John Lynch - Vice President, Investor Relations Christopher O'Connell - CEO Sherry Buck - CFO.

Steve Willoughby - Cleveland Research Derik de Bruin - Bank of America Doug Schenkel - Cowen Company Paul Knight - Janney Montgomery Dan Arias - Citi Tycho Peterson - JPMorgan Tim Evans - Wells Fargo Securities Jack Meehan - Barclays Capital Isaac Ro - Goldman Sachs Luke Sergott - Evercore ISI.

Good morning. Welcome to the Waters Corporation Second Quarter 2017 Financial Results Conference Call. All participants will be able to listen-only until the question-and-answer session of today’s conference. This call is being recorded. If anyone has objections, please disconnect at this time. It is my pleasure to turn the call over to Mr.

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

Thank you, operator, and good morning everyone, and welcome to the Waters Corporation second 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 third 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 October 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 second 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. Good morning, everyone, and 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 Q2 and year-to-date 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. We will then open the lines for Q&A to take your questions.

Jumping right in, I am pleased with our second quarter results where we delivered growth in all three of our major customer defined end markets of pharmaceutical, industrial and governmental and academic. In addition, product sales were balanced with steady growth in our recurring revenue and our core LC, LC/MS, and thermal analysis systems.

Geographically we continued to see strength in Asia and Europe with slower demand in the Americas, though with improving trends in the United States. Overall second quarter revenues grew at 5% against a strong base of comparison in the second quarter last year.

Year-to-date, our sales were up 6% also against a strong comparison led by solid growth in our pharmaceutical markets and a continued improving demand from our industrial end markets.

Looking at our P&L, disciplined operating spending and operating efficiencies resulted in operating leverage, and therefore adjusted earnings per share growth of 11% in the quarter and 13% year-to-date. Additionally, we delivered another record quarter of free cash flow.

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 4% in the quarter against double-digit growth comparisons in the prior year.

Pharmaceutical demand continues to be driven by macro trends of rising global regulatory standards, increasing worldwide patient access to medical therapy, and growing volume of more demanding biologic drug testing.

For the first half of the year, overall sales for our pharmaceutical markets were up 6% against a strong prior year performance with balanced growth from small molecule quality control testing applications and large molecule research workflows.

Sales to our worldwide industrial category, which includes the materials characterization, food, environmental, and fine chemical markets were strong and balanced in the second quarter, growing at 7% against a strong performance in the prior year.

This result continues the positive momentum we saw in the closing months of 2016 and the first quarter of 2017. Year-to-date sales in our industrial category were up 8%, representing a strong first half to the year. As we see continued evidence of a cyclical recovery in global industrial demand, we believe we are well positioned in our chosen markets.

Looking at our governmental and academic category, we saw sales grow by 5% in Q2, driven primarily by an improvement in Asian and European markets related to environmental and medical research applications.

As we've discussed before, the governmental and academic category is a small percentage of our overall business and quarter-to-quarter growth can be highly variable given the nature of purchasing activity and our product mix, particularly in the United States.

That said, we are starting to see signs of increased activity with US government funded accounts. Now I will review product line dynamics within our Waters and TA brands. Waters branded instrument sales grew 3% in the quarter and 5% year-to-date.

We continued to see strong growth from our ACQUITY Arc, a system that scientists – a system for scientist working with established methods who are looking for the versatility and robustness required to bridge the gap between HPLC and UPLC, while continuing to support validated assays.

Benchtop LC Tandem mass spec systems, including our recently introduced higher end Xevo TQ-XS, as well as the popular Xevo TQ-S micro continued to grow solidly in the quarter and year-to-date, primarily in food safety and biopharmaceutical applications.

Overall, we continue to see mass detection adopted for broader uses, such as routine pharmaceutical and biopharmaceutical applications, including strong utilization of both ACQUITY QDa and the TQ-S micro.

These market trends are driving our strategy to integrate LC and M-S technologies, along with advanced informatics and chemistries into true system solutions.

While not a new theme for Waters, enhancements to our LC/MS workflows in improving the characterization of biologic drugs was an emphasis at this year's American Society of Mass Spectrometry Conference in Indianapolis, which I personally attended.

As you are aware, recurring revenues, the combination of service and precision chemistry now represent approximately 50% of our business. During the second quarter, we saw 7% growth in recurring revenues, driven by global strength from both service and chemistry offerings.

Year-to-date, our chemistry and service businesses have grown at 6%, indicating continued high utilization rates for the installed base of Waters instruments. Turning to our TA product line, we are encouraged by the 6% growth for TA products and services in both the quarter and year-to-date.

