Welcome to the Waters Corporation Second Quarter 2010 Financial Results Conference Call. (Operator Instructions) 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.

Thank you. Good morning and welcome to the Waters Corporation second quarter financial results conference call. With me on today’s call is John Ornell, the Waters Chief Financial Officer; Art Caputo, President of the Waters Division and Gene Cassis, the Vice President of Investor Relations. As is our normal practice I’m going to start with an overview of the quarter’s highlights. John will follow with details on our financial results and provide you with our outlook for the third quarter and for the full year, but before we get to that, I’d like John to 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 future income statement results of the company, this time for Q3 and full-year 2010. 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, 2009 in part one 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 October 2010. During this call we will refer to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure 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 entitled Reconciliation of Net Income per Diluted Share included in this morning’s press release.

Thank you John. Well from many perspectives I think we’re pleased with our second quarter’s performance. Sales of our newly introduced instrument systems and a broad-based improvement in customer demand contributed to 9% currency neutral sales growth and close to 20% growth in earnings per share. At the same time, we are confident that our exciting new product launches, which we showcased at June’s ASMS conference and earlier this year, will provide us with a powerful competitive edge in the second half of 2010 and further into 2011. When you look at the quarter, sales growth to pharmaceutical and industrial chemical customers significantly improved in comparison to what we’ve been seeing in the last few quarters. As you know, the pharmaceutical segment represents more than half of the Waters Division’s sales, and it was improvements in this customer set that contributed most meaningfully to the division’s growth in the second quarter. Geographically, pharmaceutical growth was strongest in North America and Asia, with drug discovery and QC applications leading the way. Sales in the quarter for most of our large-cap drug accounts grew sequentially from the levels that we saw in the first quarter. However, in absolute terms, demand remained somewhat weak, as many of these customers continue to rationalize their operations. Fortunately, strong demand from generic, specialty biopharmaceuticals, and TRO customers much more than offset the slower sales at our larger drug firms and all in our pharmaceutical business segment enjoyed double-digit top-line growth in the quarter. Sales to industrial chemical accounts were also strong in the quarter, and our TA instruments division benefitted from a significant and broad rebound in capital spending. As you may recall, TA’s largest customer segment is the industrial chemical market, manufacturers of fine chemicals and polymers used in applications ranging from consumer electronics, to…

Thank you Doug, and good morning. Second quarter sales increased by 8% and non-GAAP earnings per diluted share were up 19% at $0.93 this quarter, compared to earnings of $0.78 last year. On a GAAP basis, our earnings were $0.90 this quarter, compared to $0.72 last year, and a reconciliation of our GAAP to non-GAAP earnings is included in our press release issued this morning. Reviewing Q2 sales results compared to Q2 last year, sales were up 9% this quarter before currency translation. Currency translation reduced sales growth by 1% this quarter. Looking at our sales growth geographically, and before foreign exchange effects, sales within the U.S. were up 11%, Europe’s sales were up 9%, sales within Japan were down 3%, and sales in Asia outside of Japan were up 14%. Turning to the product front, within the Waters division instrument systems sales increased by 8% and recurring revenues grew by 7% this quarter before foreign exchange effects. Within our TA instruments division, sales were strong and increased by 28% versus prior year as customers returned to more traditional levels of purchasing activity. Now I would like to comment on our Q2 non-GAAP reported financial performance versus prior year. Gross margin performance continued to be strong this quarter and came in about as expected at 60.3%, comparable to prior year end last quarter. SG&A expenses increased 2% this quarter compared to prior year. Salaries increased modestly and marketing costs were up related to food safety programs, but these increases were largely mitigated by lower currency translation costs, lower than anticipated incentive plan expenses from finalization of 2009 accrual balances, and a continued restraint on adding additional headcount at this time. For the remainder of the year we expect SG&A to grow at a mid-single-digit rate. R&D expenses increased by 6%…

Thank you John, and operator I think at this point we can open it up for Q&A.

(Operator instructions.)

Congratulations on a nice quarter. Could you remind us again, in previous cycles, when after a downturn and then a pickup in the industrial, you had a really strong TA quarter, how long does kind of a rebound like this usually occur Doug?

