Good morning, and welcome to the Waters Corporation Third Quarter 2019 Financial Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the conference call. This conference call is being recorded. If anyone has any objections, you may 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’s third 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 results of the company for the fourth quarter and full year 2019. We caution you that all such statements are only our present expectations 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 the risks factors included in our annual report on Form 10-K for the fiscal year ended December 31, 2018, 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 intent to update its -- any of its predictions or projections, except during our regularly scheduled quarterly earnings release conference calls and webcasts or as otherwise required by law. The next earnings release call and webcast is currently planned for February 04, 2020. During today’s call, we will be referring to certain non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and available on the company’s website. In our discussions of the results of operations, we may refer to non-GAAP 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 stated otherwise, references to quarterly results increasing or decreasing are in comparison…

Thank you, Chris. And good morning, everyone. In the third quarter, we recorded net sales of $577 million, an increase of approximately 1% in constant currency. Currency translation decreased sales growth by approximately 1% resulting in flat sales as reported. In the quarter, sales into our pharmaceutical market grew 3%, sales into our industrial market were flat, while academic and governmental markets declined 3%. Looking at product line growth, our recurring revenue, which represents the combination of precision chemistry products and service revenue, grew 5% in the quarter, while instrument sales declined 3%. As we noted last quarter, there was no year-over-year difference in the number of calendar days during the third quarter but there is one additional calendar day in the fourth quarter of 2019 compared to 2018. Breaking third quarter product sales down further, sales related to Waters branded products and services were flat, while sales of TA branded products and services grew 5%. Combined LC and LC-MS instrument platform sales were down 5% and TA’s instrumentation system sales were up 7%. Looking at our growth rates in the third quarter geographically and on a constant currency basis, sales in Asia were up 7% with China growing at 2%, sales in Americas were down 5% with U.S. down 4% and European sales were flat. Now, I’d like to comment on our third quarter non-GAAP financial performance versus the prior year. Gross margin for the quarter was 58.2%, about flat compared to 58.3% in the third quarter of 2018. Moving down the third quarter P&L, operating expenses were about flat year-over-year on a constant currency basis and benefited from lower variable expenses as compared to the prior year. In addition, foreign currency translation decreased operating expense growth by approximately 2% on a reported basis. In the quarter, our effective…

Thank you. Our first question is from Doug Schenkel, Cowen. Your line is open.

Good morning and thank you for taking the question. So Chris, over the last five years, Waters’ division recurring revenue has gone from over 8% in 2015 to now tracking to 5% or below this year. In the time we’ve been tracking Waters, which goes back to the early 2000s, we can’t find anything that resembles this trend. And I can’t find an annual recurring revenue growth number for the division as well as the one year tracking to this year other than in 2009. I think we can all understand why there might be periods where capital demand slows. But at the core of an investment in Waters, there’s always been a belief that recurring revenue growth would be steady. Simply put this is your 5 of ongoing declines in this metric, and this year is the worst other than the great recession. And this is in the midst of what has been one of the golden periods for tools. This begs a number of questions. I’ll limit it to three. One, what can you point to that would demonstrate that there are not structural issues at Waters that are different from the peer group? Two, have competitive dynamics intensified, leading to share loss that you would now acknowledge? And three, why is a continuation of the share buyback, which has arguably depleted the company’s rainy day funds with shares at historically high multiples, the best use of capital moving forward given aforementioned trends and amid concerns about structural and competitive dynamic issues? Thank you. Chris O’Connell: Thanks, Doug. Good morning. Okay, you asked three questions there, so I’ll try to take them in order. In terms of the recurring revenue and a reflection of the overall structure of our company relative to our peers, of course, Waters as…

Thank you. Next question is from Tycho Peterson with JPMorgan.

