Good morning. Welcome to the Waters Corporation Fourth Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode until the question-and-answer session. This conference call is being recorded. If anyone have objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Bryan Brokmeier, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to the Waters Corporation fourth 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 first quarter and full-year 2019. 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2017. 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 April 23, 2019. During today's call, we will be referring to certain non-GAAP financial measures. Reconciliation of the non-GAAP financial measures to the mostly directly comparable GAAP measures are attached to our earnings press 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 Reconciliation of GAAP to Adjusted Non-GAAP Financials included in this morning's press release. Unless we say otherwise, references to quarterly results increases or decreases are in comparison to the fourth quarter of fiscal year 2017. 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 would like to turn the call over to Waters' Chairman and Chief Executive Officer, Chris O'Connell. Chris?

Thanks, Bryan, and good morning, everyone. Thank you for joining us today. Along with Bryan Brokmeier, 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 fourth quarter and full year 2018 operating results, as well as some broader commentary on our business. Sherry will then review our financial results in detail and provide commentary on our first quarter and full-year 2019 financial outlook. We will then open up the lines to take your questions. Jumping right in, I am pleased with our fourth quarter results, particularly given the dynamics of the business earlier in the year, as we delivered growth across all three of our broad market categories and demonstrated strength in key geographies and product lines. Geographically, we saw continued strong performance in China in Q4, as well as strengthening in the United States. Offsetting expected softness in Europe and India, as we closed out the year. Q4 product sales included continued strength in demand for standalone liquid chromatography systems. Our expected rebound in sales for thermal analysis systems after a temporary Q3 dip and increasingly positive signals in demand for our mass spec technologies. Furthermore, steady recurring revenues contributed to our strong finish in 2018. Overall, our fourth quarter revenues grew 5% and adjusted earnings per share grew 14% versus prior year Q4. On a full year 2018 basis revenues grew 4% and earnings per share grew 11%. Taking a closer look at the business, starting with the review of our market categories at the corporate level. Sales to every major market category were up for the quarter and for the year. Fourth quarter sales to our broadly defined pharmaceutical category increased 7% year-over-year driven by double-digit growth in China, and the aforementioned pickup…

Thank you, Chris and good morning, everyone. In the fourth quarter we recorded net sales of $715 million, an increase of approximately 5% in constant currency. Currency translation decreased sales growth by approximately 1%, resulting in 4% sales growth as reported. For the full year, sales grew by 4% before currency translation, which increased sales growth by 1%, resulting in 5% full year sales growth as reported. In the quarter sales into our pharmaceutical market category grew 7%, our industrial category grew 2% and sales into our governmental and academic market category grew 3%. For the full year, the pharmaceutical market category grew 4%, our industrial market category grew 1% and sales to governmental and academic customers were up 7%. Looking at product line growth, our recurring revenue, which represents the combination of precision chemistry products and service revenue grew 6% in the quarter, while instrument sales grew 4%. For the full year, recurring revenue grew 6%, while sales of our instrument product groups grew 1%. As we noted last quarter, recurring sales were impacted by one additional calendar day in the quarter, which resulted in a slight increase in service revenue sales. Looking ahead, there is one less calendar day in the first quarter and one additional calendar day in the fourth quarter of 2019, compared to 2018. Breaking Q4 product sales down further sales related to Waters branded products and services grew 5%, while sales of TA branded products grew 7%. Combined LC and LCMS instrument platform sales were up 3% and TA's instrumentation system sales were up 6%. Our total recurring revenues, which includes both Waters and TA products grew by 6%. Looking at our growth rates in the fourth quarter geographically and on a constant currency basis, sales in Asia were up 9%, led by 15%…

Great. Thank you, Sherry. I'm summary, we were pleased to end 2018 on a high note with solid momentum in our key business drivers and we are excited about the year ahead in 2019 highlighted by our new product cycle and enhanced capital deployment activities. With that, we will now begin the question-and-answer session. As we are not always able to get to everyone's questions, please limit yourself to one question and one follow up. And if you have additional questions, please contact the Waters Investor Relations team after the call. Operator?

