John Lynch - Waters Corp. Christopher James O'Connell - Waters Corp. Sherry L. Buck - Waters Corp..

Tycho W. Peterson - JPMorgan Securities LLC Daniel Arias - Citigroup Global Markets, Inc. Doug Schenkel - Cowen & Co. LLC Bryan Brokmeier - Cantor Fitzgerald Securities Amanda Louise Murphy - William Blair & Co. LLC Isaac Ro - Goldman Sachs & Co. Jack Meehan - Barclays Capital, Inc. Steve C. Beuchaw - Morgan Stanley & Co.

LLC Luke Sergott - Evercore Group LLC Brandon Couillard - Jefferies LLC Tim C. Evans - Wells Fargo Securities LLC Derik de Bruin - Bank of America Merrill Lynch.

Good morning. Welcome to the Waters Corporation First Quarter 2017 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, and good morning to everyone, 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 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 2017. 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, 2016 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 July 2017. During today's call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the mostly 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 titled 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 2016. 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.

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. Along with John Lynch, joining me on this morning's call is Sherry Buck, Waters' Chief Financial Officer. During today's call, I will provide an overview of our Q1 operating results as well as some broader commentary on our business.

Sherry will then review financial details for our reported results and provide an update on our full-year 2017 financial outlook. And as always, we will conduct a robust Q&A session.

Jumping right into our operating results, I'm very pleased to report that our first quarter exceeded our expectations with continued strong sales growth from pharmaceutical markets augmented by a pickup in our industrial business.

From a product perspective, we experienced balanced growth across our product categories including instrumentation, chemistries and service. Geographically, strong growth in Asia and Europe outweighed a slower start to the year in North America.

Overall, the first quarter results revenues grew 6% even after the effect of two fewer days versus the prior period. Looking at our P&L, disciplined spending and continued judicious use of capital resulted in growth in adjusted earnings per share of 9% before consideration of new stock compensation accounting rules and 16% after the change.

Taking a closer look and starting with a review of our market categories at the corporate level. Sales to our broadly defined pharmaceutical category grew 9% in the quarter.

Pharmaceutical demand continues to be driven by macro trends of rising global regulatory standards, increasing worldwide patient access to medications, and growing volume of more demanding biologic drug testing. We continue to benefit from the evolving diversification towards generics and biologics in our pharmaceutical customer mix.

In the quarter, growth in biopharmaceutical markets was driven by large-molecule drug development applications in Europe and the Americas. Complementing this, growth from validated QC testing applications with a strong focus on data integrity significantly drove growth in China and India.

Sales to our worldwide industrial category, which includes the materials characterization, food, environmental and fine chemical markets, were strong in the first quarter, growing at 9%. This result continues the positive momentum that we saw in the closing months of 2016.

The industrial category is driven by growing global needs to characterize material properties across a wide range of industries, as well as expanding food testing regulatory trends.

While these end markets can experience variability quarter to quarter, we are encouraged by the improving market sentiment and believe we are well-positioned as a cyclical recovery in industrial markets appears to be underway. Looking at our government and academic category, we saw sales decline by 11%.

This follows solid mid-single digit growth we achieved in the fourth quarter of 2016.

As we've discussed before, the government and academic category is a small percentage of our overall business and quarter-to-quarter growth can be highly variable given the nature of government and academic purchasing activity and the typically high selling prices of the advanced systems that we promote into this end market.

Despite potential quarter-to-quarter variability, our expectations is for improvement as we move throughout the year. Now, I will review product line dynamics within our Waters and TA brands. Waters' instrument sales grew 6% in the first quarter with solid contribution from both our LC and LC/MS platforms.

We saw strong growth from our ACQUITY Arc and workhorse Alliance-based systems which are primarily used for regulated testing applications. Bench-top LC/MS systems that incorporated our Xevo family of Tandem Quadrupole mass spectrometers grew strongly in the quarter, particularly for biopharmaceutical applications.

We also experienced continued solid growth from the ACQUITY QDa which is setting the standard as customers take the opportunity to upgrade their large and growing LC base to mass detection.

Having now delivered thousands of QDa detectors for a broad range of applications, we are confident that our application expertise and industry-leading Empower software tailored to QDa methodologies affords Waters a distinct advantage in this high-potential product category.

Speaking of Empower, in March, Waters introduced Empower Cloud, a cloud deployable compliance-ready version of our chromatography data software. We have seen significant interest in this new embodiment of Empower, the gold standard for data integrity and operational efficiency for 25 years and counting.

As you are aware, recurring revenues, the combination of service and chemistry consumables, represent approximately 50% of our business. During the first quarter, we saw 6% growth in recurring revenues. Turning to our TA product line. We are encouraged by first quarter performance as revenues for TA products and services grew by 7%.

Instrument sales grew 11%, led by our new Discovery line of thermal analyzers introduced in 2016. Also at this year's Pittsburgh conference, TA launched the Discovery SDT 650, a simultaneous differential scanning calorimeter and thermogravimetric analyzer, which delivers unprecedented sensitivity and versatility.

Rheology products also performed well in the quarter with broad-based growth, including the acquired technology systems we have tailored for elastomer characterization. Finally, I will review our performance by geography at the corporate level.

