Good morning. Welcome to the Waters Corporation fourth quarter financial results year 2015 conference call. All participants will be able to listen only until the question and answer session of the conference. This conference is being recorded. If anyone has objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. John Lynch, Vice President of Investor Relations. Sir, you may begin.
Thank you, operator. Well, good morning 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 2016. 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, 2014, in Part One 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 the 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 2016. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures 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 Quarterly Reconciliation of GAAP to Adjusted Non-GAAP Financials included in this morning's press release.
Unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the fourth quarter of fiscal year 2014. 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, which at this time generally adjusts for the negative effect of foreign currency translation. Now, I'd like to introduce Waters' Chief Executive Officer, Chris O'Connell. Chris?
Thanks, John, and good morning, everyone. Thank you for joining us today. It's great to speak with you again. The last three months since my first earnings call as Waters' CEO have flown by. It's been an exciting and enjoyable time for me. This morning, I will share my thoughts on the state of our business heading into 2016 and our priorities for the coming year. I would also like to provide commentary on the changes announced yesterday to expand our leadership structure. As I indicated on the last earnings call, my first priority is to drive our quarterly and annual business performance. Accordingly, let's start by reviewing the results for our fourth quarter and 2015 overall. I'm pleased to report that Q4 was another strong quarter for Waters.
In the face of a challenging year-over-year comparison and meaningfully fewer selling days versus the prior year's fourth quarter, sales were up 5% as the positive momentum that we saw earlier in the year continued. For the full-year, sales were up an impressive 9%, with all major segments of the business contributing to this balanced result. Now let's dive deeper by taking a look at the Waters division performance. Revenues for Waters products and services in Q4 increased 4%, led by sales to our broadly defined global pharmaceutical segment, which were up 6% in the quarter. Full-year 2015 pharmaceutical segment growth was 11%. Globally, the government and academic segment was down mid-single digits in the quarter against a very strong performance in 2014. For the full-year, sales to this segment were about flat.
Sales to the food, environmental, and industrial chemical markets grew modestly, up 3% in the quarter, with slower growth in Europe offsetting a strong performance in China. For the full-year, sales to this segment were up 7%, with balanced geographical results. From a product line standpoint in the quarter, instrument platform sales grew at a 3% rate in comparison to a strong prior year's performance. Just as we saw in the third quarter, demand in the fourth quarter was strongest for our bench top LC and LC-MS instruments used in broad-based life science applications. For the full-year, Waters instrument platform sales were up 10%. ACQUITY and Alliance LC technology systems grew at a double-digit rate, and the ACQUITY QDa mass detector continued to expand the usage of MS detection in classic LC markets.
On the high-resolution mass spec front, I'm happy to report that we began shipments of our new Vion IMS QTof platform in the fourth quarter. Our recurring revenues, the combination of service and chemistry consumables, grew 4% in the quarter. This rate reflects the effect of fewer selling days in the quarter. Waters service business growth was generally balanced across all major geographies, with contracted service plan revenues driving much of the growth. On the chemistry consumables front, sales were up 5% and benefited from strong pharmaceutical demand in both research and quality control laboratories. Looking at the full-year, Waters' recurring revenue were up an impressive 9%, a rate that's indicative of strong instrument utilization, growth in service agreements, and a continuing trend towards the usage of UPLC methodologies in more routine and regulated testing. Now I'd like to cover Waters division performance from a geographic standpoint.
Starting in the U.S., sales were flat in comparison to a strong 12% growth performance in prior year's Q4. Modest growth in U.S. pharmaceutical and industrial sectors was offset by a decline in government spending. Full-year sales in the U.S. were up 10%, with balanced growth across all major product lines and customer categories. Our European sales grew 3% in the quarter. Pharmaceutical sales were up mid-single digits, government and academic business declined, and industrial sales were about flat. Just as we saw earlier in the year, stronger growth in Western Europe was partially offset by weakness in Eastern Europe. Looking at the full-year, Waters' European sales were up 7%, and similar to the U.S., sales growth was balanced across our major product lines and end markets.
In China, growth was 9% in the fourth quarter and 16% for the full-year, with our mix well-balanced between privately and publicly funded customers. As I saw firsthand during my recent visits to Beijing and Shanghai, we are truly a powerful franchise in China and are well-positioned to achieve continued strong sales growth over the long term. Sales in Japan were relatively flat in the fourth quarter and also for the full-year. Looking at the full-year results, sales were strongest for our chemical analysis business, where we saw strong growth for food applications throughout the year. In India, we enjoyed a very strong fourth quarter, capping off a truly remarkable full-year performance in that geography. In the fourth quarter, India sales grew at a strong double-digit rate, consistent with our 25% growth for the full-year.
We continue to see strong demand from generic drug companies for LC instruments, services, columns, and networked information systems. Impressively, India's growth was against a very strong performance to the prior year's result. Similar to China, we have a very strong organization and market position in India. In fact, I am heading to India tonight and look forward to learning more about how we can sustain strong rates of growth in this strategic market. Finally, from a business segment standpoint, TA Instruments performance rebounded nicely from a slower 2014, growing 9% worldwide in 2015. To recap last year, 2015 was truly a milestone year for Waters. I must compliment all of our employees worldwide for staying very focused on executing an aggressive business plan while we smoothly transition to a new CEO and also smartly invested for future growth. Financially, 2015 was a successful year.
