Waters Corporation

Good morning. Welcome to the Waters Corporation second quarter 2022 financial results conference call. All participants will be in a listen-only mode until the question and answer session of today's call. This conference call is being recorded. If anyone has objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Kasper Tudor, head of investors relations. 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'll 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 of 2022 and full year 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, 2021, in Part 1, under the caption risk factors. And in our most recent quarterly report on form 10Q for the quarter ended April 2nd, 2022 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. 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 as otherwise required by law. During today's call, we'll 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 results increasing or decreasing are in comparison to the second quarter of fiscal year 2021. 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 Chauvel, Waters Senior Vice President and Chief Financial Officer. The second quarter, we continue to deliver excellent results led by instrument growth of 12%, with continued broad-based strength across our end markets and geographies. I would like to take a moment to again acknowledge the unwavering efforts of our teams who have persistently worked through the challenging environment to deliver for our customers. We saw this with our China team whose dedication and agility through the lockdowns in Shanghai drove exceptional results again this quarter, which came ahead of our expectations. But importantly, we've seen this commitment across all our teams and regions, and it truly reflects the indomitable spirit we have here at Waters. Turning now to slide three, we have three messages. Our strong commercial momentum is driving great results in markets that remain healthy. This is reflected in the broad, sustained growth we are delivering across our products, geographies, and markets. Customer demand remains robust with orders that again outpacing sales as our strong momentum continued with double digit sales growth again in the second quarter. Innovation is contributing meaningfully to our growth. A refreshed product portfolio is highly competitive and providing key benefits to our customers which is again driving stronger option of these new products as well as market share gains. Over time, we expect that the strong instrument placements and resulting expansion in our installed base will drive growth in recurring revenue tied to these instruments. And thirdly, we have a robust business model serving an attractive and resilient base. Water serves end markets with sustainable growth drivers that are linked to key demographic areas such as fill count population growth and increasing regulatory requirements around testing. With our strong business model, we have growth levers that exist throughout the market cycle across instruments, service, chemistry, and informatics. Growth in one of these areas usually results in follow-through performance across our business model, and you can see this today with our strong pull-through of instrument sales into higher attachment rates, which is again driving recurring revenue growth. Now moving on to slide four. In the second quarter, our revenue The revenue grew 5% as reported and 10% on a constant currency basis, with broad strength across our end markets and geographies, as well as in both instruments and recurring revenues. Orders in the quarter exceeded sales of $714 million, as we continued to see very strong demand from our customers. Our Q2 non-GAAP adjusted earnings per share was $2.75, up 6% year-over-year despite FX headwinds. The impact of FX headwind lowered our non-GAAP earnings per share growth by 11% versus the prior quarter. Amol will cover the impact of FX in more detail later in the call. Now looking more closely at our top line results for the quarter on slide 5 in constant currency. First, by operating segment, Waters division grew 10% while TA grew 12%. By end market, our largest market category, pharma, grew 10%, industrial grew 8%, and academic and government grew 16%. In pharma, we saw continued broad-based strength across segments, geographies, and applications, with growth in large molecule and small molecule applications. Growth was led by the US, which grew mid-teens with large molecule applications growing twice the rate of small molecule applications. China, which grew in mid-teens, and India, which grew 12%. In industrial, growth was driven by the US up mid-teens, Europe up high single digits, and India, which grew over 50%. Our food and environmental business is performing well, with PFAS testing also positively impacting growth. In academic and government, after seeing a slower recovery than our other end markets last year, customer spending continued to be more active during the quarter, with mid-teens growth for the quarter led by strength in China, India, and the Americas. Now, by geography, sales in Asia grew 9%, the Americas grew 15%, and Europe grew 7%. In Asia, growth was led by China, where sales grew 9%, despite the presence of COVID-related lockdowns for much of the quarter. Customer demand in China remained strong, and we're observing great activity levels which rapidly picked up in June relative to April and May when the lockdowns were in effect. Meanwhile, sales in India grew 24%. The Americas was again our fastest growing region, with the U.S. growing 14%, which was led by strong instrument sales, which grew 20%, along with recurring revenues, which grew 11%. In Europe, the growth was led by pharma and industrial, which both grew high single digits. By products and services, instruments grew 12% with our LC, mass spec, and DA portfolios each growing double digits. Recurring revenues grew 8% with chemistry up 9% and service up 8%. New products again contributed meaningfully to growth in the quarter with unit sales of ARK HPLC and Acuity Premier more than doubling versus the second quarter of last year. Unit sales of Maxpeak Premier columns also more than doubled and have continued to add strength and incremental growth to our chemistry business, driven by large molecule applications. In mass spec, we saw strength across our portfolio, including for our Zevo TQ-XS and cyclic IMS instruments, as well as strong traction for our newly launched Zevo TQ Absolute, which sold out at launch and has already developed a backlog. Customers are seeing the value that TQ Absolute provides in application areas such as food safety and pharma development