John Lynch - Vice President, Treasurer and Investor Relations Christopher James O'Connell - President, Chief Executive Officer and Member - Board of Directors Eugene Gene Cassis - Chief Financial Officer & Corporate Vice President - Business Development and Investor Relations.

Jonathan Groberg - UBS Securities LLC Isaac Ro - Goldman Sachs & Co. Tycho W. Peterson - JPMorgan Securities LLC Derik De Bruin - Bank of America Merrill Lynch Steve C. Beuchaw - Morgan Stanley & Co. LLC Ross Muken - Evercore ISI Doug Schenkel - Cowen & Co. LLC Bryan Brokmeier - Cantor Fitzgerald Securities Sara M.

Silverman - Wells Fargo Securities LLC Daniel Arias - Citigroup Global Markets, Inc. (Broker) Jeff T. Elliott - Robert W. Baird & Co., Inc. (Broker) Miroslava Minkova - Stifel, Nicolaus & Co., Inc..

Good morning. Welcome to the Waters Corporation First Quarter 2016 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 and welcome to the Waters Corporation First 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 the future events or future financial performance of the company.

In particular, we will provide guidance regarding possible future income statement results of the company for the second quarter and full year 2016. 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, 2015 in Part 1 under the caption, Risk Factors, and in 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.

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 in this morning's press release.

Unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2015.

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 adjust for the negative effect of foreign currency translation.

Lastly, as you recall in January, we announced a new integrated structure for what was traditionally referred to as the Waters Division and TA Instruments Division. So, today on this call and into the future, we will now refer to the Waters products and markets and TA Instruments products and markets.

Now, I'd like to turn the call over to Waters' Chief Executive Officer, Chris O'Connell.

Chris?.

Thanks, John, and good morning, everyone. Thank you for joining us today. Also here for our commentary and Q&A is Gene Cassis, Waters' Chief Financial Officer. Since delivering results is our first priority, I will begin my comments with highlights from our first fiscal quarter of 2016.

Overall, I was pleased with our execution in the first quarter as the results largely materialized as we expected. Five percent revenue growth was at the high end of our guidance which is encouraging to me when you consider that sales in the prior year's first quarter were up 15% making for a challenging base of comparison as we entered 2016.

Sales strength in our pharmaceutical end market, impressive growth from our recurring-revenue products, and continuing double-digit increases in China and India are all continuations of positive multiple-quarter trends in these key growth drivers. Taking a closer look at our business by major end markets.

The highlight was the 9% growth of our broadly defined pharmaceutical market for Waters products. The growth in this market was most pronounced in regulated testing markets such as quality assurance and quality control testing.

As we have seen for about the last two years, the strength of our pharmaceutical revenue was broad-based and highlighted by growth in smaller firms, specialty, and generic customers.

Our global Waters industrial business, which includes food, environmental, and chemical materials markets, was flat in the quarter, with growth in overseas markets offsetting a decline in the U.S. Within this market, underlying demand for food quality and safety applications was strong in certain regions. And the decline in the U.S.

is principally related to tough comparisons with last year. Looking at governmental and academic markets, we saw a slight decline of about 1%, with strong shipments of research LC/MS systems in China, offset by declines in U.S. and European institutions against a strong first quarter in 2015. Turning to product line dynamics in the quarter.

Waters Instrument sales grew 2%, weighted towards workhorse chromatography systems used for routine pharmaceutical testing applications. We are seeing significant traction for our newly introduced ACQUITY Arc System and continued growth for ACQUITY QDa mass detection on new systems, as well as through upgrades to existing systems.

On the research mass spectrometry side, we began regular shipments of Vion IMS QTof in the quarter. Waters' recurring revenues, the combination of service and consumables led our product categories in the quarter posting 8% growth in comparison to a strong prior year's result and with one fewer selling day.

Waters' service and support business grew at a 7% rate with performance geographically broad-based and primarily associated with a strong uptake in contracted plans. Consumables 8% growth was largely balanced across major geographical regions with continued strong underlying demand for ACQUITY UPLC columns.

In addition, we continue to see positive reception of our application specific preanalytic kits such as the GlycoWorks RapiFluor-MS labeling and our newly released ProteinWorks kits.

Overall, the robust growth of our recurring line is indicative of our strong market share position, a growing installed base of our systems and strong instrument utilization rates. In our thermal analysis and rheology products from TA Instruments, business in the quarter was flat in comparison to a strong first quarter in 2015.

We made a decision to launch the new Discovery line of thermal analyzers at this year's Pittsburgh conference which had the effect of delaying orders and shipments of current systems in the quarter, but sets up a stronger overall opportunity over the course of 2016.

Featuring new instruments for DSC or Differential Scanning Calorimetry and TGA or thermogravimetric analysis, this new product line represents a step function improvement and performance in utility for TA's core business. Interest in these new platforms was high at Pittcon with a strong pipeline of new orders building in recent weeks.

We expect the new Discovery system business will benefit growth in the second quarter and help support another year of strong sales growth and profitability for TA. Geographically, we saw a decent balance with modest growth in the developed markets and strong growth in key emerging markets. In the Americas region, the U.S.

delivered 2% growth led by low teens growth from the U.S. pharmaceutical market in the quarter. U.S. industrial sales were affected by strong quarterly comparison as well as TA's Discovery system launch. We expect government and academic sales to ramp later this year as budgets get released.