As you know, we have a balanced geographic portfolio with Asia becoming a bigger part of our overall business. In the quarter, Asia continued to outpace the overall growth, led by strong double-digit sales growth in China and India. Within China, we saw impressive growth from pharma and industrial customers.

Looking specifically at the pharma category, growth drivers included new regulatory requirements by China's Food and Drug Administration, which focus on consistency of results and the integrity of data in generic drug evaluations, as well as growth in active pharmaceutical ingredient production.

Japan sales were in line with our expectations of a Q1 decline against a difficult base of comparison, particularly amongst pharmaceutical customers that generated very strong demand for our products in the first quarter of 2016. Revenues in the Americas declined by 2% in the quarter, with our U.S. sales down 7%. The decline in the U.S.

was most apparent in our small molecule pharma segment compared to strong double-digit growth in the prior year's quarter. Trends within the quarter suggest that slower budgetary releases partially accounted for the weaker demand. We saw improvement later in the quarter, as well as the opening weeks of this month.

We anticipate that our sales growth in the U.S. will improve throughout 2017 as we remain confident in the overall condition of the U.S. pharmaceutical and industrial markets. Europe was a strong contributor to the first quarter, growing 9% overall.

Strength in pharmaceutical end markets, accompanied by robust demand from industrial markets, offset weakness in government and academic markets. We saw broad-based demand from our pharmaceutical customers for both small and large molecule applications.

Demand from our industrial customers was strongest for materials characterization and chemical analysis. While we face a more difficult base of comparison in Europe as we move throughout the year, we are encouraged with the underlying demand dynamics and our operational execution in a complex environment.

Summarizing the state of our business after Q1 2017, our key growth drivers, including global pharma demand, Asia markets generally and the consistency of our recurring revenues, appear to be factors that will benefit our 2017 performance just as they did in 2016.

Furthermore, we are encouraged that 2017 should present us with improving market dynamics within our industrial materials base of customers. Added together, 2017 is off to a good start.

Stepping back and looking at the bigger picture, I'm encouraged that our results continue to reinforce the key messages and growth themes that we outlined at our comprehensive Investor Day recently held in New York City.

I'd like to thank everyone who attended or listened and take a brief moment now to recap the three key messages from the day that underscore our value creation model.

First, Waters is very well positioned in structurally attractive markets, headlined by leading and focused positions in the most demanding applications for pharmaceutical development and production, materials characterization and food testing. Second, Waters is a truly global company, serving an increasing broad, diverse and global customer base.

We are benefiting from strong and sustainable market trends, including growing patient access to medicines, increasing complexity of molecular structure in innovative drugs, rising measurement standards for high performance materials and increasing regulation around food safety and quality.

And third, Waters has a strong track record of delivering industry-leading organic growth driven by internal innovation, augmented by continuous operational improvement and ever judicious use of shareholder capital. Investor Day was a positive experience for us and hopefully a valuable addition to our proactive investor relations program.

We will continually strive to give you a comprehensive understanding of our company and ongoing insight into how our leadership team approaches the Waters business. And with that, I'd like to pass the call over to Sherry Buck for a deeper review of first quarter financials.

Sherry?.

Thank you, Chris. And good morning, everyone. We recorded net sales in the first quarter of $498 million, an increase of about 6% before currency translation, which reduced sales growth in the quarter by about 1%. This resulted in 5% reported sales growth. Our growth was driven by strength in our largest markets.

Both our pharmaceutical and industrial markets grew 9%, which was partially offset by an 11% decline in academic and government customers. Product line growth was balanced with total instrument sales growing at 7% and recurring revenues growth of 6%.

Recurring revenue sales were impacted by two fewer calendar days in the quarter which we estimate reduced recurring revenue sales by about 2% and overall revenue by about 1%. Breaking that down further, sales relating to Waters' branded products and services were up 6% while TAs grew 7%.

Combined LC and LC/MS instrument platform sales increased by 6% and TAs instrumentation system sales grew by 11%. As Chris shared, we are encouraged by the strong start in TA Instruments as we saw benefits from new products and more positive industry dynamics. Our total recurring revenues associated with both Waters and TA products grew by 6%.

Looking at our growth rates in the first quarter geographically and before currency translation, sales in the Americas were down 2% with growth at Latin America offset by a 7% decline in U.S. sales. European sales were up 9% with Western European sales growing double digits and Eastern European sales growing mid-single digits.

Sales in Asia were up 13%, led by strong double-digit sales growth in China and India, which were partially offset by an 8% sales decline in Japan. Now, I'd like to comment on our first quarter's non-GAAP financial performance versus the prior year.

Gross margins for the quarter came in at 57.6% as we had expected compared to 57.7% in the prior year's quarter. Positive mix dynamics were offset by currency headwinds. Moving down the first quarter's P&L, operating expenses were up 6% on a constant currency basis.

Foreign currency translation reduced operating expense growth by 4% on a reported basis. These spending levels and timing were consistent with our first quarter plan and the seasonality of our business. We expect operating expense growth rates to moderate on a full year basis and grow at a rate lower than our top line.

