WAT
#Sure, thanks <UNK>.
Let me make a couple comments, and then <UNK> can provide some additional data points.
You're right, we did get SG&A leverage.
That's a combination of I would say three factors.
Certainly, the little bit of revenue weakness lowers some of the sales-type spending.
Very strong operating discipline.
This team, as you know, has a history of disciplined operating management.
We obviously have the ability to manage expenses tightly while still making sure we're doing the right things for growth.
We got a little bit of FX benefit, as well.
I guess it's important to say as well, SG&A will be an area that we continue to look for operating leverage over time, especially in the interest of maintaining or even enhancing our investment in R&D.
I've said before that as long as we can cover it and still get operating leverage in the P&L, and as long as I'm convinced that there is good R&D productivity, I'm even interested in increasing our commitment to innovation.
Being the most vital organic grower and innovator in the industry is an important strategy of ours.
I am very pleased that we are able to get operating leverage, primarily through the SG&A line, and at the same time increasing our focus on innovation and fueling the new product pipelines.
I think there is a good balance in the P&L right now.
I think many of those factors are indeed sustainable, and we want to obviously have that type of a philosophy going forward.
I will let <UNK> comment a little more specifically on the puts and takes in the gross margin.
Sure.
Thank you very much, Chris, and hi, <UNK>.
Looking at the gross margin, in every quarter there are pushes and pulls.
You are right that we did get some FX benefit in the gross margin line, primarily from the Japanese yen, and yes, some benefit from the British pound.
Offsetting that was some dynamics in terms of product mix and geographical mix of the business.
Historically, TA has been a very high gross margin business for us.
It was a little bit weaker in the quarter, so that was one of the factors that influenced gross margin.
We had a very strong quarter in the area of service, which is a little bit dilutive to the gross margin, but it's nicely accretive to the operating margin.
There's been a lot of focus on devaluation of the British pound post the Brexit vote.
I just wanted to comment that we didn't really see the full effect of the pound's current value in these third-quarter results, as the pound weakened throughout the quarter.
The average rate of the pound wasn't quite as favorable as it is today.
Where we see it most dramatically is in our R&D expense.
I think we had talked about there being about a 9 percentage point difference between the constant currency R&D growth and the actual reported R&D growth.
Those are some of the factors where currency affected our P&L in the quarter.
Yes, thanks, <UNK>.
Let me try to add some value on that comment that you're making.
I think overall I want to reiterate that we ---+ I think the approach we're taking on this in these markets in really separating some of those growth drivers I talked about, which are really doing so well ---+ pharma, China, recurring revenues ---+ and we continue to focus on those.
In the areas that you mention, I think we're being quite balanced, actually, and cautious and conservative.
I don't think we have a feeling that there's some major cyclical trend that we are heading into.
I think we see the normal back-and-forth of some of these markets, particularly at the later point of the year.
I don't have any evidence that political uncertainty is causing any abnormal issues here.
Certainly from a Brexit standpoint, our business in the UK and in Europe has actually been pretty steady.
In the Europe context, while the overall number looked a little bit lower, you really have to separate western Europe from eastern Europe and the Middle East.
The western Europe part of that business, as I mentioned, is quite stable, and even the UK itself.
Same comment on the US political environment.
We don't really see any linkage to the current election cycle to behaviors or attitudes in terms of the end customers.
We do have more visibility to certain of those sub-sectors, say particularly in the academic world where we give a longer view into the pipeline.
As I mentioned before without trying to quantify it, we see enough evidence in the trialing and the quoting and the ordering to say that hopefully we will have some opportunities to improve on what we did last quarter coming up here.
Again, a conservative and a pragmatic approach in terms of the outlook in those markets, but truly looking for an opportunity to do better.
Yes, terrific question, <UNK>.
That's exactly the right question, is probably the question I spend most of my time thinking about.
Embrace your core business, love your core business, and try to understand it at a deeper level.
Clearly, this question of cycles in pharmaceutical and staying power of demand, as you say, is exactly the point.
My perspective, and I welcome <UNK>'s more longer historical perspective as well, but my perspective is the pharma market we see today and that we expect to see feels like a very steadily changing and different type of market than historical ---+ potentially with less cyclicality, more balance geographically, more balance from an end customer standpoint.
I used the word earlier, renaissance in medical research, but I think that term also applies to the drug development process.
