Waters Corporation

Good morning. Welcome to the Waters Corporation fourth quarter 2020 financial results conference call. All participants will be in listen-only mode until the question and answer session of the conference call begins. This conference call is being recorded. If anyone objects, please 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 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 results of the company and commentary on potential market and business conditions that may impact Waters Corporation over the first quarter and full year 2021. We caution you that all such statements are only our present expectations and that actual events or results may differ materially from those indicated in our forward-looking statements. 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, and our most recent quarterly report on Form 10-Q for the quarter ended September 26, 2020, in the Part 1 under the caption Risk Factors, both of which are on file with the SEC, as well as cautionary language included in this morning's press release, including with respect to risks related to the effects of 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 is otherwise required by law. The next earnings release call and webcast is currently planned for May 5th, 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 fourth 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. Along with Brian, joining me on this morning's call is Mike Silvera, Waters' Vice President, Controller, and Interim CFO. Some of you may already know Mike, who has been a part of the Waters Finance Organization for 16 years, and I'm happy to have him joining me on this morning's call. I would like to start by thanking our employees around the globe for their hard work and dedication through what has been an extraordinarily difficult year. It is one that has brought significant change and sacrifice. From navigating the pandemic and resulting short-term cost-saving initiatives earlier this year, to changes in leadership, the Waters team has responded with drive, determination, and an indomitable spirit. I am impressed by and grateful for our team's resilience and commitment to our customers and to each other. During today's call, I will provide a brief overview of our fourth quarter and full year operating results, as well as an update on the stabilization that we have seen in the LC market and a few factors influencing our thinking for 2021. Mike will then review our financial results in detail and provide comments on our first quarter and full year financial outlook. We will then open up the phone lines to take your questions. Briefly reviewing our operating results for the fourth quarter, revenue grew 10% as reported, 7% on a constant currency basis, and adjusted earnings per share grew 14%. For the full year, revenue declined 2% and adjusted earnings per share was up 1%. This strong finish to the end of a challenging year was driven by the pharmaceutical market improvement, capital spending recovery in the second half of the year, strong execution, and early contributions from our near-term growth initiatives. Looking more closely at our top-line results, first from a customer perspective, our largest market category, pharma, was the primary growth driver in the quarter with 15% growth. Our industrial market grew 5%, while academia and government declined 15%. Now, the geography. On a constant currency basis, sales in Asia were up 12%, with China up 19%. Meanwhile, sales in the Americas grew 3%, with the U.S. growing 4%, and European sales grew at 6%. From a product perspective, our waters-branded products and services grew approximately 8%, while TA declined by around 1% on a constant currency basis. While still navigating the global pandemic, we are seeing clear signs of improving customer activity, positive growth trends in our recurring revenues, and an evidence of stabilization in LC instrument demand. Services grew 10% while consumables business grew approximately 14%, driven largely by global pharma strength, including sales of our recently launched premier columns, which performed exceedingly well in the first quarter on the market. LC instruments grew across most of our major geographies with high single-digit growth. This improvement in capital equipment purchasing reflects the combination of the return of some of the planned capital spending that was delayed from the first half of the year, a normal pharma year-end budget flush, and early contributions from our LC replacement initiatives. Following last June's release of the ARC HPLC system in the core HPLC market, with a particular focus on the small molecule development and QA-QC space, we look forward to the continued expansion of our liquid chromatography portfolio. On February 10th, we will launch Acuity Premier, a next-generation UPLC system that offers customers an extraordinary breakthrough in efficiency, sensitivity, and overall capability. This new system will benefit both large and small molecule discovery and development, as well as biomedical research. This new system has even more profound benefits when paired with our Acuity Premier columns, which I mentioned earlier and were launched in the fourth quarter. The combined solution will alleviate nonspecific binding absorption losses and provide a significant leap forward with enhanced reproducibility, reduced passivation, and an increased confidence in analytical results. After a very strong third quarter, mass spec sales were about flat in Q4. As you know, the mass spec business can be lumpy, which we saw with biomedical research. There was also a general softness in clinical diagnostics as budgets were diverted to COVID-19 testing. Notably, however, mass spec sales to pharma customers grew double digits, driven by the strong double-digit growth of both BioChord and the QDA. Finally, to TA, revenues declined low single digits, which was much improved from earlier in the year. We saw the core thermal business start to pick up, driven by market improvement in Asia. In particular, life sciences, including pharma and medical devices, grew double digits. Combined, these comprised approximately 10% to 15% of TA's total revenues. However, this