On the tax front, our effective operating tax rate before the effects of the new stock compensation rule for the quarter was 14.7%. This is the result of a mix of our legal entity profits in the quarter and we expect our full-year tax rate to normalize. In the quarter, net interest expense was $5 million, down slightly from prior year.

Our average share count came in at 80.8 million shares or approximately 1.2 million shares lower than in the first quarter last year. This is a net effect of our ongoing share repurchase program. During the first quarter, we bought 540,000 shares of our common stock for $82 million.

Our non-GAAP earnings per diluted share in the first quarter was up 16% to $1.46, in comparison to earnings of $1.26 last year. On a GAAP basis, our earnings per share were $1.31 versus $1.15 last year. Both our non-GAAP and GAAP earnings include a benefit of $0.09 resulting from the new stock compensation accounting rules.

Excluding the benefit of the new stock compensation accounting rules, earnings per share increased 9% on a non-GAAP basis and 6% on a GAAP basis. A reconciliation of our GAAP to non-GAAP earnings is attached to our press release issued this morning.

Turning to the balance sheet, cash and short-term investments totaled $3 billion and debt totaled $1.9 billion, bringing us to a net cash position of $1.1 billion. We define free cash flow as cash from operations less capital expenditures and excluding special items.

In the first quarter of 2017, free cash flow came in at $156 million after funding $18 million of capital. This represents a strong start to the year and the highest free cash flow quarter in our company's history. Accounts receivable days sales outstanding stood at 84 days this quarter, which is comparable to Q1 of last year.

In the quarter, inventories increased by $17 million in comparison to the prior quarter. This is in line with typical seasonal patterns. As we look forward to the balance of the year, I'd like to share our full year 2017 guidance.

Our outlook generally assumes continued global growth and demand from our pharmaceutical end markets, year-over-year growth in our industrial markets, and consistent growth in our recurring revenue. These dynamics, along with our first quarter performance, support a strong mid-single-digit, constant currency sales increase in 2017.

At current rates, currency translation is assumed to reduce 2017 sales growth by about 2%. Our outlook for gross margins for the year is consistent with our previous guidance in the range of 58.5% to 59%, as higher volume and manufacturing efficiency gains are expected to be offset by negative effects from foreign currency translation.

Our plan for the full year is to continue managing operating expense growth at a rate that is less than our sales growth. Moving below the operating income line, net interest expense is expected to be approximately $23 million.

Next, to provide as much transparency as possible, I'd like to share some insights on how the new stock compensation rule will affect our operating tax rate and guidance. The impact of the new accounting standard will reduce our current full year non-GAAP operating tax rate from about 14% to approximately 12%, which is approximately a 2% reduction.

Currently assumed in our full year earnings per share guidance is a $0.15 benefit from the decrease in our tax expense. This is comprised of the reported Q1 impact of $0.09 and an assumption of $0.02 in each of the remaining quarters of 2017. Quarter-to-quarter variation reflects the timing of actual stock option exercises and our stock price.

Our 2017 guidance regarding capital allocation assumes continuation of our share repurchase program through 2017 at a rate that will result in an average diluted 2017 share count of about 80 million shares outstanding.

Rolling all of this together and on a non-GAAP basis, full year 2017 earnings per fully diluted share are projected to be within the range of $7.20 to $7.40. Because of the number of moving parts since our last earnings call, I will summarize for you the three key items that have increased our full year guide range.

Recall from our year-end 2016 earnings release, we provided a guidance range of $6.85 to $7.10. The first item impacting our full year earnings per share guidance is FX.

At current rates, foreign currency is assumed to negatively affect full year earnings per share growth by approximately 3%, which is about 1% better than we assumed in our January 2017 earnings call. Second, the updated guidance reflects our strong first quarter results and confidence in our assumptions for the balance of the year.

And, third, as mentioned previously, we have assumed a $0.15 benefit to our full year earnings per share from the decrease in our tax expense due to the change in accounting for the tax benefit on stock compensation. Looking at the second quarter of 2017, we expect strong mid-single digit constant currency sales growth.

At today's rates, currency translation is expected to reduce second quarter sales growth by about 3%.

Combining these top line factors with a moderate increase in expenses and assume $0.02 of tax benefit due to the new accounting standard and approximately a 3% negative impact from currency translation at current rates, we estimate second quarter earnings per diluted share in the range of $1.65 to $1.75. Now, I'd like to turn the call back to Chris.

Chris?.

Great. Thank you, Sherry. As we move through 2017, we will continue to emphasize execution in our core business and believe that trends in our key business drivers suggest a continuation of solid operating performance.

As always, we'll strive for balance in our results and we'll seek to cover unexpected changes in our assumptions with the breadth of our growth opportunities. Additionally, as we have consistently stated, we will seek to balance growth, operating leverage and investment in the business. With that, we'll now open the phone lines for Q&A.

We are rarely able to get to everyone's questions, so please limit yourself to one question and one follow-up. And if you have additional questions, please contact our Investor Relations team after the call.

May I have the first question please?.

The first question comes from the line of Mr. Tycho Peterson from JPMorgan Chase. Your line is now open..