In Europe, we saw a similar 2% sales increase with balanced mid-single-digit pharmaceutical and industrial growth offset by lower governmental and academic shipments. Our most significant geographic growth in the quarter came from Asia, which posted an 11% growth rate with strong demand from China and India.

Sales in China, our largest Asian market, were up mid-teens with balanced sales growth across all major end markets. We are very encouraged by the strong and steady business momentum that we have seen in China in recent quarters.

I also continue to be impressed with the growth of our business in India where continued strong generic drug testing business drove a high teens sales growth performance. And not to be overshadowed, sales in Japan were also up in the high-single digits with double-digit pharmaceutical growth and general stability in other end markets.

Before I turn the call over to Gene for more financial detail, I'd like to share my broader thoughts on our progress. I feel we're off to a good start this year with solid revenue performance against a tough Q1 2015 comparison and strength in our core business drivers.

Looking beyond the revenue line, I was very pleased with our team's execution on the P&L. We managed our expenses well in the first quarter, generated very strong free cash flow and continue to deploy capital conservatively, primarily towards internal innovation as well as our well-established share repurchase program.

While first quarter results in the past have not necessarily been a reliable indication of how the full year will play out, at this point, we are encouraged about our 2016 prospects based on our belief in the sustainability of Q1's growth drivers, as well as our expectation for an increasing balance of end market demand over the course of the year.

At the same time, we are also investing in future growth opportunities. One of my top personal priorities is to stay close to the science and technology, and to ensure that we maintain a robust pipeline of new instrument, applications and research programs.

Related to my focus on innovation, I have continued to travel extensively, visiting a wide range of customers across our market segments so that I can gain an even deeper sense for their needs and how we should invest towards better solutions. Since I started in September, I have visited well over 50 customers in 20 cities on three continents.

This process has been energizing, and has given me an increasing appreciation for the unique quality of our field teams, and the growth opportunities ahead of us. Finally, I want to acknowledge the efforts of our leadership team. We delivered a solid quarter while also transitioning to our new globally integrated organizational structure.

I am very pleased with the pace of the team in seizing opportunities to capitalize on our unique competitive advantages. Now, I'd like to pass the call to Gene for a deeper review of the financials.

Gene?.

Thank you, Chris, and good morning. In the first quarter, our revenues came in at $475 million, an increase of about 5% before currency translation, which reduced sales growth in the quarter by about 2 percentage points, resulting in reported sales growth of 3%.

Our non-GAAP earnings per diluted share in the first quarter were up 4% to $1.26 in comparison to earnings of $1.21 last year. On a GAAP basis, our earnings were $1.15 and consistent with the $1.15 that we delivered last year.

Notably, the impact of foreign exchange reduced first quarter earnings by about $0.08 and without this negative impact, our non-GAAP earnings per share would have grown by about 11%. Importantly in the quarter, and as Chris had mentioned, sales to our broadly defined biopharmaceutical markets grew about 9%.

Geographically, the strength of this important segment was broad-based, with the U.S. up 13%, Europe up 5% and Asian markets growing at double-digit rates. On the product front, Waters' sales were up 5% while TA sales were up 1%.

Breaking that down somewhat, LC and MS instrument system sales increased by 2% and TA instrumentation sales declined slightly in the quarter and were down 3%. Our total recurring revenues associated with Waters and TA products grew by 8%, with TA service revenue up 9%.

Looking at our growth rates in the first quarter geographically and before foreign currency translation, U.S. sales were up 2%, Europe also up 2%, Japan was up 8% and sales in Asia outside of Japan were up 12%. Sales of Waters' products were strong in China and up 13%.

TA product sales were generally stronger in Asia, offset by declines in the United States and Europe. Now, I would like to comment on our first quarter's non-GAAP financial performance versus the prior year. Gross margins for the quarter came in about as expected, at 57.7%, with a moderate currency headwind.

Moving down the P&L, SG&A expenses were up 2% on a constant currency basis, and were flat on a non-GAAP reported basis. R&D expenses, including those associated with new product development and incremental investments, grew about 4% in the quarter, and on a constant currency basis, were up 2%, primarily as a result of a weaker British pound.

On the tax front, our effective operating tax rate for the quarter was 13.7%. In the quarter, net interest expense was $6 million, and our average share count came in at 82 million shares or approximately 1.8 million shares lower than in the first quarter last year, this being a net result of our ongoing share repurchase program.

Turning to the balance sheet. Cash and short term investments totaled $2.5 billion and debt totaled $1.7 billion, bringing us to a net cash position of $786 million. As for first quarter share repurchases, we bought 745,000 shares of our common stock for $90 million. This leaves $351 million 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 non-recurring items. In the first quarter of 2016, free cash flow came in at $141 million after funding $25 million of capital.

Excluded from this capital spending is approximately $3 million of investments associated with major facility expansion. Accounts receivable days outstanding stood at 84 days this quarter. Inventories increased by $24 million in comparison to the prior quarter, reflecting the typical seasonal patterns. Now, I will discuss our full-year 2016 guidance.

