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

Tim Evans - Wells Fargo Tycho Peterson - JPMorgan Dan Leonard - Deutsche Bank Derik de Bruin - Bank of America Doug Schenkel - Cowen Jack Meehan - Barclays Dan Arias - Citigroup Amanda Murphy - William Blair Patrick Donnelly - Goldman Sachs Puneet Souda - Leerink Partners Brandon Couillard - Jefferies Steve Willoughby - Cleveland Research.

Good morning. Welcome to the Waters Corporation Third 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 Third Quarter Earnings Conference Call. Before we begin, I will cover the cautionary language. During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the company.

In particular, we will provide guidance regarding possible future income statement results of the company for the fourth 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 January 23, 2018. During today's call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is attached to the company's earnings release issued this morning.

In our discussions of the results of operations, we may refer to pro-forma results, which exclude the impact of items such as those outlined in our schedule 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 third 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 Q3 and year-to-date operating results as well as some broader commentary on the business.

Sherry will then review financial details for our reported results and provide an update on our Q4 and full-year 2017 financial outlook. We will then open up the lines for Q&A.

In summary, we are very pleased with our third quarter results, where we delivered solid revenue growth from each of our major customer defined end markets, as well as across all of our major product lines, well balanced between instrumentations and recurring revenue.

Geographic strength continued in Asia and Europe, and importantly we saw another quarter of sequential improvement in the United States. Third quarter revenue has been totaled were up 6% compared to the same period in 2016, which built nicely upon our consistent quarterly results in the previous two quarters of 2017.

This Q3 performance led to year-to-date revenue growth of 6% and a very strong P&L featuring operating leverage and consistent double-digit earnings per share growth of 13% for the quarter and 13% year-to-date. Additionally, we delivered another quarter of strong free cash flow bringing our year-to-date growth in free cash flow to 11%.

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 5% in the quarter which is encouraging against a strong low teen base of comparison in the prior year.

Our pharmaceutical growth was led by strength in large molecule and biomedical research applications.

Geographic growth was balanced between our developed and emerging markets and we also absorbed some headwinds from the natural disasters in the Americas and meaningful timing delays in India caused by our customers' implementation of systems to accommodate the new goods and services tax protocols or GST.

Year-to-date overall sales for our pharmaceutical markets were up 6% against the strong prior year performance.

Our ongoing strategy work continues to emphasize the vast opportunities in our core pharmaceutical business where we believe we are very well positioned to benefit from rising global regulatory standards, increasing patient access to medical therapies and growing volumes of biologic therapies that require more demanding analytical testing methods.

Sales to our worldwide industrial category which includes the materials characterization, food, environmental and fine chemical markets grew 5% in the quarter led by strength in material characterization. Overall, we have seen encouraging growth across applications within our industrial markets where year-to-date sales are growing 7%.

Looking at our governmental and academic category, we saw sales grow by 13% in Q3 with broad based performance across all major geographies. In the quarter, we experienced strength in spending from academic institutions focused on biomedical and Omex research. Now I will review product line dynamics within our Waters and TA brands.

Waters branded instruments sales grew 4% in the third quarter and are growing 4% year-to-date. Within instruments, I would like to particularly highlight our bench top LC tandem mass specs systems led by our higher-end GVO TQXS as well as the workflow GVO TQX Micro.

Mass spec continues overall to grow solidly in the quarter and consistently year-to-date. As we have commented on the past, we continue to see the expansion of mass spec technology into routine use quantification workflows primarily in food safety and biopharmaceutical applications.

The development of our tandem, Quad [zero] platform has enabled us to meet evolving demand for reproducible quantification capabilities for both small and large molecules. Waters branded recurring revenues the combination of service and precision chemistries grew 8% in the quarter and now represent approximately 50% of our Waters business.

Recurring revenues were driven by global strength of our service, HPLC and UPLC application kits and our complete chemistry offerings. Year-to-date our chemistry and service revenues have grown at 7% indicative of high utilization rates for our installed base of Waters instruments.

Turning to our TA product lines, sales grew by 9% in the quarter bringing our year-to-date growth to 7%. Instrument sales for TA grew 12% in the quarter and continue to be led by our new discovery line of thermal analyzers introduced in 2016. This strong quarterly result also benefitted from the growth of rheology and high temperature thermal systems.

We are well positioned to capitalize on market trends of rising innovation in highly engineered, high performance materials. Finally, I will review our performance by geography at the corporate level. Asia, our largest reach in terms of revenue grew by 8% again led by China which grew faster as well as Japan.

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

Japan continue to benefit from strengthened governmental and academic customers and steady growth from pharmaceutical customers.

As mentioned previously, disruptions associated with customers, implementations of the new GST reporting system impacted our results in India in the quarter, we expect this situation to smooth out over the next couple of quarters, with continued solid overall performance of our Indian business. Turning to the Americas.

Sales were flat in the quarter, with our U.S. sales up 1% despite headwinds from recent natural disasters in the broader region.