I was wondering if you can just comment on linearity in the quarter. It sounds like U.S. pharma improved exiting the quarter. So, maybe if you could just talk to the trends there, what your expectations are.

And then, similarly on industrial, if you could just talk about linearity there throughout the quarter and how we think about the slope of the recovery heading into 2Q and the rest of the year?.

Sure. Thanks, Tycho. Yeah, let me just maybe put a little more color on the comment we made on pharma. We did get off to a slower start in the U.S. in pharma, and part of that reflects a very strong comparable from a year before. If you recall last year, U.S. pharma grew somewhere in the mid-teens.

And so, when you normalize more of a stacked comp look, it didn't seem as severe, but we did notice relative sluggishness in budgets opening up in particularly large pharma companies in the U.S. And that did improve over the course of the quarter.

And as I noted, as we look in the first few weeks of the second quarter that recovery pattern has continued. Of course, all that's in context of a very strong pharma result worldwide, where we grew our pharma business 9%. And I think that just reflects the global nature of the business. We're less and less dependent on the U.S.

We're more and more benefiting from some of the broader global trends. And even looking at Europe with very strong pharmaceutical performance, a lot of times, business does tradeoff between the U.S. and Europe for some of the global companies. So, it's hard to completely map all of that out. But we do put that U.S.

pharma result in the right context, both as a comparison as well as to what's going on more broadly in the global picture. Industrial is the second part of your question. And I would say the pattern was probably a little more stable in industrial overall. We had a great industrial quarter, as we pointed out with 9% growth worldwide.

Again, that was led by Asia and Europe overall with sort of reasonable expectations in most geographies looking forward and this has been a big thing we've keyed on over the course of last year to see when this cyclical recovery may be occurring and it did definitely feel better across the board in Q1 than at many times over the prior year.

But obviously, we're continuing to watch that closely..

And then if I could ask one follow-up on academic, you recovered in 4Q after a difficult 3Q and then it was down again this quarter.

Could you just get us comfortable that that's all kind of market demand issues as opposed to anything competitively?.

I think our experience in academic, and we've been through this a couple of quarters now in a row in this discussion, is exactly what we've said. It's a small business. It's in the low teens percentage of overall revenue. It's lumpy by its nature. It's not just lumpy overall, but it's lumpy geographically. We, for example, the U.S.

government and academic business was actually very reasonable, and some of the softness was in Europe this quarter as I pointed out certainly overcome by very strong pharma and industrial demand in Europe. And so, it does move around quite a bit. We've not changed any of our models or expectations for that business on any rolling period.

So, quarter-to-quarter variability in government and academic just doesn't surprise us one bit. We definitely look to long-term trends in that area..

Okay. Thank you..

Thank you..

Our next question comes from the line of Mr. Dan Arias from Citi. Your line is now open..

Yeah good morning. Thanks. Chris, just following up on industrial, if we just look at the rebound. Are you feeling like overall, it's fairly balanced in terms of U.S. versus Europe or does what you saw this quarter kind of make it seem like things are a bit farther along overseas for you guys.

I guess, where are you seeing the most improvement?.

Yeah. Thanks, Dan. As I alluded to, the stronger part of the industrial was in the international markets, and in Asia and in Europe, in particular, was better than the U.S., although we're certainly seeing green shoots in most markets around the world.

Clearly, the industrial business is made up of a couple of important components that we watch carefully. The food business, in particular, is one that we highlighted at Investor Day where we're seeing great stability of that business really all over the world.

And then, we're seeing better performance in really more the materials side, as well as the industrial polymer side that crosses over both the TA and the Waters franchises..

Okay. And then, maybe on TA, do you feel like you saw kind of the full force of the Discovery launch this quarter? Are you expecting sales and placement activity to kind of ramp as we get closer to the middle of the year? Just kind of curious whether 1Q was a full-hit-the-ground-running quarter, so to speak, on that portfolio. Thanks..

Thanks, Dan. That's a good question, and thanks for pointing out Discovery because that is a multiproduct family that is still very much coming to market. I noted the new combination, DSC/TGA product that we launched, really, this quarter at Pittcon, so that's obviously very new. The first two launches last year are beginning to contribute.

The nature of new product launches in this field, of course, is that they do take time to get traction. So, no, I don't think actually we've seen the full benefit of the Discovery launch. Certainly, TA was a solid performance in Q1 and is benefiting from that technology.

And as we've said in the past, we're looking for a recovery in the industrial markets and hopeful that our strong product position puts us in a good place to take advantage of that growth. And that's – I think we saw signs of that in Q1, and I think we still have a ways to go on that..

Okay. Great. Thank you..

Thank you..

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

Good morning. My first question is on, I guess, generally speaking, the Americas. Overall, you were up against a favorable comparison in the U.S., but as you noted, this was not the case in the pharma end market. It sounds like Americas pharma was the key driver to the 2% core (30:23) revenue decline in the quarter.

What was Q1 growth by end market in the Americas? Because it does sound like there must have been some offsets there.

And were any end markets in the Americas notably impacted by uncertainty related to headlines coming out of Washington?.