Our strong top-line performance was delivered while generating significant operating leverage when measured on a constant currency basis. Even with the significant currency headwind, we grew our adjusted earnings per share at a high single-digit rate while meaningfully increasing our R&D spending and investing in customer support personnel. As we enter 2016, we are focused on the following. First, we will strive to continue our track record of delivering reliable and consistent performance each quarter while also investing for future growth. Second, we will develop our organizational capability, investing in our people and building the broader leadership team that will enable Waters' future success. Third, we will sharpen our long-term strategic plan, which will guide our ongoing resource allocation. I believe Waters is poised for continued market-leading growth as we focus on our priorities of product innovation, global market development, and excellence in the overall customer experience.
In particular, I'd like to comment on our innovation story, which I believe is a rich one. in 2015, we launched significant new instruments, including the ACQUITY Arc and the aforementioned Vion IMS QTof. Launched in the second half of 2015, the ACQUITY Arc System is a modern LC system with the versatility and robustness required to bridge the gap between HPLC and UPLC while continuing to support validated assays. In the relatively short time this product has been on the market, we are already seeing the system's strength. Similarly, the Vion IMS QTof platform is creating good momentum as we are seeing increased interest and adoption of ion mobility mass spectrometry. These groundbreaking technologies augment the continued steady growth of our well-established technology platforms, including Alliance, ACQUITY, and Xevo mass spec.
In consumables, we continue to expand our line of UPLC and specialty columns, as well as advanced analytical reagent kits, such as the GlycoWorks labeling kit for glycan analysis. We expect our 2015 product introductions to gain momentum in 2016, benefiting Waters' sales growth and market share gains. In addition, our product pipeline is rich with innovative new product launches planned for 2016 that I will speak more about in the coming quarters. I'd like to close my comments by commenting on the leadership announcement from yesterday. After a nearly 40 year career at Waters, our Waters Division president, Art Caputo, has decided to retire at the end of 2016, and he will serve as a non-executive advisor to me throughout the year. It is impossible to describe the enormity of Art's impact on this company.
He has been a truly unique leader in Waters' history, who has personally influenced our market-leading performance, our many meaningful innovations, and countless customer successes with Waters technology over the years. While I've only had the pleasure to work with Art for a short six months, it's clear to me that his business and organizational legacy has put us in a strong position to move forward. Perhaps Art's greatest contribution has been the many leaders and employees he has personally mentored and developed. Taking advantage of Waters' deep reservoir of talent, as detailed in yesterday's press release, I've had the opportunity to promote key leaders from inside the organization to our newly formed executive committee, establishing a forward-leaning operating structure that will ensure leadership continuity, it will enhance our strategic differentiation, and further streamline execution.
On behalf of all Waters employees, I salute Art and thank him for his extraordinary career. I also want to express my sincere confidence in our newly shaped executive committee and the broader leadership group as we lead Waters into the future. Now I'd like to hand the call over to Gene Cassis, Waters' CFO, for a review of our financials and further comments on our future outlook. Gene?
Well, thank you, Chris, and good morning, all. In the fourth quarter, our revenues came in at $587 million, an increase of about 5% before currency translation, which reduced sales growth in the quarter by about 5%, resulting in a modest increase in reported sales growth. Our non-GAAP earnings per diluted share in the fourth quarter were down 2% to $1.96 in comparison to earnings of $1.99 last year. On a GAAP basis, our earnings were $1.83 versus $1.80 last year. For the full-year 2015, sales grew about 9% before currency effects. While currency translation reduced sales growth by about 6.5%. Non-GAAP earnings per diluted share were up about 7% to $5.89 per share versus $5.48 last year. Notably, the impact of foreign exchange reduced full-year earnings by about $0.59. Without this negative impact, earnings per share would have grown by about 18%.
On a GAAP basis, full-year earnings per share were $5.65 versus $5.07 in 2014. A reconciliation of our GAAP to non-GAAP earnings is attached to the press release that we issued this morning. Looking at our growth rate in the fourth quarter geographically and before currency translation, U.S. sales were up 4%, Europe was up 3%, Japan was flat, and sales in Asia outside of Japan were up 14%, with strong demand in India and China. On the product front, LC and MS instrument sales increased by 3%, and our recurring revenues grew by 4%. In all, Waters division sales were up 4%. TA sales were up 16% in the fourth quarter and 9% for the full-year, with new technology offerings and acquired products benefiting the quarter and the year.
Sales were strongest in the U.S. and Asia, where the growth rates were up in the double digits during the quarter. Now I'd like to comment on our fourth quarter's non-GAAP financial performance versus last year. Gross margins for the quarter came in at 59.4% as compared to 60.1% in last year's fourth quarter. For the full-year in 2015, gross margins were 58.7% versus 58.5% last year. For both the fourth quarter and full-year, foreign currency impacted gross margin percent negatively, masking the otherwise positive impacts of product mix and manufacturing cost dynamics. Moving down to P&L, SG&A expenses were down slightly as reported. However, factoring in the positive effects of foreign currency exchange on expenses, SG&A grew in the quarter as we funded product introductions and additional field headcounts to ensure customer support.