Macroeconomic and governmental policy uncertainties that we talked about last quarter, still persist, affecting general business activity in the United States, but we are seeing steady sequential improvement in line with our expectations. We are looking for continued improvement in the U.S.

growth trends based on our strong product and market position. Europe was a strong contributor to the third quarter, with sales growing 13%, highlighted by broad-based growth from our pharmaceutical customers, across product categories and throughout the region.

We saw strength in bio-pharma applications where we are well positioned with our targeted LCMS and a bio-molecule separation solution. We also saw strong service revenue from our large and growing base of installed systems. Commenting further on Europe, I was able to spend to sometime in the region this quarter with customers and employees.

In addition to a deep dive into our high potential Eastern European operations, a highlight of this trip was my visit to the Water separation in Brasov Romania.

The Brasov team has grown steadily over the years, into one of our top operational sites worldwide, recently this site became Waters Informatics Center of Excellence, supporting development of our Empower Chromatography Data Systems, Unified Software Technology and New Genesis Lab Management System as well as the development of LCMS and TA instrument drivers.

During my visit we dedicated a modern new facility designed to enable collaboration and innovation. Our informatics offering is a key differentiator for Waters and Brasov is a significant contributor to this strength.

So, as we head into the home stretch of 2017, I am pleased with the consistent top line and bottom line results the company has delivered for the first three quarters of the year. We also remain steadfastly focused on our five-point value creation model.

As I have constituently communicated, we aim to create shareholder value by first holding a unique and highly differentiated position in structurally attractive markets. Second, executing a clear growth strategy driven by organic innovation. Third, seeking opportunity for continuous operational improvement.

Fourth, being a disciplined capital allocator and fifth operating with a performance oriented culture and management team. Finally, I’d like to comment on last week's announcement regarding the retirement of Doug Berthiaume as Chairman of the Board of Directors and my election as the new Chairman effective January 1, 2018.

You all know Doug, as a visionary leader, who built the modern Water’s and created significant value for shareholders. His achievements as Chairman and CEO have profoundly impacted our customers, employees, shareholders and the broader community.

During the past two years in his role as Non-Executive Chairman, Doug has been invaluable mentor for me and orchestrated a smooth and productive transition. On a personal level, I am grateful for his example and his support and we’ll continue to utilize him for advice and counsel.

More broadly in my view, Waters has always been a model for good corporate governance with a rigorous cadence to Board meetings, robust transparency practices and a strong lead independent director.

As part of this, I am pleased that Tom Salice will continue in his position as lead Director working very closely with to sustain and continuously enhance our governance practices. Furthermore, I will continue our efforts underway to ensure the optimal mix of backgrounds and capabilities for our Directors to our ongoing board development program.

This initiative has already resulted in the recruitment of Dr. Flemming Ornskov, CEO of Shire Pharmaceuticals as a new Director of Waters. Flemming has now participated in two board meetings and has added valuable new insights to the Board and management team.

I look forward to continuing to develop our Board, to ensure the highest possible quality and effectiveness of our governance practices. With that, I’d like to pass the call over to Sherry Buck for a deeper review of our third quarter financials.

Sherry?.

Thank you, Chris and good morning, everyone. We recorded net sales in the third quarter of $566 million, an increase of about 6% before currency translation which increased sales growth in the quarter by about 1% and results again 7% reported sales growth.

In the quarter, pharmaceutical markets grew 5%, our industrial markets also grew 5% and sales to academic and governmental customers were up 13%. Product line growth was strongest in our recurring revenue with the combination of precision chemistry products and service revenue growing 7% while instrument sales grew 5% in the quarter.

Breaking that down further, sales relating to Waters' branded products and services were up 6% while TA's grew 9%. Combined LC and LCMS instrument platform sales increased by 4% and TA’s instrumentation system sales grew 12% as we continue to see the benefits of new product introduction.

Our total recurring revenues associated with both Waters and TA products grew by 7%. Looking at our growth rates in the third quarter geographically, and before currency translation, sales in the Americas were flat with sales in the US increasing 1%. European sales were up 13%. Sales in Asia were up 8% led by strong growth in China and Japan.

Now I would like to comment on our third quarter non-GAAP performance versus the prior year. Growth margins for the quarter were steady coming in at 58.3%. Positive mix dynamics and product manufacturing efficiencies were offset by approximately 30 basis points of currency headwinds from higher cost as a result of the UK pound and the euro.

Moving down the third quarter’s P&L. Operating expenses were up 5% on a constant currency basis. Foreign currency translation increased the operating expense growth by about 1% on a reported basis. Year-to-date sales have grown about 1% faster than operating expenses.

On the tax front, our effective operating tax rate before effects of the new stock compensation rule for the quarter was about 14%. This is the result of the mix of the legal entity process in the quarter. Including a $0.03 benefit from new stock option accounting rules, the non-GAAP effective operating tax rate was about 12%.