Yes. The first question in the queue is from Stephen Beuchaw with Morgan Stanley. Your line is now open.

Good morning, and thanks for taking the questions here. I would love to just get a couple of detail on how you're pulling together the top-line outlook for 2019. Maybe I'll ask a two parter and then I'll get back in queue. I guess maybe the most important one is, how are you thinking about hardware growth in the 2019 outlook given the commentary on BioAccord now out in the market and it sounds like you anticipate a cadence of further product launches throughout the year. So the balance between hardware and consumables are recurring revenue growth would be my first question? And then the second part of my very long winded two parter is, can you just talk through expectations for some of the regions in 2019, particularly India and China and then maybe any commentary on Europe given what we've seen here in the quarter would be great. And I will jump back in queue. Thanks very much.

Great. Thanks, Steve. Appreciate the questions and I will take a crack at some of these and have Sherry supplement in terms of how we're thinking about 2019 overall. But really starting at your first -- the first part of your question, Steve, the mix between recurring and hardware, it's a good reminder to all of us that we do have that steady recurring revenue of chemistry in service and even in the type of year we have behind us those lines were really steady both growing 6%. And so, looking forward and not assuming everything goes perfectly right, we expect continued contribution of our recurring revenues as a nice foundation. With that being said, we are looking at the instrument business if you will and looking at a year that should firm up. We definitely showed some improvement as we got towards the end of the year really across the board in our instrument business that's LC, mass spec as well as TA Instruments. And of course as noted in the commentary, we are very excited about new product launches. At this point, I'm not going to put a lot of specificity around what we expect relative to say the BioAccord launch other than to say that that type of technology gives us greater confidence in our instrument outlook for the year. And then, of course, as you alluded to will be supplemented by other instrument launches throughout the year. So with respect to the regions and starting with India, as noted in my comment, Q4 was interesting. It was slightly below prior year, very slightly below prior year but for context, the prior years was our number one quarter ever in India. So this fourth quarter was actually our second biggest quarter historically in India. So while the…

Next question is from Tycho Peterson with JPMorgan. Your line is now open.

Hey, thanks. Chris, I'd like to start with the pharma recovery, I was just curious as to whether you think there was any kind of onetime dynamics here in terms of budget push. I know you called out the lack of a budget push earlier in the year. So how much of this was maybe transitory and a catch up effect. And then on BioAccord, I understand you don't want to kind of put numbers around it, but can you maybe just talk to the degree of pent up demand you see into the launch. And do you think the adoption curve will be different then prior systems given that you're really kind of going after the QA/QC and process development market?

Sure great. So starting with pharma, Tycho, we'll just give a couple of comments there. So we grew 7% in the quarter and that was clearly a strong quarter and better than we'd seen all year overall. And I would also note that pharma results was delivered even with India obviously being flattish and as you know India is by and large a pharma market. I would say there was nothing unusual as it related to a flush at the end of the year. We certainly have seen the pattern in the U.S. for the last couple of years where we have a slower start to the year and a faster finish that that kind of manifested itself again. But I think we were encouraged, we are encouraged by the balance in pharma as I mentioned for the year in retrospect, we ended up solid in small mol and very strong and large mol for the year. And we are particularly encouraged in the quarter by high res mass spec in pharma. So, as I mentioned, the tone has been improving in mass spec and in the period we probably saw that most acutely was high res mass spec in pharma. U.S. pharma was strong and even within Europe, pharma was better than the other market category. In Europe, it was still relatively modest, but it was positive. So, I think heading into the year again taking a balanced view, there's a lot of dynamics affecting the pharmaceutical industry. But what's unmistakable to me is just the pace of innovation that's happening. And, we talk a lot about that in large molecule. But there's also quite a bit going on in small molecule and a diversification and a globalization of the generics business. So, where we typically see a lot…

Ross Muken with Evercore ISI. Your line is now open.