We're seeing less and less dependence on the biggest customers, less and less dependence on traditional, large, integrated biopharmaceutical companies, more and more growth and innovation in the specialty area, the biotech area.
Obviously on one end of the spectrum a real growth in the generic category, driven by rising patient access to medical therapies around the world; but on the other end an increasing drive for innovation and increasing complexity of molecules that are under development, and frankly, that have more challenging characterization requirements.
I'm personally spending a ton of my time with customers still, and many of these factors are reinforced.
We're excited about what's happening in the pharma world in all of those vectors, and we'll continue to try to quantify that and really lean into that, so we're really maximizing our performance in our core business, which is our strategic goal number one.
Yes, first of all, as it relates to large pharma, I would say we continue to see steady performance out of large pharma.
It's not our fastest-growing segment, but it's there.
It comes in and out a little bit quarter to quarter, but we're certainly not declining in that segment.
Actually, I think large pharma is doing pretty well right now as a sector and an end market.
But really a lot of the growth, as you point out, is coming from specialty and biotech and so forth.
I've spent a lot of time studying this this year.
I think the Company made a bet five or seven or eight years ago, something in that time frame, to really develop more application support for the biotech world.
We've used a couple of examples of that in terms of some of the consumables and kits; but also the workflows around the mass spec product line.
I think what we're seeing is we've seen a steady increase in market share in the large molecule segment.
The large molecule segment is growing faster than the small molecule segment in general for the future.
It's a very different market.
That's what we're trying to do is really unstack the stack, and understand it with more granularity what the demands are in each of these sub-sets.
I think our biotech offering ---+ and you see this reflected in our current products, but also as we share more of our product pipeline for the future, continued strong emphasis on this biotech sector.
Japan is mixed, as we commented.
The pharma sector in Japan is solid right now.
Like I said, the pharma sector around the world has been pretty balanced, and that's true in Japan.
In Japan, where we've been through a little bit of a cycle and saw it again this quarter with less spending on the government side and declines ---+ some pretty good-sized declines in that sector as the government has prioritized other national vestments in the wake of some of the unfortunate disasters there.
There's some infrastructure rebuilding that has what we believe temporarily moved money away from some of the research ---+ government-type research business; but <UNK> may want to comment more on that.
No.
I think that's very accurate.
As Chris mentioned, the pharmaceutical spend in Japan continues to be robust.
The other thing that we're seeing is that is a country that is very receptive to new technologies.
The up-take of some of TA's new discovery products is something that we are very optimistic on as we look at the industrial opportunity in Japan.
I'm sorry, can you repeat the last part of that ---+ an opportunity to what to our investments.
I don't think that's necessarily fair to say.
We're right in the middle of our budgeting cycle.
I think like history, we've implied all the way along here we're going to be prudent and cautious.
It's our goal to sustain very attractive top-line growth and to deliver some modest operating leverage while continuing to invest in R&D and our sales force.
I don't think ---+ I don't anticipate any sort of a step-change spending increase program.
We're going to continue to be very disciplined about how we deploy our capital internally.
That's a good question, <UNK>.
I would say I'm still learning about the competitive landscape relative to product cycles and what they're trying to do, but frankly, I'm 100% focused on what we're trying to do and making sure we're doing the right thing for Waters.
I don't know that I have a perfectly clairvoyant vision on your question.
I look at what we're doing in product development, and take the last four or five big products we've done, like the Acquity A mass detector, the Acquity Arc, a couple of really great new entrants in mass spec category with Vion and then Xevo TQ-XS in the quantification area, then the stuff on the TA side.
I like the way these products are shaping up for the priority segments, these particular products that we're newer in the market with.
Keep in mind, product launches in this sector continue to impress me as things that really deepen and build and scale more steadily over time, rather than being quick hits.
You think about the key priorities around our core business in small molecules, and technologies like the Arc, and the advantages that gives us in a more flexible approach to methods in geographies like China.
You look at the biotech development phase in the food safety area and some other things, and the strength we have in the tandem quadrupole area.
I think some of the products that we're emphasizing right now in our portfolio are very much at the core of the most important friends trends that we're trying to drive in the market place.
We'll over time give you a little more visibility into the pipeline for the future, but I've had an opportunity to spend a lot of time thinking about our portfolio and working with our engineering teams to make sure that what is coming next continues to build on this momentum.
In the chemical space.
I don't know.
I think that's a fair question.
Obviously you have Dow, Dupont out there.