In the quarter, net interest expense was $5 million down about $1 million from year. Our average share count came in at 80.5 million shares or approximately 900,000 shares lower than in the third quarter last year. This is a net effect of our ongoing share repurchase program.

During the third quarter, we bought 4,37,500 shares of our common stock for $79 million. Our non-GAAP earnings per diluted share in the third quarter were up 13% to $1.77, in comparison to earnings of a $1.57 last year. On a GAAP basis, our earnings were $1.69, versus $1.53 last year.

both our non-GAAP and GAAP earnings included benefit of $0.03 resulting from the new stock compensation accounting rules. The impacts of foreign currency translation in the quarter on earnings per share were a positive $0.01. keeping the year-to-date impact about 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 totaled $3.3 billion and debt totaled $2 billion, bringing us to a net cash position of $1.3 billion.

We define free cash flow as cash from operations, less capital expenditures and excluding special items. In the third quarter of 2017, cash flow was strong and came in at $134 million after funding $20 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 11%. Accounts receivable days sales outstanding stood at 73 days this quarter, which is down two days from the second quarter of this year and three days compared to Q3 of last year.

In the quarter inventories were approximately $298 million compared to $303 million in the third quarter of the prior year 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 fourth quarter 2017 guidance.

Our outlook generally assumes continued global growth and demand from our end markets and consistent growth in our recurring revenue. Bringing this altogether we continue to expect constant currency sales to increase 5% to 6% for the full year. At current rates, currency translation is assumed to be neutral for the full year.

Out 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 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 $22 million.

We estimate our full year tax rate including an expected benefit to earnings per share of approximately $0.19 due to new stock option accounting rules, to be about 12%. This is comprised of approximately $0.17 benefit realized year-to-date plus an assumed amount of $0.02 in the fourth quarter of this year.

Quarter-to-quarter variation will reflect the timing of actual stock option exercises and our stock price. We continue to provide a reconciliation of this item with remainder of 2017.

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

Rolling all this together and on a non-GAAP basis, full year 2017 earnings per fully diluted share are projected to be within a range of $7.38 to $7.48. At current rates, the foreign currency impact on full year earnings per share growth is expected to be about neutral.

Looking at the fourth quarter of 2017, we expect constant currency sales growth in the range of 3 to 5% against a very strong basic comparison as well as another quarter of likely impact from hurricane affected areas. At today’s rates, currency translation is expected to positively impact fourth quarter sales growth by about 2 to 3%.

Combining these top line factors with a moderate increase in expenses and assumed $0.02 of tax benefit due to the new accounting standard, we estimate fourth quarter earnings per diluted share in the range of $2.38 to $2.48. Now I’d like to turn the call back to Chris.

Chris?.

Great, thank you Sherry. As we move into the fourth quarter, we will continue to emphasize execution in our core businesses and delivering on our operating performance objectives. As we have stated, we will seek the balance growth, operating leverage and investment in the business. With that, we will now open phone lines for Q&A.

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

Thank you. Our first question comes from Tim Evans from Wells Fargo. Your line is open..

Hi, thank you. Can you perhaps give us a sense for how big the hurricane impact and the India GST impact was in the quarter and maybe also hope that you’re expecting at least for Q4. .

Sure Tim, thanks for the question. We estimate that these one-timers that we refer to in the call hit our top line growth rate by about 1% and that was roughly equally split between the natural disasters in the Americas region and the India GST but as we commented, those factors will look a little bit different in the fourth quarter.

We think that the India GST situation is working through as we speak and you know while we may not be completely out of the woods, we expect to recover that business steadily over the coming two or three quarters and that’s really simply a delay in orders and shipments.

From a natural disaster standpoint, it was really the US that took the majority of the hit in the third quarter where some of that risk shifts to Latin America for the fourth quarter but you know hopefully the impact will be somewhat less in Q4 than we saw in Q3. .

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

Hey Thanks. Chris, I want to ask a little bit about kind of the bifurcation growth you’re seeing out of Europe versus the US.

You know the particular sub-segments in Europe that are driving 30% growth this quarter, I mean that certainly stands out and then conversely here in the US, I noticed it does feel slow a little bit sequentially versus an easier comp.

Is that kind of dragging down the US market?.

Sure, yes. Thanks, Tycho for the question. There is definitely a bifurcation as you pointed out between the US and Europe and you know I’ll first make a comment more on the pharmaceutical business.

As you know the pharma business is a very global business and clearly what our experience here and sort of the short-term we are seeing the larger multinational pharma company is favoring. The more friendly operating environment in Europe, right now and that’s obviously driven by more and more certain environment on tax and regulation and trade.

