Waters Corporation (WAT)

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Waters Corporation (WAT)

Q1 2009 Earnings Call

April 28, 2009 8:30 am ET


Douglas Berthiaume - Chairman, President and CEO

John Ornell - CFO

Gene Cassis - VP of IR


Marshall Urist - Morgan Stanley

Ross Muken - Deutsche Bank

Quintin Lai - Robert W. Baird

Isaac Ro - Leerink Swann

Derik De Bruin - UBS

Doug Schenkel - Cowen & Company

Tycho Peterson - JPMorgan



Good morning. Welcome to the Waters Corporation first quarter 2009 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 you have any objections, please disconnect at this 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

Thank you. Good morning and welcome to the Waters Corporation first quarter financial results conference call. And with me on today's call is John Ornell, Waters' 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 quarters' highlights and then John will follow with details on our financial results and provide you with our outlook for the second quarter and for the full year, but before we get going, I would 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 Q2 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, 2008, and 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 July 2009. During this call, we will refer to certain non-GAAP financial measures, a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is attached to the company’s earnings release issued this morning, and our discussion with the results of operations were being referred to pro forma results which exclude the effect of [findings] such as those outlined in our schedule entitled, 'Reconciliation Of Net Income Per Share', included in this morning's press release.

Douglas Berthiaume

Okay. Thanks, John. Well, in the past couple of quarters, we have seen significant change in demand trends in our markets. Concerns about tightening capital markets were followed quickly by a souring global economy, compounding issues related to an already skittish pharmaceuticals spending environment. Certainly these turbulent times stress even the most successful business strategies, as slower demand and weaker visibility allow little flexibility for less than optimized business decision making.

Though we have been through tough end markets before, none have matched the current environment, and I think thus our business model has been and is being subjected to a new test. I'm pleased to tell you that we are weathering this storm, and that in the first quarter, the agility and resiliency of our business has allowed us to deliver higher operating profits than earnings despite a top line that was under pressure.

Our sales in the quarter were down 5% on a currency neutral basis, and we were able to deliver 7% earnings growth due to tight cost control, currency-related cost reductions, leverage from our share repurchase program, and favorable product and geographical mix. We benefited from investments in a global manufacturing and distribution strategy that allowed us in the quarter to more than offset the adverse top line effects of a stronger U.S. dollar with reduced British pound and Euro-based manufacturing and SG&A costs to yield a nice pickup in our margins.

In addition, our global sales strategy that focuses on delivering innovative system-based solutions supports a market-leading pricing position that can be quarter after quarter seen in our superior gross margin. Looking at the top line, the strong performance of our recurring revenues, including our service and chromatography chemicals businesses help partially offset slower instrument sales. Over the years, our recurring revenue growth has remained fairly consistent and somewhat insensitive to the quarterly fluctuations we’ve seen in instrument demand. That dynamic has benefited us during the past couple of quarters and we expect to see this trend continue through 2009.

In the first quarter of 2009, the calendar treated our recurring revenues kindly, and we estimate that more selling days added about one to two points of growth to our corporate sales. Instrument revenue saw our mid-teen decline in the quarter, as demand from industrial chemical accounts and from some developing countries was particularly weak. We attribute the weakness in chemical spending to global recessionary pressures, while declines in our sales in India and Eastern Europe, seem due to a combination of economic factors and significantly weakened local currencies.

Looking at our instrument system business more closely, demand for high-end and application-focused systems was stronger than for more routine analysis instruments that were often purchased to replace older systems. Customer interest was strongest for our new mass spectrometry and ACQUITY instruments. Looking at our end markets, pharmaceutical segment sales growth was inline with the company’s overall performance, while weaker industrial sales were offset by stronger government and university spending.

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