Our outlook generally assumes a continued strong biopharmaceutical end market, relatively balanced performance across our instrumentation lines; and we feel that these dynamics will support a mid-single-digit constant-currency sales increase in 2016. Currency translation at today's rates is expected to be about neutral to sales growth.

Moving down the P&L, gross margins for the year are expected to be about equal to those in 2015 as volume-related manufacturing efficiency gains will likely be offset by a modest full-year negative FX dynamic. We expect to manage our operating expenses to grow at a rate that's less than our sales growth rate.

Moving below the operating income line, net interest expense is expected to be approximately $28 million. We currently expect our full-year operating tax rate to come in at between 13% and 14%.

Looking at share buybacks, we plan to continue our share repurchase program through 2016 at a rate that we expect will result in an average diluted share count of about 81 million shares outstanding.

Rolling all of this together and on a non-GAAP basis, full-year 2016 earnings per fully diluted share are projected to be within a range of $6.20 and $6.40. Looking at the second quarter of 2016, we are estimating that sales will grow at a rate between 5% and 7%.

At today's rates, currency translation is expected to be about neutral to sales growth in the quarter. Rolling these factors together, we expect our adjusted second quarter's earnings per diluted share to be in the range of $1.38 to $1.48. And with that, I'll turn you back to Chris..

Thank you, Gene. And with that, we'll now open the phone lines for Q&A. We are rarely able to get to everyone's question. So, please limit yourself to only one question and one follow-up. If you have additional questions, please contact our Investor Relations team after the call. And after the Q&A, I will add a few closing comments.

Operator, first question, please..

Thank you. Our first question comes from the line of Jonathan Groberg from UBS. Your line is now open..

Great. Thanks, Melena, and congratulations on a solid quarter. So, just two quick questions from me. First, can you, Chris, as you've gotten to know the business a little bit more.

I mean, what strikes in the quarter is the strength of recurring revenues, particularly because I think you had one less selling day in the quarter? So, maybe if you could just talk about what you saw there? Is that being impacted by pricing at all? Is there anything that's happening from a pricing standpoint on the services or the consumable side?.

Sure, Jon. Thank you. And yeah, the strength of the recurring business is certainly a highlight for us and something we watch very closely.

And as I said in my comments, I think it's a function of a variety of factors including our strong position in instruments and our growing installed base but also our ability to not only hang on to but enhance our contracted service plans.

And your point on price is also correct that we do seek over time to maintain or even enhance our pricing power for these recurring lines on service and on chemistry consumables.

And on the consumable side, we are benefiting from a continued uptick of our UPLC systems and higher attachment rates that we get on those chemistries which is a nice natural tailwind for us in addition to some of the application specific kits that I mentioned early and we're very excited about GlycoWorks and ProteinWorks and other things in our pipeline.

So, this has been a nice source of growth for us. It's gradually increasing. It's a mix of our overall portfolio and has favorable economics that go along with it. So, it is a top priority for us..

Okay. And then, just quickly.

I don't know either Chris or Gene, there has been some comments around Ireland looking to change how it looks at the tax rate that it offers companies there? I think you renegotiated Singapore but I'm just kind of curious what your outlook is for tax in Ireland and just tax, in general, if there's anything you're seeing there that we need to be aware of? Thanks..

Well, this is Gene, Jon. Thank you for the question and we carefully monitor changes in governmental tax policies around the world especially those that impact our company directly. And you're right that between Singapore, Ireland and the UK, they're all very meaningful to us along with the United States.

But at this time, we're not anticipating any change in our situation in Ireland. The effective tax rate that we enjoy there is in the 11% or 12% range and as we look at the guidance for this year and look at the long-term outlook for the company at this time, we're continuing to use that rate..

Okay. Thanks..

You're welcome..

Thanks, Jon..

Thank you and our next question comes from the line of Isaac Ro from Goldman Sachs. Your line is now open..

Good morning, guys. Thank you. I'm wondering if you could comment a little bit about the competitive environment, you had obviously a really strong comp to work against this quarter and curious if you felt like you were able to take a little bit of market share in any of the key product areas..

Thanks, Isaac. I appreciate the question. As you know, measuring market share on a quarter-by-quarter basis in this business is a little bit challenging and so in order to assess how we're performing competitively, I tend to look at – I've looked at a lot of data on more of a rolling basis. And market share is critically important.

We do want to win in all of our major categories and I think looking at our growth rate in instruments, looking at our growth rate in chemistries and service and some of the different product categories, we do believe we've grown at a rate that exceeds the market.

And so, we do believe that in the core LC business, we are gradually picking up some market share and that's our goal and we need to continue to feed that with innovation which is our primary lever. On the mass spec side, it's a little bit different by product category.

While we've been under some pressure on the higher end research mass spec, we have performed in a solid way in the tandem quad business and particularly the new category of the QDa, have been a nice – a gainer for us.

So it's a little bit of a mixed bag there, but we continue to really focus and prioritize our execution in making sure we're maintaining and enhancing that market share position..

Great. Thanks, Chris.

