Waters Corporation

Good morning and welcome to the Waters Corporation third quarter 2020 financial results conference call. All participants will be in a listen only mode until the question and answer session. To ask a question, please press star and then one. This conference call is being recorded. If you have any objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Brian Brookmeyer. Sir, you may begin.

Thank you, operator. Good morning, everyone, and welcome to the Waters Corporation third quarter earnings conference call. Before we begin, I will cover the cautionary language. During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the company. In particular, we will provide commentary on potential market and business conditions the company anticipates for the fourth 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 a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see the 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. and in our most recent quarterly report on Form 10-Q for the quarter ended June 27, 2020, in Part 1A under the caption Risk Factors, both of which are on file with the SEC as well as 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 earnings release conference calls and webcasts or as otherwise required by law. The next earnings release call and webcast is currently planned for February 2nd, 2021. During today's call, we will be referring to certain non-GAAP financial measures, reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and available on the company's website. In our discussions of the results of operations, we may refer to non-GAAP results which exclude the impact of items such as those outlined in our schedule titled Reconciliation of GAAP to Adjusted Non-GAAP Financials included in this morning's press release. Unless stated otherwise, references to quarterly results Increasing or decreasing are in comparison to the third 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 Dr. Udit Batra, Waters President and CEO. Udit?

Thank you, Brian, and good morning, everyone. Before I begin with the content, let me say I'm honored and thankful for the opportunity to lead Waters and work with such a talented and dedicated team. It has been a very busy eight weeks. Along with Brian, our CFO Sherry Buck is joining me in today's call. During the call, I will provide a brief overview of our third quarter operating results and then share some of my early impressions of the company and the opportunities that I see. Sherry will then review our financial results in detail and provide comments on our fourth quarter financial outlook. We will then open up the phone to take your questions. Let's start with the third quarter. Our teams have worked tirelessly during the pandemic to stay close to our customers. We've seen a cautious return to work by our customers, and this is reflected in our results. After a steep decline in the second quarter, third quarter sales were up 2% year-over-year on a constant currency basis, and adjusted earnings per share grew 1%. First, from a customer perspective, our largest segment, pharma, was the primary growth driver in the quarter with 4% organic growth, followed by industrial, which grew 3%, and academic and government, which declined 7%. From a product perspective, our waters-branded products and services grew 3% organically, while TA declined by 8% on a constant currency basis. Improving access to labs, especially in pharma, continue to help drive growth in the recurring revenues. Services grew 4%, while consumables business grew approximately 7% organically, driven largely by pharma. Consumables remain a growth area for us. In fact, earlier this month, we introduced our Acuity Premier Columns, which reduce variability risks and save time when analyzing metal-loving analytes ranging from oligonucleotides peptides, glycans, and phospholipids. The chemistry on the surface reduces unwanted analyzes of surface interactions to produce real improvements in sensitivity, peak shape, and recovery. The third quarter was strong for our mass spec systems with double-digit growth. We were encouraged by the demand of our high-resolution mass spec systems in pharma and biomedical research, particularly in the U.S. and Europe, and the demand for our tandem quad systems in food safety in China. BioAccord also grew nicely in the quarter. However, it still does not represent a material portion of our revenue. With its simplicity and dedicated workflows in peptide mapping, glycan analysis, intact mass, and oligonucleotide analysis, we believe it is the right instrument to bring LC-MS into the manufacturing and QA-QC space. I have spent time with several of our customers who are using BioAccord instruments, and many of them highlighted its ease of use and a robust feature set that can be utilized across multiple lab applications. So I think BioQuad has a good future, but I also think it will take longer than originally anticipated to significantly impact our core growth. This is a dynamic water as seen with prior new product launches, such as Acuity, which took almost four years to reach its peak sales. LC Instruments also saw a better quarter after double-digit declines in the first half of the year, with a modest decline in Q3. Some of this improvement can be directly attributed to RKH PLC, which was launched in June. Finally, to TA, revenues continue to decline in the high single digits due to constrained capital spending at our industrial customers. Pharma and electronics revenues saw a nice double-digit increase, but this was not enough to offset the industrial declines. Turning to our key geographies, both the Americas and Europe grew mid-single digits, while Asia was flat. In the U.S., the growth was driven by pharma, Food and academia partially offset by declines in material science and clinical. We saw especially strong engagement with customers who are assisting the fight against the pandemic. Latin America remained soft, mostly due to the continued impact of closures due to COVID-19. Europe also experienced a recovery with mid-single-digit growth largely driven by biologics, CROs, and genetics, including strong growth at large pharma accounts. After