pretty strong this year along with strong growth in instruments.

But the growth in services has been strong for a number of years now, and so I was just wondering if you had any thoughts on if there's any relation between the growth in service versus your growth in instruments or any other color on what's driving the strong service growth over the last number of years? And then the second follow-up is just, Gene, within your guidance for this year, what are you now assuming in terms of the EPS impact from FX in your overall guidance? Thanks so much..

Sure. And maybe just a quick note on service there, Steve, and Gene can comment as well. But you're right to focus in on the sustainability of the performance in service.

And it's a pretty fundamental mix between both the contracted service business, which we continue to strive for higher attachment rates and good customer value and pricing that comes along with that, but also a fairly robust parts business and the continued maintenance.

As you know, our equipment is heavily used and is used for a long time, and the opportunity to help our customers maximize the return on those investments has also resulted in a great service business. It'll continue to be a big priority for me moving forward.

So, Gene, do you want to put a finer point on that?.

Well, just on the service side, in the last quarter we did see a very nice service growth in some of our larger Asian markets, and as the installed base continues to ramp up nicely in those countries, and as there is a higher degree of focus on making sure that these instruments are properly validated, especially for pharmaceutical applications, I think that that provides us with a base of stability for our service business going forward..

And the question on the guidance?.

Oh. On the guidance. Yes. Thank you. Looking at the effects of foreign exchange on our business, if I look at where we are year-to-date, foreign exchange has been pretty meaningful on the EPS line; we think it represents about $0.41 of EPS headwind associated with foreign currency exchange.

The last quarter was a little bit more dramatic than we had originally anticipated. So for the full year and looking at the fourth quarter we think that the effects of foreign currency are going to be not quite as dramatic as they were in the third quarter because we began to see currencies move in a positive direction last year.

We think for the full year the effect of foreign currency exchange is going to be similar in the range of $0.50 to $0.55 of headwind for the corporation..

Okay. Thanks very much, guys..

Next question comes from the line of Bryan Brokmeier from Cantor Fitzgerald. Your line is now open..

Hi. Good afternoon – or good morning, and welcome, Chris. Following up on the question previously on the service business, you said that it was strong.

Could you describe a bit of the impact that your business is having from some of the lab-wide service offerings of your competitors?.

(59:50 – 59:59).

Yeah. Bryan, one of the things about our services (1:00:04) business is that this is an area where we have continually invested heavily to make sure that we are providing the top service levels that our customers can (1:00:20) to sell an instrument. Invariably, they will cue in on service as being a primary driver as their reason for investing.

The second aspect – and we find ourselves much more insulated from the third-party effect because of our basic strategy. It's heavily innovative based. Things like ACQUITY or LC-MS solutions, these offerings that consist of instrumentations, chemistry, support services insulate us from the traditional attacks that third-parties usually go after.

And they're usually going after more commoditized offerings, where, quite frankly, our primary emphasis for growth is in the areas of innovation and performance.

And the more commoditized offerings, while we sell there, is not what our customers recognize us for; so when third-party goes into the account, they don't associate us with as highly being susceptible to third-party as many of the other vendors in the industry..

Good. Thanks, Art. Appreciate that. And I think as you can see, Bryan, the service business is a really interesting part of Waters and a big area of investment and something that we're all working closely on to make sure we continue to get the performance out of it for the future that we've gotten out in the past as well..

I think we're a little bit over time. And so maybe I'll bring the Q&A session to a close. But thanks for your great questions. I really enjoyed our first call here together today, especially the substantive dialogue we just had in the Q&A. I do look forward to getting to know all of you well.

And as that goes, I am committed to interacting in a manner that keeps our communication open, honest and insightful. At this point, Gene and John and I are mapping out opportunities for me to meet with a number of you later in the fall, as well as to engage with the investment community more broadly throughout 2016.

So on behalf of our entire management team, I'd like to thank you for your continued support and interest in Waters. We look forward to updating you on our progress in our Q4 call, which we are currently anticipating holding on January 26, 2016. Thank you all and have a great day..

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