I just want to get back to China pharma for a minute. So it sounds like the market was quite robust, but the government late in December, made a number of changes around pricing. And they're sort of essentially encouraging a consolidation of the generic industry in China and then seemingly also trying to promote the innovator side. And so help us understand how that dynamic and sort of mix shift has played out in your business. And if we think about where your revenue mix is today, at least in that generic and [indiscernible] market, versus what seems like it'll be a much bigger biotech market. Just help us kind of understand how that plays out through the P&L?

Sure. Ross, as you know the Chinese market is one we watch very closely and is constantly changing in terms of policy and standards and so forth. And I can't speak specifically to the policy changes you're referring to, I am generally familiar with some of those directions and they are consistent where the Chinese government has been in the past. I mean, to the extent the government has an interest in consolidating the generic space, that's being done for the reasons of scale. The government is intent upon increasing patient access to basic medical therapies and in whatever tactic is needed to do that if it's consolidation, if it's regionalization. It's all being driven at that aim and that's all going to drive volume and as you know our small mol business is very much a volume oriented type of business. And on the other end of the spectrum the promotion of innovation that's clearly happening there is tremendous activity in China around the development of biosimilar companies and even novel drug innovators. And so I think in that way, China is sort of a micro chasm, if you will of what's going in the world, there is business for us at both ends of the volume side of generics and also on the kind of testing intensive side of the innovation. And just in terms of our business in rough terms and we'll update this further at the Investor Day, but in rough terms two-thirds of our business is related to the small molecule world that's sort of generics volume business and one-third relating to the bio molecule development with very little in QA/QC. But we see bio molecules going down that same path, just like our small molecule business grew up around late state development, method development, process development and evolved into manufacturing quality control we see large molecule going down the same path, which is why we're investing so much to make sure that we can serve the market to make that transition. And, at this point both ends of that formula are important to us. Next question please.

Next question is from Derik De Bruin with Bank of America Merrill Lynch. Your line is now open.

Hey, good morning.

Good morning, Derik.

Two questions. First one just a little bit more commentary on your academic and government comment about Europe. And then also on that just sort of what are your sort of taking plans in terms of preparing for Brexit because you do have that big UK facility in Manchester. And then just any signs of any pull forwards at the end of the year because the people worried about trade issues? Thanks.

Sure, again thanks Derik for the questions, and I may ask for a clarification on the pull forward part of it. But let me jump into the academic government. We did have a -- as you know really kind of a strong year if you will in academic and government at 7% growth with a little less growth at the end of the year. And that was really a function of Europe, but we actually had growth in the U.S. and strong growth in China and Asia in academic and government in the quarter, which really reflected a pattern all year along with a little bit of softness in Europe. In Europe it probably reflects more that wait and see kind of tone in some of the markets related to some of the macro conditions that's about as good of a thought I can have there. There is a bit of a mix in the academic and government sector between biomedical research where it's been weaker and pharma discovery where it's been stronger. And again for reference keep in mind, our academic and government is a significantly smaller part of our portfolio than everything else and even within that our academic and government business is about two-thirds or more academic and university and therefore the government piece is smaller. But, we're watching that closely and like I said earlier it was nice in Europe, even though it was a little bit of soft year than we expected that pharma was a -- could offset that some a little bit as well. So from a Brexit standpoint, we watch Brexit closely, I have been very tuned into this since the beginning. As you point out we have a large research facility in Wilmslow in the UK. There is obviously a range…

Yes. I was just talking about the fact that some of the life sciences and industrial companies have talked about trying to -- some of their Chinese customers pulling forward just because they're worried about trade issues. I'm just wondering if you saw that?

Yes. China, I wasn't thinking about China when you asked the question, but that's perfectly fair. And again, don't have a lot of evidence of unusual pull forward or a flush of any type there. The business throughout the fourth quarter in China reflected more typical Q4 type dynamics.

Right, thank you.

Thank you.

Next question is from Doug Schenkel with Cowen & Company. Your line is now open.