very significant declines in the first half, China grew at low single digits driven by an acceleration in food and pharma, as well as strength in DA instruments driven by investments in 5G networks across the country. This was partially offset by continued weaknesses in academia and government. India also recovered with double-digit growth. The third quarter benefited from some catch-up of revenues, which was delayed from the first half of the year, and looking ahead, while customer activity and access are improving, we remain cautious. We continue to face variability in our end markets and macroeconomic concerns tied to COVID-19, and academic customer trends remain depressed. Moreover, we are uncertain on the level of capital spending in the fourth quarter, particularly by our pharma and industrial customers. Now, let me share with you some of my early thoughts on the company. As a former researcher who has used Waters products in the lab, As an engineer who has modified rheometers and DSCs, and as a former customer, I believe my 25-year experience at Pharma and Tools has prepared me well to work with my colleagues to transform waters. Indeed, it is a transformation to return a champion to where it belongs. Since the announcement in mid-July, I've spent most of my time listening and learning. I met with investors and shareholders, including many of you. talked with and visited customers, read and researched, and conducted many deep dives with my colleagues around the globe. My learning is far from done, but today I can share with you three ideas that resulted from this deep transparency phase. First, Waters has built a solid foundation with exposure to a number of attractive end markets. Second, despite this strong foundation, our momentum has stalled in the last few years. Third, and finally, We are already developing a transformation plan with tangible short-term actions. Let's take each of these in turn. First, we have a solid foundation in attractive markets. Our largest end-market pharma is benefiting from growth of biologics and continued development of novel modalities. Moreover, our strong base in small molecules, which represents approximately 75% to 80% of pharmaceutical industry sales, will benefit from the growth of CROs, oligonucleotides, and mRNA therapeutics, as well as the increasing potential for repatriation of small molecule manufacturing. We have a global footprint with 25% of our sales coming from China and India. We have a solid base in these markets that is characterized by trusted brands, deep customer relationships, and a culture that is rooted in science and engineering. In my customer meetings, Waters employees are acutely aware of the issues facing our customers and are so tightly integrated with them that I often had a tough time distinguishing between our employees and that of our customers. Finally, as we look to further strengthen this base, our high margin and free cash flow gives us the flexibility to continue to invest. Second, despite this strong foundation, we have underperformed both our historical growth and that of the market for the last few years. Our performance has trailed the market in LC, mass spec, and thermal analysis. We were slow to respond to the transition of food testing from government labs to contract testing labs in China. Our product launches have not met expectations that we set. BioAccord, while a product that clearly meets a need, has been slower on the uptake than anticipated. Our culture is one that appreciates deep scientific insights, but one that has lacked focus and urgency. Strategically, the focus on our portfolio on LC, LC-MS, and thermal analysis has limited our ability to keep up with emerging trends like bioprocessing, contract manufacturing, and testing or diagnostics. This is evident in our lack of exposure to tailwinds from COVID-19 as compared to some of our peers. Third, so where to from here? While we are still continuing an in-depth analysis, and developing our transformation strategy, some themes are already emerging. And let me break these into three. First, in the near term, we're focused on making changes to regain commercial momentum. Second, in the mid-term, the focus is on the pipeline and organic growth with intense focus and urgency. And finally, as we strengthen our organic growth, we will start to examine strategic investments. Let me give you some concrete examples in the near term. we are squarely focused on regaining our footing in LC instrumentation. For instance, we have identified all the units in both our installed base and in the larger Empower network and implemented a specific program to upgrade and replace older systems with Waters HPLC instrument portfolio, including with the new ARC HPLC. For example, there are thousands of Alliance systems in service that are more than 20 years old and in need of an upgrade. Second, Approximately 20% of our consumable sales go through the e-commerce channel. For many of our competitors, this number is over 50%. In the near term, we're implementing actions to increase traffic to this channel, such as increasing paid search and improving search engine optimization. Third, our penetration in CRO channel trails our competition. We will increase our commercial presence to penetrate this growing channel at a level that better aligns with our peers. Fourth, as I mentioned earlier, We still have a lot of faith in the success of BioAccord. Customers in QA, QC are conservative and we need to spend a lot more time developing methods in collaboration with them and further developing enterprise level software to help them deploy the system seamlessly. As you can see, there are near term actions that are backed by detailed targets and KPIs. However, I want to be clear, these changes will take time and will not significantly impact our results overnight, especially as we implement these initiatives amid the background of COVID-19. However, I can assure you the team is very engaged and have seen an impressive increase in drive and ambition in the eight weeks that I've been here. With that, I'd like to pass the call over to Sherry Buck for a deeper review of the third quarter financials. Sherry.