R&D expenses, including those associated with new product development and incremental investments, grew about 2% in the quarter before taking into account the favorable impact of foreign currency exchange. On the tax front, our effective operating tax rate for the quarter was 14.3%. For the full-year 2015, our operating tax rate was 13.8%. This includes the impact of the U.S. R&D tax credit that was reestablished at year's end. In the quarter, net interest expense was $6 million, and our average share count came in at 82.4 million shares or approximately 1.6 million shares lower than in the fourth quarter of last year, a net result of our ongoing share repurchase program. Turning to the balance sheet, cash and short-term investments totaled $2.4 billion, and total debt came in at $1.7 billion, bringing us to a positive net cash position of $731 million.
As for fourth quarter share repurchases, we bought 595,000 shares of our common stock for $78 million. This leaves $441 million remaining on our authorized share repurchase program. We define free cash flow as cash from operations less capital expenditure plus non-cash tax benefits from stock-based compensation accounting and excluding unusual non-recurring items. In the fourth quarter of 2015, free cash flow came in at $136 million after funding $24 million of capital. Excluded from this amount is approximately $3 million of investment associated with major facility expansion. This brings our full-year 2015 free cash flow to $484 million. Accounts receivable days outstanding stood at 71 days this quarter, up three days from the fourth quarter last year, and sequentially down five days from the third quarter. In the quarter, inventories declined by $18 million in comparison to the prior quarter.
Looking ahead to 2016, our outlook generally assumes a continued strong foundation in our biopharmaceutical end markets and stable growth in our recurring revenues. Along with growth from TA Instruments, this will combine to help support a mid-single-digit constant currency sales increase in 2016. Currency translation at today's rates is expected to reduce 2016 sales growth by 1% and earnings per share growth by about 2%. Moving down the P&L, gross margins for the year are expected to be about equal to those in 2015, as volume-related manufacturing efficiency gains will likely be offset by the negative impact of foreign currency. We expect to manage our constant currency operating expenses to grow at a rate that's less than our constant currency sales growth rate. Moving below the operating income line, net interest expense is expected to be around $29 million.
We currently expect our operating tax rate to be about 14%. We do plan to continue our share repurchase program through 2016 at a rate that we expect will result in an average diluted share count of around 81 million shares. Rolling all this together and on a non-GAAP basis, full-year 2016 earnings per diluted share are projected to be within a range of $6.10-$6.35. Looking at the first quarter of 2016, we are estimating that sales will grow at a rate of about 3%-5%. At today's rates, currency translation is expected to reduce first quarter sales growth by between one and two percentage points. Rolling these factors together, we expect first quarter earnings per diluted share to be in the range of $1.17-$1.27. Thank you, and Chris?
Thank you, Gene. With that, we'll now open the phone lines for Q&A. In addition to Gene Cassis and John Lynch, Art Caputo is also joining us for the question and answer period. We are rarely able to get to everyone's questions, so please limit yourself to one question and one follow-up. If you have additional questions, please contact our investor relations team after the call. After the Q&A, I'll add a few closing comments. Operator, can we please have the first question?
Thank you. Our first question came from Dan Arias. Dan, your line is now open.
Good morning, guys. Thank you. Chris or Gene, maybe we could just start by touching on biopharma a little bit this quarter, what you saw on a global basis. Maybe next year, just looking at the way in which you're seeing growth across the different regions, given the comps that you're working with. I'm curious this quarter whether you did see any budget flush dynamic that maybe you had not seen in previous years. Thanks.
Yeah. Hey, Dan, it's Chris. Thanks for the question. I'll take a first run at it and Gene can add. It's been obviously a key focus of ours to monitor the underlying market dynamics in biopharma, which were solid throughout the year. As we mentioned on the call, in the fourth quarter, with a tough comparison, this segment for us grew 6% and then double digits for the year. Obviously, we think we're seeing a trend in the market towards a broader and more diversified pharma end market that's not nearly as concentrated in the traditional large pharmaceutical companies as it has been in the past. We're seeing a lot of activity in the biotech world, in specialty pharma, and obviously our generics business, particularly in India, has been a major source of growth.
Yes, the comparisons are tough, but we do anticipate that the market trends that we're seeing in every phase of the pharmaceutical market from discovery and development all the way through QC and production ought to remain relatively stable. We are going to continue to strive for good growth in this segment.
Yeah. Just adding on to what Chris said and following on your question about the dynamics of sales within the quarter, I would say that as the large global pharmaceutical customer set is continuing to be a smaller percent of our overall pharmaceutical business, and as that historically was the group of customers where you would see this traditional end-of-quarter flush, it was actually less pronounced this quarter. One other factor, given the large installed base in large cap pharma, that's also the customer segment where we saw the greatest impact from the fewer selling days and the effect that that has on our recurring revenue.
Okay. Thanks for that. Appreciate that. Then maybe just specifically on the biotech set, how much spending do you actually see that's increasing post-ACAP arrays? I think the consensus view that those two events are correlated, but I'm just curious about the magnitude of that dynamic to the extent that it does exist. Is there something you can help us with there?