And so, the U.S. does feel like its bending a little bit of wait and see mode, but like we said in the call, we definitely saw a sequential improvement in that tone in the U.S.

certainly Q2 was better than Q1 and Q3 was better than Q2, so hopefully we’re stepping out of that and as you know sometimes these companies have cycled their purchasing activity between the U.S. and Europe and that’s what we think we’re seeing right now. In the industrial sector, we actually saw a growth in both the U.S.

and in Europe, which was encouraging. Our industrial performance is pretty broad-based right now, and in academic and government we also saw a growth in both the U.S and in Europe. So really the U.S.

versus Europe question is really trading-off pharma demand but like we said we’re very encouraged with pharma demand overall, we think pharma demand is healthy, despite the near-term U.S.

shift and the pharma growth that we saw in the quarter was obviously on tough comps as well as absorbing some of those one-timers that we just spoke about a few minutes ago. .

Okay.

And then just as a follow-up, I know on biopharma, if you could just comment a little bit on where you are feeling better or worse, I know you like to talk about the increasingly broad customer base there and I know you highlighted large molecule but we get a lot of questions on the generic side given some of the headlines there, so I am wondering if you can comment on, what you are hearing from those customers as well?.

Yes, I think a lot of the themes that we saw in the quarter, Tycho were pretty similar to what we have been seeing all year and what I have been seeing over the past couple of years, the demand in generics is good.

There is obviously some headlines with some bigger companies out there, but again keeping in mind that even in some of the larger generics companies that have had some difficulty, our business is much more a function of volume and production than it is about say new initiatives.

But the generics market is very broad based, certainly the Indian business has been consistently strong despite the short-term dislocations with system implementation and GST and the U.S. continues to see new investment in generic categories from startup companies and mid-sized companies.

And as I alluded into the call, the biopharma market has been really solid again, we continue to see the majority of the innovator companies focusing their investments on new analytical techniques for biopharma and as you heard at our analyst day and in subsequent investor conversations, we continue to highlight our strategy to win in that environment.

.

Thank you. Our next question or comment is coming from Dan Leonard from Deutsche Bank. Your line is now open..

Thank you, Chris how are you thinking about the opportunity on the margin side as you head into 2018?.

Sure, margin is as I pointed out in the call on the value creation model, our margin philosophy and approach is to look for continuous improvement, obviously we operate at strong margins.

As I said before, I think our margin profile is a unique reflection of our business model, and the concentration we have in highly attractive end markets and technologies and it's not a reflection of being optimized in any way and so we have a strong operational improvement initiative underway, where we think we can achieve modest ongoing operational improvements.

If you look at our P&L year-to-date, we’ve delivered operating leverage in the quarter and year-to-date on both a reported basis and a constant currency basis and so I think that mentality is going to continue into ’18. We’re not giving guidance on ’18 yet and we’ll certainly do that in the January call.

But we will be looking at another solid year of revenue and looking to drive some modest operating improvements while continuing to invest in future growth particularly in R&D.

Maybe I’ll take a moment while you raise that just to comment but one of the things I like most about our P&L both quarter-to-date and year-to-date is that we’ve achieved a really nice leverage on the SG&A line while investing in R&D our year-to-date R&D investment on a constant currency basis is up about 10%.

I mean that’s really a reflection of our strong desire to continue to lead the industry and organic innovation..

Thank you. Our next question coming is from Derik de Bruin from Bank of America. Your line is open..

Hi, good morning. A couple of questions. The first one Sherry just a question I mean you’re doing a $0.19 tailwind from the stock based comp this year.

I guess can you talk about how you’re looking at what that would translate over into ’18 and obviously the follow-up question I mean there is obviously there is tax reform you’re going to be able to repatriate some cash.

Can you sort of talk about what cash is overseas and sort of what your initial thoughts would be, I assume you would use some of that to buy back shares to help offset this? What are the dynamics on the questions posed?.

Sure, that’s a really good question on the stock compensation impact for next year and I'd say it’s a little bit too early as Chris talked about for our guidance for 2018. Probably the best comments here I can provide is we’re looking at better operating tax rate and we would expect that to remain consistent in the mid-teens as you’ve seen this year.

And then switching to your next question on tax reform, as we shared with our team internally looking at the tax reform and we have an ad hoc finance committee meeting that is helping us also in this arena.

And for us we have a lot of optionality and we obviously would look to continue our share repurchase program but it will free up quite a bit of cash on our balance sheet and as we think about deploying that and looking to invest in the business is important to us and looking at our debt profile as well as return to shareholders.

And we think we have a lot of options and we’re going to watch closely with the details of the tax reform emerges and put a fine point on it when we have some more details.

I don’t know Chris if you’d like to add anything else?.

That’s well said Sherry. .

Okay, a follow-up question. Just wanted you to walk through the EPS bridge for the full year.

It looks by my math, you're about a negative 2% FX headwind before and then now you’re talking about initial lines of benefits it's like a $0.14 increase by my math and then you know obviously the increases sort of full year is not as high as we would have thought sort of based upon that math. I guess what’s going on with the underlying business.

It looks like it’s a little bit lark, just walk through the EPS bridge..

Yeah, so we're looking at the EPS bridge, basically as we look at our guidance, we’re following through our Q3 and just a little bit of the FX and as Chris mentioned earlier, we’re taking some of the FX upside and investing in the business through R&D year-to-date up about 10% on a constant currency basis, so really trying to balance the benefit of some of the operating leverage and investing in the business.

