Waters Corporation

Good morning. Welcome to the Waters Corporation first quarter 2020 financial results conference call. All participants will be on a listen only mode until the question and answer session of the conference call. The 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. Brian Brockmeyer, head of investor relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to the Waters Corporation first 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 commentary on potential market and business conditions the company expects for the second quarter and full year 2020. We caution you that all such statements are only our present expectations and that actual events or results may differ materially. For detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see the risk factors included in our annual report on Form 10-K for the fiscal year ended December 31, 2019, in Part 1 under the caption Risk Factors, in the cautionary language included in this morning's press release, including with respect to risks related to the effects of the COVID-19 pandemic on our business. We further caution you that the company does not intend to update 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 July 28, 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 issue 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 to the first quarter of fiscal year 2019. In addition, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis. Now, I'd like to turn the call over to Chris O'Connell, Waters President and Chief Executive Officer.

Chris? Thanks, Brian, and good morning, everyone. Thank you for joining us today. Along with Brian Brockmeyer, joining me on this morning's call is Sherry Buck, Waters Chief Financial Officer. I hope you and your loved ones are doing well at this challenging time and staying positive as we all strive to overcome the global COVID-19 public health and macroeconomic challenge. Like most of you, we are all working from home, so please bear with us if we encounter any unforeseen audio issues with today's call. During today's call, I will provide an overview of our first quarter operating results, as well as some broader commentary on the impact that COVID-19 is having on our markets and business. Sherry will then review our financial results in detail and discuss our financial actions as it relates to the balance sheet and cost structure. We will then open up the phone lines to take your questions. As you well know, the COVID-19 global pandemic is a significant challenge for the world that is putting extraordinary pressure on the economy, our customers, employees, and their families. I would like to personally extend my gratitude for the hard work and dedication that everyone has shown over the past few months. I'd especially like to thank all of our dedicated employees who have been working in our manufacturing facilities, laboratories, and distribution centers, ensuring that we can supply our products and expertise to our customers. I also want to thank our talented field service engineers who have been on the front lines installing and maintaining critical analytical instruments and data systems to support the ongoing work of our customers. These efforts are incredible and truly inspire me, but they don't surprise me as I've consistently seen our great people step up to deliver benefit to our customers under all conditions. To briefly review our operating results for the first quarter, Q1 sales declined 8% and adjusted earnings per share declined 28%. The biggest COVID-19 impact on our business in Q1 was China, which declined 45% in the quarter, impacting total company sales by approximately 8 percentage points in constant currency. As severe containment actions were implemented in China at the time of the Spring Festival, economic activity and demand significantly decelerated, and these conditions persisted through the quarter. On a positive note, it was encouraging to see flat sales ex-China for the quarter, and 4% growth ex-China through week 12 of Q1 before broader containment actions went into place in the U.S., Europe, and India. Rapidly changing market conditions in these geographies during the final week of the quarter included declining access to customer sites, as well as the inability of some customers to place and receive instrument orders. Through four weeks of Q2, we have seen signs of recovery in China and other parts of Asia and Europe, though we expect the conditions seen at the end of Q1 in the U.S., India, and some parts of Europe will persist into Q2, making the second quarter likely more challenging than the first quarter. As we operate in this fluid environment, we have five overriding priorities. Number one, putting the health, safety, and well-being of our employees and customers first. Number two, ensuring business continuity. Number three, maintaining financial strength, flexibility, and liquidity. Number four, actively planning for recovery, particularly in maximizing the benefit of our strong new product flow. And number five, contributing our expertise and capabilities in the global fight against COVID-19. Let me say a little bit more about each of these five priorities. First, the health, safety, and well-being of our employees and our customers is our clear top priority. At every stage of the pandemic, we have taken decisive and appropriate cautions, including a mandatory remote work policy for all employees, with the exception of manufacturing, distribution in certain laboratory environments, as well as bans on non-essential travel and visitors into our facilities. Early on, we engaged a medical advisor to guide our policy deployment, and we continue to take proactive measures to ensure the health of our global employee base and the safety of all customer interactions. Our second priority is to ensure business continuity. The vast majority of the markets we serve, most notably the pharmaceutical, biomedical research, food and environmental, and clinical markets, have continued to operate at various levels, and we are working closely with these customers to ensure their seamless operation. Over the last several years, Waters has executed on a digital workplace strategy focused on providing modern connectivity and collaboration tools to our employees. Our strategic technology investments have enabled us to swiftly meet the remote working needs as the situation has escalated. From a customer facing standpoint, we are leveraging digital demand generation activities, including virtual demos across all regions, remote instrument installations, virtual sales seminars, online product training, and a rapid acceleration in one-to-one communications, over emails phone and video conference we also recently launched a new customer portal on waters dot com enabling a convenient and personalized online experience that's more mobile friendly augmenting the recent expansion of our digital commerce capabilities we're continuing to invest to provide our customers a similar world-class experience through digital means as they receive in person and we're seeing great customer engagement from a supply chain standpoint We have proactively and successfully secured access to raw materials for ongoing manufacturing needs, and we are working closely with our transportation providers to minimize any disruption to our distribution network. At this time, we do not anticipate any immediate supply or distribution concerns during the second