And just a follow-up, the guidance for 2Q that you gave us was relatively in line with what I was looking for, but I'm curious if you could talk a little bit about operating leverage in the business? You mentioned the importance of the good expense control in the first quarter, and if we look at the top-line profile of mid- to high-single digits on organic growth rates, the bottom-line growth, historically in this business has been – has shown pretty good leverage, and I'm wondering how you think about that this year as you put your plan more into place..

Sure. No, happy to address that, Isaac. Thanks. You know obviously, as you know, the last three years, as I look back over the last two to three years, I think there's been good operating leverage masked by FX, of course, and the challenges we face there.

And so, as we look at 2016 is a little more of a transition year as it relates to FX, we are trying to balance that growth and the investment in the portfolio, obviously with a good top line over the last year, and continuing to push the top line, we want to make sure we're feeding that growth with the right levels of investment.

And so as we look across the balance of the year, I think our revenue outlook is balanced in terms of over the course of the year, each of the end markets harmonizing more to our guidance range.

And we have an investment plan over the course of the year that is designed to yield some very modest leverage, obviously, with top-line performance, if top-line performance exceeds our stated guidance, there is some potential for some additional leverage.

But obviously, over the course of time, I do feel that leverage is possible in this business based on the mix and the evolving mix of our business particularly towards service and consumables. The fact that we operate in very attractive market segments and the opportunities for scale up and down the P&L as we grow. So, that's really our approach.

But overall, it is a balanced approach because, as I mentioned in my comments, feeding the growth is critical particularly on the innovation side..

Got it. Appreciate all that color. Thank you..

Thank you. And our next question comes from the line of Tycho Peterson from JPMorgan. Your line is now open..

Hey. Thanks. Maybe first on government academic. I know you had a difficult comp this quarter, as you did last quarter. Just wondering when you think you may see things pick up a little bit both in the U.S. and Europe, I know you talked about being a little soft as well..

Sure, Tycho. I'll make a quick comment, and maybe Gene wants to add to it.

But the government and academic in general has been, as I look at this business, more of a back-half factor with lumpier performance in the first half of the year, and I think that's our continued expectations, particularly as some of the new budget gets released through the NIH funding that we've watched closely.

And so, we've been relatively conservative on our assumptions in the first half of the year and expect that to be more of a back-half phenomenon..

Yeah..

And....

Just to add, I think Chris did a very good job explaining the situation. I would just add that historically, our participation in those non-profit market segments has been weighted towards our higher end-mass spectrometry offerings.

And as we go through this year, we will continue to see a ramp of our Vion instrument as well as some pretty exciting new product introduction plans at the upcoming ASMS meeting. So, I think we're encouraged at the prospects and we have a pretty good pipeline as we look at the remaining quarters of 2016, Tycho..

Okay. And then just maybe following up on Isaac's question earlier about leverage. Chris, one of the things you've been vocal about is maybe showing more discipline on the R&D spending and kind of rethinking maybe the way you approach R&D.

Can you just talk a little bit about how you think about implementing some of those changes around systems engineering and maybe realigning some of the R&D priorities?.

Sure. It is a very high priority as I mentioned. Thanks for the question. And I'm still in my process of learning all about how we create value through that innovation process. And as I have been vocal about – remained very, very committed to our position, I believe, in the industry as the most vital organic innovator.

And in doing that, the question of R&D productivity is vital. The company has made great strides in recent years on sort of the portfolio approach. And certainly, some of the organization evolution that I've been leading is really designed to get after that responsive, more integrated product portfolio.

One thing I've tried to take a look at, because there is so much innovation, is a crisper definition of the difference between what's in our product development pipeline and maybe what's in our research pipeline. And the good news is, there's a lot happening on both scores.

Just to make sure that we get increased visibility as to our near-term pipeline, but also we're making the right bets to ensure bigger innovations down the road.

As part of that, and looking at both the combination of our Instruments or LC and our MS Instruments, as well as our applied technologies, certainly, the market does appear to be tilting towards an increasing appreciation for the strength we bring across all of those categories and the more integrated view of our product portfolio and so, that's certainly feedback I've heard from many customers and the dialogue internally and I think the team's making great progress.

I also want to comment on TA, because some of what I just mentioned in terms of the instruments refer to the Waters products but on the TA side, the Discovery series that I mentioned in the call has been long coming.

It's beginning to show its promise in the marketplace and while TA has also benefited from some modest tuck-in M&A over the past, I think this cycle of innovation's going to make a big difference as well..

Great. And then just one clarification the $3 million in facility expansion that was called out, is that at all tied to the Health Science initiative? I know you've talked about new manufacturing to meet medical device requirements. I'm just wondering if that feeds into that..

Hi. Tycho, it's Gene. That is more tied to an updating of our headquarters facility here in Milford. We've had a plan over the last two or three years to try to use space more efficiently at this campus and that's a continuing effort..

Okay. Thank you..

Thank you. And our next question comes from the line of Derik De Bruin from Bank of America. Your line is now open..

Hi. Good morning..

Good morning..

Morning..

Hey, a couple of questions. So, I'm curious about the gross margin. You noted that strength in the instrument business was in the workhorse chromatography, so I assume that's Alliance which I believe is a relatively high margin product, and then you had a high consumables mix this quarter.