I don't know, Dan. I think it's hard to tease out that particular factor in the biotech sector. What I've noticed, and I've been out into the market quite a bit visiting customers in terms of the large biotech companies as well as a number of startup companies, is there is a rush of innovation in that industry, and you probably have the statistics better than I do on R&D spending and the ramp in R&D spending in that area. But the complexity of the molecules that are being worked on in the discovery phase and the development phase continues to grow, and the demand for more characterization is there. We're seeing a nice steady trend in that area. We're also seeing our technology being adopted in new and different ways throughout the manufacturing process.
For example, I was visiting a major biotech customer recently on the West Coast, and our QDa system was identified by that company as a new entrant in their quality control process to ultimately replace the peptide mapping that occurs at the end of manufacturing for quality control. We see a lot of opportunities as the biotech business continues to evolve.
Okay, thanks very much.
Our next question came from the line of Ross Muken from Evercore ISI. Sir, your line is now open.
I just want to dig in a bit on the biopharma side, maybe more so on the emerging market. I know you mentioned, Chris, emerging market generics, particularly India was strong. We are seeing a ton of volatility in the rupee and some of the other currencies. Just help us think through, particularly on the instrument side, just how we are supposed to think about demand in those verticals and maybe in GRO over the balance of the year, given some of those dynamics.
Sure. Let me comment, Ross, specifically on China and India as good sources of growth that I mentioned. Although, it is a balance and there is other geographies in the emerging markets such as Brazil and Russia and some of the Eastern European countries that are slower. That is more than being offset by China and India in particular. When you mentioned the instrument demand, one of the differences in a market like that is we are still being driven by new placements. So there is the traditional replacement business. There is obviously a strong recurring revenue piece, particularly on chemistry consumables, the columns, as well as the service piece. But we are still increasing our install base, which is a good trend because that is going to be followed by the recurring revenue streams as well.
As it relates to the rupee and some of the local currencies in those types of markets, I'll have Gene comment a little bit further, but a lot of our billing is actually in dollars in those geographies. We're watching that closely. But as we build those types of markets, we tend to go first in dollars and try to stick to that factor, which will lend stability to our business over time. Really, we'll continue to focus heavily on India and China because together, those two geographies are 20% of our worldwide revenue growth. While growth always isn't in a straight line and sometimes can be lumpy, those markets both appear to be some of our strongest long-term growth opportunities overall.
Yeah, just building on what Chris said, this is Gene, and thinking about the currency impact. As Chris alluded to, we transact a lot of our instrumentation business in U.S. dollars. But some of our recurring revenue streams, our columns business and our service business are contracted in local currency. So the devaluation of the currency in China and India is one of the components that we're dealing with in this currency headwind situation that we've experienced for the last couple of quarters and that we expect to experience during the first and second quarter of next year.
Great. Maybe just turning to the pricing side of things. Obviously, you've had good new product momentum across the portfolio. Can you just help us understand sort of the trajectory of price capture, just given, again, some of the volatility in maybe some of the more economically sensitive end markets or in the academic side, government side? Just help us think about across the portfolio how that's differing.
Yeah. From what I can see, Ross, the pricing continues to remain in a corridor where we're getting some modest low single-digit type of annual price increases at the portfolio level. But Gene, you want to add anything to that?
Yeah. I'd just say that if you look at the difference in gross margins for the quarter, all of it is attributed to currency. I would agree with Chris that what we're seeing is price stability, or in some instances, we're seeing a little bit of price increase.
Got it. Thanks, guys.
Our next question came from the line of Dan Leonard from Leerink. Sir, your line is now open.
Thank you. My first question, can you elaborate a bit more on what you saw on the academic and government end markets in the fourth quarter and also what you're planning for in 2016?
I'm sorry, can you ask that question one more time, please?
Sure. In the fourth quarter, it sounded like you were talking that the academic and government end markets were a little weak. I was hoping you could elaborate on that given strong funding backdrop in some circumstances, and then what your outlook is for 2016 for those customer classes.
Yes. If we look globally, the government and academic component of our business has been around mid-teens percent of our business, which in comparison to the overall health sciences tool space, is a little bit on the light side. If you dig a little bit more deeply into that, you find that there's a heavy component of higher-end mass spectrometry within that number. From our past experience, we tend to see that business be somewhat lumpy for us. We're encouraged by the increased funding that we see for next year. If I take a look at the results that we reported in the fourth quarter and maybe some of the slowness there, the majority of that can be accounted for by a very strong performance in the prior year.
Got it. Thank you. My follow-up for Chris. Chris, can you characterize your appetite for opportunistic M&A over, call it, the next six months here if we're heading into a slowdown and opportunities present themselves?
Sure. Happy to comment on that, Dan. As I've been very consistent all along, I see M&A as a tactic that could be employed to deliver our business strategy. We will not see M&A generally as an ongoing strategy. We're focused first on the basic strategic questions of where we want to compete and how we want to compete. If opportunities present ourselves that make us stronger and more effective from either a product line or a channel standpoint, and if we apply our rigorous financial discipline to that type of an investment, we will assess that. But there's nothing in the environment now that would accelerate our appetite for M&A per se. We're focused first and foremost on organic growth driven by innovation.