Thanks, Chris, I want to follow up on the U.S. headwinds because obviously last quarter, you were up 7%, pharma up mid-single digit. So this is a pretty decent reversal. It seems like it caught up with you late in the quarter. Can you just give a little more color on how much was pharma, how much was generics. What really does give you confidence in a fourth quarter recovery? Is it the order book? Just curious as to what the drivers of the reversion here are in particular versus some of the comments we’ve heard? Chris O’Connell: Yes, thank you, Tycho. Yes, just to confirm, your -- the first part of your question, this was -- in fact it happened quite late in the quarter, as you know more than half of our business comes in the third month of the quarter as just to give some color on where our head was at a quarter ago, we did comment on the fact that coming out of the chute in the beginning of the quarter we saw the continuation of trends we had seen in Q2, which as I mentioned in my prepared remarks reinforced the view we had on the U.S. August is always a little bit variable with vacation periods and September ended up being a lot weaker than we expected. And really the only thing I can point to in general is just a lot of noise in the market right now, whether it’s industry litigation or M&A, or certainly on the generic side some of the effects later in the government year on the generic user fee increase. There’s just a bunch of different factors that make for a more noisy market than is expected. I’ve had the chance to personally with the team evaluate a number of the large orders that we expected, that we had forecast internally within the third quarter and I’m confident that those orders which come from well known customers, strong customers, have been delayed and not lost or cancelled. And so that has given us confidence to suggest that the U.S. ought to be better in Q4 than it was in Q3 and year-to-date. But we’re certainly also being pragmatic and cautious in assuming overall trends for the year continue. And therefore, our assumptions for Q4 do not include a large budget flush. Certainly if a large budget flush were to materialize, as it has in the past, that would represent upside to our numbers, but we’re not forecasting that at this point.

And then for the follow up I want to hone in a little bit on the China dynamics. Can you give us some color on how much China pharma grew? And then as we think about 4+7, you talked about the bidding process beginning in September. We’ve heard anecdotally, maybe a third of the labs will go away. So how do we get comfortable this isn’t a bit of a false bottom here? And then also, it seems like some of the Indian generic companies are also participating in 4+7. I think Dr. Reddy’s won a tender. So just curious how you think about the trade off in growth between China local generic and India pharma? Chris O’Connell: Yes. We’re certainly learning as we go. It’s an interesting environment there. As we know, Q1, really the market went on hold and it came back in Q2 and Q3, it was solid as well. We had double-digit growth in China pharma in the third quarter. And what we’ve seen there is that even as 4+7 extends to a broader part of the market, the second phase of bidding in September was the same 25 drugs that we had seen in phase one extending to 27 provinces. About 60% of the participants in the phase two tender were the same companies that participated in the first round of the tender and about 40% were new. But just about all of the major bidders in the process were companies that you would consider to be in the top 100 within China. To your point about foreign participation, the first phase was almost entirely local China companies, larger China companies in that larger category. In the second phase, we did see an increased participation of the non-Chinese companies, it was about an 85%, 15% mix between China and the non-Chinese companies. So, for example, the Indian company you referenced is an example of the type of companies that are making up that 15% in the second phase. Like we’ve stated before, the big picture here is that this effort is being done to enhance the overall access of medications to the population and therefore volumes will be increasing. And so, these are long-term positive -- these initiatives are long-term positive for volume in the market and testing volume. And it does also lead to some change in the market. Some of the companies for example that have not won some of these tenders don’t necessarily leave the industry altogether, they have focused on other things. So we have some examples of generic companies leaving the generic space and getting involved in new drug development for example. So it is still a dynamic situation playing out but at least in the two quarters we’ve just reported most recently, Q2 and Q3, we’ve seen a stabilization of that demand.

Thank you. And our next question is from Derik De Bruin, Bank of America. Your line is open.

So, a couple of questions. So first of all, I wanted to follow up on something that Doug asked. So in the HPLC, UPLC market, typically those instruments have a five to eight year life cycle, life span in them and the upgrade cycle we went through in LC ended in 2017. And clearly we’re getting some changes in terms of the generic manufacturer in U.S. and China, Tycho referenced companies going out of business, essentially. I guess just what gives you confidence that we should see a rebound in LC instruments in 2020? Is the first question. Chris O’Connell: Yes, thanks a lot, Derik. I want to do as much as I can to provide color on some of the market dynamic that we’ve seen year-to-date now that we’re through three quarters. But I also want to balance that with the fact that fourth quarter is our biggest quarter and a lot can play out in fourth quarter. And so before we put too fine a point on the trends in the market that would underscore our guidance for 2020, we want to see the fourth quarter play out. As you know, in some markets, this business, the LC business in particular has become pretty backend weighted. And we’ve seen in some years a significant increase in business in the fourth quarter that creates an overall story for a kind of a rolling analysis. And so we want to see that play out. Like I said earlier, we’re not assuming a big flush at the end of the quarter. And that’s why we put the guidance where it is just for caution and conservatism purposes, but we do want to see it play out before we say too much about what we expect out of LC instruments in 2020. But like I mentioned earlier, the LC, the small mol LC market has been reliable historically. We are currently seeing more modest growth and believe that to some extent demand is building for investment in that area as we step into the next several years. So, we’re watching it closely. We want to see what fourth quarter trends look like. And also keep in mind that when you think about the LC business, and the increase of focus on mass spec based workflows that we’re seeing in the market, particularly in large molecule that LCs are an important component and with just about every mass spec system we sell, LCs come along with it. So, we’re looking at LC in both the standalone LC optical market, if you will, as well as the LC-MS market.

