Waters Corporation

Good morning. Welcome to the Waters Corporation First Quarter 2021 Financial Results Conference Call. All participants will be on a listen-only mode until the question and answer session of the conference call. This 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 guidance regarding possible future results of the company and commentary on the potential market and business conditions that may impact Waters Corporation over the second quarter and full year 2021. We caution you that any and all such statements are only our present expectations, that actual events or results may differ materially from those indicated in the forward-looking statements. 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, 2020, in part one under the caption risk factors and the 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 August 3rd, 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 first quarter of fiscal year 2020. 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, Corporate Controller, and Interim CFO. I would like to start by expressing how grateful I am to our colleagues for their continued hard work and commitment, especially to those who are continuing to experience the devastating effects of the pandemic. We've not yet seen a uniform recovery as there are still many regions around the world that are being ravaged by the pandemic. As many of you are aware, India is facing a particularly dire situation at the moment. Our colleagues and customers there are very much on our minds and we're working closely with our team in India to ensure safety of our employees and their families and we're doing all we can to support our customers. During today's call, I will provide you a brief overview of our first quarter operating results as well as an update on our three-phase transformation plan focused on, number one, regaining our commercial momentum, number two, further strengthening our organization with leadership and performance management, and number three, aligning our portfolio with growth areas. Next, I will provide some thoughts on how our business is positioned to drive sustainable growth. Mike will then review our financial results in detail and provide comments on our updated second 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 first quarter, revenue grew 31% as reported, 27% on a constant currency basis, and non-gap adjusted earnings per share grew 99% year over year. This strong start to the year was driven by growth across all end markets as we saw continued strength in pharma and earlier than expected recovery in non-pharma spending by our customers, new product correction, and strong commercial execution by our team. Looking more closely at our top line results, first, from a customer end market perspective, all our end markets grew double digits during the first quarter. Our largest market category, pharma, grew 28% in constant currency, industrial grew 24%, and academic and government grew 29%. Moving now to our sales performance by geography, On a constant currency basis, sales in Asia grew 41%, with China up 109%. Sales in America grew 14%, with U.S. growing 13%, and sales in Europe grew 25%. From an operating segment perspective, our waters division grew 26%, while TA grew by 28% on a constant currency basis. Customer activity continued to improve in the first quarter with pharma leading the way, driving better than expected trends in recurring revenues and a significant growth in instrument revenue. Recurring revenues grew 15% with services growing 14% and chemistry consumable revenue growing 18% driven by combined pharma strengths and improved industrial demand. LC instruments grew across all of our major geographies and market categories with more than 40% growth. It's encouraging to see both HPLC and UPLC instrument units grow double digits, driven by pent-up demand, penetration of the ARC HPLC, and strong execution of our LC replacement initiative. The success of the launch of the ARC HPLC in the general purpose HPLC space cannot be understated, and the acuity premier has been received very well by customers since its February launch. Mass spec sales were also strong in the first quarter with growth in excess of 50% as demand in the pharma market remained robust. In addition to rebounds, we saw in other markets including clinical, food, and environmental and biomedical research. Demand was solid for our tandem quads in Europe and China, particularly in pharma and in food. Finally, to TA, revenue grew 28% as demand rebounded in the core industrial business and strength continued in pharma medical devices and semiconductors. Growth was robust across all major geographies and product lines with particular strength in thermal and electroforce. Looking deeper at our sales performance by geography, all major regions grew double digits. China built further on last quarter's strength, more than doubling sales year over year. Results were strong across all end markets as China continued its recovery from last year's COVID disruptions. Pharma was particularly strong in China. driven by triple-digit growth in both contract labs and traditional Chinese medicine. Our food business in China also saw meaningful growth, driven by a significant rebound in contract testing organizations to the level that were above those we saw in 2018 and in 2019. This is just one quarter and not indicative of a trend, but it demonstrates that the market is recovering and our execution has improved. India's sales grew double digits for the third consecutive quarter despite worsening conditions and continued pandemic challenges throughout the country. Europe experienced broad-based strength across all customer and markets, including meaningful sequential improvements in both industrial and academic and government markets. In the U.S., both pharma and industrial markets had strong growth in the quarter, while demand in our academic and government market remained soft as it lags behind other markets in reopening. In summary, we had a great start to the year with strong year-on-year growth that was broadly based than last quarter with impressive performance across all our regions and markets and product categories. Pharma demand has not subsided and many of our non-pharma markets are now in the process of recovering, which gives us greater confidence as we look to the remainder of the year. Now, I would like to talk more broadly about our business and its overall direction moving forward. including the strength of the company, the attractiveness of the market that we serve, and our deep commitment to innovation as we look beyond this quarter into the longer term. Our three-phase transformation plan is number one, regaining our commercial momentum, number two, strengthening our organization with leadership and performance management, and number three, aligning our portfolio with growth areas. Looking at our first priority of regaining our commercial momentum, let me review some initiatives I mentioned previously. First, our instrument replacement initiative. We delivered a significant acceleration in instrument revenue growth