Frankly Quintin, we haven’t seen anything that was quite as sharp a dropoff as we saw late 2008 into 2009. So I’m not sure that what we’ve seen in the last 10 years is indicative of what we’re likely to experience this time. We think that the second half is going to continue to be very robust in the TA business, and it probably has legs just from that bounce back in 2011. There’s no signs of this tailing off at this point. The start to this quarter has been continuing very robust at TA and they’re optimistic for the rest of this year. Realistically, I think it peters out as we get into the, further on in 2011, but I see no sign that we’re going in for another dip. So I’d say we look good into 2011.

And I’d say the Q3 comparison, Quintin, is pretty comparable to Q2, and then Q4’s basis a bit stronger, so I’d say the Q2 results, while we’re not in our guidance suggesting that it continues at that very high rate, the expectation would still be for some type of double-digit growth, perhaps in the third quarter before it begins to mitigate as we exit the year.

Thank you. And then, with respect to H-Class, have you seen an impact on your Alliance sales and the people that are taking it up, are they Waters legacy customers or are you seeing market share wins to new customers?

I’d say the H-Class hasn’t had much impact on Alliance. We have seen, if anything, an impact on higher-end ACUITY sales. So if you look at the mix I’d say some of those H-Class sales would have previously been ACUITY sales, not so much Alliance. But our strongest Alliance customers today are still in India, and in those generic accounts. What’s really encouraging about the H-Class is that it’s beginning to penetrate into classical QC applications, and that works on several fronts. Number one, that’s an area where we’re seeing large pharma long out their replacement cycles and number two, they tend to the highest purchases of columns. Those applications are heavy column users. Now, the benefit of H-Class is they can use traditional columns, but as they move to more high-throughput applications and get truly into UPLC applications, they use more UPLC columns. So I think that works in our favor on a number of fronts. We think we’re at the front end of that but the early signs are very encouraging.

Doug, in the earlier comments you talked about investing during the downturn and in particular with regard to the TA business can you comment on whether the results you’re seeing here are market growth are you really starting to pull some share here? And can you also comment on competitive wins in mass spec overall and are you starting to pull some share in that business as well?

You know we need to be very careful about talking about share changes on the basis of one or two quarters, Tycho, so I firmly believe that our most recent mass spec offerings are at the top of the class. And our customers tell us that they’re very happy with the G2 kind of performance in our QTof grade instruments and it’s early on in the triple quad business but boy we see side by side evaluations of our new triple and we haven’t seen any side by sides where we have lost. And that business is growing at very good, solid, double digit rates and nobody reports quite as much detail on that business as we do, but we can’t find too many competitors reporting that kind of growth in their mass spec business, particularly the high end mass spec business. So all of those are good signs that probably in the short term we’re leading the pack here and if it continues over multiple quarters it would be hard not to suppose that we’re gaining share there.

And then in your comments you also talked about government sales softening and I think you made the comment austerity measures having an impact and then later you talked about you’re holding up, so is it fair to assume that the government pressure was here in the U.S. and can you elaborate a little bit more on, is that just a lack of stimulus or are you seeing things actually . . .

I apologize if that was the implication. I think the government business softness we’re seeing generally. If you look at our non-profit business it was the university market that was stronger and government business, Japan in particular, we saw very strong end of their fiscal year growth in the first quarter and did not see a repeat of that in the first fiscal year of Japan. I think Japan was actually the most notable weakness in the government business but we also see signs of it in Europe and in the U.S.

And then just lastly on the manufacturing over to Singapore can you comment on where you are with H-Class and transitioning that over, and then I think you’ve also made the decision not to move ACUITY production over there. Can you talk about the rationale behind that?

I’d say at this point Tycho, we’re pretty much on track with the original plans at the start of the year and the H-Class product will make its way over there in the second half. In the interim we’ve moved various UPLC detectors that have begun to ramp up production volumes there and ultimately as we transition from our existing high-end ACUITY to its next iteration, it’s likely that that production in following years will make its way over to Singapore. So I would say we’re on track. We’re feeling really good about the all business that’s being generated out of that geography and everything remains pretty positive as we look to the tail end of this year and 2011.