Instrument systems for TA grew 8% in the quarter, led by our new discovery line of thermal analyzers that we began to introduce in 2016. Material scientists rely on TA for the highest performing instrumentation and the new discovery line embodies the most advanced thermal analysis technology for superior measurement outcomes.

Finally, I will review our performance by geography at the corporate level. As you know, we have a globally balanced portfolio. And Asia now represents our largest region in terms of revenue. In the quarter, Asia grew 14%, again, led by China which grew even faster and also included double-digit sales increases for both India and Japan.

Our China operation saw solid growth across all core markets. Within the pharmaceutical category, growth drivers continued to include new regulatory requirements from China’s Food and Drug Administration. In the industrial category, China experienced strong growth across our materials characterization, food testing, and environmental customers.

Japan benefited from balanced sales growth from pharmaceutical, industrial, governmental, and academic markets. Turning to the Americas. Sales declined by 3% in the quarter with our US sales down 2%. Macroeconomic and government policy uncertainties appear to be affecting general business activity in the United States.

While we are off to a slower than anticipated start, we did see improved trends in the US in Q2 versus Q1. We anticipate that our sales growth will continue to improve throughout 2017, based on an outlook for more normalized customer spending and as year-over-year comparisons become more favourable.

Europe was a strong contributor again with second quarter sales growth of 5% overall. Europe growth was led by pharmaceutical and government and in academic customers with product sales generally balanced across our instruments and recurring product lines.

Summarizing the state of our business through the first half of 2017, I am pleased that we are delivering strong mid-single digit revenue growth with operating leverage. Additionally, our double-digit earnings per share growth is tracking above our historical average.

Our key growth drivers of global pharma demand, Asia markets generally and the consistency of our recurring revenues remain intact. And I am especially encouraged with the robust balance of our growth combination, including the improvement of our overall industrial end markets. Stepping back and looking at the bigger picture.

I believe our strong and consistent results validate and reinforce the 5 elements of the Water's value creation model that we outlined in our Investor Day held in March of this year. We hold a unique leadership position in structurally attractive markets. We have a clear growth strategy driven by organic innovation.

We see opportunity for continuous operational improvement. We are a disciplined capital allocator and we operate with a performance oriented culture and management team. Finally, I would like to update you on a few key changes within the Waters organization.

First, in support of our ongoing efforts to leave the industry in innovation, we have integrated our Waters branded product groups into a single R&D organization under the leadership of Ian King. This important change combines our technology centers, including LC, mass spec, precision chemistries and informatics.

This move is driven by our transformational engineering vision that Ian introduced at our Investor Day, as well as our strategic plan that emphasizes integrated workflow solutions for our key customer defined business segments.

Ian is an experienced, broad based technical and business leader with particular expertise in chemistry and in instrumentation.

Furthermore, this combined Waters Global Products Group provides a strong complement to the existing Waters Global Markets Group under the leadership of Mike Harrington, further emphasizing our focus on high value workflows and delivering on the needs of our increasingly global customers.

At the board level, we recently introduced and welcomed our newest Director Flemming Ornskov, Chief Executive Officer of Shire plc, a leading global biopharmaceutical company focused on serving people with rare diseases and other highly specialized conditions. Dr.

Lawrence Krauss [ph] broad global experience in the biopharmaceutical industry combined with his passion for improving human health positions him to make significant contributions to our growth strategy and makes him a great addition to our diverse and experienced board of directors.

With that, I'd like to pass the call over to Sherry Buck for a deeper review of the second quarter financials.

Sherry?.

Thank you, Chris. And good morning, everyone. We recorded net sales in the second quarter of $558 million, an increase of about 5% before currency translation, which reduced sales growth in the quarter by about 1%. This resulted in 4% reported sales growth. In the quarter, pharmaceutical markets grew 4%.

Our industrial markets grew 7% and sales to academic and governmental customers were up 5%. Product line growth was strongest in our recurring revenue with a combination of precision chemistry products and service revenue growing 7%, while instrument sales grew 4% in the quarter.

Breaking that down further, sales relating to Water’s branded products and services were up 5%, while TAs grew 6%. Combined LC and LC/MS instrument platform sales increased by 3% and TAs instrumentation system sales grew 8%. As we continue to see the benefits of new product introductions.

Our total recurring revenues associated with both Waters and TA products grew by 7%. Looking at our growth rates in the second quarter geographically and before currency translation, sales in Americas were down 3%, with sales in the US declining 2%.

European sales were up 5%, sales in Asia were up 14% led by double-digit sales growth in China, India and Japan. Now I'd like to comment on our second quarter’s non-GAAP financial performance versus the prior year. Gross margins for the quarter were solid coming in at 58.9% consistent with the second quarter of 2016.