Good morning and thank you for taking my questions. I'll just get them both out there and then get back into the queue. First on TA, would you quantify the impact of timing dynamics on Q4 core growth for TA? And what are you assuming for 2019 TA growth, presumably you're thinking above the corporate average again. And then my second topic is on mass spec. What was mass spec core growth in Q4? And are you assuming in guidance to that growth improves to at least mid-single digit levels in 2019 given new products and favorable comparisons? Thank you.

Yes, thanks, Doug. Appreciate it. On TA when you roll the whole Europe, it was a really solid year of growing 7% and it was growth in 7% for the quarter. And as you recall from Q3, we had a little bit of a dip down to the low single-digits for TA. Sales growth in the quarter although we felt strongly enough that that was a temporary dip that was really based on a different mix of inventory at the end of the quarter that we identified the fact that all underlying orders growth was consistent in Q3 as it was in the first half. And really when you roll i8t together I think that that's exactly what played out in terms of both order and sales growth for the year being really solid right in the range that we reported. And in terms of 2019, we're making the same type of forecast of a risk adjusted number. I don't want to give you a specific number and -- but I would say TA ought to perform at least at the company average. We're in a good product position there. The business continues to diversify. One experience I had also recently being in the field calling on customers is the increase in tech companies for example buying our thermal analysis, rheology and even as they work to develop better materials for various computer type products utilizing the Waters chemical analysis, particularly the gel permeation chromatography type product line. So, our materials franchise is broader than TA. And it does feel to me over time that that industry market is diversifying to include other sectors besides the traditional chemicals and polymers and inorganic side of the business. Related to mass spec, I don't really want to break out the details on the specific growth, but what I would say about mass spec is it was better in Q4 than it was in Q3 and Q3 was better than the first half. And furthermore, our orders performance in Q4 was better than our sales performance. And so, I think we are heading into the year with -- on a little stronger footing and we certainly expect our mass spec product line to contribute to growth in the year ahead, where it in aggregate didn't contribute all that much growth in 2018. So certainly very excited about the product cycle, BioAccord, as I mentioned before, we have a new super high resolution mass spec technology coming out during the year as well as some other things that I don't want to comment on yet. So anyway, thanks Doug, appreciate the questions.

Next question is from Sung Ji Nam with BTIG. Your line is now open.

Hi, thanks for taking the questions. Chris, I was wondering about you guys are posting 4% organic growth this year -- in 2018 and you're guiding to 4% to 6% outlook for 2019. I was curious as to kind of is it mostly attributable to the end market general outlook that you guys have or is it more due to new product launches. I'm just curious as to kind of slight improvement potentially in the outlook for the year.

Yes. Thank you, Sung Ji. I think that's correct. I think we're -- to me the end market outlook is more of a baseline. And certainly as we experienced this year you always make assumptions and those assumptions can change. And so, we try to make sort of risk-based assumptions coming into the year and not assuming everything goes, right. But for the most part in general sense, we feel that the end markets are reasonably stable. And certainly if there is some incremental growth this year, it is based on a better product position. We certainly don't have a crystal ball, if you will that's better than anybody else as it relates to macro conditions. But in terms of what we can control and what is different at Waters heading into this year is the product position in terms of the new launches both in 2018 as well as the ones that I've alluded to and mentioned in 2019. I guess, furthermore, I'd say the other thing we've done alongside of the -- on market preparation relative to these launches is we've really invested in our commercial operations. I'm very pleased with a number of things we're doing across the board in our commercial operations around the world in terms of we built a new sales operations functions, we have a new sales enablement process so that by the time technology hits the market our teams are really ready to go. And furthermore, we've supplemented headcount in our field operations on both the sales and service side as we've talked about in the past. And so, it's really a total team effort and a 360 degree process of getting ready for this type of new launch cadence. And I think that's probably what's -- probably what would explain better growth in 2018 versus -- 2019 versus 2018. And Sherry, go ahead.

Yes, Sung Ji, maybe just to put a little bit macro perspective around it. When you think about our business our recurring revenues represent about 50%. And our recurring revenues grew this year 6%. So if you think about our guide range of the 4% to 6% that gets you halfway there. And so, then the other levers that Chris talked about then would be improvements in some of the geographies that we saw momentum towards the end of the year and the continued solid market dynamics and then the impact of new product introductions. So that might give you some parameters to think about.