was not enough to offset declines from TA's industrial customers. Looking now at our geographies, all major regions grew. The Americas grew low single digits, Europe grew mid-single digits, and Asia grew double digits. In the U.S., the growth was driven by pharma, which was partially offset by declines in material science, environmental, and academic and government. Though Latin America continued to decline, it improved meaningfully relative to earlier in the year. Europe also experienced strong pharma performance, partially offset by material science, food, and academic and government. In both U.S. and Europe, pharma growth was broad-based, including strength in big pharma, large molecule customers, genetics, and contract labs. China had an impressive quarter with strong double-digit growth, driven by continuing acceleration in pharma, as well as strong environmental growth. The pharma growth was driven by both small and large molecule customers, including particularly strong growth at contract labs. India also continued to grow double digits. In summary, Overall, in the fourth quarter, we saw further relative strength in the market and benefited from strong year-end spending trends. Now, for the year, our pharmaceutical market category achieved 1% growth, with the U.S., Europe, and India all seeing positive growth. Industrial declined 3% for the full year, and academic and government declined 16%. Notably, our pharma market category grew 10% in the second half compared to the first half decline of 8%, owed in part to strength in small molecules, The industry recovered from lockdowns. Industrial also grew in the second half at 4%, while academic and government declined 12% compared to the first half declines of 10% and 22% respectively. Geographically for the year, Asia sales were down 4%, with China sales down 8%. Sales in Americas were down 4%, with the U.S. down 2%. Europe sales were up 2%, notably all our major geographies grew in the second half of the year with the US up 4% and Europe up 6% following first half declines of 9% and 3% respectively. Our China market grew in the second half up 11% reversing much of its sharp 31% decline in the first half of the year. I would like to share some of the progress we've made in our transformation program as several of the initiatives we're putting into action are starting to contribute to growth. First, I will talk about our instrument replacement initiative, then our progress in contract lab expansion, followed by e-commerce, and lastly, I'll give you a bio code update. First, as it relates to our instrument replacement initiative, which is the most advanced initiative underway, we delivered our first quarterly LC instrument revenue growth in two years, and our LC instrument win-loss was the highest it has been in three years. Initial customer feedback has been very positive on the ARC HPLC as well. Second, as part of our contract lab expansion initiative, we have made important progress in targeting this high-growth customer group. We have contacted a number of customers globally, particularly in China, and have strengthened our value proposition with expanded alternative revenue and service offerings which have been well received by this segment. It is still early days, but we're pleased with the progress we're making. Third, our e-commerce initiative is still in the early stages, but waters.com traffic is up double digits, driven by search engine optimization and paid search. While there isn't a one-to-one relationship between traffic and revenue, increased traffic is an important first step in driving revenue growth through the e-commerce channel. In tandem, With our e-commerce actions, we've also enhanced our e-procurement platform, on which we've expanded our coverage of customers leveraging this channel. This supported strong e-procurement growth, indicating that it's now easier to work with Waters. Fourth, driving launch excellence. BioCord sales exceeded expectations in the quarter as our market development efforts and our specialist sales model have started to take effect, particularly in the U.S. and Europe. Many customers are increasingly adopting BioAccord for manufacturing, and several have placed follow-on orders. Once we get BioAccord applications on an enterprise software platform, we believe we will be seeing more follow-on orders. More importantly, customer activity continues to be encouraging, which makes us optimistic about 2021. Lastly, I'd like to highlight our efforts to help mitigate the public health crisis. In addition to the significant efforts by our innovation response team, We're encouraged to see waters consumables specked in on QAQC methods for COVID vaccines and therapeutics. We're also seeing an uptick in COVID-driven demand for our instruments and consumables. This peaked in the fourth quarter, where COVID revenues contributed an estimated one to two percentage points to the growth, driven by those pharmaceutical customers developing COVID vaccines and therapeutics, who saw meaningfully higher growth than manufacturers that don't have COVID-related programs. In summary, as a wrap up to 2020, we've done a great job at keeping our employees safe and our operations running. Our teams have focused not only on getting products out the door, but we have also assisted our customers engaged in COVID related efforts. Meanwhile, our base business is showing signs of recovery and our transformation is well underway. Turning to 2021, while the business environment remains uncertain, we look forward to building on the fourth quarter momentum. Mike will provide further detail on our outlook for 2021, which is based on three key factors. One, we're assuming a gradual improvement in customer activity led by the farmer market. Two, we expect all major geographies to perform better than they did in 2020, led by growth in China. Lastly, our near-term growth initiatives are expected to continue to ramp up, led by our LCE replacement initiative, which we expect to increasingly contribute to performance. With that, I'd like to turn the call over to Mike Salvera for a deeper review of the fourth quarter and 2020 financials and our outlook for 2021. Mike?