Positive mix dynamics and product manufacturing efficiencies were offset by approximately 80 basis points of currency headwind. Moving down the second quarters P&L, operating expenses were up 3% on a constant currency basis. Foreign currency translation reduced operating expense growth by about 2% on a reported basis.

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 the mix of our legal entity profits in the quarter. Including a $0.05 benefit from new stock option accounting rules, the non-GAAP effective operating tax rate was 11.9%.

In the quarter, net interest expense was $6 million, down slightly from prior year. Our average share count came in at 80.8 million shares or approximately 700,000 shares lower than in the second quarter last year. This is a net effect of our ongoing share repurchase program.

During the second quarter, we bought 430,000 shares of our common stock for $77 million. Our non-GAAP earnings per diluted share in the second quarter were up 11% to a $1.76, in comparison to earnings of a $1.58 last year. On a GAAP basis, our earnings were $1.63 versus a $1.57 last year.

Both our non-GAAP and GAAP earnings include a benefit of $0.05 resulting from the new stock compensation accounting rules. The impact to foreign currency translation in the quarter on earnings per share was a negative $0.02, bringing the full year impact to neutral.

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 totalled $3.1 billion in debt totalled 1.9 billion, bringing us to a net cash position of $1.2 billion.

We define free cash flow as cash from operations, less capital expenditures and excluding special items. In the second quarter of 2017, cash flow was drawn and came in at $159 million after funding $17 million of capital expenditures. Modest improvements in working capital efficiency and disciplined capital spending contributed to our cash generation.

This represents both a strong quarterly performance and year-to-date growth of approximately 14%. Accounts receivable days sales outstanding stood at 75 days this quarter, which was down one day compared to Q2 of last year.

In the quarter inventories were approximately flat in comparison to the prior year quarter, which was in line with our expectations. As we look forward to the balance of the year, I'd like to share our full year and third quarter 2017 guidance.

Our outlook generally assumes continued global growth and demand from our pharmaceutical and industrial end markets and consistent growth in our recurring revenue. Bringing this all together, we continue to expect a strong mid-single digit constant currency sales increase for the full year, which we consider to be in the range of 5% to 6%.

At current rates currency translation is assumed to reduce full year 2017 sales growth by about 1%. Our outlook for gross margins for the year is consistent with our previous guidance in the range of 58.5% to 59%.

Higher volume and manufacturing efficiency gains are expected to continue 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. We estimate our full year tax rate, including an expected benefit to EPS of $0.18 due to stock option accounting rules to be about 12%.

This is comprised of the $0.14 benefit realized year-to-date, plus an assumed amount of $0.02 in each of the remaining two quarters of this year. Quarter-to-quarter variation is a result of the timing of actual stock option exercises and our stock price. We will continue to provide a reconciliation of this item for the remainder of 2017.

Our guidance regarding capital allocation assumes continuation of our share repurchase program through 2017 at a rate that will result in an average diluted 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 a range of $7.30 to $7.45. At current rate, foreign currency is assumed to negatively affect full year earnings per share growth by approximately 2%.

Looking at the third quarter of 2017, we expect constant currency sales growth of strong mid-single digits. At today's rates, currency translation is expected to reduce third quarter sales growth by about 1%.

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 an estimated 4% to 5% negative impact to adjusted EPS from currency translation at current rates, we estimate the third quarter earnings per diluted share in the range of a $1.68 to a $1.78.

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 businesses and delivering on our operating performance objectives. As always we will strive for balance in our results and we will seek to cover unexpected changes in our assumptions with the breadth of our growth opportunities.

Additionally, as we have stated consistently, 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. Operator, first question please..

Yes. Our first question comes from Steve Willoughby from Cleveland Research. Your line is now open. [Operator Instructions] Steve, your line is now open..

Can you hear me, okay?.

Yes. Hi, Steve..

Hey, there guys. A couple of questions for you. First Chris, if you could just explain a little bit more about what you're seeing in I guess both the US, as well as with your pharma business. You know, I heard your comments you know, you're seeing some incremental positive signs in the US and expect better trends in the back half of the year.

Can you just talk a little bit about what you think is holding things up so far in the first half of the year and how you think that might be changing in the back of the year, and if that's related to your growth with pharma? And then I just have one follow up..

Sure. Yes, happy to address those and those are two related but different questions. So I'll just start with the US question and really the broad US market and the patterns we saw in the first half.

Clearly, I think when we look at the US, we are looking at both the broader and business environment, but also our comps, which were strong in the second quarter here.