to 45%. In February, we launched the Acuity Premier System, augmenting the already solid placement of RKH PLC launched in June of 2020, creating new opportunities for instrument replacements. Additionally, we have gained traction with customers to replace aging tandem quad mass spec instruments with newer instruments. As part of our CRO CDMO expansion initiative, we've seen revenue growth accelerate to strong double digits in both these customer segments. Customers continue to perceive us as a strong technical partner as they transfer methods from originators, and they see us as a strong collaborator rather than a competitor. Third, our e-commerce initiative has begun to deliver tangible results. Search engine optimization and paid search have led to search impressions that are up more than 40% year-on-year. While not every click translates to immediate revenue, increasing traffic is an important first step in our e-commerce efforts. Fourth, driving launch excellence. Let me start with liquid chromatography. While the ARK HPLC is a leader in general-purpose HPLC space, I want to focus on the Acuity Premier. Last year, we launched the Acuity Premier columns and followed that up with the Acuity Premier system last quarter. Though we're still In the early stages of the revenue ramp-up, for both the columns and the system, sales of Acuity premier columns are significantly outpacing prior successful chemistry launches, including the original Acuity columns. Turning to mass spec, in 2019, we launched the BioChord, Cyclic IMS, SynaptXS, TQS Kronos, and a next-generation version of our TQS Microbe. Pairing our tandem quads with Acuity Premier creates industry-leading reproducibility and sensitivity for challenging assays. With expanding applications of the BioQuad, we've maintained our focus on bringing a versatile, easy-to-use, and robust LC-MS system to the QA-QC space. During Q1, we launched a full workflow for peptide multi-attribute method on the new Waters Connect platform to enable the monitoring of quality attributes at the peptide level. This adds to already existing simple-to-use applications of peptide mapping, intact subunit mass analysis, released glycan profiling, and oligonucleotide mass confirmation. Over the last year, we established the BioAccord into the workflows for characterizing mRNA molecules that have since become vaccines. In fact, BioNTech recognized Waters for our support of its COVID-19 vaccine development and release efforts. Cyclic was launched in September of 2019 and is targeted at the most advanced high-resolution mass spec users. Augmenting traditional LC-MS with high-resolution ion mobility allows us to separate molecules with identical molecular weight based on their different shapes. This is now especially relevant for monitoring structural changes in the sugar pattern of the spike protein of the SARS-CoV-2 virus. We do recognize that we still have a bit of work to do on our mass spec informatics applications, and we're addressing this through the development and rollout of our Waters Connect software platform across our full mass spec portfolio. Today, Waters Connect supports biopharma characterization and monitoring workflows with a range of capabilities on the BioCord, VivoQ-TOF, and Bion, and with the launch of our RDA BenchTOF in Q1, Waters Connect also enables small molecule workflows. We're grateful to have earned the trust and partnership with our customers as we develop further applications and beta test upcoming products and software. Next, from our TA Instruments Division, last year we launched the X3 DSC, which offers unique advantages for routine high-throughput labs and R&D, especially in pharma, electronics, and advanced materials. The ability of the X3 DSC to deliver high-sensitivity measurements of physical properties more quickly than comparable products is is enabling these measurements to be more broadly deployed in manufacturing processes where scientists can evaluate multiple formulations in parallel, reducing time to market. The more time I spend with my R&D colleagues together with our customers, the more impressed I am with the strength of our deeply, deeply technical culture. Moving on to our second priority. You've already seen the planned leadership transitions we announced last month. Amol Chawbal will join us at CFO on May 12th. Amol has deep experience in pharma and diagnostics and has led many transformations in his prior roles, through both organic and inorganic roles. I would like to sincerely thank Mike Silvera for his four months of service as interim CFO. Mike will continue to serve as our corporate controller, and I'm pleased to add that Mike will also assume the role of chief accounting officer. Secondly, we've established a dedicated innovation board, which I will share, that includes leaders from R&D, business development, and marketing. The innovation board will review unmet needs in markets we serve, assess technology proof of concepts, and monitor the execution of top R&D programs. Thirdly, I'd like to thank Mike Harrington and Ian King, our SVPs of global markets and global products, respectively for their decades of dedication to waters. Though their retirements are effective July 2nd, they've graciously offered to serve as consultants for a period of time to ensure a smooth transition. Finally, we welcome our own John Pratt as the leaders of the Waters Division, while Jinqiang Bennett will succeed John at the TA Division. Both John and Jianqiang have deep commercial and transformation experience in global leadership roles in fast-growing markets, such as molecular diagnostics and bioprocessing. I'm really pleased with our new team, and I look forward to introducing them to you in the coming months. That brings us to our third priority, aligning our portfolio with high growth areas. While we won't take our eye off commercial execution, which remains our top priority, we have recently started our strategic planning process. Now I'd like to share with you some high-level thoughts on where we are today. Our number one priority is to continue strengthening the core, meaning LC, MS, and materials characterization instruments, informatics, service, and consumables. Second, is tapping into faster-growing adjacencies where we can bring our strength of managing compliant data without competing directly with our customers. These adjacencies include opportunities to increase our exposure to biologics, be it in reagents, other instrument technologies, or bioprocessing, or in accelerating LC-MS into diagnostics or other high-growth markets. Lastly, we will maintain our longstanding disciplined approach to financial management, capital structure, and capital deployment as we are focused on maintaining a top-tier ROIC. Over the coming year, I look forward to sharing more with you on our strategy as well as the data points that give us confidence that we have the foundation in place to sustainably grow in this attractive market. With that, I'd like to pass the call over to Mike Silvera for a deeper review of the first quarter financials and our outlook for the remainder of 2021.