Great. And can you talk a little bit about the European markets, just maybe some comments on Eastern versus Western Europe food, environmental, academic, governant, just a little bit more color there? And the shift of the question being is, how much uncertainty you think Brexit has caused across the European markets? Thank you. Chris O’Connell: Sure. Thanks. Yes, Europe has been a fairly challenging operating environment this year and just to recap the numbers overall for Europe, it was flat in the quarter and is down 2% for the year. That’s -- that includes an overall European pharma number that is 1% up in the quarter and 1% up year-to-date with actually a pretty decent academic and government market up double-digits both quarter-to-date and year-to-date offsetting a similar range of declines for the industrial market. Some of the trends we’ve seen year-to-date -- quarter-to-date was actually a little better in Europe industrial at a mid single-digit decline versus a double-digit decline for the year-to-date. So even though the numbers are still negative in European industrial there, they’ve gotten incrementally better in the third quarter, and that’s really a kind of a combination of the chemical materials market and TA being flatter, and the food and environmental market being down overall. In terms of the overall environment, there’s enough economic data including PMI that shows a kind of a flat to contracting economic growth environment. And certainly Brexit delays, as you mentioned, are front of mind. And we felt that through the Brexit process, much sentiment is on hold. And we do believe that in that process, there is some pent up demand building, particularly in the UK, in the Northern parts of Europe. And so we’re really trying to look ahead and see when we might see an improving picture, but it’s -- Europe has been kind of a flattish scenario all year long. And that said, we’re super confident in our competitive position throughout Europe and believe that the concentrations we have in certain sectors are really -- provide the right context for what’s happening there. But believe we’re poised particularly with our new product flow to take advantage of improving market conditions when they come. Okay, next question, please.

Thank you. Our next question is from Dan Brennan, UBS. Your line is open.

Great, thanks for thanks for the questions. So, Chris, I want to just look at China. Could you provide some color within China regarding food versus industrial versus pharma. You made some comments in your prepared remarks I think signaling kind of macros having an impact. And I know food has been a bigger drag for you. So anyway, if you could just separate out your key areas within China, kind of how they did and kind of what you’re expecting going forward? Chris O’Connell: Sure. Thanks, Dan. So China was up 2% for the quarter and it’s up 1% year-to-date and the year-to-date obviously incorporates the decline we saw in Q1 with a bit more stability in Q2 and Q3, particularly on the pharma side. And like I mentioned earlier, the pharma business was up double-digits in China and has solidified in the -- as the 4+7 program as we talked about has matured a little bit at least and has more visibility. And really the rest of the business is flattish on the industrial side. It was flat in the quarter and is down 1% for the year. And then on the academic and government side is where we’ve actually seen much more of the pressure, which is down double-digits. And that’s really a function of the food market. As you know, the bulk of our food testing business has been in government-oriented labs, and that’s as the market makes a transition from the government focus on food testing, where government labs are doing the bulk of the testing to one where they’re in more of a supervisory role, that particular market has been somewhat disruptive. We do see a number of dynamics there. Even though the demand has been soft on the government side, we expect an…