The US business environment is clearly seen across multiple markets, not just pharma, and you know, we do believe there is some holding back due to the uncertainties with government policy et cetera. Some companies are holding back and some companies are investing elsewhere. Clearly, the US is a little slower right now and Europe is a little faster.

As you pointed out, US was actually better in Q2 than Q1, not exactly where we wanted to be, but clearly heading in the right direction. And I think you know, it's looking at broad trends and the order book and demand, I would say that I'm cautiously optimistic that the US will normalize.

We think the demand is still there and are assuming some improvement in the back half of the year in the US, but certainly not assuming a strong big bounce. But we are assuming some improvement. You know, as it relates to pharma and I think the best way to look at this picture is globally and is with the rolling trends.

The quarter that we had in pharma I think reflects timing in comps.

Recall that a year ago in the second quarter our pharma business worldwide grew 12% with strong comps in particular in Asia, and I think that if you look the slightly bigger picture of say a rolling six month or a rolling 12 month, our year-to-date pharma is up 6% in our last 12 months and pharma is up 8%.

And so you know, I think when I look at pharma, I think pharma is healthy and I think it's balanced on strong comps. So you know, looking at the back half, I think it's on track and expect at or above historical trend lines on a strong base from 2016. So that's how I’d characterize the pharma picture overall..

Okay. That's very helpful. Chris, thank you. The quick follow up I had is, just going back to comps. You know, I know you're going against I believe negative comps in your TA business in the back of the year.

And so you know, given the stronger instrument trends here in the second quarter, how are you thinking about the TA business overall and for the TA instruments going into the back half the year based on what you're seeing out there in the comps you have?.

Yes, thanks. You know, TA, I'm pleased with the TA in the year they're having. They've been solid in the first couple of quarters and as we've talked about in the event of a cyclical recovery in industrial demand. TA is very well positioned with their new product family, the Discovery Series.

And so you know, I was actually just out of TA a week ago with their worldwide management team, and I think the team is looking at the back half of the year with those factors and hopeful we'll continue to see good end markets and good -- you know contribution to the growth of the company..

Thanks very much..

Our next question comes from Derik de Bruin from Bank of America. Your line is now open..

Hi, good morning. It’s Derik de Bruin. Hey, just to clarify, Sherry, can you just clarify one accounting question, and then I’ll ask a more broader question.

On the accounting question, so if the stock based comps tracked tax treatment for the second quarter, your prior guidance was $0.02, and when you updated last time it was $0.05, this quarter it was an incremental $0.03 is that how I'm looking at that?.

That's correct..

Okay. Just want to clarify that. All right. And then you know, you called out strong Japan, which is the first time I've actually heard anybody say strong Japan, those words in a long time. Can you sort of elaborate that and just also talk a little bit more about India. I know you - you're facing some tougher comps in that market as well.

Can you sort of elaborate on that as well?.

Sure, Derik. You know, put both India and Japan in the broad category of Asia and as I pointed out, you know we really - feel good about Asia. It's our largest geography in terms of revenue contribution. It's been growing very steadily.

You know, Japan as we talked about last quarter had a little bit of a soft Q1, but that was as we talked about somewhat timing related in the later stages of what typically can be fiscal years in Japan and our tough comps, and is that - as some of those factors normalized in Q2, we saw a good solid performance actually in each of the end markets in Japan.

And so you know, Japan historically has been a relatively consistent and very reliable generator of modest growth and profitability. You know, we still expect that modest growth going forward, but are glad to see them post a solid quarter.

You know, as it relates to India, I think we're continuing to see consistency out of India really on the on the backs of the generic drug industry.

We have a strong competitive position as you know in India, and the growth rates we're seeing though they are in the double digits really in the mid-teens continue to validate the economic engine that India is.

And in terms of providing the generic pharmaceutical base for many markets, and you know, there it's just a consistent performance on instruments, on service, on chemistry and we've got a very strong team there and expect to continue to see good things out of India..

Is that India market most - still mostly alliance or is it shipped to ACQUITY Arc?.

It's mostly alliance. It's mostly well established HPLC methods there in India. But you know, we are beginning to try to see you know some opportunity for ACQUITY Arc, but also keep in mind in India the Empower Chromatography Data System backbone for regulated methods is really the key factor.

As you know, regulatory standards in India have been rising. FDA has been taking a more active interest over the years in factories in India for the exporters into the US market and the Empower business has really solidified our leadership position there..

Thank you very much..

Thanks..

Our next question comes from Doug [Schenkel] from Cowen Company. Your line is now open..

Hey, good morning. First, in Q1 US biopharma revenue growth was weak. You attributed this to slow budget releases, but at that point noted that trends had improved at the end of Q1 and in early Q2.