Thank you, and congrats on a great quarter. Can we get a little more on the pharma commentary? As you think about some of the non-big-Pharma accounts, whether it’s the CROs, some of the specialty guys, the Generex, can you compare and contrast what you’re seeing in those various players and also is it geography based? The comments on India were pretty encouraging and so I think maybe that has part of it to do with it and then I have sort of a follow up.

I’d say a couple of things that are relatively positive and a couple of things that still flash some warning signs. The big drug accounts still are struggling with their acquisitions and their restructuring. So if you look at absolute comparisons of our largest pharmaceutical companies around the world, those results were negative quarter-on-quarter. That is, compared to the ’09 quarter. What’s interesting is that sequentially they improve from the first quarter to the second quarter, we’re seeing order rates improve. We’re also seeing a great deal of interest and quote rate activity is pretty strong there. I think you know, holding my breath and crossing my fingers, that sequentially we’ll continue to see improvement in those accounts. It’s hard to imagine that they could get worse. And particularly in the bio applications of those accounts we’re seeing a huge amount of interest from our most recent offerings with our bio ACUITY and the results coming out of our new systems offerings. So that’s all encouraging. In terms of current business, generic accounts, that being particularly true in India, bouncing off poor results last year, but generic accounts in Europe and in the United States are all very strong, and that’s across the board and that’s where some of the interest that we’re seeing in H-Clas and QC applications coming from. I think that’s pretty broad based. And that’s also true of CRO activity, pretty broad based geographically. So that’s I think the result of our good performance in pharma. Again across the board we had double digit growth in pharma in the Waters division this quarter, so we’re pretty enthusiastic about that.

And can you talk a bit about the type of purchasing patterns we’re seeing for the H-Class. You talked about the potential to spur a more significant replacement cycle. Are we seeing broad adoption across the bio-pharma base in terms of small and large type companies looking to add or replace the instrument? And with the larger ones are we seeing several box orders, are we seeing large scale box orders, or is it very sort of customer specific.

It really is customer specific. We’ve begun to see multiple unit orders in pharma accounts in QC, but I caution it’s that the front end of that cycle and I need to see more evidence before I really take it to the bank. I’d say it’s an encouraging early sign. It’s across the board. We’re seeing that kind of activity show itself in big pharma, in specialty pharma, and in biotech. I’d say the bio applications are probably the most near-term, where the traditional small molecule pharma is longer term, but of course all of these accounts are saying they’re gearing up for the bio applications, so I think we’re well positioned to take advantage of things there. And those are the most near-term areas where they have the most money to spend I’d say Ross.

I just wanted to continue to follow up on that H-Class QA/QC question. Is there any way you can tease out in the second quarter what percentage of your H-Class is actually going to the QA/QC setting? Is it 5%, 10%? Any numbers you could put there? And can you also talk about the backlog? Did it actually grow quarter over quarter?

Yes, our backlog did grow in the quarter, so that’s certainly an encouraging sign. In terms of the H-Class in QC, I don’t know whether we could actually give you a specific number there. Art, do you have anything qualitative to say about H-Class in the QC market?

Generally speaking, we don’t go into that level of detail, but suffice it to say that the product was really targeted at the downstream development, method development, and quality control segments, so it’s safe to say that easily half our sales are going into those two areas for that product. It’s also being well-accepted in food testing and environmental testing, so it’s broad based. But the product was designed to be, whereas the original ACUITY was leaning on the front end for the bulk of the sales the H-Class was designed for the pre-quality control development of methodologies and then carrying it down into the execution and being a system that can either conduct a legacy method of quality control or either go through the conversion to HPLC, or be a system down the road if they ever decided they did want to improve the productivity. There are separations that UPLC do that within H-Class. In rough numbers it’s the bulk of the sales and it’s roughly half the market for that business, for those two segments.

And can I just ask you just one quick follow up on the gross margin? You’re talking about 50% year over year, or 50 basis points year over year growth of the gross margin. Can you just tease out the pieces for a second? There’s FX pressure but there’s mixed manufacture lift, so you can just tease out the three pieces that are leading to the gross margin expansion for the year?