Yeah. So, thanks, Doug. Good morning. I guess the one clarification I want to make on U.S. pharma is that the place we saw the most pressure, as I noted, was in small molecule. We actually grew in the biologic category, and we're really seeing a lot of good signs in that market.

We, as you know, at our Investor Day, pointed out our enthusiasm for the large molecule opportunity increasing. For example, the increasing uptick of LC-MS technology in regulated methods, not just in research methods. And so, some of those underlying trends are favorable and, like you suggest, provide puts and takes.

It's very hard for me to say whether the uncertainty in the U.S. kind of political realm, if you will, is affecting markets.

I mean, clearly, a lot of our major customers in both the pharmaceutical category and the industrial category, are paying close attention to evolving policy directions on tax and trade and healthcare and a variety of factors, and we do try to stay well attuned to that. And it wouldn't surprise me if there is some hesitation in the U.S.

right now generally, but again, it's our job to manage through that and we obviously, had great strength in Asia and Europe to offset that dynamic in the U.S. But nothing has really changed about our fundamental outlook for the U.S.

and a lot of the things that we expect over the course of the year to develop in terms of our business we think are still very much there. So, first quarter, as you know, is a small quarter. It tends to move around in terms of the assumptions we make going into the year, but we do expect greater balance and stability as we get through the year..

Okay. That's all helpful, Chris. Thank you for that. Just going back to the first part of the question, is it fair to say that given what we've talked about in terms of the U.S. pharma in the quarter and the fact that it rebounded late in the quarter into Q2, those are good signs.

As we think about the other end markets within the Americas, is it fair to say that they actually did grow in the first quarter, just going through the math, it seems like that would be the case.

Is that correct?.

I don't want to get too specific. Industrial was a little bit softer in the U.S. than it was in other parts of the world. And government and academic was actually reasonable in the U.S. So, it's a little bit of a mixed picture there..

Okay. And one last question. Going through the EPS bridge, Sherry, that was very helpful. Even going through that, it does seem like part of the driver has to be an assumption that top line growth is going to be a little bit stronger than what you had embedded into your guidance at the beginning of the year.

Is that – and obviously, that flows through to the bottom line providing a component of the EPS guidance increase.

Is that the case? And if so, is that largely attributable to what you're talking about in the industrial end market seeing some signs of improvement there?.

Yeah. So, I'd say our guide range as we walk through that when we guided at the beginning of the year, we talked about mid-single digits growth. And I would say, with the performance we saw in the first quarter with our strong performance in both pharma and industrial, that's giving us a lot more confidence in the full year.

And so, we're talking about a strong mid-single digits. And I'd say that's part of the flow through and the bridge for the earnings per share guidance..

Okay. Thanks again for taking the questions..

Thanks, Doug..

Thank you our next question comes from the line of Ms. Amanda Murphy from William Blair. Your line is now open..

Hello, Amanda? Maybe you're on mute, Amanda? Are you on the phone? Why don't we go to the next caller, then maybe we can pick up Amanda next?.

Thank you. Our next question comes from the line of Mr. Bryan Brokmeier from Cantor Fitzgerald. Sir, your line is now open..

Chris, you mentioned the strengthening industrial business and it sounds as though quite a bit of that is coming from the TA business but also from the Waters and with some contribution from the new Discovery platform. But you mentioned that there was stability in the food safety market.

Was food a bit softer than what you've seen over the last year or was that actually also growing strongly in the quarter?.

No. We had a good food quarter. Food has been a very consistent contributor.

The applied markets there continue to be buoyed by some of the factors we talked about in depth at our investor conference in terms of rising regulation particularly in Asia, increasing consumer demand for quality and purity in food supply and, frankly, an up-tiering of technology in a lot of those methods particularly in the research labs.

We definitely had strength across the core LC-MS workflows, particularly given our strong product position in the Xevo tandem quad. You'll recall last year, we launched the Xevo TQ-XS, and that complements the TQD and the TQ-S micro as probably the industry's strongest offering in that core tandem quad category for the applied workflows.

And I think that's put us in a great position in food, and we've seen consistently strong performance there including this quarter..

And looking at the large molecule drug market, are you able to tell, based on the sales cycle, the conversations you've had with customers or the types of systems that those customers are making.

Are you able to tell whether that is sustainable, given the current funding environment that they've encountered and whether those customers continue to have strong cash balances and the ability to continue making purchases regardless of whether there's any improvement in the capital-raising ability of these companies?.

It's a really good question. I think first of all, we've seen consistent demand in large molecule testing.

And as I alluded to earlier, that core LC-MS product position that we have and the increasing adoption of LC-MS methods in the regulated testing in the development and even getting now into QA/QC is a trend that I think belies some of the uncertain factors that you described. The diversity of innovation in the biopharm sector, I think, supports this.

It's not just the small sort of capital-dependent companies that are doing this work.

Really, a large segment of the innovator drug approach overall in companies large and small and through all the contract players and other new models emerging are all providing for a fairly broad, really, company set doing this work that probably provides more sustainability than, maybe, we would've thought in the past.

So anyway, we watch it carefully. It's an important market. And while the smaller companies can be lumpier, there's a lot more market participation right now..