Those have been good customers for us.
I haven't seen any evidence that there's some discontinuity in terms of demand from those types of customers.
I think the industrial backdrop that we have been talking about on this call is something that many people have seen.
It's across sectors.
We're trying to be very clear-eyed about it, and certainly not panicking, and being conservative and cautious, like I said; but looking for opportunities and making sure we're poised to seize those opportunities.
What happens when you're in a cycle like this is that pent-up demand builds.
We're looking for opportunities to get some big wins in that regard.
Thanks, <UNK>.
I'm glad you raised India.
We do tend to talk to China a lot as a huge market and high-performing market, but India has been in the same category.
I very much think about India a lot, and work with the team there.
Our growth there has been in recent quarters and years really solid in the mid-teens.
I think that reflects a couple of different things.
Number one, it reflects the vibrancy of the generics market in terms of both the Indian companies and the multinational companies that are operating there developing generic pharmaceuticals, producing generic pharmaceuticals for the world.
As you allude to in your question, the regulatory requirements from the FDA and other notified bodies and regulators around the world has been increasing.
We've done particularly well in that market, and believe we've built our market share position, and actually have quite a high market share position in India based on our competitive advantage in chromatography data systems, i.
e.
Empower.
It's a huge competitive advantage for us.
It's one we continue to build upon.
We're building a stronger and stronger foundation of loyalty in that market.
The other point about India that I find interesting is not only is India an interesting market from a multinational standpoint and an export standpoint, but it's going to become over time a vibrant domestic market, as well.
The strength of our franchise there over time, the strength of our relationships and our team sets us up well for other new waves of growth in India.
India is a huge priority.
It's challenging to be our third-largest country in the world after the US and China, and will continue to be one of our top priorities.
We are pretty well balanced between development and production ---+ more 50-50 between R&D and then the QC-QA side.
The QA-QC side, as you know, has more oriented towards recurring revenue and the service and the consumables, whereas the R&D side a little more oriented towards capital.
We have traditionally been strongest in late-stage development and then QA-QC.
Certainly, as based on the earlier conversation we had on the changing nature of pharma, as there's been more activity in development in recent years from more sectors, particularly specialty and biotech, that's been an area of strength for us.
But we also have opportunities.
We can do better in earlier-stage development and even in the research side.
We're excited about some things we're working on to augment the strength we have on late-stage development in QC into earlier-stage development in research.
We want to continue to improve on all areas.
I don't know that there's been any drastic changes in mix.
I don't think so, in terms of our overall business composition between those areas.
But like anything, there's areas we do particularly well, and areas we can improve.
Yes.
That's a fair question, <UNK>.
We don't want to quantify all the different growth rates by sub-segment, but just in a broad sense, about 15% of our worldwide business overall for the corporation is government and academic.
To your point, it is a smaller mix.
Within the US, the pure academic sector may be around 10%.
It ebbs and it flows a little bit.
Government adds to that.
You can see how a decline in these segments affects the overall result.
Like I said, we're taking a balanced view on one hand.
We're not happy with the decline, and we want to do better, and we believe we will do better, but on the other hand keeping it in perspective, and keep our number one focus on the core business and the sectors like pharma, like food and others that are giving us a lot of growth right now.
Affecting the overall geography wasn't just as simple as pharma and then academic.
There's a lot of other sectors within industrial, too, that as we pointed out, have had more moderate growth, particularly in the industrial side ---+ the chemical, materials, polymer ---+ the environmental-type end markets.
Yes, <UNK>.
I just wanted to mention, as a follow-up to Chris's comments on the US, that in this particular quarter we were comparing against a mid-teens growth in the prior-year quarter.
Please bear that in mind as you think about the particular growth rates in the US in the third quarter.
Thinking about the yen, as we mentioned, we had a slight decline in Japan on constant currency; but we had a double-digit growth rate at actual because of the appreciation of the yen.
Japan has been, and continues to be a high-single-digit percentage of the corporation's business.
Good, I think we're coming closer to the top of the hour, but we have time for one or two more questions.
Maybe a couple more.
Does that answer your question, <UNK>.
Probably too small.
It's a good question, but probably a little too small.
Once we start breaking our own numbers down in that level of granularity, there's too many exogenous factors to draw good conclusions.
But yes, we did see a slightly moderating pattern there.
Keep in mind, earlier in the year in a number of categories that continue to do well, we constantly out of conservatism, expect some degree of moderation.