I’d say that if you look at the gross margin performance it was relatively strong in the first half of last year. The gross margin in the third quarter came down a bit and we’re suggesting that we’re more likely to be somewhat consistent with gross margins as we move into the third quarter from the second this year as a result of product mix. And also the currency environment remains very favorable for us. We have a relatively strong Yen still as we speak, so our sales in that region are being translated favorably where there’s no production in that part of the world so there’s no offset to the cost of sales line. And the British Pound continues to be relatively weak, so our units coming out of our Manchester operation as they’re sold around the world are favorable. So that environment continues as we look at the second half, so I would say that you’re looking at probably two thirds of the overall improvement is currency and the remainder is associated with cost reductions and product mix and some of the newer products that our coming out pretty strong in margins. So that’s, based on where we are today, that’s how it works. Marshall Urist – Morgan Stanley: So, first one, I know you had some comment about some sort of conservatism built in to the back half outlook, so could you talk about where you feel like you’re being conservative. Where could the upside, and I guess by the same token where could the downside come from?

Conservative. In our second half organic growth is just a smidge slower than we’re experiencing now, and if we continue to see current run rates and things involved on the new product front, it’s not impossible that we could see better results. But tempering our expectations is major questions about Western Europe, particularly the government-supported segments of the Western Europe business. Frankly, all in Europe has been pretty good, but we’ve seen pockets of weakness in Western Europe and that government-supported piece is under a fair amount of strain. So that tempers our expectations. We certainly saw strong government spending in Japan in the first quarter, weaker in the second quarter, so that causes us some element of concern. We factored that into our results. If things evolve a little bit better then we could possibly do a little bit better. We frankly have not seen a lot of results from stimulus spending in the United States from government stimulus spending. That could be a little bit better, but frankly we’re not banking too much of that in the second half either. I’d say that’s where most of our conservative comes in. We might be a little conservative on how long we think the TA bounce and how high it can get so that’s another element that if we turned out a little bit better we wouldn’t be totally surprised. Those are the key elements of when I say we’re a little bit cautious in the second half. Those are areas that we think we’ve injected some degree of conservatism.

Okay perfect. And then just one other one from me. I’m just curious, on China, the kind of underlying dynamic there. Are things still strong, sort of business as usual, no major changes, or are you seeing any impact on the dynamics in that market?

I’d say it remains strong. We’ve continued to have good, strong double-digit growth in China. Some indications that it could even see elements of strengthening. So I think China and Asia, outside of Japan, in general are still showing very good opportunities. And across technologies. Paul Knight – CLSA: Do you have any difficult comps still in the China market that you’re still going through, like melamine?

No, I’d say you shouldn’t expect us to say, for this year, maybe next year . . .

I think with China specifically that’s true. Business in general, though, we have obviously a better comp in Q3 versus Q4 but not relating to anything to do with China really specifically.

In Asia, are you order patterns different than the rest of the world? Are they large units orders or is it the same worldwide.

I’d say typically it’s the same worldwide. In China sometimes we’ll get a concentrated order that’s a little bit larger and certainly with some of the potential business that we’re seeing in the second half that could be true, but typically it hasn’t been the case. I’d say in general, seeing the strength that we’re seeing in high-end mass spectrometry, our average order has tended upwards, but that’s more of a product mix issue, Paul, than it is a general statement of how tenders are being done.

Sometimes in China you get a somewhat larger governmental order and that might make its way to different places, but that’s a one-off here or there. It’s not the common way of doing business, at least historically.

Are you seeing any impact from the Indian and Korean stimulus packages on research?

I’d say we’re seeing a little bit in Korea probably, but our India business is traditionally highly focused on that generic drug business. So it’s not a key ingredient of what we’re seeing in India.

And before we go to our next question we do ask that you limit your turn to just one question.

I guess just one clarification question and then a question that I was asking at the same time but can you maybe, I think you talked about having a pretty good Synapt backlog through the first half of this year, and then depending on what happened with government that maybe that wasn’t as clear, and from what I’m hearing you’re saying government really, some of that money hasn’t really materialized. So could you maybe just talk about where you’re at with Synapt, and then just, that was kind of a clarification, and then if you could just talk about your free cash flow strength and whether or not there’s any, given your balance sheet, whether there’s any desire or appetite to be a little bit more aggressive on the buyback front.