Based on your US growth performance for the quarter and pharma growth performance, it's not obvious that the trend of improvement that you described carried through the quarter. So the question is did revenue tail off at the end of the quarter in the US relative to what you would have expected given the early momentum you described.

And if so was this just pharma?.

So to answer your first question Doug about Pharma, you know, I think when we're in the first quarter keep in mind it's our smallest quarter and we're hyper focused on early trends out of the gate. And so we do in the first quarter tend to look a little more that balanced to the quarter.

But you know with the benefit of looking at the first half you know, I think we tried to point out in my commentary that you know, the trends in the US are probably more reflective of the broad economic backdrop and questions and uncertainties in the US that many companies are facing.

And so you know, I don't want to get into too many details around the shape of revenue in the middle of a second quarter. But it is true that our second quarter was definitely better in the US in pharma and in other markets than in Q1. And so you know, we are hopeful and cautiously optimistic that there is a normalization pattern emerging.

We're watching it very, very carefully. And to the last part of your question, the US phenomenon and in terms of a market backdrop did affect all markets not just pharma..

Okay. Yeah, I know that's helpful, because I'm just trying to reconcile what you described in an encouraging way about your trends improving.

But also the fact that you are highlighting the uncertainty related to Washington having an impact at the end of the quarter or are seemingly over the course of the quarter, maybe more so than maybe you would have expected coming out of Q1. So I'm not sure there is more to say there, but that's why I'm drilling in here..

I know that, and it's a good question and I think it's fair to say that this – there is a clearer picture as we said halfway through the year of that you know, broader governmental policy backdrop and the good news is that we have a lot of levers to pull to continue to deliver numbers. And even with relatively modest contribution from the US..

Okay. One more quick one. Sherry, you bumped up EPF guidance by I think at $0.075 at the midpoint for the year. How much of this was the Q2 to be, how much of its FX.

I guess I'm just looking for a bridge between old guidance and new guidance?. Thank you..

Yes. So it is about an 8% difference between our last guidance and I would characterize it at $0.08 FX and on the stock option capability we had in Q2 and then FX capability we're looking at..

Okay. Thank you..

Our next question comes from Paul Knight from Janney Montgomery. Your line is now open..

Good morning.

I know you guys have been doing a great job on the operating margin improvement, but you’ve been really not manufacturing in the Chinese market, are you thinking about footprint or is there more margin according to how and where you manufacture I’d love some color on that?.

Sure, Paul Yeah, I know we're very pleased with the P&L and think that the strong P&L that we showed for the quarter and for the year to date demonstrates you know, that consistency and resiliency of our model.

And you know, I'd further note that we're able to deliver that P&L, while you know, for the year-to-date, so far we're actually growing our R&D 9% on a constant currency basis. So we're investing for the future, while continuing to get the operating leverage through good efficiencies, operating wise and G&A.

In terms of the manufacturing base, as we've noted before Paul, we have a very balanced geographic footprint on manufacturing with our biggest centers in the United States, the UK, Ireland and Singapore. We do not have any manufacturing in China, but we certainly have a very global supply chain.

And you know, continue to work that to gain ongoing efficiencies and continuous improvement in our costs..

And could you talk to China a little bit more in depth. Like was that the manufacturing for biologics, was the government academic or industrial, what was - what was within those three areas stand out? Chris, thanks..

Sure. Yes, China was very balanced. In fact, you know, it's important to note about China, that China is probably a more balanced market than almost any of our major markets in terms of its contribution. Where our worldwide mix is maybe 60% pharma or just under 60% pharma, in China it's 10 points less than that.

Furthermore, we've got our strongest concentration of our food testing business in China versus any major market. If I look at the quarter the growth was very balanced. In fact, perhaps the highlight of the quarter in China was the industrial business. We had a huge comp in pharma for a year ago in China.

And I don't want to quantify that too much, but we had good growth in pharma in China off an enormous comp. But really in the quarter the star of the quarter in China was our broad based industrial business..

Thank you..

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

Yes, hi. Good morning, guys. Thanks.

Chris I just wanted to touch on the competitive dynamic inside TA if I could, just sort of curious about on the new end product introductions whether the team feels like it's taking part in a broader portfolio refresh across the industry or whether you're sort of more off cycle so to speak? I don't mean if do you have a left field [ph] with a question here - I'm just - I'm trying to understand how much the new Discovery line-up is kind of poised to stand out in a market that's clearly improving?.

Yeah, it's a good question. I'd rather not comment on the competitive launches because I just don't have the insight as to how people stage those and so forth. What I can talk about is Discovery, which you know is a pretty significant leap forward in both performance, but also cost.