Great, thank you. Next question please?

Next question is from Dan Leonard with Deutsche Bank. Your line is now open.

Thank you. Question for Sherry. Sherry, the -- on capital deployment, so 2.5 times net debt to EBITDA that's not a 2019 target, correct? That's a target over two years.

Dan, the way we've looked at our capital allocation as you know the U.S. Tax Reform is a real game changer for us as we got access to our cash. And this year we started ramping up our share repurchases. And we've talked about this year working towards the 2.5 times net debt to EBITDA leverage ratio. Our guidance for the full year we've assumed about $2.5 billion. So that wouldn't get you to that kind of leverage at this guidance point. But what we're going to do is, we're going to evaluate throughout the course of the year. There's lots of dynamics here. So, we've given you guidance also for Q1 and as the year unfolds, as we look at our performance, what our investment needs are, and opportunities are macro factors, et cetera, we will kind of adjust it accordingly.

Okay, thanks. So just wanted to confirm. And then my follow-up question, can you help me think about the sources of operating leverage in 2019 a year where you're investing in sales and marketing ahead of some new product launches, you've been growing R&D at twice the rate of revenue, and gross margins tend to be kind of flat. Can help me think about the drivers?

Sure. So probably characterized first, just kind of overall operating margin leverage as we look at it. And I'd say, we really look at kind of the two big factors as our top line growth goals that we have, and then what are our needs to invest in the business to drive that top line growth. And then there's obviously other factors such as whatever FX fall through throughout the course of the year and offsetting inflation, et cetera. And so, as we set our plan for this year of the 4% to 6% revenue guide, and then our EPS growth, we look to be able to deliver modest operating margin improvement. If you look at our 2018 results where we ended the year with about 4% constant currency growth, we were still able to deliver about 50 basis points of operating income improvement. So those are kind of the factors that we look at because as we learned from 2018, there's a lot of moving parts. So we really set out to within our revenue guide just to have some modest operating leverage as we look at the different levers we have to pull.

Okay, thank you.

Brandon Couillard with Jefferies. Your line is now open.

Good morning. Just a quick one for Sherry, if you could tell us what your penciling in for free cash flow for the year as well as CapEx? And if there's any added spillover from the Taunton expansion in the CapEx number for the year? Thanks.

Yes. So it's a great question. So we have a big investment that's a five year project with the Taunton Chemistry Operation. This year, we'll probably spent about $11 million related to that from CapEx, but it's a five year program and would be $200 million over the five year period. Next year, we probably expect spending about $90 million on the Taunton facility. However, we are calling that out as an adjustment from our cash flow. So really looking at it as a major facility investments as we've done with some of our other major facilities, for example, in Wilmslow and other areas. So if you kind of strip that out and really look at it, as we look at our cash flow. In general, we've looked to grow our cash flow in line with our top-line. And our depreciation historically is around 2% to 2.5% of sales. And I'd say, we'd expect that kind of operating CapEx probably towards the higher end of that in 2019.

Very good. Thank you.

Next question is from Steve Willoughby with Cleveland Research. Your line is now open.

Hi, good morning. Couple of questions for you. First, I guess, just on SG&A, in the last few quarters, it's been running a little bit below, at least our expectations. Just was wondering, if you could comment there on what you're doing to hold in SG&A and if that's sustainable going forward. And then I guess secondly, for Sherry maybe, your guidance here for the first quarter, the midpoint looks like about 7% earnings growth, compared to the full year of 12% to 13% earnings growth. Just given somewhat easier comparison in the first quarter, just wondering how you're thinking about kind of the back half weighting so to speak for your overall EPS guidance? Thank you.