Second question first, Jon. Our cash flow is strong. I would say there’s nothing unusual in that, it’s not like we dramatically raised our payables balance or anything. We think it’s sustainable and we continue to evaluate the aggressiveness of our buybacks. We continue to believe that our stock is a very good investment. So I think you could think of us continuing to be on the aggressive side of that equation rather than the less aggressive side. We’ll continue to lean in that direction. In terms of our Synapt business and really talking about our high end mass spec business, we’re very confident of our position. We had a great first half in that. That’s particularly so on the orders front, but also true on the shipment front. It is true that we built some backlog, and what we’re talking about in terms of concerns or potential issues in the second half is not related to the high end MS. If anything, I’d be surprised if we saw a material softening of high end mass spec in the second half. We’re continuing to see the university piece, which of course is an indirect level of government spending in most of our areas, be very strong as it looks to that high end mass spec product line. And we have a great list of opportunities coming out of the second half. So that’s a very encouraging piece of our business.

John, can you just comment on the buyback plan in the context of the current M&A environment. It’s slowed down a bit in the second quarter but still heavily weighted obviously in the first half, but just are you seeing anything different on the M&A side, or any emergence of opportunities that might be responsible just for tempering the buyback pace a bit?

I guess I would say that we thought we would front-end-load the program, we have front-end-loaded the program. We were relatively aggressive in the second quarter I’d say, at $75 million. We talked about the program at least early in the year being targeted at maybe $250 million for the full year, so we’re well ahead of that clip certainly as we make our way through the first half. We’ve principally spent what we’ve generated, if you will, on the program, say, for $25 million. So I’d say the message there is that we are bullish on being aggressive in buyers of the stock. We’ve done that. There really isn’t anything on the front burner right now from an M&A perspective. We continue to look at the small bolt-on acquisitions that we’re typically trying to close, but I would say at least in the near term there doesn’t appear to be one that would consume cash, so it’s likely that we’ll continue to get back in the market when the window opens and continue to buy our shares in the second half. It’s not impossible that we’ll go well beyond, perhaps, that $250 million limit to the extent that we don’t buy something on the M&A front.

Okay, great. And then can you just give us some sense of the contribution from the suite of new products in the second quarter, whether qualitatively or quantitatively. And then within that, I know Doug mentioned strong double digits in high end mass spec. Can you give us a bit more quantitation around how the high end mass spec business did in the second quarter?

Well, I think in terms of mass spec our overall mass spec business was well into the double digits and our high end mass spec was beyond that. It was the strongest performer across the line. So that’s probably as much detail as I want to go into. It was a very strong quarter in high end mass spec. In terms of the new product contribution, in the mass spec area most of that performance were products that were introduced prior to this year’s AFMS. So we didn’t ship any of the products that were introduced at this year’s AMSM. Well, maybe a few, but nothing of any significance. So that’s still one of the (inaudible) and that’s probably another area where we’re being perhaps a little conservative as we look to the second half.

And while the H-Class did very well, as a percent of our LC business, it’s still rather modest. The trajectory is very good, but that would have had less of an impact, perhaps, on LC and will have more as we make our way through the second half.

Yeah, but still very, I mean the uptake in the H-Class is very strong. That’s all. I don’t want to break out unit data but boy, from a standing start in the first quarter, to where we are now, it’s been as strong an introduction of a new product since probably is . . . ACUITY was very strong five years ago when we introduced it but H-Class is very comparable.

All right, great, appreciate the color. So it’s safe to say that in the first half of this year, very limited contribution, in terms of incremental contribution from new products, and that should definitely build into the second half.

Those words are yours, John. I think yeah, particularly on the mass spec side, those new products should contribute in the second half. Derik De Bruin – UBS: One question in five parts. No, just kidding. So when you look at your R&D and SG&A spending, you’re still being a bit conservative as you look forward to the outlook. What type of costs do you need to add back into 2011 as you start looking forward there? Are there things, and I guess at what volumes do you really think you need to, organic (inaudible) growth volumes, do you think you need to start adding people and infrastructure for next year? And off on the SG&A question, historically going between Q2 and Q3 you tend to be a little bit lower in the Q3 number in SG&A. Same trend this year?

