Waters Corporation

Good morning. Welcome to the Waters Corporation third 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. The conference call is being recorded, and 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 Investors Relations. Please go ahead, sir.

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 guidance regarding possible future results of the company and commentary on potential market and business conditions that may impact Waters Corporation over the fourth quarter for year 2021 and 2022. 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 10Q for the quarter ended July 3rd, 2021 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 quarterly earnings release conference calls and webcasts, whereas otherwise required by law. The next earnings release call and webcast is currently planned for February 1st, 2022. 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 issues 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 results increasing or decreasing are in comparison to the third 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 Chobal, Waters Senior Vice President and Chief Financial Officer. We have reported another quarter of strong, broad-based momentum across our portfolio and geographies. We first thank our over 7,000 colleagues around the globe who represent the indomitable spirit of Waters. Our teams have remained focused on supporting our customers and developing and delivering exciting new products despite the continuing impact of the pandemic. September 1st marked one year since I joined the company and what a year it has been. I'm often asked what is different. I would first like to talk about what is the same because that is what is giving us the ability to compete more effectively. Our brand stands for deep scientific expertise clear understanding of our customers' challenges and courage to invest in game-changing innovation. This remains the same. What we have injected with our new leadership team is a stronger focus on execution, a sense of urgency and accountability. We are a work in progress, but the trend is positive. Now moving to slide three, which summarizes where we are on our journey. Firstly, we're sustaining our commercial momentum with another strong quarter, delivering stacked sales growth of 6%, showing solid business performance with minimal COVID ailments. Meanwhile, our commercial initiatives and strong traction of new products like Premier Columns and Instruments and RKH PLC were well positioned to deliver market-class growth through 2022. Finally, we're building on this momentum by taking decisive steps in solving key problems that are present in higher growth adjacencies like biologics manufacturing. I will now provide a brief overview of our third quarter operating results as well as commentary on our end markets, geographies, and technologies. Amol will then review our financial results in detail and provide comments on our updated financial outlook. We will then open up the phone lines to take your questions. Moving now to slide four, In the third quarter, our revenue grew 11% as reported and on a constant currency basis, reflecting continued strength in our pharma and industrial end markets with balanced demand for our instruments and recurring revenue products. This translates to a 6% stacked CAGR for the quarter versus 2019 on a constant currency basis. Year-to-date, revenue has increased 21% with a constant currency stacked CAGR versus 2019 also above 6%. Our top line growth resulted in Q3 non-GAAP adjusted earnings per share of $2.66, growing 23% year over year. Year to date, non-GAAP adjusted earnings per share have grown 39% to $7.54. Looking more closely at our top line results for the quarter on slide five, in constant currency, first by operating segment, the water division grew 9%, while DA grew by 27%. By end market, our largest market category, pharma, grew 16%, industrial grew 9%, while academic and government declined by 11%. In pharma, we saw a broad-based, continued strength in sales across customer segments, geographies, and applications. Strength was both in small molecule and large molecule applications, which both grew in mid-teens for the quarter. Industrial growth was regionally broad and led by our TA business, which saw strong growth globally in thermal, microcalorimetry, and rheology. Turning to academic and government, which is about 10% of our business, continued strength in Europe was offset by software performance in China and other regions. Moving now to our sales performance by geography, on a constant currency basis, sales in the Americas grew 16%, with the U.S. growing 13%. Sales in Europe grew 8%, sales in Asia grew 8%, with India over 40%, and China sales were down 3%. Now to a bit of clarification on China. Demand remains very healthy, as does the execution of our initiative. A shipment of approximately $12 million got delayed at an airport in the last few days of the quarter due to a third-party shipping issue and has been delivered in the first few days of the fourth quarter. Looking, therefore, at China orders for the quarter, this was up mid-teens year over year, so really no challenge from a demand perspective. In the U.S., growth was led by a broad-based continued strength in our pharma and industrial air market. In pharma, we saw strength across our instrument and chemistry portfolios. In industrial, our waters and VA businesses both saw strong growth. In Europe, demand remains robust across all end markets with continued strength in pharma, industrial, and academic and government. For the quarter, India was our fastest growing market, driven by very strong growth in instrument sales to our pharma customers. As you know, India is primarily a small molecule and generic market for export, and this is indicative of continued strength in global pharmaceutical demand for small molecule drugs. By products and services, customer demand for our instruments remained strong after an impressive first half of the year, while recurring revenues also continued to see sustained growth. Overall, instrument sales grew 10% for the quarter, driven by robust demand, our improved commercial execution, new product contribution, and instrument replacement. In LC, the newly released ARC HPLC continue to see strong growth and uptake of our premier instruments, both ARC and Acuity, especially for applications in novel modalities like mRNA and biologics, remain solid. The strength we are seeing in our LC instrument portfolio remains a positive indicator for sustainable future growth in consumables and service. In mass spec, demand strength from pharma customers continued, with strong demand for our single quads, led by users for oligo and biologics purification, as well as strength in our tandem quads used in late-stage product development. We're also encouraged by early interest in our select series MRT time-of-flight platform, which delivers highest quality resolution at fast