Okay. Thank you.
Our next question came from the line of Jonathan Groberg of UBS. Sir, your line is now open.
Great. Thanks, and congratulations on a solid end of the year. I don't know if Chris or Gene, if either of you want to comment, but if you think about your mid-single-digit growth on the top-line outlook for 2016, which seems reasonable given a very strong 2015, I think you're guiding only 6% EPS growth or if you exclude currency, 8% EPS growth. If we think kind of the next three to four years, Chris, as you get to know this business, do you see anything about it that should alter what the historic kind of long-term model has been in terms of how much you're going to need to invest in some of these new initiatives that you've talked about? I'm just trying to think how we should think about the long-term, EPS growth model that Waters has traditionally had.
Sure. That's a good question, Jon, and one that I look forward to engaging deeper in over time. Let me start with where you began. You're right, mid-single digit is, I think, a very solid outlook for this year, particularly on the strong base of 9% growth last year. Really that's based on a pretty broad set of drivers. We've talked about solid underlying market conditions, whether that's in pharma or some of the geographies that we've mentioned. Certainly the recurring revenue stream after a strong 2015 and a good outlook consistent with historical trends. The new product uptake that we've talked about in terms of products launched last year, but even some of the prior years. In the mid-year, we're going to see a little bit of TA acceleration as well with their new product platform in thermal analysis.
As we look at the year, we want to continue to focus on a number of these levers that we can pull, but also have a spending plan that really is designed to drive growth. As we see opportunities to take advantage of revenue growth in the market, that we're positioned to take advantage of that. Obviously, the more we grow on the top line, the more operating leverage we would feel comfortable shooting for, and we're going to continue our regular share buyback program. So when you bake all that in, we do expect EPS leverage as you pointed out in the range you pointed out. As I look at the long-term model, I guess there's still a lot of work we need to do on strategy to really characterize what we think our top-line growth opportunities are.
But we're going to probably stay consistently focused on trying to gain some modesty of operating leverage while investing for growth, but also that financial leverage. At this point, I've not set a long-term aspiration for earnings per share growth, but we certainly want to be best in class and industry leading in that regard.
Okay. That's real helpful. Thanks, Chris. Then just my quick follow-up. Gene, on the free cash flow, where are we in terms of the CapEx that you keep calling out? Where are we in terms of stopping to exclude some of these incremental investments on the CapEx side?
Yeah. Thank you, Jon. Over the last years, we have been engaged in some major facility builds and also some facility improvements. Specifically, you all recall the new mass spectrometry center in Wilmslow, U.K., and over the past couple of years, we have embarked on a modernization program for our headquarters in Massachusetts. I think that we are still in the midst of that Massachusetts upgrade. I think that 2016 will be another year of investment on that front. Obviously, the Wilmslow facility is behind us. As I think about capital expenditures for 2016, I think they are going to be in a similar range to 2015, and I think there is an opportunity to maybe see a little bit of easing on that as we move into 2017 and beyond.
Great. Thanks a lot.
Thank you.
Thanks, Jon.
Our next question came from the line of Tim Evans of Wells Fargo Security. Sir, your line is now open.
Thank you. Sorry to beat the biotech horse here a little bit, but I do think it's important given your exposure there. Can you talk about how you think about the funding environment right now? Obviously, it's a little bit more challenging, and obviously you've diversified your pharma base a little bit more heavily into CRO and biotech customers. In your 2016 outlook, are you expecting, or are you factoring in a little bit of conservatism for this more challenging funding environment? Do you think that CROs and biotech customers in particular might be a little bit more hesitant on their capital outlays?
Tim, that's a good question, and I would say I'm still early in my process of gaining a more intuitive feel for how some of those funding patterns work, A, and B, how they affect our business. I would just caution by saying that particular segment of our business, biotech and CROs, is a smaller portion of our overall driver. Even if there are modest or moderate short-term patterns of the nature you describe, it's not necessarily a major driver. Obviously we're trying to build balance in terms of our business, not just tied to new funding cycles and early innovation, but development programs that are occurring throughout the entire life cycle for those companies all the way to including the production environment and the advent of the biosimilars world.
We're looking to gain further insights into exactly that question you ask over the course of the year, and we'll update you with what we learn.
Do you think you might be able to call out, say, the exposure to a combination of CROs plus unprofitable biotech? Give us some sort of close approximation of what that is as a percentage of your revenue.
I do not know. That is the type of question that I am trying to get at in our own strategic planning process, and I would like to go through that first before I put that type of number out to the street.
Got you. Thank you.
Our next question came from the line of Derik de Bruin of Bank of America Merrill Lynch. Your line is now open.
Hi, good morning. Hey, so a couple of quick questions. One is, there's obviously been some M&A in the chemical industry with DowDuPont, could you talk about sort of what you're seeing in that exposure and just some thoughts on Japan? I know it's been a tough market, how do you think about the recovery in that market?
