Waters Corporation

Good morning. Welcome to the Walter Corporation second quarter 2021 financial results conference call. All participants will be in listen-only mode until the question and answer session of the conference call. This call is also being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to Mr. Casper Tudor, Manager of Investor Relationships, Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to the Waters Corporation second 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 third quarter and full year 2021. We caution you that any and all such statements are only our present expectations and 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 31st, 2020 in part one under the caption risk factors. And in our most recent quarterly report on form 10 Q for the quarter ended April 3rd, 2021 in part one A 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 quarterly earnings release conference calls and webcasts, or otherwise required by law. The next earnings release call and webcast is currently planned for November 2, 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 in the appendix of our presentation, which are 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 and in the appendix of our presentation. Unless stated otherwise, references to quarterly earnings results increasing or decreasing are in comparison to the second 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, Kasper, and good morning, everyone. Along with Kasper, joining me on this morning's call is Amol Chawbal, Waters' Senior Vice President and Chief Financial Officer, and John Lynch, Waters' Vice President and Corporate Treasurer. This is Amol's first conference call as Waters CFO. Welcome, Amol. Thanks, Udit. I would like to start the call on slide three by paying our respects to the founder of our company, Jim Waters, who passed away on May 17th. Jim was a brilliant and spirited scientist and a pioneer in liquid chromatography. I met Jim the first time in 2019 when he came to talk to me about the merits of the technology we had acquired in a previous company. We spent hours in front of a whiteboard debating how to manage innovation, and in particular, how the application of certain technology could deliver benefit. Jim continued reaching out to me, not just on technology, but also on our mutual love for science education, and then more recently, on Waters. Jim's legacy will live on with each and every one of our innovations as we continue to strive to deliver benefits. around the globe have continued to manage admirably through the pandemic, which is still very much with us. Most of all, we've kept the working environment safe for employees and have remained flexible and resourceful as we continue to support our customers. I remain grateful for the ongoing resilience, commitment and dedication that our team has shown. Moving on to slide four. During today's call, I will provide a brief overview of our second quarter operating results, as well as some commentary on our end markets, geographies, and technologies. I will also update you on the progress of our transformation plan. We continue to be focused on three primary objectives. Number one, regaining our commercial momentum. Number two, further strengthening our organization. And number three, building on a strong core to access even higher growth areas. Amol will then review our financial results in detail and provide comments on our updated third quarter and full year financial outlook. We will then open up the phone lines to take your questions. As outlined on slide five, in the second quarter, our revenue grew 31 percent as reported and 27 percent on a constant currency basis reflecting continued strength in our pharma and industrial end markets with strong demand for both our instrument systems and recurring revenue products across our major geographies. Sales for this quarter represent a 6% compounded average yearly growth versus our 2019 results on a constant currency basis. This translates to a 7% stacked CAGR versus 2019 for the first half of the year, again on a constant currency basis. Our strong top-line growth resulted in year-over-year Q2 non-gap adjusted earnings per share growth of 24% to $2.60 per share. Our top and bottom-line performance translated into solid free cash flow performance and allowed us to strengthen our balance sheet. Looking more closely at our top-line results in the quarter on slide six, first, by operating segment, our waters division grew 27%. while TA grew by 32% on a constant currency basis. By end market, our largest market category, pharma, grew 31% in constant currency, industrial grew 28%, and academia and government grew 7%. Continued strength in sales to pharma customers was broad-based across customer segments, geographies, and applications. Late-stage drug development activity drove sales of our TandemQuad MS instrument systems such as the Zivo TQ-XS and Zivo TQS Micro. Small molecule applications in manufacturing QA and QC grew across Asia, Europe, and North America, and were particularly strong in India. Industrial and market growth was also broad-based across geographies and applications, continuing its recovery so far this year. Food testing and environmental demand grew nicely in the quarter, as did our thermal and rheometry portfolios. Turning to academic and government, which is less than 10% of our business, growth in the U.S. and Europe was partially offset by lumpiness in China. Year to date, our primary geographies have all returned to growth versus last year. Moving now to our sales performance by geography on a constant currency basis. Sales in Asia grew 28%, with China up almost 40% and India up almost 60%. Sales in the Americas grew 28 percent, with the U.S. growing 26 percent, and sales in Europe grew 25 percent. In the U.S., all end markets had strong year-over-year performance led by pharma and industrial. Academic and government saw a return to growth for the quarter as the market continues to recover. Europe's growth was also broad-based across end markets and subregions. Overall, pharma drove growth with strong demand in small molecule and large molecule applications. Industrial and academic and government markets continued their recovery with both having strong quarters and strong starts to the first half of the year. China sales were up sharply in our pharma business, and we had solid growth in our industrial and applied end markets there as well. We're encouraged by our continued strength in the contract labs business due to strong execution of our growth initiatives. In India, sales for the quarter were again very strong, even as the contract country continue to feel the effects from the pandemic. We're really grateful for the hard work and dedication of our colleagues who persevered through these challenging and tragic conditions. Strength in Q2 and year to date for our LC instrument portfolio is a positive indicator for sustainable growth in consumables and service plans. In the second quarter, LC instruments grew grew across all major geographies with more than 40% growth, driven by our instrument replacement initiative and new products, especially ARC HPLC and a strong uptake of our