in small and large molecules, small molecule applications, given its dramatic leap in performance and efficiency compared with other instruments in its class. Here in New England, one state public health laboratory was the first to purchase and install a TQ Absolute for the express purpose of PFAS testing in water and environmental samples. That customer told us their TQ Absolute is giving them a 100 to 400 fold increase in sensitivity versus their prior instrument while being far easier to use in terms of sample prep and in quickly giving them highly accurate results. Meanwhile, at the high end, we're seeing good demand for our cyclic ion mobility technology. One example is researchers at MD Anderson Cancer Center at the University of Texas. We're using it for precision molecular profiling within omics research. We're getting feedback that it is enabling significant progress in discovering and validating novel blood and plasma biomarkers for early disease detection in oncology. Finally, TA had another great quarter with sales up 12% led by strong growth in thermal analysis, microcalorimetry, and rheology. Demand for TA products continues to be strong across all regions led by electronics and batteries. Now moving to slide 6, I would like to reflect on the excellent strength and momentum we have sustained in the first half of the year, driven by our commercial execution, product innovation, and pricing offsetting inflation leading to these great results. So far this year, instruments have grown almost 20% with recurring revenue up just under 10% against strong stacked comps last year. In the US, instruments have grown over 35% year-to-date. All our regions have seen growth led by Americas, which has grown 20% year-to-date. Meanwhile, China has grown low teens despite the COVID-related lockdowns, which we were able to successfully navigate through in both the first and second quarters of 2022. Each of our end markets have seen double-digit growth, which speaks to our broad execution across regions and segments. Meanwhile, we continue to observe strong demand from our customers and are seeing ongoing positive impacts from our Market Plus growth initiatives. Now turning to slide seven, while each of these initiatives continue to progress, the three areas I would like to highlight this quarter are service attachment, e-commerce adoption, and launch excellence. First, with service attachment, we're seeing strong pull-through of our instrument sales into service plan coverage, which has driven our attachment rates over 100 basis points higher so far this year, which is ahead of our expectations and builds on excellent results last year. The progress we're making with service underscores the opportunity ahead to grow our recurring revenues, which layers on top of our instrument growth. Second, also part of our recurring revenues, e-commerce adoption of chemistry has continued to move higher, which is having a positive effect on sales by making it easier for our customers to do business with us and driving incremental growth opportunities. Thirty-one percent of our chemistry is now sold through digital channels, which is a ten-point increase compared to 2019 when the initiative began, and we see further runway to over 50 percent in the long term. Since we started the initiative in 2019, revenue from digital sales has more than doubled, and in the first half of this year, it grew over 30 percent versus the first half of 2021. Our revitalized portfolio is contributing to growth as demand has scaled up for ARK HPLC, for Acuity Premier, and MaxPeak Premier columns. Our product vitality index has grown 300 basis points versus the second quarter of last year to 15% as sales of these products have quickly ramped with launch excellence and the impact of innovation driving strong market uptake. As I've shared before, Acuity Premier and MaxPeak Premier were specifically designed to solve challenges that are particularly relevant for large molecules. This technology is capturing growth opportunities as shawarma customers seek to expand their capacity and build capabilities for biologics and novel modalities such as oligonucleotides, mRNA, and peptides. Meanwhile, small molecule growth remains solid with customers continuing to refresh and expand their capital equipment with RKH PLC. Now, on slide 8, in June at ASMS, we announced our new Zivo G3 high-resolution mass spec. The G3 is our latest generation benchtop Q-top, and it provides increased sensitivity and range for large molecule analysis over its predecessor, the G2, which is one of our best-selling high-res mass spec products. This instrument is described by our customers as an analytical workhorse, given that it offers the power and range needed to characterize complex biotherapeutics while also providing the reliability, robustness, and reproducibility needed in late-stage development. As biologics and novel modalities increasingly move into later stages, this instrument supports the associated workflows by allowing more detailed characterization of these molecules in product and process development. This occurs before they move downstream into higher-volume manufacturing QAQC, where routine analysis will then be performed on instruments such as BioChord. A further key piece of innovation is the software we've developed on Waters Connect, which allows the compliant workflows developed on the G3 to seamlessly transition to BioChord with just a few mouse clicks. This ease of transfer had been unheard of before now, and it allows our customers to transfer data between instruments and global locations within their enterprise network, all while remaining in an industry-compliant setting. On Waters Connect, our latest apps are enabling exciting new analytical areas for the G3 and BioChord, including cell culture media analysis and peptide analysis with in-depth protein and glycan profiling. Most recently, we've added the ability to characterize oligonucleotides and conduct impurity analysis, as well as perform lipid nanoparticle compositional analysis and stability testing, which is highly relevant for mRNA molecules. These are all new analytical areas in large molecule characterization where there is a lot of long-term potential as the market looks for more advanced characterization capabilities for biologics and novel modalities. As we continue to innovate and expand our offering, we are increasingly well positioned to support biologics and novel modalities as they move downstream into routine analysis. Now, I'd like to pass the call over to Amol to guidance for the remainder of 2022. Amol? Thank you, Udit, and good morning, everyone.