.

Thank you. Our next question or comment is from Doug Schenkel from Cowen. Your line is now open..

Good morning.

What was core revenue growth by each sub-segment within the food, environmental and core industrial category and could you provide any relevant details on trends within each sub-segment by geography?.

Doug, I think we’re not going to go breakout those details at that level granularity, but I’d point you back to some of our general commentary.

Our industrial business was quite well balanced actually across many of those different categories in food and materials characterization and environmental and it was really well balanced across our major geographies, U.S., Europe and China were all in positive territory on industrial and India was slightly negative in part due to the GST tax implementation, but these are smaller, much smaller number and industrial as you know with a bigger pharma business.

So, I would just look at both quarter results, but also on industrial the year-to-date results and last 12-month results all in positive territory in the U.S., China and in Europe. .

Okay. Just flipping back to biopharma. You had a good year, but your biopharma revenue growth for the year has lagged the broader tools group at least the last couple of quarters.

This may simply be a function of your concentration on certain product classes and company specific comparisons, that said Chris, how comfortable are you that competitive share shifts are not also a factor?.

Yeah, I guess as you sort of alluded to Doug, the basic comparison last two quarters of low teens growth in prior year has to be taken into consideration when looking at our pharma growth rate, but we have been really rock solid at 6% pharma growth both year-to-date as well as last 12 months and over almost any rolling period.

I am confident that we are doing well from a share standpoint in the pharma business and if you compare our results over almost any rolling period to competition, I think you’ll see that.

We obviously do the best we can to look at market share data from different sources like SDI and the oldest survey and all of those surveys tend to reinforce the same point. As you know share can be very sticky in these markets.

We have done a good job innovating and holding on these shares, certainly there are some categories where we have seen some pressure like high resolution Mass spectrometry in recent years, but we also are continuing to invest in new technology that will turn that in the other direction.

In the heart of the LCMS world, we have done very well from a share standpoint, we believe especially with the broadening of our [indiscernible] product line that I talked about earlier and [indiscernible]. And as those two technologies continue to grow together and utilization we think we’re well positioned for share gains in the future.

And then our core LC business, we have got a very strong base of share that’s really headlined by not just for multiple technology categories of HPLC and UPLC but also our empower chromatography data systems, keep in mind we own about two-thirds of the market for CDS, which gives us great visibility into what’s happening with instruments in the market and is the major competitive advantage that only continues to be enhanced.

So, we do try to study the share question as much as we can but we feel good about where we are..

Thank you. Our next question or comment is from Jack Meehan from Barclays. Your line is open..

Thanks, and good morning guys. Chris, I was wondering, could you elaborate on the industrial trends in the quarter, obviously a great result from TA and as you think about the fourth quarter, a little bit of a tougher comp there.

If you could talk about the setup that would be great?.

So, as you point out the industrial has been a good story all year long as just to reiterate our industrial growth year-to-date has been 7% and actually last 12 months has been 9% because as you allude to we did have a strong fourth quarter in industrial last year.

I would say that the balance in our industrial performance is really good between TA and those Waters categories.

And TA has really come on strong this year, TA has had a year as you’ve seen that’s developed well over the course of the year and this quarter we saw double digit instrument growth out of TA and naturally a reflection of this we believe is really a winning product strategy around the discovery line of thermal analyzers which as you know has been rolling out steadily since mid-2016 and we’re still in the process of maturing that overall portfolio of tiered instruments for all the different thermal applications.

I think we’re also encouraged by the performance of some of the more recent acquisitions of TA, as you should know TA has a bit of a drum beat of small tuck-in product line acquisitions like the electro force group and [indiscernible] things we’ve talked about in the past and a lot of those are also beginning to scale a little bit and give us strength and even a broader footprint in some of these industrial markets.

So obviously we watch this closely, when we came into the year we were setting out to have good balance growth between pharma and industrial and I think that’s what’s played out over the course of year and I think one of the more satisfying aspects of the year-to-date so far. .

Great. And then just one for Sherry, you mentioned on gross margin FX is about 30 bp headwind that would imply about flat year-over-year or otherwise.

Could you just talk about some of the mix impact in the quarter, whether its product or end market driven that got to that result?.

Sure, any question we have a lot of pushes and pulls on the gross margin. So there as some positive mix dynamics and manufacturing variances were helped some of the cushions on it, we had a pretty strong service quarter and so as you know that’s kind of a headwind to our gross margin but it helps us on the operating margin.

Our US performance, with it being, it has been improved but now there is bigger part of the total that is also a little bit of a headwind on the gross margin. So, you put all those things together and with the FX that gets us to our gross margins for the quarter..

Thank you. Our next question or comment comes from Steve [indiscernible] from Morgan Stanley. Your line is open..

Hi, thanks. First is just a couple of housekeeping items for Sherry and then I have one for Chris.