The gross margin was a little bit lower than where I thought it was going to come in.

So, could you sort of walk through the dynamics on what was going in, the give and takes?.

Sure, Derik. Maybe I'll make a quick comment, and Gene can add to it as well. When we think about the gross margin, obviously, at the very top of it is our ability to maintain price. And that came up earlier in the call. And so, certainly our pricing was strong in the quarter, particularly around our recurring revenues.

And, really, what you refer to as a positive mix was offset by some currency headwind, as – pretty much as we expected, but volumes and factors like absorption were very much in line.

So, this gross margin was actually very much in line with what we expected and should correlate pretty well to the expectations we've laid out for the rest of the year..

Great..

Hi, Derik. This is Gene. I mean, one of the things on the gross margin side is that the first quarter of 2015 was kind of a hard quarter to replicate. At the end of the (32:17) year last year, we had gross margins that were around 59%, and that's what we delivered in the first quarter last year.

And historically, our high-margin quarters are later in the calendar year as we do a better job absorbing some of our fixed expenses. On the gross margin side, as well as almost in every attribute, the first quarter of 2015 was a little bit of a point off the line.

I think that the 58-ish percent gross margin that we delivered in the first quarter is consistent with a full-year outlook that would bring you up to 59% for the full year, with stronger gross margins anticipated in the fourth quarter..

Great. And just one quick follow-up, you did mention currencies, obviously, Japan's rebounded off of what was some doldrums last year, and the yen's rebounded. Can you sort of talk about Japan, and sort of like the yen pull-through? Thanks..

Oh, yeah. Just so you know that in the guidance that we gave, we were looking at a yen of about ¥109. It's a little bit higher than that today. We had a strong quarter in Japan, with Japan up 8% in the first quarter. So, certainly that is a little bit of a tailwind for us as we look at FX dynamics moving through the year.

On the other hand, we have some secondary currencies that have been a headwind for us. And those currencies are in countries where the business tends to be a little bit lumpy.

So, there's a little bit of conservatism in our forecast, anticipating that the tailwind that we get from the stronger yen could potentially be largely offset by some continuing headwind from some of these secondary currencies. But, frankly, it's a hard thing to call..

Great. Thank you very much..

You're very welcome. Thank you..

Thank you. And our next question comes from the line of Steve Beuchaw from Morgan Stanley. Your line is now open..

Hi. Good morning and thanks for taking the questions. One, my first question is actually on China. Really strong balanced trends there. It seems like coming in to 2016, Waters and perhaps others had pretty strong backlogs in China.

Could you speak to the relationship here between new order growth and revenue growth in China?.

Yeah. Steve, I think that's probably a level of detail that we don't really want to get into too much. And obviously our whole goal is to make sure that our sales growth is balanced over time with our orders growth.

And there is a longer pipeline in China than in other geographies for a variety of reasons, but I think on the whole, the results that we're reporting here on the sales line reflect what's happening on the underlying order side as well..

Got it. Thank you. And then just one follow-up on the pharma business. Could you speak to how you're seeing growth evolving this year, specifically in small pharma and biotech? I heard a comment on the strength in the prepared remarks, but I wonder if you could compare and contrast it to what you saw, maybe second half 2015? Thanks..

Yeah. No, thanks. I think the trends, Steve, are pretty similar to what we saw over the course of 2015 and particularly in the back half, and that is a reflection of the greater diversification of the pharmaceutical customer base, both within these categories of traditional large multinational pharma, but also biotech, generic, specialty, et cetera.

In fact, just as a point of reference, if you look at our top accounts, our larger traditional accounts, they grew more in the low- to mid-single-digit range versus the bigger parts of our growth which came from some of those other pools.

And it's not just a company diversification, if you will, or a customer diversification, there's also geographic diversification.

For example in the generic business, there is a very strong presence in India, as well as different parts of Europe, and even a visit I had in Canada, where there is a tremendous amount of innovation and growth and scale in that generics category and even some green shoots in the biosimilars category.

So, it continues to impress me as I get out to see customers that some of the old divisions maybe, between who you'd expect to be developing small molecule drugs and larger molecule drugs, those lines are blurring. And the level of competitive intensity is high in that field, the level of innovation is high, but it's a more balanced approach.

So, we obviously watch this closely. I'm continuing to try to get even more deeper, more granular understanding as to the dynamics and the sustainability of this market, but it does appear to be a very different market than what it's been in the past..

No question. Thanks, Chris..

Thanks..

Thank you. And our next question comes from the line of Ross Muken from Evercore ISI. Your line is now open..

Hey, guys. So, I'd love a little bit more color on sort of the generic pharma emerging markets CRO demand front. We've seen, on the generic side, pricing destabilize here the last three or six months.

So, I'm curious with some of the vendors struggling a bit, how you think about that at least from a CapEx perspective? Obviously on a units perspective, it doesn't really influence the recurring revenues much.

And then, specific to maybe India and then sort of the CROs, with some of the currency volatility and then, in general, some of the struggles they've had on the FDA side.

Again, how are you thinking more on the CapEx side of demand there? It seems like the business has been pretty resilient despite all the noise?.

