Waters Corporation (WAT)

WAT 
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Waters Corp. (WAT)

Q4 2008 Earnings Call

January 27, 2009 8:30 am ET

Executives

Douglas Berthiaume - Chairman, President and CEO

John Ornell - Vice President, Finance and Administration and CFO

Analysts

Ross Muken - Deutsche Bank

Doug Schenkel - Cowen and Company

Quintin Lai - Robert W. Baird

Tycho Peterson - JPMorgan

Isaac Ro - Leerink Swann

Derik deBruin - UBS

Chris Arndt - Select Equity Group

Presentation

Operator

Good morning, and welcome to the Waters Corporation fourth quarter 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 any objections, please disconnect at his time.

I would like to introduce your host for today's call, Mr. Douglas Berthiaume, Chairman, President and Chief Executive Officer of Waters Corporation. Sir, you may begin.

Douglas Berthiaume

Good morning, and welcome to the Waters Corporation fourth quarter and full year 2008 financial results conference call.

With me on today's call as usual is John Ornell, the company’s Chief Financial Officer and Gene Cassis, the Vice President of Investor Relations. As is our normal practice, I will start with an overview of the business highlights and John will follow with details on our financial results and then provide you with our outlook for the first quarter and the full year 2009. But before we get going, I'd like John to cover the cautionary language.

John Ornell

During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the company. In particular, we will provide guidance regarding possible future income statement results of the company, this time for Q1 and full year 2009. We caution you that all such statements are only predictions that actual events or results may differ materially. For 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, 2007, Part I under the caption 'Business Risk Factors.' 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 April 2009. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is attached to the company's earnings release issued this morning. In our discussions of the results of operations, we may refer to pro forma results, which exclude the impact of items such as, so as outlined in our schedule titled reconciliation of net income per share included in this month’s press release.

Douglas Berthiaume

Thank you, John. In the fourth quarter we reported flat organic sales growth and a 9% increase in adjusted earnings per share during what was clearly a very difficult economic environment. Despite the lower than originally anticipated sales volume, the strength of our business model enabled us to maintain our operating profitability and we finished the year with record annual free cash flow.

Though we believe that sales growth in 2009 remains challenging for our business, we are confident in our ability to adapt to these rather difficult economic conditions, while we continue to make the critical technology of product development investments that'll help ensure our long-term strength in the marketplace.

The top line trends that we saw in the fourth quarter included a softening in demand by industrial chemical customers primarily in the U.S. and Western Europe and the loss of purchasing power experienced by our customers in many developing countries caused by the adverse effects of a rapidly appreciating U.S. dollar.

Somewhat offsetting these pressures, we saw stable growth in our recurring revenues and continued strong demand in China. Reviewing our business with industrial chemical customers, we estimate that around 15% of our sales come from worldwide chemical and plastic manufacturers. These companies are in many instances the suppliers of bulk materials used in many consumer electronic goods, automobiles, and in building construction.

Within these companies are products that are used primarily for new product development and in some cases for quality assurance. During most of the past couple of years, our business with these firms has grown nicely as they invested new technologies. This growth has been most apparent in our TA instruments division. In the fourth quarter we saw a downturn in instrument demand from these customers, as concerns about weakening economic conditions resulted in budgetary cutback.

But we are confident that researchers in these firms appreciate the advantages of our new technology instruments. We also expect that capital will be tight, so concerns about the deepening global recession at bay and times of a recovery and consumer demand begin to surface.

In the mean time we will focus our efforts on promoting the advantages of our technologies and improving both research and manufacturing efficiencies within Water. We will also position the advantages of our new instrument systems and facilitating environmentally friendly processes and in complying with product safety tests.

We look at the effects of currency. The strengthening U.S. dollar had a negative effect on our revenues in the fourth quarter. We transact about a third of our business in the European Union and the rapid appreciation of the U.S. dollar against the Euro, with the principle factor that drove the 4% reduction in reported sales due to currency translation. However, the appreciation of the dollar also affected our businesses in parts of the developing world, where we transact sales in U.S. dollars. Local currencies experienced even more significant devaluations than the Euro.

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