Sherry, there are some new revenue recognition rules coming into play for next year to get a chance to take a look at those and then see if you have any sense whether they’ll impact particularly on service any of the rev record counting? And then also for Sherry, it seems like currency for next year is probably going to be I don’t know, maybe 3%, 4% positive to the bottom line, is that anywhere close to what you’re thinking? And then again, I had one for Chris.

.

Sure, on the revenue recognition, our team has been doing quite a bit of work on that globally just to understand the impacts of it and while we aren’t totally complete with everything our current assessment would be that we’re not having material impact on our revenue line or the service contracts at this point in time.

Your other housekeeping question about FX for next year. So, a little too early to be giving guidance for 2018, we will do that in January, but I would say looking at today’s FX rates it would be just a slight positive tailwind, I wouldn’t be thinking as high as 3 or 4% based on today’s rates.

But, too early to call obviously since we are not in 2018 yet. .

Okay, thanks Sherry, and then Chris look we have covered a lot of details here in the Q&A, I’d love to just kind of open it up to you and ask a real simple question, it's like over the next I don’t know quarter a year, you can pick the time horizon, if you want investors thinking about one thing that you really excited about that’s a driver of topline growth through Waters that you think people might under appreciate.

What is that? And I’ll let others step in here. Thanks. .

Sure, thanks for the question Steve and it’s a good time to think about those things, we have just completed our second annual strategic planning process, we had a great discussion with our Board of Directors last week in New York.

And one of the things that I have gained a deeper appreciation for I guess I have been on the job a little more than two years now, is just the opportunity out there, I think there is more opportunity in this business that I have been appreciated, when I first came in and that really is a function of sort of the inexorable desire of the world to gain even deeper insights into the molecular structure of material of all type whether its drugs, food or materials and I think as we look at our long range plans and we look at our technology roadmap, making our technology more accessible to more users and to really open up that opportunity not just in Pharma but in our other categories is a big opportunity.

I’d say at the very top of our list is something that I have mentioned in some previous settings, including your conference, which is just the rise in analytical rigor around bio-molecules and the opportunity to move LC plus Mass spec workflows into routine regulated applications and we have talked a little bit about our [indiscernible] program and there is lot behind that is well.

But I think there is some things out there that could lay the foundation for sustainable growth for a long period of time.

And as we put more specificity around workflows and applications and informatics for the other vertical markets, we think that this is a great market development opportunity overall and I think what I am most excited about as we really hold all the cards in this deck, we have a very strong position as you know in chemical separations in Mass spectrometry particularly the integrated use of Mass spectrometry of course precision chemistries and the informatics that makes it all work together and comply with regulation and compliance needs.

And so, I know that’s a bit of a long answer but that’s the opportunity that’s on my mind, and so it's up to us as the management team to be a very disciplined on how we continue to deliver strong results and growth but also balance that margin expansion with the investment in the business, to get after these opportunities. .

Thank you. Our next question coming is from Dan Arias from Citigroup. Your line is open..

Good morning, thank you. Chris, within Mass spec, can you just put some color to your comments there. You came back to the expansion of the application base in MS.

So, at this point you’re seeing higher growth from routine testing or is it more of the discovery research segment? Just curious how the split looks by usage or is there in fact a difference?.

Yeah, it’s a good question Dan and actually as I highlighted in the note, we’ve been encouraged by our mass spec performance this year. We’ve had a solid mass spec year both in the quarter and year-to-date and that strength is broad based.

We are seeing I think the beginnings of what I alluded to there in the prior question about the movement of mass spec into the heart of product development and even working its way even further downstream in to QA QC. But discovery has been robust, but it's also been robust in the applied markets.

Our tandem quad portfolio in particular with [indiscernible] TQSX and TQS Micro is shown its strength in the food and in some of the chemical application areas as well.

So again, somewhat of an outside in view coming into the company, I really do see mass spec overtime playing out as a much more broadly utilized tool in more simple formats that go well beyond some of the research applications that its traditionally been known for. .

Okay, helpful. And then if I just maybe could ask one more question on the setup within the customer class. If I just look at the coming quarter, the comp for biopharma is 6% I believe which is less than what it was this quarter.

So, I mean if you just look ahead at 4Q, do you think you could finish the year a couple of points higher in biopharma or is 5 to 6% in line with what you’ve done year-to-date still the way to think about it?.

You know Dan I guess I just comment that what we always typically say which is we look at the long-term historical growth rate of the markets which we have very much been tracking at on sort of a rolling basis as we’ve said. And we continue to strive for that and strive to overachieve it where we can.

And obviously year-end dynamics will play into that and I think we continue to look at the business as a global business.

We’re cautious in the US at this point but cautiously optimistic we think and we’re not assuming everything goes right in terms of our guidance and so we’ll continue to take step by step but the main point is that we think the pharma market is healthy overall is a very attractive and increasingly attractive market looking forward.

And so, we’ll just continue to stay laser focused on it in getting the best we can..