Okay. Thank you very much..

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

Okay. I'll try this again.

Can you hear me this time?.

Yes, we can. Thanks, Amanda..

Sorry. I promise I was not on mute. Anyway, I did have a question about the CFDA. So, that's something that you said for a number of quarters now. So, I just want to get a sense of kind of what parts of the business that's driving – I'm assuming that there's some instrumentation component there and recurring revenue.

So, I just want to get a sense of that.

And then, also, just thinking about how long you think that might be a driver, where we're at there in terms of whether there's adoption in the front of it or whether there will be continued contribution from that over time maybe on the recurring revenue?.

Yeah. And so, just the first part, I want to make sure I heard you clearly.

You said the CFDA, the China FDA, right?.

Exactly. Yeah..

Yeah. So, it's a good question, and we think we're right in the heart of that opportunity. And we talked about this quite a bit in the past, where the 13th Five Year Plan of China, which is now more transparent and understandable by many, is clearly driving increasing requirements for data security and regulated methods.

Obviously, there's a large process going on in China right now with the large population and increasing patient access to medications and a desire on the part of the Chinese government to have local Chinese companies supply the bulk of that business and, furthermore, look to the future where they can become multinationals in their own right.

And so, from a technology standpoint, yes, there is a lot of instrumentation being sold but, really, at the heart of what's happening is the Empower Networks that we're selling.

We've long offered Empower software in local language within China, and we've got a team in China that has decades in experience with this particular software and the backbone for our overall infrastructure. In fact, I was just over in China a few weeks ago reviewing this exact question with the team directly and with key influencers in the market.

I think we – it's hard to predict what cycles look like or how long various investment periods last. But as that market gets bigger, it's our hope that this becomes a pretty robust and sustainable market opportunity.

And obviously, following the – the period of time during which big installations go in for instrumentation in software, you have follow-on opportunities in the recurring revenues of chemistry and service that we have a long way to go to develop..

Yeah. Okay. And then just a quick follow-up to that one. So then, can you just remind us then, I know you've talked about Empower a lot.

Just as that solution is adopted more and more what exactly that means from a P&L perspective? So – and obviously, you've got the benefit on revenue, but just can you remind us where – what that means for margins, et cetera?.

Yeah. I mean, like we've talked about in the past, some of our applied technologies, if you will, like the chemistries and the service and the informatics carry very favorable financial characteristics in terms of growth in margin relative to our overall portfolio.

And as we pointed out at our investor day, 60% of our revenue is accounted for by service and chemistry and informatics and that's a nice foundation for us to build on in terms of our unique P&L structure..

All right. Thanks very much..

Thank you..

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

Good morning, guys. Thank you. I want to come back to the academic end markets. I know we've cut a lot of this data a couple of different ways, but I was hoping maybe if you could look at it from the standpoint of how academic did between developed markets and emerging markets.

And I acknowledge you guys earlier said that the business is lumpy, but I just want to sort of parse out what's going on in emerging markets in the academic channel versus U.S., Europe, so to speak?.

Yeah. Thanks, Isaac. And, again, like I said earlier, this is a smaller market and tends to be highly variable, and that's true overall but also by geography. As I alluded to, U.S. was actually a modest positive in the quarter where Europe was more of a decline, of course, offset by all the great pharmaceutical and industrial business.

The emerging markets business is, again, relatively small in proportion, and that's a little bit of a mixed picture. It's very, very small in say, in India and in China. We've seen good performance out of that on a reasonably consistent basis.

So, again, we don't want to cut it too finely just because I think we could maybe draw the wrong conclusions because things tend to bounce back and forth quarter-to-quarter. What I tend to look at on that government and academic business is what does the rolling trend look like.

And I think if I look back at the rolling 12 months and what lies ahead, it does tend to smooth out over time. But for the full year, we definitely see opportunities based on our new product launches and look for more balance over that type of time period..

That's helpful. And then, just a follow-up on HPLC, interested in attach rates for consumables there. You've obviously had a very strong position in your live technology leadership over the last – for many years. And I think in the last couple of quarters, we've seen one of your major competitors on the com side get acquired.

So, you've got a little bit of shift in the competitive dynamics. Just wondering how you guys are managing through that and the extent which you see opportunity for improved attached rates. Would be interested in how you're seeking to do that. Thanks..

Yeah. Sure. I always see opportunity in attach rates. As you know, in HPLC, it's lower than it is in UPLC where our attach rates are 2X or more in UPLC, and that certainly relates to the high-performance nature of those chemistries and the more integrated workflows there where it's a little more plug and play in HPLC.

And certainly, to the extent there's disruption in the market with competitors going through various changes, that presents us opportunity. And so, we think our strength is our total package that we offer our customers, the consistency and reliability, and interoperability of our different system components. And we'll continue to key off of that.

And we always do set objectives to try to improve those rates. So at this point, we're just continuing to push the performance benefits of our chemistries and think we have competitive advantage in this area..

Thanks..

Thanks, Isaac..

Thank you. Your next question comes from the line of Mr. Jack Meehan from Barclays. Your line is now open..

Hi. Thanks. Good morning, guys.