And then this is a follow-up. So on the new products side Chris I know in your prepared remarks you talked about meaningful revenue contribution. I know you’re not going to give us a number right now. But at least could you just discuss with the fourth quarter kind of what assume from new products? And then is there any way to just kind of categorize how to think about what the potential of all these new products that you’re rolling out could be since it’s such a critical part I think of kind of your story and kind of strategy shift that you’ve made at Waters? Thank you. Chris O’Connell: Yes. Thanks, Dan. And absolutely job one at Waters is new product innovation. And we’re in the midst of a significant transformation of our R&D efforts and really the continued achievement of innovation leadership. I think a lot of those efforts are going really well. We’re extremely encouraged by the products that have come through the pipeline already with a pretty heavy focus on mass spec, given the growth opportunities in the mass spec markets as well as competitive position that we needed to improve. That was clearly the case. But kind of furthermore on the innovation side with the increases in investment, we’ve built a really robust five year product roadmap that we have more clarity than we’ve ever had at Waters in terms of a cadence of new product introductions across instruments, chemistries. And of course, we’ll be talking a lot more about informatics in the years to come with the Waters Connect platform. Just a couple of quick notes on the products we’ve launched, there are different type of products, of course, we’ve made a number of different key line extensions on the LC side that…

Great, thank you. Chris O’Connell: Thanks, Dan. Next question please.

Operator, is there another question in the queue?

Our next question is from Stephen Beuchaw with Wolfe Research.

First, I actually want to follow up on a point that the Doug alluded to, it has to do with capital deployment. If I think back to the beginning of the year, you -- well, it actually goes even into the fourth quarter of the prior year. You made a commitment to not just doing the $2.5 billion but also to getting to a leverage target that implies that you continue to buy back stock beyond 2019. Are you still committed to going to that leverage target?

Hi Steve, this is Sherry. So yes, so just to go back a little bit with the availability of our cash, as a result of tax reform, we did a lot of work and analysis and wanted to our balance sheet to work. And we communicated our share buyback program for the year of $2.5 billion and we’re working toward that as reflected in our guide. And then as we look at overall capital structure and optimizing that capital structure, 2.5 times net debt to EBITDA ratio is still a near-term goal. And I would say, as we end the year we’ll probably be about 2 times with our guidance around the share buyback. So, we’ll look at our 2020 plans and give some more details around what our specific guidance for next year, but that is still a goal we’re working toward but not obviously for this year.

Okay, perfect. And then, Chris, I should’ve opened the door in a different kind of way. There have been a lot of really good questions asked here in the Q&A with people focusing on customer demands, competitive demands, R&D, macro. These are all important parts of a sort of broader conversation around -- what do you own when you own Waters as a stock, right. If I talk to an investor who owns Waters, they’re generally talking to me about how much appeal they see because of the likely sustainability of the growth of pill count. And that should mean that you get to mid-single digit growth. I’m sure you’re going to get questions on this topic from a lot of investors in coming weeks and months. So I guess now that we’re at this point in the year and we’ve learned a few things, a few things we didn’t know even six months ago, how do you talk to that investor about that path back to mid-single digit growth? Is that the right way to think about things? Thanks so much. Chris O’Connell: Sure, yes. No, of course all efforts, Steve, are focused on returning to better -- much better growth. And we’ve certainly seen better growth in different instrument cycles within the specific categories we focus in. At the end of the day, I think a lot about the markets we participate in and want to make sure Waters is well positioned in structurally attractive markets. And even putting aside cycles and different macroeconomic conditions, we still fundamentally believe that the attractiveness of the pharma and biopharma space is very high, and furthermore that there is an accelerating innovation story in material science and food safety testing and some of the other markets we’re in. So, we’re really…

Thank you. Our next question is from Steve Willoughby, Cleveland Research.

Hi, good morning. Thanks for taking my questions. I guess two things; first, Chris, if you could just -- I guess asking about new products in a different way, the company has had to guide down organic growth 3 times so far this year. And I’m just trying to get a feel for kind of what were you expecting the impact or contribution from new products this year at the beginning of the year as compared to now? And then I have a follow-up for Sherry. Chris O’Connell: Yes, Steve, I think we were -- we always had modest expectations and that’s why we didn’t put too fine a point on a number. Certainly, we expected toward the back half of the year to see more of an impact on that. And obviously, with our largest quarter ahead of us, Q4 accounts for 30% of the year in terms of our historical averages of the third quarter. We want to make sure we see fourth quarter play out and do expect to see a bigger impact. But overall for the year, we expected a modest impact. And so, in terms of what’s played out, I don’t think there’s any question that the muted capital purchasing environment and some of the macro-dynamics we’ve spoken about probably had somewhat of a moderating effect on that impact, but that’s why we focus on some of those underlying metrics of market development that I have continuously alluded to, to gauge our progress. And ideally what that adds up to here is strengthening in the fourth quarter and setting the stage for an even bigger impact in 2020.