It's a wide ranging portfolio across different modalities of thermal analysis. And like any launch in the analytical instruments field it does take time to get traction. And so even though we had launched the DSE and the TGA last year, I think we're only beginning to find our sea legs [ph] in those products and still have additional modules to go.

And as we do that, we really define as we say winning the measurement in the field and are confident in products superiority. And furthermore with a platform that’s been engineered with great attention to tiering, but also scaling technology and platforms, so that we can get profitability enhancements.

And so our TA business with that additional growth is just a terrific profit generator for the corporation..

Got it. Okay. And then maybe Sherry on the gross margin outlook, you noted the effect of currencies.

I'm wondering if you can just touch on the impact that you think new products are having on the gross margins as those ramp? I think that was something that you touched on a little bit at the Analyst Day, just curious how you're thinking about that as an offset?.

Yes. So as we look at our gross margins, you look at FX impact, as I mentioned in the quarter it was about 80 basis points. I would say, we're going to continue to see some impact of FX for the year as a headwind probably in the range of 80 to 100 basis points.

And I'd say as far as new products when you look at our overall Water’s results and the portfolio, I wouldn't say it was a big contributor to the gross margin..

Okay. Thanks..

Thank you. Our next question comes from Tycho Peterson from JPMorgan. Your line is now open..

Thanks. Of course, you've talked about the government uncertainty here is being a bit of an overhang in the US, but you know, to Doug’s question earlier, US pharma got a bit better, it seems like academics improving a bit.

So that overhang mainly on the industrial side and then as we think about you know where US is improving in the back half of the year.

How much of that is more you know academic versus an industrial pickup?.

Tycho, it’s a important question and certainly the - you know I think our results at least looking at our different categories show that this overall backdrop and environment is affecting most businesses.

My comment on better than Q1 reflected the US business overall, but specifically pharma, which was as you know not quite positive, but definitely better than Q1.

And so you know, I think what I look at is the underlying tone of demand in the market I talked to a lot of customers as you know and try to get into this dialogue and you know when I look at the combination of the demand which I still think is there, certainly in some cases global companies can move some of that demand to other parts of the world, which we do see a little bit of.

But you know, there is probably some holding back and the combination of that and in our order book gives me I'd say some cautious optimism that we should see a continuing pattern of improvement. And you know, hopefully in the back half of the year see US in positive territory..

And can you touch on the demand in Europe, the results were solid there, can you just talk on where they are in terms of the replacement cycle versus maybe some of the US pharma counterparts?.

You know, I don't want to - the question replacement cycle, as we talked about at our Investor Day you know, is you know, not really a major factor in the business.

And it's not clear that there's any evidence that a replacement cycle demand affected demand in Europe in Japan or any of these markets, really owing to the very broad diversity of today's biopharmaceutical market.

So I think the trends we saw in Europe and Asia were evidence of you know, solid growth out of the developed markets and that growth does tend to move around a little bit between the US and Europe and Japan and I think that reflects the global nature of our business.

We have plenty of examples where multinational companies ordered in the year - in Europe, but not in the US or ordered in Japan, but not the US. And so you know the way I look at the business is more broadly at those developed markets.

And if you look at trends for pharma in the developed markets they've been pretty steady quarter-to-date, year-to-date in that kind of low single digit way, while the emerging markets is a strong double-digit, solid double-digit type growth picture.

You know, that's a slightly different way of cutting the business, but probably gives you a little more flavour as to know what the global picture looks like..

And then just if I could ask one last one. You know, there's been a lot of changes on the CRO side in terms of consolidation in that space. Any change in demand from out of the CROs? And then also you know, we've heard about a bit of a slowdown in – on the bio process side from third parties [ph] and others.

Is that something you've seen from your biotech customers as well? Any change if events?.

No, I I'd say it's probably too hard to piece out any particular CRO or CDMO trend. As you allude to there is clearly a robust contract business out there. It's one we're well aware of. We've been a leader in and continue to prioritize.

And yes, there is some consolidation, but really the underlying volumes in those type of operations continues to be you know, as they were and we don't see consolidation necessarily affecting that in the near term. In terms of bio processing. You know, I would say that - I wouldn't accentuate any unusual trends in our bio area.

Keep in mind, most of our business in biotech is in the development stage and you know, we're excited about that because that portends greater volumes, as some of that type of testing moves into the more routine operational workflows later in the cycle. So our perspective is probably a little more narrow there in the development phase..

Okay. Thank you..

Our next question comes from Tim Evans from Wells Fargo Securities. Your line is now open..