That's what as <UNK> said for the fourth quarter even our best growth drivers.
We're really ---+ these particular product lines or service lines, if you will, in the recurring revenues are really a core part of our story and our competitive strength, and the robustness of our ongoing business models.
I think we're pleased overall with where that's at.
Let me start on that.
I think that if the pound stays where it is today, <UNK>, we will get more of a full impact in the fourth quarter.
As I mentioned earlier, the pound devalued within the third quarter.
To your point, some of the positive effects of the pound on cost of goods sold are going to be dependent on just the product mix, and whether or not we sell the higher volumes of high-resolution mass spectrometry systems which are manufactured at our UK operation.
I have to say that as a higher-ticket items those tend to be lumped a little bit more toward the closing months of the year.
Chris had already mentioned about some orders migrating from the third quarter into the fourth quarter on the academic spend.
That was mostly represented in our higher-end mass spectrometry space.
Looking at next year, some things to consider is that we have had historically between 10% and 15% of cost of goods sold as pound denominated, and probably more significantly about 1/3 of our R&D expenses is denominated in sterling.
Those are some of the opportunities that we have, maybe as we begin to look out into upcoming quarters to get a little bit more favorable impact in our P&L.
Good.
I think we have time for one more, please.
Why don't I start out on the FX side, and then I will leave it to Chris to finish up on the second part of your question.
Yes, we had ---+ we are enjoying a little more favorability in FX during the fourth quarter this year than we had originally anticipated.
To quantify it, it's about $0.05 more benefit across that period more than we had originally anticipated.
You're looking at $0.02 or $0.03 a quarter associated with total currency benefits in the third and fourth quarter.
<UNK>, quickly on your geographic questions to finish up.
Those are good questions to finish up.
Maybe I'll start with the UK and finish with China.
We've seen very steady market conditions in the UK.
Our UK business is roughly 4% or 5% of our global turnover, so it's one of our bigger countries.
It's also one that's quite balanced.
There's a strong pharmaceutical sector there, of course, and also a strong government and academic sector in the UK, as well.
That market's an important market for us.
We've seen steady performance, and in the near term don't see any impacts of Brexit.
We are paying very close attention to Brexit.
In fact, I've dialed up my participation in the UK and been there a number of times, including to key thought leaders in government and other sectors, to really advocate for the types of policies that will continue to promote the life science industry in the UK.
The ecosystem of the life science industry in the UK is very critical to us, to Europe, and to the world.
I'm actually, despite all the uncertainty, confident that everybody understands that, and will keep the interest of that industry in mind as the negotiation gets under way.
Again, much of that's out of our control, but to the extent we have a voice in what some of those policies are, we are going to be active in that process.
From the standpoint of China, again we don't want to get too specific, other than to say we're operating at a high level in China right now.
I think that's a function of two or three things.
First of all, it's a strong overall economic backdrop relative to the priorities of the government.
We are between year one and year two of the 13th five-year plan.
We've studied that very deeply, and very well aware as to what the government is trying to do, particularly around advancing and incubating the local pharmaceutical sector and rising quality standards there and rising data standards there, as well as in the food industry and the area of traditional Chinese medicine.
Those are three of our big priorities.
We're seeing a lot of balance across those right now.
We're seeing the rapid adoption of some of our newer technologies like the Acquity Arc that really allow many of these sectors to get up to speed quickly, but also advance to more innovative up-to-date methods.
It's a pretty robust market.
I think one of the reasons we're having success there is we've got a very strong team.
We have been in China for a long time.
We're coming up on nearly 500 employees in China.
We have a huge commitment there.
We're very active with a number of the key opinion leaders and academic centers there.
I'm actually heading back over to China in a few weeks to dig even deeper, because we think that what's happening there is very positive for our industry, for our business.
It's at the very top of our list.
Thanks for that question, and let me also now just move to conclude the call.
As we move into the fourth quarter of 2016 and begin to focus on 2017, we are very encouraged by our year-to-date performance.
The strength of our key growth drivers has enabled us to deliver double-digit earnings-per-share growth for the first three quarters of the year.
On behalf of our entire Management team, I would like to thank you for your continued support and interest in Waters.
We look forward to updating you on our progress during our Q4 2016 call, which we currently anticipate holding on January 24, 2017.
With that I thank you, and wish you a wonderful day.
Bye.