Thank you. And our next question is from Vijay Kumar, Evercore. Your line is open.

I had one China question and one guidance. Maybe I’ll start with China. Chris, maybe -- you mentioned some comments on food. Is that end market graph maybe stabilizing, improving or maybe not better, worsened? And I’m also curious, we hear noise on this round two of 4 by 7. Should we think of that as incremental or is this already being accounted by customers, given that they knew the second round was coming? Chris O’Connell : Yes, thanks, Vijay. I’m happy to take those, and welcome to coverage of the name. I know you’re not new to the space overall but new to us, so welcome. And in terms of China, it’s hard to say where to call the current short-term trend right now and we want to see another quarter or two. I don’t think we have any expectation that food is going to jump back this quarter. There is a transition going on in the market. If you look at the China food market from a bigger picture perspective, food had a really great run in China in the sort of ‘15 to ‘17 time frame in the relative recent past. And it’s a market that, as I mentioned before, has been very oriented to government laboratories that’s changing. It’s changing for the right reasons because a lot of the testing infrastructure is being pushed out into the community. And there will be a privatization process underway there, which we think is ultimately going to lead to a return of really favorable growth conditions. And as I mentioned before, our improving tandem quad portfolio is going to be well timed for when that comes back, But again, it’s -- don’t have enough visibility to call a rebound in the immediate future here. And just a small point on 4+7, then I’ll let you ask your Sherry question since we’re running a little low on time. But the -- we do learn more incrementally. We do have a pretty good feel for what the second phase has brought. And we see confidence on the part of the largest companies that are participating and doing well in those tenders. And as I believe Tycho asked earlier, beginning to see the participation of some major global companies as well in the process. But again, that process is all about growth and managing price through these tenders in a way that gives the government confidence that can support the growth that’s being demanded by their population. Was there a financial question?

I think we have time for one last question.

Thank you. And our last question is from Jack Meehan, Barclays. Your line is open.

Chris, I guess just given some of the recent growth trends, I wanted to prod a little bit more on capital deployment. You’ve talked a couple of times about tuck-in M&A. Just curious, earlier this year, you changed the credit agreement to allow for increased leverage for deals over $400 million. If you did a deal that size, would you consider that additive to the buyback plan? And are you looking at assets of that size? I’m just curious if there is any additional color you could give around the pipeline. Thanks. Chris O’Connell: Sure. Yes, Jack, let me take -- thanks for the question. And let me take the first part of that and have Sherry comment as well. Yes, we’ve been investing internally in a capability for M&A to add some -- to add to our portfolio in advanced and adjacent technologies with a very rigorous strategic financial and execution framework. And I would characterize the assets we’re looking at as more in the small to mid size, more in the tuck-in category is -- we certainly have a lot of flexibility in our balance sheet to do everything we’re looking at and obviously want to make sure that we can be opportunistic where it’s appropriate. But I’ll have Sherry comment a little further on the covenants and so forth.

Right. Yes, so we updated some of our agreements and with the recent offering that we made, it was just bringing all of them in line with language that we already had as far as what our leverage ratios are. So, it’s maybe just a little bit of housekeeping on that. But as far as our overall capital structure, we’ve talked about working through a near-term leverage ratio of 2.5 times. And certainly, if there is a right asset that makes sense for us from our strategic goals and our strategy, we’d be willing and have the flexibility, as Chris mentioned, to lever up. And we’ve got the covenants in place to cover that. Chris O’Connell : Good. Thanks. Sherry, and thanks everybody for your participation and questions. We’re going to wrap up the call now. Just a note of conclusion here. Despite the more challenging capital purchasing dynamics that we’ve talked about this year, 2019 has been an important year for Waters in setting the stage for an exciting multiyear product cycle. We’ve begun to see the early outputs of our significant recent investment in R&D and are encouraged by early customer response. We expect to see increasing sales contribution from our newly commercialized products as well as those still to come over the coming quarters and years. So on behalf of our entire management team, I’d like to thank you for your continued support and interest in Waters. We look forward to updating you on our progress during our Q4 2019 call, which we currently anticipate holding on February 04, 2020. Thank you, and have a great day.

And thank you. This does conclude today’s conference call. You may disconnect your lines and we appreciate your business. Thank you.