Thank you. Our next question comes from Amanda Murphy from William Blair. Your line is open. .

Alright, good morning. I actually had a similar question to Dan just in terms of the LCE side of the business. So obviously you’ve talked about or just talked about growth in generics and how that’s going to continue drive our results strength in biologics.

So, I just is wondering if you could help us understand kind of how the mix looks like in the install base at this point so between the alliance platform and then some of the UPLC product kind of what does that look like and how has it changed, how do you expect it to change and kind of what’s the contribution to growth from both sides at this point?.

Sure on the LCE business Amanda, that’s a good question and we continue to see pretty good balance actually between our HPLC and UPLC platforms and you know at this point in time alliance in HPLC is still bigger in terms of units, the new PLC and also don’t forget the [indiscernible] system which is a hybrid system that can bridge those methods and so we have a pretty robust portfolio and we continue to develop enhancements to that platform alongside our informatics platform because it's really LC plus Optical detection plus empower chromatography data systems as an overall system solution that is really the offering in the marketplace that serves particularly that generic customer as well as a wide variety of other types of molecules and it's not just the LC component but its actually the system and that’s why you hear us talking so much about more of a systems orientation and systems engineering and transformational engineering things we can do uniquely by pulling all those things together.

.

Got it, okay and then I also another question on China. So, one of the other areas you talked about in the past as being a driver of growth is traditional medicine.

I just was curious if you had any contacts around how big that market could be for you, is that, as you think about China is obviously growing quite well, but how much of that market is driving the growth at this point and again kind of thinking going forward?.

Yes, that’s a good question.

TCM is definitely a unique aspect of the China market, and it's hard to predict I think or get our arms around how big that could be but it’s an important market and the data point that I always love to hear and see is that the Chinese population takes prescriptions in equal amounts for TCM type products as well as traditional medical therapies and yet the labeling requirements in the testing methods around TCMs are small but growing quickly and so there does seem to be a genuine interest on a part of the Chinese regulators to continue to enhance the labeling requirements and the testing requirements for TCMs and we think that’s a long term tailwind, those are pretty niche applications now.

But we definitely see TCM and I'd also throw in food and food testing alongside TCM as categories that are seeing increasing regulation within China.

China, has been a great story for the Company, we have had a very strong year-to-date in last 12 months and quarter itself in China and the thing that continues to impress me about China is the balance and the breadth of that growth, China is actually less concentrated in pharma than a lot of other markets, its more concentrated in food and materials than other markets and even within pharma has a lot of diversity in terms of generics, innovator drugs and TCMs.

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Thank you. Our next question or comment is from Patrick Donnelly from Goldman Sachs. Your line is open. .

Great thanks. Chris, I think you guys aren’t the best proxy for government academic market given your relatively small exposure but certainly saw some notable growth there. Can you maybe just kind of talk through where you saw particular areas of strength and then maybe just a focus on the U.S.

what you saw with the lab budgets here?.

Sure, no actually Patrick you are exactly right, you said it well which is we’re not a great proxy for that market, its roughly 10% of our revenue.

It was definitely a good quarter overall and that built on the 5% we grew in the prior quarter and year-to-date though if you look at more the rolling period of year-to-date or last 12 months were in that low to mid-single digit type range which is again I think more characteristic of that market overall.

As we pointed out before, the academic market is small for us and somewhat lumpy. So, we do get quarter-to-quarter variation and will continue to emphasize that because if the market goes down a bit or up a bit, we don’t get overly exercised because we see a pretty steady drumbeat of that business over the rolling period.

But in particular there just continues I think to be a very healthy appetite for investment in biomedical research and in the Omex and we’re particularly pleased with our position in a lot of the metabolomics type work, assays and have particularly strength there and we have seen greater and greater interest from the research community on metabolomics and better understanding of microbiome and some of the related areas of biomedical research..

Okay, makes sense.

And maybe just one more on pharma and obviously a few questions on that, but when you look at the last couple of quarters at 4 or 5% growth, when you look forward, do you see kind of pockets of growth opportunity that you feel can reaccelerate this market towards kind of the high single digit growth that you feel and I know you talked about the longer-term growth rate of 6%.

I mean do you feel like we’re kind of in the cycle where we’re going to hang around there for a little while there?.

I don’t exactly know, I mean I think we feel good about the overall market right now as we’ve said and you now we never get too far ahead of our tips if you will in terms of forecasting accelerated growth over historical trends but as you know we do get that from time-to-time from quarter-to-quarter and we’ve had some years like that and we do think that the underlying trends in pharma give us that possibility of continuing to see better growth from time-to-time and to fairly safely rely on that through the long-term historical rates.

So, it's pretty hard to predict when that happens but it has happened and ought to continue to happen from time-to-time that we get some acceleration. .

Thank you. Our next question or comment is from Puneet Souda from Leerink Partners. Your line is open. .

Hi Chris, thanks for taking my questions. A quick clarification on the GST, I just assume India has still 7 to 8% of the mix.