Thank you. So Chris, I hear you on the comp, on the pharma, but even on the stock comp basis it did decelerate off of Q1. And I think we're all trying to just get a sense for like what was driving that deceleration? And then another way to think about it is just, you said that you felt comfortable that that was going to kind of maintain trend line.

The trend line really in pharma has been high single digit.

So what should we be thinking about in terms of growth for that market going forward?.

Sure. Fair question. You're right, a recent trend line has been up in the high single digits, you know, in ‘16 pharma was 10. Like I said rolling 12 month pharma is 8. We did head into - we are heading into a period here of Q2 and even Q3 with very strong global pharma comps.

But when I say trend line Tim, recall I'm referring to more of the long-term trend line of the pharma market, which for us has been in that 6% range.

And so as we talked about at the beginning of the year, as we look at the year we always you know, kind of revert back to our broad historical trend lines that maybe not the near-term trends, but the broad long-term trends. And in pharma you know, that's more than that in that 6% range. Certainly as it relates to stacked comps.

You know, in Q1 the last two Q1s the stack comp is 9, in the last two Q2s stat comp is 8. So that's been more of a near term phenomenon. But you know, as you know, we don't always assume everything goes right and we forecast more of a long-term trend line for that and that I would say is where we're looking at it for the year we're in now..

Okay. That's great. That's really where I wanted to get at. Thank you..

Thank you. Our next question comes from Jack Meehan from Barclays Capital. Your line is now open..

Thanks. Good morning.

Chris, I was wondering if you could elaborate a little on the comments related to the industrial demand, what you're seeing in order trends and what's embedded for growth in the end market through the end of the year?.

Sure. You know, just to, Jack to reiterate on the industrial side, we again had a really solid 7% quarter. Just to give you a sense on the broader picture, now year-to-date we're growing industrial at 8% and the 8% is also the growth of the industrial business for the last 12 months.

And so you know, recall we had come into the year after some lesser consistency we'll call it in the industrial markets in ‘15 and ‘16. You know, hopeful that some of the backdrop would improve. We have a very diversified industrial business as you know, between materials, characterization, food, fine chemicals, et cetera.

And so far the way the years played out is you know, we're very much benefiting from that - that industrial picture and that's a real positive for Waters.

You know, again, as I've said a few times, one of the things that I really like about our model and the resiliency and consistency of our model is the fact that we have multiple levers to pull and you know, not every quarter plays out exactly like you think it's going to play out.

But the fact that we're getting such good balance from our industrial end markets is a real positive for the company right now..

Great.

And just to follow up maybe within Europe with the growth there you know, outside of the biopharma customer class you know, is there any commentary around Western versus Eastern Europe, any pickup in the Eastern side of the continent?.

Yeah, I mean, I would say the Europe business we're very pleased with in terms of its consistency and balance. And I would say to your question that we are seeing some encouraging signs in Eastern Europe, albeit Eastern Europe is much smaller than Western Europe.

We definitely saw a nice pickup in the Eastern Europe business to create a picture in Europe that's pretty well balanced across most markets there..

Great. Thanks, Chris..

Thanks..

Our next question comes from Isaac Ro from Goldman Sachs. Your line is now open..

Good morning, guys. Thank you. I wanted to ask a couple of long-term questions, as it relates to where you’re going to expand your end market opportunities.

First off, I was just curious if you had an update on the Health Sciences initiative to extent that you can take some of your technology into more critical diagnostic settings, kind of curious how you're thinking about that? And then secondly, on large molecule drug production to the extent that that’s a growing part of the drug pipeline, I'm interested in your latest thoughts on how to monetize your technology for QA/QC in those markets?.

Sure. Thanks, Isaac. Appreciate the question. You know, as it relates Health Sciences and in particular clinical diagnostics because there is a couple of different pieces of what's been traditionally referred to as Health Science.

You know, I as you know in the strategic process tried to separate some of the more medical research applications around Olmecs [ph] and some of the really leading edge technology from the clinical diagnostics question which is a different one in a regulated market. You know, those markets are smaller for us as we pointed out.

You know, our top priorities are of course pharma materials and food. I think we continue to see intriguing long-term upside and another growth engine to light at some point. But we've not disproportionately shifted investment in that area. We think technology is going to take some time to evolve in those markets.

And we're being patient with that I'd say. We do have as you know, some very differentiated technology in that space around direct ionization mass spectrometry and we're very committed to leading the science in that area, at some point that could turn into a big business opportunity. But it's not in the near term, but that's how I'm thinking about it.

Meanwhile, we're beginning to build capability. We've made some strong hires in the area of quality and trying to make sure that we do all the right things in the near term to position for a longer term opportunity.