Yeah, Derik, it's a good question. I'd say it's too early on the M&A in the chemical industry, we haven't really seen an impact in terms of our relatively modest position in that market from an overall mix standpoint. Really our business in that sector is pretty broadly spread. Trying to get a read on how a large merger like that affects our business is challenging and a little bit like the effects that we see from the large pharmaceutical mergers together. The one thing I can say is that a lot of these merger companies through my travels feel like they're driven by strategic reasons to actually increase the amount of innovation that those firms are able to generate while gaining efficiencies in other areas to pay for innovation.
We're just keeping our heads down and trying to act no differently, even though those are larger companies and try to stay away from any defocusing with what they're going through and just support them in any way we can. Gene, you want to comment a little bit on Japan?
Oh, sure. We have a long history in Japan, Derik, and we have an excellent operation there that is able to accommodate changes in the local market. If I take a look at 2015, the growth in pharmaceutical in Japan was not stellar compared to other places around the world. However, what we did see is a nice pickup in the food safety business, and I think we have within Japan, a lot of resources that can very nicely customize our instrumentation to the applications that are important at the time. So we see a broad continuation of that going into 2016. There are no warning signs that we have. We're not expecting the Japanese business to contribute positively to that mid-single-digit growth rate, but we are developing a plan that does include growth in Japan.
Great. If I can squeeze one final one in, I got one from a client here. Chris, I think you came from a more medical device company. You are now running a more cyclical business, and there are concerns about global recession going on. If you can talk about how your through your background is you are looking at now a much more cyclical industrial global business versus what you sort of were used to at Medtronic and just sort of talk about what you are sort of doing in terms of looking at the economic implications for the business. Thank you.
Sure. Medtech is not uncyclical. I guess I would say there are uncycles in medtech, and certainly some of the businesses that I was involved in had a large capital component to them and some of the same underlying dynamics. I am actually finding some perhaps more similarities than differences as I get into the health sciences tools area. But really, the big lessons from medtech, from my standpoint, that I am really trying to apply here are to continue to sharpen our focus on innovation and where maybe in the medtech world, the goal was to drive new therapies to standard of care. The goal here in our measurement business and our analytics business is to drive our technologies to standard of analysis to have very positive beneficial impacts on our customers.
Some of those underlying principles of innovation and market development are really at the forefront of my mind as we strive to continue our track record of being a strong grower.
Great. Thank you very much.
Our next question came from the line, Bryan Brokmeier from Cantor Fitzgerald. Sir, your line is now open.
Hi, good morning. Chris, as you think about your industrial business as a whole, as well as for TA by itself, how would a global recession impact your business, even if the U.S. does not enter a recession itself?
Yeah, it's a good question. The industrial sector is really about a third of our business overall, and that includes industrial, chemical, food and environmental. If you break it down from there, one of the cores of that is the food safety and the food security business, and that whole area maybe can be thought about a little bit differently than what you might consider to be the core industrial segments. I'm still trying to get my arms around what the global recession, if you will, means for some of these end markets. Our business in these areas, and particularly in TA, you mentioned TA, is very diversified geographically and very diversified in terms of customers with very few customers that represent a significant portion of the business.
We're just trying to work collaboratively with these customers to make sure that they can continue their investments in our products and their capital throughout this cycle. There undoubtedly are effects in certain end markets, certain geographies and certain customer segments, but at this point in time, we're just trying to manage through that and would certainly highlight any major dislocations or gaps as we see them materialize.
Chris, could you also elaborate on how the roles of the new members of the executive committee may be changing and how the decision-making process is changing?
Sure. So thanks for commenting on that. We put out the press release yesterday on an organization evolution, and really this was a carefully planned evolution as Art Caputo has contemplated retirement. It's been a very smooth process. Art is a remarkable person and really the team that he's developed, the talent there is truly impressive, so the opportunity to promote from within. So we have a new structure that is going to enable me to be one step more hands-on. It's going to, I believe, accentuate our competitive advantages by organizing around major product groupings in terms of the platforms group and then the applied technologies group, which combines our strength in chemistry, service and informatics. It gives us the opportunity to have an integrated go-to-market organization, sales and marketing, under another leader.
Really what we're going to do is we're going to evolve into a set of operating mechanisms that are very crisp and very regular in terms of enabling each of those large functional leaders to translate our strategy to execution, and to do so in a very efficient way. So, those processes are well under development. We really don't expect to miss a beat. This is a very senior and experienced leadership team in this industry and this company, and I have a lot of faith in the structure moving forward. I'm excited about it.
Okay, thanks a lot.
Our next question came from the line of Sung Ji Nam of Avondale. Your line is now open.
Hi, thanks for taking the questions. Gene, or maybe even Art, could you maybe talk about how the ACQUITY Arc is differentiated from the H-Class in terms of potentially target market segments, applications and things like that, given you're talking about bridging HPLC to UPLC?
Yes. Hello, Sung Ji. This is Gene, and I'll start, and then Art can add in. The ACQUITY Arc System is actually a system that's designed to accommodate methodologies that are in regulated markets that use HPLC separations technology. It's designed to be able to accommodate column lengths that are typically used in these applications. It also affords the user the opportunity to experiment with UPLC columns and see what the differences are in resolution and speed between UPLC and HPLC. What we've found going to market is that there are a number of customers that want to exactly replicate methodologies that were created on systems like our Alliance. We've designed the ACQUITY Arc to be able to seamlessly translate a method from a system like the Alliance LC system to the ACQUITY Arc system. So that is the primary difference.