quarter and are actively mitigating potential risks. Our third priority is maintaining our financial strength, flexibility, and liquidity under a range of business scenarios. We are seeking to balance prudent management of all areas of our spend while continuing to invest in growth initiatives. We are taking a proactive approach to preserving balance sheet strength and liquidity, as well as to appropriately right-size our cost structure for the unpredictable months ahead. Specifically, we have paused our share repurchase program until we return to a more stable and predictable business environment. We're also taking actions in 2020 that will reduce our cost structure by about $100 million, as well as actions that will result in about $45 million of cash flow improvement from CapEx and working capital management. Sherry will provide more details on these measures during her remarks. Fourth, we are actively planning for a variety of recovery scenarios, with particular emphasis on maximizing the impact of our exciting new product cycle. including products launched in the last year, as well as new technology coming to the market this year. In the context of our cost measures, R&D investments continue to be a priority, especially those that will contribute to near-term growth. We remain sharply focused on our primary growth strategy of organic innovation, and as stated before, we have made durable improvements in R&D productivity, positioning us well to benefit as demand normalizes and for the long term. Finally, while we're not assuming a material financial benefit, we have mobilized quickly to contribute our expertise and capabilities in the fight against COVID-19. We formed a COVID-19 innovation response team to bring Waters industry leading expertise to the forefront of the global scientific surge to quickly and effectively deliver diagnostics, therapies, and vaccines. By extending our resources to scientists that are working on the challenging biology of the virus, and pursuing a range of interventions, we know that we can help accelerate the push to defeat COVID-19. A few examples include, first, Waters donated columns, service, and instrumentation to hospital laboratories in Milan, Turin, and Rome in Italy, and in Bordeaux, Lyon, Marseille, and Paris in France. These donations are supporting drug monitoring and research for potential coronavirus therapies. Second, in the UK and Ireland, our team has been working overtime to quickly deliver specialized mass spectrometry instruments for researchers for measuring potential new COVID-19 drugs in experimental models of the SARS-CoV-2 infection. And finally, we are providing our unique glycan analysis capabilities to vaccine developers. The significance of glycosylation as an antigen is underscored by numerous recent publications on the structural biology of the SARS-CoV-2 spike protein. We are enabling high resolution, high sensitivity molecular glycan fingerprints in just minutes versus the days typically needed with traditional approaches. Turning to guidance, as a result of the uncertainty surrounding the magnitude and duration of the COVID-19 pandemic and its impact on our customers, we are withdrawing our prior 2020 guidance which as a reminder explicitly did not include any impact from the COVID-19 pandemic. However, I will provide you with some color to help you better understand our current thinking. We have built a range of scenarios by categorizing each geography into one of three phases of the COVID-19 pandemic, containment, recovery, and return to growth. Importantly, we anticipate that the previously mentioned cost actions provide us with adequate flexibility even in our most conservative scenarios. Looking at the various geographies, we believe that the U.S., India, Japan, and parts of Europe are currently in the containment phase, and we expect these geographies to move into recovery in the second half of the year. We believe that China, many parts of Asia, and some parts of Europe are currently in the recovery phase, And while there is a possibility for a second wave of the virus, we see them on an improving trajectory. For geographies operating within the containment phase, we expect continuing limitations to customer sites. In these areas, pharma production and QAQC activity remains stable, though we expect pauses in non-essential customer spending. At the same time, many resources in pharma R&D have shifted to COVID-19-related projects. In terms of service, we are generating revenues through a mix of direct and remote access to their facilities, and we are seeing growth where customers have contracted service plans. For geographies operating in the recovery phase, we are expecting a pickup in demand for recurring revenues and some stabilization in demand for instruments. That said, we anticipate that purchasing activity in governmental and academic markets may lag corporate customers. When geographies enter the return to growth phase, we expect recurring revenue growth to normalize and for instruments to see growth supported by the release of previously budgeted spending. As we look for signs of recovery and growth, we are closely monitoring service calls, quoting activity, recurring revenue trends, and customer capital purchasing plans. Market dynamics aside, we remain sharply focused on our primary growth strategy of organic innovation. Looking at the Waters product line, New products contributed positively to our performance in Q1, including the BioAccord, Cyclic IMS, SynaptXS, and our two new TandemQuads, furthering our confidence in a multi-year revenue ramp for these products. Our confidence in having the right technology at the right time has been bolstered by evolving customer needs. For example, we recently received multiple BioAccord orders from a major global pharma customer as this unique system and application set is truly fit for purpose and for certain COVID-19 vaccine development and monitoring requirements. In our TA Instruments product line, the first quarter featured three important new product launches, the Discovery X3 Differential Scanning Calorimeter, Discovery Hybrid Rheometers, and the TAM4 MicroXL Isothermal Microcalorimeter. Each of these instruments builds greater productivity and efficiency to the development of next-generation, high-performance materials and we believe will further enhance our innovation leadership in the thermal analysis market. In summary, sales in our first quarter were impacted by the COVID-19 pandemic. Aside from China, our largest geographies were performing well until week 13, when many countries within them implemented containment measures which impacted the close to Q1 and have created uncertainty in the near term. That said, The Waters business model has historically proven sustainable through challenging macroeconomic environments driven by our global footprint, large installed base of instruments, strong recurring revenue mix, and diverse largely regulated end markets. These factors have had a limiting impact on periods of negative revenue growth and supported consistent free cash flow in most scenarios. We are confident that our strong balance sheet, access to capital, focus on preserving flexibility and liquidity, and our robust new product flow will translate into a sustained bounce back as market conditions allow. With that, I'd like to pass the call over to Sherry for a deeper review of our first quarter financials. Sherry?