Yeah. No, Ross, I think that's a good word, resilient, in terms of how this market appears. And again, I'm pretty new in understanding this and spent time in some of these markets to understand exactly your question.

At the end of the day, there is some competitive volatility in that market, and I've certainly had the chance to learn about different facets of that, whether they're American companies participating there or Indian companies, or Canadian companies, et cetera.

But at the end of the day, if the pill count is rising, and the underlying operational activity is there, which it certainly is, then that's going to translate into that resiliency or that stability in the end market.

Obviously, as you point out, the regulatory bar continues to rise for generic drug manufacturers particularly those serving the United States who are operating outside the United States and some of our competitive advantages in terms of our informatics are in power, chromatography data systems, for example.

And what we've been able to supplement on the service side in terms of helping companies through their growth to meet regulatory compliance has all been positive factors in our device utilization. Our market share tends to be pretty high in some of these methods and in some of these markets and we don't take that for granted.

We fight for it every day, but we continue to see this as a good opportunity for growth and by the way, that's resulting in some very positive things for the healthcare system overall and greater patient access to medications and therapies. So, it's good business..

And how are you thinking about where you're going with gross leverage over time. I mean, obviously, Waters has had sort of a trapped cash issue like many and you've obviously solved it via borrowing and then being able to continue to repurchase stock.

I think we're pushing at some point two-and-a-half times on the gross side, I mean, where do you think that can go comfortably and then does it make you think differently since you've been there a bit about M&A, ex-U.S.

in terms of unlocking some of that trapped cash overseas?.

Yeah. It's an important question. Obviously, we watch this closely and I'm devoting my energies over time and my CEO voice to responsible tax reform so, that we can have policies that allow us to utilize our cash better globally and to strengthen our country and our economy and that's the important message for all of us.

But we think this is a very manageable situation. We do have capacity in the leverage metrics that you identified. And I don't see this issue compelling us to a different M&A strategy than we have.

I mean my view on M&A strategy is very clear which M&A is a tactic for us that would be utilized for the appropriate business strategy if we see the right opportunity that can make us better and stronger and enhance the value of our products for our customers in our chosen markets.

We'll do M&A but it's secondary to our internal innovation program and certainly not driven by balance sheet factors like you mentioned..

Great. Thanks, Chris..

Thank you. And our next question comes from the line of Doug Schenkel from Cowen. Your line is now open..

Hi. Good morning. My first question is I was hoping you could help us work through the components of the EPS guidance change for the year. You increased EPS guidance for the year by $0.075 at the midpoint. I estimate that you get about $0.05 from tax and interest expense changes. FX seems to be about $0.08 to $0.12.

So, it seems like there has to be some offset here. You didn't increase constant-currency revenue growth expectations for the year.

So, is the offset here all increased operating expenses?.

Yeah. I'll comment on that. I think your first observation, Doug, is accurate that obviously, the FX environment has changed. We started the year anticipating that the FX headwind in terms of our number of cents on EPS would be $0.15 or $0.16. And we saw around $0.08 of that in the first quarter.

We're anticipating that that would be the lion's share of the FX headwind that we encounter for the full year. And I think as you correctly noted that there is an expectation that the amount of operating leverage that we get for the full year will not be the same level of operating leverage that we delivered in the first quarter.

We do know that we have expenses coming as we go into the second and third quarter associated with what we hope to be very exciting new product launches. There'll be more material expenses, there'll be more marketing expenses associated with that.

And if you do a rough calculation, you'd see that our full year EPS guide doesn't really have baked into it the 200 basis points of leverage that we delivered in the first quarter on an organic constant currency basis but much more moderate.

So, there is an anticipation that operating expenses will increase as we move through the year and the basis of this increase is primarily new product launches that are planned as we move through the year..

Okay.

But just to be clear, did you increase your plans for operating spends relative to where you were at the beginning of the year or are expectations the same today as they were three months ago?.

Well, the expectations are roughly the same, Doug. It's just that we were a little bit more efficient on the expense side in the first quarter than we anticipated originally and we benefited from that in the first quarter's results. But our expectation is that we will execute on the plan as articulated on the last earnings call..

Okay. And my second question is just related to TA sales. You noted that they stalled a bit due to the introduction of new products. Any chance you would quantify and relatedly maybe provide backlog data as a way to frame underlying demand? Thank you..

I think we probably stop short of providing that kind of information, just to embellish a little bit on my comments, Doug.

We did make a very calculated decision during the middle of the quarter when we saw some of the strength in some of our other sectors like pharmaceuticals to take advantage of the platform we had at Pittcon, which is an important meeting to talk more openly about our pipeline there.

And in terms of the effect on TA, it was material to TA, but I think balancing the small hit we took in Q1 on TA is a encouraging set of quoting activity, demoing activity, and ordering activity that will begin to show later in the second quarter.

But I'd stop short of providing backlog data other than to say our overall year, we probably have a higher confidence in TA based on the actions we took in Q1..

Okay. Thank you..

And our next question comes from the line of Bryan Brokmeier from Cantor Fitzgerald. Your line is now open..

Hi. Good morning. So, India has now had strong quarters for the past eight quarters. That's, of course, after a prolonged period of weakness.