As it relates to the manufacturing in large molecule and really the production side, I guess what I’d say Isaac there, our focus is really on you know, all phases about pharma. I think the opportunity we see to move routine mass spectrometry measurement into more routine workflows is a huge opportunity.

And that's why you've seen us really lead the market in technologies like the QDa and the Xevo TQ-S micro where we can you know, achieve a great balance of sensitivity size and value in reproducibility, so that companies can introduce SAs [ph] for multi attribute monitoring and more sophisticated measurement in routine operational workflows.

And I think that's really where our focus is. At the investor conference you heard us talk about the bio TARP [ph] program as an example of that, which is really our first signature move in our transformational engineering program, which is now backed up by really a bold organizational move to pull that off.

So I think we're doing all the things we can do to make sure we're delivering technology to that segment over time..

Okay.

Well, maybe to follow up you know, on both of those initiatives, as we think about like the long-term kind of cadence of news [ph] flow, is this something where we might expect a more meaningful update in 2018 or is it more of a three to five year things, just of kind of curious about how you're thinking about manifesting some of these opportunities with investors?.

I'd say you know, starting where I ended the previous comment with, I think we hopefully were helpful to investors in talking about this vision for transformational engineering at our investor conference and backing that up with an example of a product system.

There's obviously more where that's coming from and those type of product milestones and system milestones coming out of that philosophy and that R&D strategy you know, will certainly be visible. You know as we roll into ‘18 and beyond.

In terms of meaningful changes or updates on the clinical diagnostics or as you call the Health Science side you know, I think that's an area that we'll just certainly share information when we have it.

But just assume for the foreseeable future we're plugging away to service that business and trying to position for future opportunity without distracting from our number one priority, which is investing to grow in our core businesses..

Understood. Thank you, guys..

Thanks, Isaac..

We still have a question here from Dan Leonard from Deutsche Bank. Your line is now open..

Hey, guys. This is Mike Circo [ph] on for Dan Leonard. Just had a quick question, I know you had said growth in India has been really strong and you expect it to continue.

Are you seeing any effect even if it's a modest one from the implementation of the goods and service tax?.

Thanks, Mike. Thanks for dialling in.

You talked about the GST tax?.

Correct..

Yeah. I mean, this is a – as you know, this is a harmonization of state and national transaction taxes into a national system long-term goal of creating a single market in India and to hopefully facilitate trade across their states. You know, we think in the long run it should be positive, in the short run there's not a material impact to Waters..

Okay. Thank you..

We have a question here from Ross Muken from Evercore ISI. Your line is now open..

Hey, guys. This is Luke [Sergott ] on for us. Sorry about that. I had the mute button on.

Can you just talk about how the underlying core business guide on profitability has changed from your prior forecasts and where the biggest swing factors for the second half aside from tax and FX?.

The guide for the core business, I think Sherry, Luke had been pretty detailed in terms of how some of the numbers stack up, but let me just - I'll just offer a general comment on second half guide, which is you know, we're solid through the first half of course in that strong mid single digit range on revenue and that's the type of guide that we're expecting in the second half of the year, and again all this is on strong comps from a year ago.

So we're you know, really believe that we're tracking to another really solid year consistent with our historical pattern and a lot of the key drivers in the core businesses you ask are in place.

The global pharma market, the Asia market, the recurring revenues and as number of people have asked with the added benefit of a really solid industrial business. So as it relates to some of the questions people had on US, we've been relatively conservative on the US recovery.

And so we're cautiously optimistic that we see some normalization not assuming any big bounce. And you know, we think that all adds up to a solid outlook with no material changes in margin assumptions. And you know, consistent modest leverage in the P&L outside of FX and tax. So you know hopefully that summarizes the big picture.

I'm not sure if you want to add anything to that..

No, I think Chris, that you’ve covered it. I think our outlook for the year reinforces our overall model with strong mid single digits and double-digit earnings per share growth..

Okay..

Good, done.

We have maybe one more or we all done with questions?.

We show no questions in queue at this time. Again reminding….

Great. Well, thank you all for your great questions. And just in conclusion, we are very pleased with our results through the first half of 2017, headlined by our ability to deliver strong organic top line growth, operating leverage and double-digit earnings per share growth.

As we move into the back half of 2017, we remain focused on delivering results and feel that market conditions and our strong competitive position support continued success. So on behalf of our entire management team, I'd like to thank you for your support and interest in Waters.

We look forward to updating you on our progress during our Q3, 2017 call, which we currently anticipate holding on October 24th 2017. Thank you very much and have a great day..

And that concludes today's conference. Thank you all for joining. You may disconnect at this time..