To answer that second one first, I would say expect a mid-single-digit growth from a year-over-year perspective, Q3 to Q3 in SG&A. So if that’s down a little bit, then it is, but I’d say they’re relatively flat Q2 to Q3. But a mid-single-digit growth in SG&A for Q3 specifically year-over-year is what we’re forecasting. As it relates to longer term needs for investment and the like, I believe currently that to the extent that the business continues to pick up and to the extent that the economy continues to do better, that we’ll have the ability to live within the organic top line growth rate in being able to fund investments in SG&A and R&D that don’t force those expenses to grow at the same rate as sales. Now, whether they can grow a point, two points less than sales or more is obviously dependent on how high that top line is. But I don’t foresee that we’re going to be needing to grow SG&A and R&D faster certainly than sales based on what we currently see in the pipeline. That does afford us to put some personnel in place, principally service-type people that come into the cost of sales line but other support people as well, and we’ve been doing some of that, even as we’ve made our way through the first half of the year, principally international folks. So I’d say we’re not in a dire need there. Yes, we’ll make investments in headcount if the business grows and I’m confident it will be contained within what you expect from us in being able to leverage our base of costs. Doug Schenkel - Cowan & Company: Couple questions, real quick ones. You guys talked about concerns about austerity measures I think specifically in Europe. Could you just size up how you’re thinking about your exposure as a percentage of sales to anything that would change in terms of European government spending specifically? And then my second question is, I believe you reduced your full year gross margin growth guidance by 25 basis points. If I’m wrong, forget the question. If I’m right, can you just break out how much of this change is attributable to FX versus, you know, I guess a couple of variables like production improvements, geographic mix, or product mix?

Within Europe the government piece of the business there is under 10%, it’s probably even closer to 6% or 7%, perhaps. I don’t have that right in front of me, but it’s under 10. And to the extent that it slows down a bit it’s not, we’re not saying it’s going to go to zero, but it’s likely to have an impact. It might be a few percent of growth opportunity. The other, as it relates to the gross margins, full-year expectation. You’re right, it is 25 basis points and that’s all currency. That’s just slight movement that we’ve seen in currency from where we last gave guidance. The rest of the margin expectations from an organic perspective are comparable to what we said in April.

Okay, and John, just to clarify, just to make sure people don’t get confused, that’s 7% of Europe. That’s 7% of Europe, not total sales. I mean, that’s clear, but I just want to make sure everybody understand that I understand it correctly.

That’s correct.

So a much smaller percentage as a percentage of the total. John Sullivan – Leerink Swann: Can you just speak for a second, as you talk about investing in your business on an ongoing basis, what kind of investment goes on in these emerging countries like China and India? How are you improving your capability and infrastructure in that part of the world?

Yeah John, every budget cycle, you know you have competing plans we have positionally been investing in terms of headcount and with us it’s in areas of growth, like India and China, it’s sales and service and application support people. And that continues to be where we put our incremental headcount. In those higher-growth areas of the business it’s been true for a number of years now, where we kind of hold the line in the more industrial lower-growth areas of our world and add headcount in China or in Latin America, etc. It’s no different and it will continue. Steve Willoughby – Cleveland Research: Just wondering if you could talk a little bit about the consumable and service side of the business and the trends that you’re seeing there. It sounds like you’re seeing an uptick or you’re starting to see an uptick in maybe some pharma spending. What are you seeing on the activity side, if you could give us some color?

The service and consumables piece of our business grew nicely in the quarter, particularly true in our traditional column business, and particularly true with the UPLC column consumables that tend to be very closely tied to our instruments, unlike the more open platforms of traditiona. HPLC. So we’ve seen a return to very predictable growth in that high-profit consumables piece of our business.

(Operator instructions.)

Operator we could probably take one more question and then bring it to a close.

Actually I’m showing no other questions at this time.