How much longer can India keep up that strong growth? How much pent-up demand is there in the market?.

Good question, Bryan. I wish I had a great answer to that, and I hope there is quite a bit more.

Obviously, we – like I said earlier in the comments on the generic market which is driving this – the signs are for continued stability in that market and obviously there's other factors in India which have occurred over time like currency shocks and things that effect local companies and those dynamics that you can sometimes never exactly predict.

And so, you can't ever be too sure, but we're just heads down focused. We've got a very strong experienced team in India that enjoys very high market share in those chromatography systems. We're obviously trying to invest in new growth engines, as well, to balance that over time.

The food safety market happens to be one example there in India that we're interested in. But I'm encouraged by what I see as a broader trend in pharmaceuticals towards the generic marketplace and the global nature of that, that hopefully will support continued strong growth in that segment for us..

Okay.

And for the overall biopharma market, did you – was the strength consistent throughout the quarter? Did you start to see any tapering as you close out the quarter?.

No. I don't think there's any particularly noteworthy trends one way or another during the quarter..

Okay. Thanks a lot..

Thanks, Bryan..

Thank you. And our next question comes from the line of Tim Evans from Wells Fargo. Your line is now open..

Hi. Thanks. This is Sara Silverman on for Tim. I just wanted to ask you kind of a broader question, Chris.

With another quarter under your belt, do you have a better feel for any adjustments you could foresee making to Waters' overall strategy that you could share with us?.

No. That's a fair question. And I guess, I'm continuing in a process, Sara, I'd say of continuing to assess the company and obviously these customer interactions and my knowledge of the marketplace grows as each quarter goes by. From a high-level standpoint, I'm encouraged by the fact that the markets that we participate in are quite attractive.

Of course, they're going to have their various cycles but over the long term, I do see these as attractive markets and I really am gaining a deeper and deeper appreciation and everything I've learned reinforces the unique position we have in the industry in terms of our focus and our record and our desire to produce industry-leading organic innovation.

My first priority as I go through this is to really put a lot of definition around our core business and job one in strategy is always make sure you're maximizing your performance and potential in your core business and we love our core and we'll continue to seek first to optimize that.

Beyond that, it's really a matter of gaining more and more clarity on where we should see upside growth opportunities in terms of some of the growing markets, new markets, and even geographic markets and I think some of the themes we've talked about even in some of these calls reinforce what those are.

At the end of the day, we are taking a pretty deep and structured and thoughtful approach to this planning process and I'm energized, the organization's energized and what I expect to be able to report on in the future is just higher degrees of clarity on priorities around the markets, our chosen markets that we're serving, our product plan and the capabilities that we want to develop in the organization to get there.

So, I don't think I've seen anything that pulls me off of my view of this business and the potential of the business. I'm very excited about the potential for Waters and making a big difference in the world and continuing on our focused innovation pathway..

Okay. Great. Thanks.

And just one quick question, back to the strength in Japan, could you tell us a little more about what the drivers were there? And how sustainable you think that is?.

Sure. Japan is a great market for us. It's a big market for us. And in fact, I had the opportunity to visit Japan since we've spoken last.

And what I saw there was a team with just tremendous focus and really kind of zoning in on some, I think, some good market share opportunities in LC, principally behind our Empower Chromatography Data System platform and a lot of those regulatory factors that are important to those customers.

I also see an opportunity in the triple quad business where we have a little bit of a lower share but some newer products and also some market opportunity. The growth in the quarter there was broad based, as we pointed out. Pharma, in particular, was strong, had maybe a little easier comparison but had good year-over-year growth.

And – but the end markets there were reasonable. So, Japan, historically, has been more of a developed market, more mid-single-digit type growth, low- to mid-single-digit type growth. And so, when we get a quarter like this out of Japan, we're excited.

I don't necessarily expect that type of growth rate to be the permanent growth rate in Japan but we do expect to be very competitive in that market and we've got a great team there..

Great. Thank you so much..

Thank you..

Thank you. And our next question comes from the line of Dan Arias from Citigroup. Your line is now open..

Hi. Good morning. Thank you. Chris, if you just strip out the impact of new products on TA, can you comment on how you're feeling about the outlook for the industrial markets right now? It would be helpful to just get some color on the different segments of the customer base there in terms of environmental, chemical, food, et cetera..

Yeah. It's a good question. I mean, overall, the industrial markets – there is pressure on these end markets, as you know, from just studying the general economy. The comps were a little tougher in the first quarter, get a little bit easier over the course of the year, generally.

And obviously, one of the big factors in our overall industrial outlook is the DSC and the TGA.

In particular, the level of performance around sensitivity and resolution of those DSC and TGA products is going to impact a number of their end markets, particularly, for example, high-performance industrial polymer markets, aerospace, semiconductors, some of those types of markets.

But I think another market that is beyond the traditional thermal analysis market in TA that's pretty interesting to us is rheology.

I've actually spent some time getting to know some players in the rheology segment of the market and am pretty encouraged by the breadth of that opportunity, and particularly as we further integrate some of our new technology that we picked up through acquisition in rubber rheology.