I was wondering within biopharma in the Americas results, could you comment on the trends with CDMOs? And was that different than some of the purchasing from the small molecule customers during the quarter?.

The CDMO question is interesting. I don't really have the data to tell you whether specifically that customer category was where that fit in the spectrum.

I don't want to get into that level of detail here, but clearly the CDMO is a rising trend on both the R&D side but also on the manufacturing side, and our sales for that segment have been pretty robust through various cycles. It's still a smaller portion of our business but a rising portion.

CDMOs are way behind where CROs are in terms of the amount of outsourcing activity that they enjoy. But we see that continuing to rise as the larger pharma companies are increasingly looking at their models for flexibility. So, that's been a good segment for us. It was good in the quarter, but I don't want to put too fine a point on it..

Great. And then just wondering if you could elaborate a little bit more in the order book with industrial customers, how that trended in the quarter for both TA and then some of the non-TA products that go into that channel..

Sure. We don't really comment on orders between orders and sales. And we have a relatively good visibility into our pipeline through our bidding process and our order indications in our orders and so forth, and have confidence that our order picture is shaping up to support what we're trying to achieve on the sales side.

So, I don't – I'd rather not give out order numbers other than to say that we had a good quarter of orders as well just like we had for sales..

Great. Thank you..

Thanks Jack..

And your next question comes from the line of Steve Beuchaw from Morgan Stanley. Your line is now open, sir..

Hi. Thanks for taking the questions. Just really two clarifications. One is I would actually take the other side of Jack's question.

Do you have any sense, Chris, that over the last couple of quarters that the developers of biopharmaceuticals have become any more or less inclined to in-source or outsource R&D or are they doing more in-sourcing today than they were a couple of quarters ago? And then for Sherry, just a question on currency.

Could you give us – sorry if I missed this – but could you give us the growth of operating expense items excluding currency in the quarter? And can you give us a sense for how currency will impact OpEx over the balance of the year? Thanks a bunch..

Thanks, Steve. I appreciate the questions. First of all, just on the in-source, outsource. It's a really good question and I try to get my handle on the same question. I think that a couple of quarters' perspective is probably too short of a window to really see any meaningful changes in that model.

I guess if I look at it over more of a 12 or 24-month kind of period, I think the trend is unmistakable towards outsourcing, particularly in later-stage development and manufacturing.

And so, when I look at our business in that area, when I look at the success and the aggregation of some of the players in the CDMO market, that to me points to more and more uptake of those types of services, particularly as they have the ability to provide plug-and-play sort of comprehensive solutions to the pharma companies.

So, I wouldn't say that I've seen any change in that kind of broad trend in the last couple of quarters. But it is something that we watch closely because it's an important topic.

Sherry, you want to comment on FX?.

Sure. I think your question was around the operating expenses in the quarter. And our operating expenses overall in the quarter were in line with our plan. And on a constant currency basis, they grew about 6% versus last year. And our plans for the full year are to monitor our expenses such that they grow at a rate less than our top line.

And when you look at the FX impact in the operating expenses, it had a favorable impact, as you can see..

And then, sorry, currency impact on OpEx for the balance of the year or the year in total?.

We had expected it to be favorable but declining throughout the quarter, as we see the currency particularly in the pound kind of turn based upon last year's FX rates..

Okay. Thanks a bunch..

Thanks, Steve..

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

Hey, guys. It's Luke in for Ross.

I was just hoping you could break out what you expect for the end markets in your guidance for the year, just kind of how the trends have been changing within those markets?.

Yeah. So you said, Luke, you're dialing in for Ross..

Yes..

Thanks for the question. Yeah. In the end markets, again, as I sort of alluded to in the script, we generally assume over a long-term outlook like over the course of the year that some of the quarter-to-quarter variability factors that you see in any given quarter just like you did in Q1, tend to smooth out.

And so, we do probably expect even more balance over the course of the year. But really, the kind of strong poles in the tent that we will continue to rely on for our overall performance appear to be reasonably stable versus what we've been experiencing in terms of strong pharma, better industrial.

Obviously, Asia leading the way with increasing balance in the developed markets and with a relatively conservative outlook for government and academic.

And don't forget, in all that modeling, the stability of our recurring revenues that were, as Sherry pointed out, a little bit affected in the first quarter with the days, but certainly remain an important part of our overall growth story and give us that reliability..

Okay. Great. And I guess, following up on Amanda's question on the China pharma market. I mean, it seems like the pharma piece has been growing gangbusters over the last two years almost for you guys.

Can you just talk about how this portfolio differs than what your developed market portfolio is, and if you guys are starting to see any opportunities in that market to, I guess, play in areas where you don't play and would like to?.

That's a good question. Broadly, the portfolio is, obviously, pharma is our number business over there. But one of the differences in China is that our food business is actually our number two business in China. The food testing environment in China is really one of the sort of hot areas of focus globally.

And some of the more innovative methods and more exacting methods of food testing really brought on by some of the challenges that China has had in the past are good opportunities and only growing bigger. In terms of how pharma is different, I guess I would point out a couple of interesting things about the pharma market from my standpoint in China.