speeds. Now for our recurring revenues, Chemistry sales grew 13%, driven by an increase in utilization of our pharma customers, as well as strength in our industrial end markets. Demand for our new premier columns remains strong, while our e-commerce initiative is progressing and making it easier for our customers to do business with us. So far this year, our chemistry consumables have grown almost double digits when compared to our 2019 base. We're pleased that our premier technology continuing to provide important benefits in separation and purification of mRNA and oligonucleotide molecules, given its unique ability to reduce selective binding of plasmids and mRNA to various surfaces. Service also grew double digits again this quarter, even as last year's comps have become tougher. On a two-year fact basis, service grew 7% in constant currency for the quarter and 6% year-to-date. By focusing on our value proposition and commercial execution, we have seen an increase in service plan attachment rates and plan renewals. Finally, TA had a great quarter, with sales up almost 30% as demand has rebounded, with strong growth across all regions. TA instrument sales have grown at 8% on a two-year stack basis so far this year, driven by strong demand for our thermal instruments used in the analysis of advanced materials, as well as microcalorie instrument demand for our pharma and academic customers. Moving now to slide six, let me now focus on why we believe that we will continue to deliver market-class growth. I think you are used to seeing these initiatives, so let me use the same frame. Starting from the left-hand side of the slide, in 2021, we expect our instrument replacement initiative to deliver over $30 million in revenue. In 2022, we expect this to become over 40 million, which means an incremental 10 million over 2021. Our focus on commercial execution is positively impacting our service business with planned coverage rates having increased by 2% so far this year compared to the first three quarters of 2019. In 2022, we think a further 100 basis points of expansion in service plan adoption is attainable. Growth in e-commerce adoption also remains strong with chemistry sales through our e-commerce channels approaching roughly 30% versus the 21% we saw in 2019. We expect this to continue reaching over 35% by the end of next year. So far, this year revenue from contract organizations has grown over 40% versus the comparable period in 2019. Next year, we expect this to grow low double digits for the year versus 2021. And new products continue to do well. We are just taking the example of ARK HPLC and Premier to illustrate the point here. Both ARK HPLC and Premier continue to be strong drivers with over 45 million revenue expected from these sources for this year in total, and separate to the replacement initiative. 2022, we are expecting this number to be over 60 million. So in all, these initiatives alone should give us approximately 1% over our base business growth for 2022, which reaffirms our belief in market-plus growth rates. Moving now to slide 7, we operate a strong core business in healthy and durable end markets. This strong foundation provides us a platform for solving critical problems facing our industry where we can bring our scientific expertise and product portfolio capabilities. In the biologics arena, on the reagent side and bioseparations, we believe there are significant problems to solve in separating and purifying these newer modalities. Having a deeper understanding of reagents coupled with our chemistry expertise will allow us to solve these problems. Second, in bioprocessing, The largest challenge I felt as an engineer in bioprocessing versus small molecule processing was that once you defined the process, you got stuck with it because it was in the drug master file. We have to decouple the process from the product. Separately, the process development timescales are longer versus small molecules given the sheer complexity of attributes you need to measure. A simple and robust tool that can measure multiple attributes is a potential solution. We believe that the BioCord is the right LC-MS tool that can begin to address this challenge. Third area is diagnostics, where we need a fast, unbiased detection of multiple biomarkers to enable early disease detection. We believe, again, mass spec has a significant role to play here. Moving now onto slide eight, let me illustrate what I mean by sharing what we are doing to solve some of the key problems in bioprocessing. Last week, we announced a partnership with Sartorius, a leader in bioprocessing, Our water biocore system has a bioprocess analyzer with Sartorius amber bioreactors, giving scientists both faster and at-line direct access to advanced quality characterization information. Scientists across Sartorius, Waters, and some of our customers have already shown that the combined offering will shorten product development timelines considerably, taking what currently takes six weeks to analyze down to only two days. It also lays the foundation for using the BioAccord as a bioprocess analyzer for process control and quality testing in the future. BioAccord is both versatile and easy to use, and we expect that process engineers will be able to master its operation within one to two weeks. In fact, one of our customers had summer interns use the BioAccord and gave raving reviews on how simple it is to use. I'm also an engineer who has been out of the lab for many years, and I was able to learn quickly. Resulting configuration will allow direct analysis of drug substance, not just cell culture media, by targeting over 250 cell culture media analytics. Separately, we also announced a multi-year collaboration with the University of Delaware to develop technology for analytical characterization of manufacturing processes for biologics and novel modalities. Through these partnerships, researchers from both Waters and the University of Delaware will identify and develop solutions that can provide better aseptic sampling, make sensor and analytical instrument improvements, and develop data analytics and process control. This partnership will help us expand our capabilities to characterize biological manufacturing processes in order to drive improvements in quality, yield, efficiency, and process control. 2021 so far has been a very successful year for Waters. We are laser focused on our commercial execution. The markets we serve are in a healthy state and our geographic regions have rebounded solidly from pandemic lows. Meanwhile, I'm convinced of the great opportunity that lies ahead of us in higher growth adjacencies to impact and deliver value by extending our scientific expertise, and product portfolio towards helping customers solve the most complex problems in our industry. With that, I'd like to pass the call over to Amol for a deeper view of third quarter financials and our outlook for the remainder of 2021.