Waters Corporation (WAT)

WAT 
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Waters Corporation (WAT)

Q2 2009 Earnings Call

July 28, 2009 8:30 am ET

Executives

Douglas A. Berthiaume – Chairman of the Board, President & Chief Executive Officer

John A. Ornell – Chief Financial Officer & Vice President Finance and Administration

Analysts

Tycho Peterson – JP Morgan Securities

Quintin Lai – Robert W. Baird

Isaac Ro – Leerink Swann & Company

Derik deBruin – UBS

Robert Hawkins – Stifel Nicolaus

Ross Muken – Deutsche Bank Securities, Inc.

Doug Schenkel – Cowen & Company

Marshall Urist – Morgan Stanley

Jonathan Groberg – Macquarie Capital (USA)

Presentation

Operator

Welcome to the Waters Corporation second quarter financial results conference call. All participants will be in a listen only until the question and answer session of the conference. This conference is being recorded. If anyone has any objections, please disconnect at this time. I would like to introduce your host for today’s conference call Mr. Douglas Berthiaume, President and Chief Executive Officer of Waters Corporation.

Douglas A. Berthiaume

Welcome to the Waters Corporation second quarter financial results conference call. With me on today’s call is John Ornell, the company’s Chief Financial Officer and as is our normal practice, I will start with an overview of the quarter’s highlights, John will follow with the details on our financial results and provide you with an outlook for the full year. But, before we get going I’d like John to cover the cautionary language.

John A. 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 Q3 and full year 2009. We caution you that all such statements are only predictions and actual events or results may differ materially.

For a detailed discussion of some of the risk and contingencies that could cause our actual performance to differ significantly from our present expectations see our 10K annual report for the fiscal year ended December 31, 2008 in part one under the caption business risk factors. We further caution you that the company does no obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding possible future income statement results accept during our regularly scheduled earnings release conference calls and webcasts. The next earnings release call and webcast is currently planned for October, 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 measure is attached to the company’s earnings release issued this morning. In our discussion of the results of operations we may refer to pro forma results which exclude the impact of the items such as those outlined in our schedule entitled reconciliation of net income per diluted share included in this morning’s press release.

Douglas A. Berthiaume

The demand patterns that we talked to you about in April largely continued in the second quarter. Overall, our business with industrial accounts, firms closely tied to the production of chemicals that are used in the manufacture of consumer goods was the weakest. Similar to the first quarter, our pharmaceutical end market showed modest decline in line with the company’s overall sales results. On the bright side, we continue to enjoy strong growth from our combined government and academic customers.

Our sales in the quarter were down 4% on a currency neutral basis and we were able to deliver 3% earnings growth due to favorable product mix, disciplined price and cost controls, favorable currency translation and leverage from our share repurchase program. To look at the top line, our recurring revenue, the combination of our service and chromatography chemicals businesses grew more modestly in the quarter while the decline in our instrument business was more moderate than in the first quarter.

The slower second quarter year-over-year growth rate for our recurring revenues primarily due to a tough comparison with the prior year’s quarter. We feel that the 2009 half year growth rate for our recurring revenue is more indicative of underlying demand and we expect mid single digit currency neutral sales growth for our chemistry and service business during the second half of the year.

Looking more closely at instrumentation, we attribute the quarter’s revenue decline to weak demand from industrial chemical accounts and from some developing countries. We believe the weakness in industrial spending is related to global recessionary pressures while declines in developing countries, most notably India and Latin America seemed due to a combination of economic factors and the residual effects of weakened local currency.

Similar to what we saw in the first quarter, demand for high end and application focused systems were stronger for more routine analysis instruments that are often purchased to replace older systems. Customer interest was strongest for research mass spectrometry and ACQUITY UPLC instruments. If you look at our end markets, overall pharmaceutical sales volume declined modestly in the quarter and was in line with the company’s overall performance while weaker industrial sales were offset by stronger government and university spending.

Sales to our top pharmaceutical customers, our 15 largest drug accounts, were up in the second quarter and showed some acceleration from the growth we witnessed in the first quarter. We were particularly encouraged by more broad adoption of ACQUITY UPLC by these firms. Geographically, our fastest growing major market was China where sales to government agencies, universities and applied markets were all strong. In India, the declines that we saw in this quarter were not as severe as in the first quarter and there are some indications that we are likely to see some continued improvements in the second half of 2009.

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