Number one is, there's a – it's a very large domestic market really geared towards generics as you might imagine as patient access to medications grows, but a market that's trying to emulate the regulatory standards of other markets. So, if you look at the Chinese pharmacopoeia, they're really reading right on the U.S.

and other developed market pharmacopoeias for their method development. Another difference in China is that there is a large and growing opportunity in traditional Chinese medicines.

The Chinese consumer spends just as much money on traditional Chinese medicines as they spend on regular pharmaceutical drugs and, yet, the testing requirements have a long way to go to catch up.

And there is a concerted effort on the part of the government and the Chinese pharmacopoeia to introduce more and more regulated methods for quality and purity and even health benefit of traditional Chinese medicines. And so, there are definitely some differences there and, of course, there is an innovator segment as well.

There's a lot of companies that are starting out in China that have more global ambitions to compete on a worldwide basis on innovative drugs. So, it's a pretty diverse opportunity there, really..

Okay. Great. Thanks..

Maybe we have time for a few more questions, maybe two or three questions. Try and go quickly here at the end..

Thank you. Our next question comes from the line of Mr. Brandon Couillard from Jefferies. Your line is now open..

Thanks. Good morning. Appreciate you squeezing me in. Sherry, just one for you.

Were there any timing benefits to the cash flow in the first quarter, be it cash tax payments or otherwise? And then, secondly, are the discrete facility expansions behind you at this point? And if so, should we expect to see the free cash flow conversion remain at an elevated level?.

Yeah. So, thanks for that question. So, from the cash flow question, there weren't any unusual timing items. I'd say it's really an impact of our strong results for the quarter, the top line and the earnings that we have there.

I'd say on the CapEx question, we are through most of all the big facility expansion that we had here at our Milford headquarters and I'd say we should look at kind of just normalization rates when you back that out on our full year..

Thank you..

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

Thanks. I know – I've heard you – what you said about your expectations for end-markets for the rest of the year and I know you're not calling out orders quantitatively.

Would you be able to comment qualitatively on your confidence that pharma growth can be sustained, industrial is going to continue to improve, and I think you also mentioned some expectation for improvement in the government and academic end market.

Do you feel like you have good visibility to those factors?.

Yeah. Thanks, Tim. I don't want to say too much than I said earlier other than to reinforce that our order trends are a positive. We have watched order trends carefully in Q1 and we want to get a jumpstart on the year from a backlog perspective, and we were able to achieve our goals from the standpoint of our order book.

And it's not an order book that we can look out with great certainty, say, two or three quarters out but all of the indications early in the year are that the order book is a positive relative to what we're trying to achieve..

Okay. Thank you..

Maybe a last question. One more..

Certainly, sir. Thank you. Our next question comes from the line of Mr. Derik de Bruin from Bank of America..

Great. Thanks for squeezing me in. So, just a couple of quick questions. So, Sherry, when we think about the 12% tax rate guide for this year, is that something we should think about for 2018 barring any changes from Washington on corporate tax reform? And then just a couple of questions.

Japan, I would have thought it would have been a little bit stronger this quarter given it's the end of the Japanese fiscal year. And just – people are asking about CDMOs, can we get – can I squeeze in one on the clinical contract research organizations. Did you see any sort of changes there? Thanks..

Yeah. I'll take the first one on the tax rate. So, yes, I think your comment of barring anything coming out of Washington, we would expect that kind of a tax rate, that – before the stock option, it was about 14%.

With the stock option expense rules and benefiting us, about 15% this year, I think that 12% is a good rate for this year and for 2018 barring any changes from the government..

Yeah. Thanks, Derik. And just real quickly on Japan. As I said in the script, we had a very tough comparison year-over-year. One thing's interesting about Japan – and I actually just got back from Japan as well. Japan, a lot of the government purchasing, their final quarter is actually our first quarter. So, Q1 in Japan feels more like a Q4.

And we had a huge comparison from a year ago, so we actually planned that type of a decline in the business, and the business met our expectations of what they delivered. And we're comfortable with the full year that we have shaping up for Japan. As you know, it's a very established mature business, very high rate of recurring revenue.

We've got a very strong proven organization over there. And so, while it was not a grower in the quarter, it was about what we expected. As it relates to CROs, they're a relatively small component of our spend.

But certainly in the bioanalysis area, we are seeing positive trends from what I talked about earlier, which is the strength in our Tandem Quad portfolio; really seeing some encouraging wins in that segment now that we have the Xevo TQ-XS to complement to TQD and TQ-S micro.

So, we like our product position there, and even though it's a small segment, we're encouraged by our performance..

So, thanks for the question. And I know we're coming up on time, so I want to thank everybody for the great questions, as always. And just to conclude, we are encouraged by our start to 2017, which is really headlined by our ability to deliver strong, organic top-line growth, some operating leverage and double-digit earnings per share growth.

So, as we move into the mid part of 2017, we remain focused on delivering strong results and feel that market conditions and our strong competitive positions support continuing success. So, on behalf of the entire management team at Waters, I'd like to thank you for your continued support and interest.

We look forward to updating you on our progress during our Q2 call, which we currently anticipate holding on July 25, 2017. Thank you, all, very much and have a great day..

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