premier instruments, both ARC and Acuity lines. This week, I spent time with customers at our Immerse Innovation Lab in Cambridge discussing the separation and purification of mRNA and oligonucleotide molecules. While mRNA vaccines have developed at a record pace, we are far from solving key issues such as aggregation and selective binding of plasmids and mRNA molecules to various surfaces, something that our premier technology addresses really well. Further strengthening our UPLC portfolio, the AHRQ system was launched earlier this year for customers who need ultimate sensitivity. The R-Premier delivers five-fold improvement in detector sensitivity and ten-fold improvement in assay-to-assay precision, helping labs accelerate time-to-market. Mass spec sales grew in excess of 30%, driven by demand from pharma research and development and food and environmental applications. This included high-resolution systems used for research applications such as the Zero-Q-TOF, tandem quad led by our Zevo TQ-XS and TQS microsystems, and our SQD and QDA single quad detectors utilized in high-performance LC-MS applications. We introduced the Waters Select Series MRT, a high-resolution mass spectrometer that combines multi-reflecting time-of-flight MRT technology with both enhanced DESI and new MALDI imaging sources. The MRT provides scientists with a unique combination of speed, resolution, and mass accuracy, especially relevant for applications in proteomics. We have been in conversations with customers to see how we can collaborate using MRT to analyze libraries of samples to create a database of proteins and metabolites to further understand the impact of therapeutics on a variety of tissues. Sales of precision chemistry columns, sample prep kits, and reagents grew 28% driven by increased utilization by our pharma customers and improved industrial demand. Demand for our premier columns continues to be strong. The low double-digit two-year stack growth of chemistry columns revenue in Q2 when compared to our 2019 base underscores the rebound in customer activity, the strong position of our portfolio, and building momentum of our e-commerce initiative. Service also showed strong double-digit growth. Our service engineers continue to have good and improved access to our customer sites, and I'm grateful for the way they have served customers while continuing to navigate the challenges of the pandemic. Finally, with respect to TA, demand continues to rebound and was balanced across all major geographies and product lines, with particular strength in the US and Europe. Let me now give you some highlights on our progress with implementation of our transformation plan on Site 7, starting with our first priority, regaining our commercial momentum. We continue to see progress in our instrument replacement initiative. Our recently released Arc HPLC has played an important role in the LC replacement initiative. Its improved mechanical specs and ability to seamlessly transfer methods from Alliance HPLC or other HPLC platforms have been very well received by our customers. We are already crossing a mid-single-digit stack growth versus 2019 on a year-to-date basis in LC. With our CRO and CDMO customers, our ability to develop and provide method transfer support continues to be a strong driver of growth. This segment grew 60% on a year-to-date basis versus the comparable period in 2019. Early strength that we saw in China has now been replicated in Europe as well as in the U.S. Our e-commerce and recurring revenue attachment initiatives are also starting to boost the momentum observed in our year-to-date two-year stack for chemistry and service revenue. Moving on to our second priority on slide eight. We have strengthened our organization with the addition of Wei Zhang to our board of directors. Wei currently serves as president of their pharmaceuticals for China and APAC. His results-driven experience will further will further expand the perspective of the board that directly aligns with Waters' strategy to accelerate growth and innovation. I'm also pleased to welcome Dr. Daniel Rush to Waters as Senior Vice President of Strategy and Transformation. Dan joins us from Bissell Myers, where he was VP of Worldwide Commercialization Strategy and Innovation. Dan joined several of our other technically trained executive committee members with experience in orchestrating transformations in M&A, in relevant customer segments like pharma and diagnostics. This brings me to our third priority of building our core to drive durable growth. As you will see on slide nine, Waters already has a strong foundation in large and growing ed markets with a leading position of science and innovation in a roughly $65 billion market. a high exposure to end markets that go around mid-single digits with a deep-rooted presence in regulated end markets like UAQC, a large installed base of instruments with over 50% recurring revenues, a diversified geographic base with almost 40% sales in Asia, and industry-leading margins with a strong financial flexibility. So you'll agree with me that this is a solid base to build off. Now I'm on slide 10. We built a team of leaders who have a strong track record of execution. Both John Pratt and Jianqing Bennett, heads of the Waters Division and the TA Division respectively, are highly experienced commercial leaders and are now very focused on building capabilities to sustain our commercial momentum. What gives me most pleasure is that we have started to hit our stride with new product introductions across the portfolio, and these are contributing to our sales momentum already. The leadership that is focused on execution and innovation is preparing us well to further build our portfolio to access even faster-growing adjacencies. We're exploring and nurturing opportunities, both organic and inorganic, to increase our exposure to biologics, be it bioprocessing, reagents, or novel modalities. We're actively shaping the promise of LC-MS in diagnostics and proteomics discovery applications and advancing lab connectivity applications through our informatics portfolio. High growth areas such as sustainable polymers and renewable energy are a focus of the TA division. In summary, we've had a strong start to the year with broad-based contributions from our end markets, product portfolio, and geographies to our revenue growth. In addition to the impressive growth versus our 2020 base of comparison, our business dynamics and customer demand look healthy on a two-year runway basis. Markets we serve are in a healthy state, and our geographic regions are rebounding solidly from pandemic lows. We remain focused on the continued progress and success of our short-term initiatives aimed at practically strengthening our core business. We're confident in the opportunities ahead to bring LC-MS products, separations expertise, and compliant data management experience into high-growth biopharma and diagnostic applications. I look forward to continuing to share more with you as we progress on these various fronts. With that, I'd like to pass the call over to Amol for a deeper review of the second quarter financials and our outlook for the remainder of 2021. Amol.