So, if you look at the GST categories and changes from a tax perspective and the GST tax buckets, once they are accounted for is it a benefit to the customer or is it a negative for them and then if that market is still continuing to be largely alliance or some of them shifting to UPLC on the generic end?.

Yeah, thanks for the question and just to clarify couple of quick things. India is more in the 6 to 7% range of our mix versus 7% to 8% but that’s a pretty small difference and yes, GST is actually a really important thing and its just [indiscernible] of India and a bull on India and the economy and the government of India really.

I applaud the implementation of GST as well as measures like demonetization. I think what India is doing right now is putting in some changes to their economy that could pave the way for more stability going forward.

The delay in orders and shipments is purely related to systems implementations for our customers to be compliant with the new laws and that our systems have to match up to their systems.

So, as we work through that which we’re working through real time, and our customers are working through that will provide certainly a very stable base of transactional capability going forward and I don’t see it as any kind of an ongoing headwind, or in particular on a Q tailwind other than the catch that we will see.

But really, I think it's another example of more of a long term foundational attribute of the Indian economy that will benefit the country overtime. .

Okay, thanks for that.

And quickly on the Hurricane impact as well as just wanted to understand, are you expecting, are you accounting for any of the uptick and instrument replacement at some of these mass specs and LC that are largely sitting idle, I mean I ask that because some of us would been in mass specs, and essential detectors rule go bad overtime as they are sitting on the back end, so just trying to understand if there is any replacement tailwind coming from that in your guidance and expectations?.

I think we’re actually pretty conservative on that and we’re not assuming any kind of accelerated replacement or tailwind there.

I mean we’re really focused on the needs of our employees and our customers, obviously we have employees in some of these ravaged areas Puerto Rico and beyond and our focus is really purely on getting people back up and running and helping our customers work through this and if that results in some additional opportunity down the road great, but we’re not thinking opportunistically about it in that way, we’re thinking more operationally about it and doing the best we can to serve our customers.

So, I think we have time, for one or two quick ones here, John maybe two more please operator. .

Thank you. Our next question is from Brandon Couillard from Jefferies. Your line is now open..

Thanks. One quicker for Sherry, sort of housekeeping items.

What was the revenue contribution from M&A in the third quarter, and just to confirm, you do have an extra day in the fourth quarter, correct?.

Yes, so just a very small contribution from M&A coming through TA as Chris mentioned in his earlier comments. And then there isn’t extra day in the fourth quarter and we kind of fully factor that into our outlook and guidance. .

Thank you. Our next question comes from Steve Willoughby from Cleveland Research. Your line is now open..

Thanks Steven here. Just a quick one for Sherry and then a question for Chris. Sherry, just when I am looking, just want to make sure I have a little math right here on your third quarter results.

I believe your guidance was for a 4% to 5% headwind from FX and then FX was a penny positive, do I have that right, so it's kind of a similar in a $0.07 to $0.09 positive swing for FX in the quarter. .

Yes, that’s correct. .

Okay.

And then Chris just wonder if you could comment all about kind of your product vitality in terms of what products are driving your growth these days whether its new products, kind of older products, how the QDA fits into that and any comments on kind of the overall new product pipeline?.

Sure, I won't give too precise of an answer on that, because it does move around quarter to quarter but actually -- we are balance really comes to our mind, I am impressed by the contribution of very old products if you will like Alliance, HPLC Systems with empower chromatography data.

That continues to chug along and be a very reliable source of growth. We continue to see good uptick on what I will call sort of medium in the market products like UPLC and QD arc as well.

Like I said mass specs have been really solid and that’s been a combination of some technology that’s been in the market for a few years like TQS Micro, QDA, but also the [indiscernible] which is about a year old.

So, have a lot of balance, and we do have a pretty strong product cycle we believe coming up in ’18 and beyond and we’ll continue to try to leverage all aspects of this.

One thing I do think about a lot of not just the launch of new technology but really how that technology grabs hold and gets traction in the marketplace and sometimes the biggest impact you actually see in a lot of these products and technology categories is actually in your two, three and four as some of those technologies work their way in to more standards of measurement.

So anyway, we think we have a pretty vibrant product offering and a good product position in this as I’ve said today and many times R&D investment is our number one priority for growth for the future. So anyway, with that maybe we’ll finish with the questions and just want to say thank you for the great questions from all of you.

In conclusion, we’re pleased with our results through the first three quarters of 2017, headlined by our ability to deliver consistently strong organic revenue growth combined with disciplined P&L management to deliver double digit earnings per share growth.

As we close out 2017, we remain focused on execution and feel that market conditions combined with our strong competitive position support continued success. So, on behalf of our entire management team, I’d like to thank you for our support and interest in Waters.

We look forward to updating you on our progress during our Q4 2017 call which we currently anticipate holding on January 23rd 2018. Thanks, and have a great day. .

Thank you. That concludes today’s conference call. Thank you for your participation, you may disconnect at this time..