So, TA is a business that's characterized by a very broad customer base, smaller deal sizes. And while they are obviously heavily entrenched and tied to the industrial markets, we do, obviously, try to subset that market effectively and make sure we're pouring resources into some of those areas that we think can give us growth..

Okay. That's really helpful. Thanks. And then, if I just think about the comment on growth in the regulated markets, are you able to sort of talk to the pace of transition of customers from HPLC to UPLC at this point? I'm just curious whether that conversion rate there is more or less steady state or whether that's picked up for one reason or another..

Yeah. That's something I'm trying to understand, Dan, as well. And from my perspective, it's a relatively steady transition, and Gene may want to add more on this. It's one of the reasons that we are so excited about our ACQUITY Arc platform as kind of a bridging technology to try to enhance that transition over time.

We fully recognize that there's a large world of HPLC out there that we need to continue to serve well, particularly around some of the more routine testing. But over time, we I think are doing a better and better job of selling the benefits of UPLC technology and providing our customers more pathways to get there.

So, hopefully that's a trend that we can continue to rely on.

I don't know, Gene, if you want to add to that?.

Yeah, Dan. I would agree with everything that Chris said.

And just remind everyone that UPLC is a fundamental chemistry technology, and that one of the best ways to look at the conversion or the adoption rate of UPLC is to monitor the consumable business associated with UPLC, and what we've seen is underlying consistent growth, and it's actually very encouraging.

The adoption rate of the technology has been more slow and consistent and steady than we anticipated 10 years ago when we first launched UPLC. But it's actually been a nice core growth driver for the overall corporation's business..

Thanks, Dan.

And maybe we have time for one or two more questions?.

Thank you. And our next question comes from the line of Jeff Elliott from Robert W. Baird. Your line is now open..

Yeah. Thanks, guys.

Gene, when you look at the recurring revenue growth, the strength there, I guess, is there a way to get more granular on the drivers there, whether it's price or kind of the same-store sales numbers or new products? Is there a way to kind of dive into that? Really, what I'm trying to get at is to better understand how sustainable that level is..

Yeah. Jeff, maybe I'll make a quick comment, then Gene can. In terms of breaking apart the recurring, again, you have to break it down by service and by consumables. And certainly, the factors you mentioned are all elements we look at. We try to enhance price.

We want to make sure that on a same-store we're actually building market share, if you will, on our columns, in the installed base, but also as we just talked about in UPLC, the transition from HPLC to UPLC and the higher attach rates we get with UPLC and the value of those columns is definitely a factor that we try to break down as well, which gives us some comfort for the sustainability.

On service, it's really a matter of continuing in all geographies of the world to enhance our offering and try to get that more and more reflected in the contracted service plans, which is a key metric we look at in terms of what by geography and really by type of customer.

And on top of that, you've heard me talk about the customer experience, and we rigorously measure loyalty and the Net Promoter Score and our customer experience, which is highly correlated to increasing net service lines. So those are the factors I'd say that we look at mostly..

Okay. And then just a follow-up there on the attach rates, the UPLC attach rates, can you remind us kind of where you are today and kind of how that's strengthened over the past year? Thanks..

Yeah. I mean, the attach rates for UPLC are nicely over half, more in the 60%-ish range and that's very strong and it's a multiple or so higher than on the HPLC..

Thank you. And our next question comes from the line of Mira Minkova from Stifel. Your line is now open..

Hi. Thanks for taking my question. Just to go back to the pharma markets for a second. I think I heard some comments earlier that your guidance, Gene and Chris, for the remainder of the year assumes more balanced growth over the remainder of 2016 across the end markets.

As you mentioned, that academic and the government particular should pick up because of the NIH budget.

Are you assuming a moderation in pharma? How do you think about pharma for the remainder of the year?.

Yeah, that's a fair question, Miroslava, and certainly we are making assumptions that give us the balance because of natural questions in the market and while we do certainly expect the pharma market to continue to grow at above our overall company growth rate, it's fair to say that we don't have unrealistic expectations in terms of the type of growth rates in the market we've seen in recent quarters.

And so, I think we are taking that balanced view and looking at that portfolio of end markets to converge somewhat over the course of the year..

Okay. Thank you. And on the – just to be clear on the TA DSC line.

When do you roll it out and is that the back half of the year impact of the numbers or is it more of a 2017?.

Well, hopefully, it'll have an impact in both of those periods. The rollout begins in the mid to later part of the second quarter. And so, we expect it to first really be seen in a little bit in the coming quarter but in the back half of the year.

And obviously when you roll out a new platform like that and look at your installed base both for upgrade as well as new placements, that is a multi-quarter, if not multi-year effect. So, hopefully, we'll see the benefit of that over the course of 2017 and even beyond..

Okay, great. Thank you very much for taking my question..

Thanks. I think we're over time but we do appreciate all the great questions. And so, thank you very much for being part of the call. I've certainly enjoyed getting to know you over the last six to eight months and look forward to our continuing productive dialogue.

So, on behalf of the entire management team, I'd like to thank you for your continued support and interest in Waters. We do look forward to updating you on our progress during our Q2 2016 call which we currently anticipate holding on July 26, 2016. Thanks very much and have a great day..

Thank you, speakers, and that concludes today's conference call. Thank you all for joining and you may now disconnect..