Yes, maybe I'll take -- thanks, Steve. I'll take a quick one on SG&A and Sherry can certainly add to that plus talk about the guide a little bit. If you look at the overall body of work in 2018, I think we managed the P&L very well to gain some modest operating leverage, while investing heavily in R&D. And as we got into the fourth quarter in part given some variable expense dynamics, as well as the investments pre-market, if you will ahead of the BioAccord launch that ticked up a little bit. But we have a number of levers to pull relative to cost initiatives and we're doing more than ever before in the company. Now in our third year of kind of a new type of budgeting cycle to really make sure we're pivoting resources and allocating resources to the things that give us the best chance for growth. And so, I think we're comfortable that we'll continue to manage our P&L, our SG&A well and over any reasonable rolling period like we saw in 2018, get that balance right. So Sherry, I don't know if you want to say more about that plus the guide.

So I'll address your question on the guide for Q1. I'd say there is a couple of factors in Q1 that is impacting the overall EPS growth, a comment I talked about is the tax rate. So just to put the tax rate in perspective, last year is our first year coming out of Tax Reform, we guided to 13% to 15% tax rate, as you know with our current results we ended at the low end of that range with a variety of factors around evolving a clarification on Tax Reform some discrete items and kind of the mix of our business. So, for full year next year, we're guiding to a full year tax rate in the range of 14% to 15%, just kind of narrowing that. But in the first quarter kind of that range of the tax rate has a bigger effect in Q1 because last year we had an exceptionally low tax rate it was about 11%. So as you look at the flow of our EPS from Q1 and then look at that in contrast to the full year the tax rate is definitely has a bigger impact in Q1. And then I'd say the second item in Q1 would be the impact of FX, it's about a 3% headwind in the first quarter and kind of overall you're seeing more impact in the first half on the FX than in the full year. So I'd say those would be the two big factors.

And operator we have time for just one more question.

Dan Brennan with UBS. Your line is now open.

Great, thank you. So Chris, could you just give us color on specifically what did China do actually in the quarter, I know I think you mentioned strong double-digits and how does this breakout across your kind of customer groups. I think you said it was broadly healthy, but is there any more color there? And then finally, what's kind of baked in for China growth as we move into 2019?

Sure, thank you, Dan and we'll finish with the question on China there. So China for the quarter Dan grew about 15%, so that was a really solid result on a similar result a year ago. So like we've commented on China was pretty solid, very solid all year along. And that growth was really led by pharma, which was north of that growth rate. And also the academic and government sector within China which certainly represents a number of things within the portfolio material science, food testing and that happens in the academic and government labs. The industrial business was a little bit softer in China relative to the overall growth rate, but very much led by pharma and academic in government. In terms of the year ahead, I would just reemphasize kind of our typical approach here and as I alluded to earlier, we -- our Chinese geography has outperformed in recent years and we always enter the year with numbers that are a little more modest than we have ended up with and obviously it's a dynamic environment like I said earlier we don't have any incremental new information on impact of trade or tariffs relative to what we have been seeing all along. So we follow news as closely as we can, but really try to stick to what we can control and that's investing in our people, it's investing in our training, it's investing in our demo labs and I think that market has shown an appetite for growth in innovation in fact one of the first units of BioAccord, we shipped was actually over to China. And so that market is attune to the technology that is coming out and is needed to progress all the innovation that's happening there. So we just try to follow the strong pace of innovation and because there's a lot of innovation in China, we're continuing to invest in that market.

So, thanks for that question and let me all -- let me wrap up in the interest of time and just say thank you for all of your questions. I enjoyed engaging with all of you. In conclusion, all of us at Waters are focused on an exciting year of growth and innovation in 2019. As we discussed on the call our top-line expectations are grounded and what appear to be stable market conditions and are headline by a compelling new product cycle that has resulted from our diligent investments in R&D. As always we're also focused on continuing to deliver on reliable earnings performance based on our organic growth and supported by our enhanced capital deployment program. So on behalf of the entire management team, I'd like to thank you for your continued support and interest in Waters. We look forward to seeing many of you at our Investor Day on February 28, and then to further update you on our progress during our first quarter conference call, which we currently anticipate holding on April 23, 2019. Thank you very much and have a great day.