The H-Class is designed with componentry and with a fluidic path that's more targeted to those people who are going to move methodology from HPLC to UPLC, rather than the audience for the Arc that may want to continue for a prolonged period of time to use an HPLC methodology. Art, is there
Yeah, I think Gene has done a great job of explaining the capabilities of the Arc. Maybe I could just add an additional flavor. Realizing that a large portion of our business goes into the regulated environment, pharmaceutical industry, biopharmaceutical industry. Traditionally, and over a long period of time, as we put in our innovation strategies, we get a mind to evolving our positions as opposed to revolutionizing them, so we have continuity. The ACQUITY platform is over a dozen years old now, and as that strategy was designed, it was designed to evolve. Every couple of years, what we did was examine its penetration into the business. Whether it was the original ACQUITY, going to the H-Class, going to the Arc and the other iterations, what you find is that we maintain a very current innovation position by watching how the market responds, how the competition responds.
The Arc is a very surgical position that we incorporated last year, which took advantage of what we saw as the market moving and evolving in the presence of ACQUITY. So the Arc has proven to be highly successful in that it wouldn't exist, that segment probably wouldn't exist if ACQUITY didn't exist. I think that the interesting thing is that you will see continued evolutions of this technology because it's a very powerful platform, and the customer base continues to respond as if it was introduced yesterday.
Good. Well, thanks Art and Gene. Next question. I think we have time for a few more.
Our next question came from the line of Isaac Ro of Goldman Sachs. Your line is now open.
Good morning, guys. Thank you. First question for you was on new products. I do not want to try and front run some of the new introductions you may have later this year at the various conferences, but I was curious if you could maybe talk at a higher level about what contribution to organic growth you expect from new products this year. I know you mentioned pricing in your earlier comments, but I was kind of looking at the opportunities this year from the standpoint of internal innovation and new products. Thank you.
Sure. Isaac, as I think about new products and given the pattern of how new products are introduced, I do take a little bit of a longer view than just those introduced this coming year. We will have some new products this year that we are not in a position to announce yet, that will just add to our portfolio.
But the way I think about it is the uptake of products that are early in their cycle, and certainly the ones to highlight that build upon our traditional platforms of Alliance and ACQUITY would be the QDa mass detector that we have talked about, that is a couple of years in the market, but really on a pretty steep curve, as well as the Xevo TQ-S micro, which has really turned into a kind of a workhorse product in mass spec applications, particularly in applied markets like food and environmental.
The ACQUITY Arc, which Gene and Art just talked quite a bit about, and now the latest one is the Vion IMS QTof that is really going to bring new dimensions to defining resolution in the marketplace. I am looking at those four products, for example, plus some other things for later this year, and certainly expect those to be incremental growth drivers above what you might model to be an expected market growth rate of our core platforms in Alliance and ACQUITY. In terms of putting a very specific number on that, I guess I am still early in my process in terms of understanding what type of statements we want to make and goals we want to set for the contribution of new products. But it is going to be a continuing theme every year.
It added several points last year, and I expect that category of newer products will continue to be accretive to our core growth rate.
Okay, that's helpful. Maybe a question on R&D spend. If I just look at the numbers this quarter, it does look like a modest sequential deceleration. I know it's relatively small numbers on an absolute basis, but I'm curious if you could talk a little bit about how we should think about the trend in R&D spend as you think about investing in new projects. Are there other projects where you're allocating dollars away to fund new initiatives? I'm just curious about how that all adds up to the total spend.
Sure. No, that's a good question, and it's something I'm laser focused on because innovation is my number one priority in terms of our growth model. Really, obviously, trying to get my arms around the overall R&D portfolio and the productivity of it and how we allocate resources to the most promising growth initiatives. But 2015 was a really big year for R&D. We increased our R&D spending on an as-reported basis of 10% and upwards of mid-teens on a constant currency basis. That brings our R&D spending up closer almost to the 6% type of level on total revenue. But also keep in mind, we have a significant service portfolio, which doesn't have the classic R&D spending, if you will. So really, R&D spending could be thought of as a little bit higher than that.
In the coming year, I expect we'll increase R&D spending slightly faster than revenue. Probably not as faster than revenue as it was in 2015, because we want to make sure that we can be as productive as we possibly can. But it's really in terms of the evaluation of when and where to accelerate it. It comes down to a portfolio set of decisions, and I look forward to giving you some more detail over the course of the year as I get my arms further around that portfolio allocation and where I see the better opportunities in the portfolio.
Got it. Thanks a bunch.
Our next question came from the line of Doug Schenkel of Cowen and Company. Your line is now open.
Hey, good morning, guys. I want to take a shot at two topics. The first on the quarter, the second really related to guidance. In a quarter where you guys had a tough compare and days working against you, recurring revenue was arguably better than one would have expected. Generally speaking, this was a solid quarter. That said, it does seem like Waters division instrument sales were a bit lighter than might have been expected, even recognizing the days impact, because that typically doesn't impact capital as much, and you did seem to have strong momentum heading into the quarter. I just wanted to make sure that instrument sales at the end of the quarter were as you expected, and that bookings heading into 2016 were okay as expected.
Yeah, sure, Doug. I think it's a fair question to always wonder about the different components. I would say, everything we saw throughout the quarter was within a range of what we expected, and there's always different dynamics at different points in the quarter. But I wouldn't call out anything unusual as it relates to order bookings and what the book looks like coming into this year.
Okay. My sense is that while many investors were expecting guidance to come in below where sell side consensus estimates sat heading into today, I do think it's fair to say that EPS guidance is below even metered expectations. Can you characterize how we should think about the error bars around guidance? Is it fair to say the bias is more to the upside versus risk to the downside? You've talked a bit about how much R&D spend is factored into guidance for the year pursuant to things like health sciences. Should we view this as the beginning of a multi-year period of enhanced investment to drive some of these growth initiatives? Thank you.
Hi, Doug. Why don't I just start on that? If I take a look at the spending in the base year, 2015, I think what you saw is us ramp spending across the year, ramp spending up on the SG&A side, more on the S side and on the R&D side. That's just in response to what we've seen as a very healthy end market. That includes 2014 as well as 2015. So as we enter 2016, we are going to start the year off comparing against expenses earlier in the year that were not as high as they were at the end of the year. So, from that regard, it's a little bit of tougher base of comparison. We also know that in our business, the second half of the year is more impactful in terms of sales than the first half of the year.
Frankly, it's further away. We look at the mid-single digit top line growth as something that's very reasonable given the strength that we had in 2015, delivering a high single, almost a 10% growth rate for the company. So hopefully, we believe that we have a spending plan that will support a stronger top-line growth rate. At this point, so early in the year, it doesn't make sense to anticipate that that demand will create another top-line performance as we had in 2015. So, we're giving guidance, with a high degree of confidence that these are numbers that are achievable, even if not everything materializes in a positive direction.
Yeah, and Doug, I'd just add to that, your question on R&D and multi-year investment and so forth. Just to reiterate, that our current R&D spending really reflects our core opportunities with only a modest contribution to some of the new markets like health sciences, and it's certainly, I think, premature to infer that this is the beginning of a new phase of investment philosophy. Investment in the business is going to stem from our strategic planning process. At this point, it's steady as she goes in terms of our traditional focus on our core while seeding some new market opportunities. But to the extent there's a shift in terms of how we want to allocate that portfolio in terms of new market opportunities, we'll have that dialogue in a very transparent way.
Okay. That's super helpful, Chris and Gene. Thank you.
Thanks. I think we have time for one more call, John?
Yep.
Thank you. Our next question came from the line of Jeff Elliott of Robert Baird. Your line is now open.
Yeah, thanks for sneaking me in here. First one, Chris, I guess, can you talk about the strength that TA Instruments had to end last year and how that can carry forward into 2016? Then a clarification for Gene. Can you talk about the selling day impact you had on the fourth quarter and what you are expecting from selling days in the first quarter? Thanks.
Sure. Jeff, to comment on TA Instruments, we did see a nice acceleration at the year and TA Instruments, that is really a broad-based variety of factors and one element of which is some of the more newly acquired businesses. That we picked up over the course of the year and the prior years as we build capacity. As you know, one of the elements of the TA Instruments business model is to do small tuck-in acquisitions that are under-resourced in terms of the capacity, and we saw some of that towards the end of the year. Really, as we look to 2016, we do see some carry-forward there, to your point. But also, the main event in 2016 for TA Instruments is the mid-year launch of the new Discovery Series thermal analysis family.
It's an exciting new product platform that'll really pave the way for the next level of evolution of that product line and solid growth for the next couple of years, so we're excited about that. Gene, there was one for you.
Oh, yes. Jeff, you had asked about the effect of the days?
Yes. Yeah, in both fourth quarter and first quarter.
Yes. In the fourth quarter, the selling day issue affects the recurring revenues in a more understandable way than it does the capital sales business. In general, the loss of a selling day typically results in about a percentage loss of recurring revenue. So if you have four less selling days and recurring revenues make up about half of your business, it's easy to quantify a couple of points, A, in associated with the selling days. In addition, it's harder to quantify, it does have some impact on the capital expenditures also. But I would say it's 2+ percentage points of growth, is a good way to think about it. Now as we think about the first quarter of this year, you might recall we're comparing against a 15% constant currency growth in the first quarter of last year. So it's a tough base of comparison.
But in terms of selling days, there is one less selling day in the first quarter of 2016. Using that same mathematics that we did to quantify the effect of selling days on the fourth quarter, that would equate to about 50 basis points of headwind associated with selling days. Not so meaningful, but one of the factors why we were a little bit more conservative on the first quarter growth rate than we are on the full-year. Does that help?
It does, thank you.
Thank you.
Good. We're at time. We're slightly over time, so I just want to conclude the call. Thank everybody for your great questions. I've certainly enjoyed getting to know many of you so far and look forward to a continuing productive dialogue. On behalf of our entire management team at Waters, I'd like to thank you for your continued support and interest in Waters, and we look forward to updating you on our progress during our Q1 2016 call, which we currently anticipate holding on April 26, 2016. Thank you, everybody, and have a great day.
That concludes today's conference. Thank you for your participation. You may now disconnect.