Waters Corporation

to the Waters Corporation first quarter 2023 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 any objections, please disconnect at this time. It is now my pleasure to turn the call over to Casper Trudeau, head of investor relations. Sir, please go ahead.

Thank you, Brad. Good morning, everyone, and welcome to the Waters Corporation first quarter earnings call. Today, I'm joined by Dr. Udit Batra, Waters President and Chief Executive Officer, and Amol Charbel, Waters Senior Vice President and Chief Financial Officer. Before we begin, I will cover the cautionary language. In 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 and commentary on potential market and business conditions, including with respect to the close of the WIAT transaction that impacts Waters Corporation over the second quarter of 2023 and full year 2023. These statements are only our present expectations and actual events or results may differ materially. For more details, please see the risk factors included in our most recent annual report on Form 10-K, are Form 10Qs and the cautionary language included in this morning's earnings release. During today's call, we will refer to certain non-GAAP financial measures, including in our discussions of the results of operations. 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. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2022. In addition, unless stated otherwise, all year-over-year revenue growth rates and ranges given on today's call are given on a comparable constant currency basis. Finally, we do not intend to update our predictions or projections except as part of a regularly scheduled quarterly earnings release or as otherwise required by law. Now, I'd like to turn the call over to Udit to deliver our key messages for the quarter. Then Amol will provide a more detailed look at our financial results. After, we will open up the phone lines to take questions. Udit?

Thank you, Kasper, and good morning, everyone. So this morning, I will start by giving you color on our first quarter results, as well as our updated guidance. Then I will cover some of our recent product launches, including Alliance IS, and I will also provide an update on WIAT. Our first quarter results were below our expectations with revenue growth of 3% on a constant currency basis versus our expected 4% to 6% growth. This was largely driven by weaker than expected demand for instruments in biotech and pharma, which I will cover in a moment. As you know, we had an extraordinary Q1 last year with 16% constant currency growth. Even though our first quarter this year was slower than expected, it still represents a very healthy two-year stacked growth of approximately 9.4%. We also saw good overall strength in our recurring revenues, which continued to grow in the high single digits, as well as mass spec and TA, both of which grew double digits. Our end markets remain resilient, and our leadership team continues to drive strong commercial execution. We have further strengthened our revitalized portfolio with a steady stream of innovative new products. Finally, we've added M&A to our growth strategy with our pending acquisition of Viat. And we continue to invest organically in our high growth adjacencies, which are also on track and are gaining momentum. Reviewing our first quarter results in more detail, our performance was impacted by a combination of three factors. China was weaker than anticipated as pharma customers scaled back purchases. Second, while we have limited exposure to pre-commercial biotech, we have seen a pronounced scale back in demand from these customers as they have significantly reduced spending to conserve capital. And third, several of our large to medium sized pharma customers delayed timing of instrument orders due to macroeconomic caution. Each of these dynamics occurred late in the quarter and led instruments declining 3% after they grew over 25% in the first quarter of last year. By end market, the impact was to our pharma business, which declined 4% overall. This was offset by strength in the academic and government segment, which grew 45%, and industrial, which grew 3%, while our recurring revenues remained strong across service and chemistry. As a result of this lower than expected volume, our non-GAAP earnings per fully diluted shares also came below our expectations at $2.49 for the first quarter. On a GAAP basis, our earnings per fully diluted share was $2.38. As we look ahead, we are assuming that spending among pharma customers in China will remain scaled back for the balance of the year. And while our exposure to pre-commercial biotech is low, We also believe that the slowdown in this space is likely to persist for the remainder of the year. As a result, we're lowering our 2023 guide due to these two factors. We now expect our full year organic constant currency growth to be in the range of 3% to 5%. We believe that large to medium pharma-sized budgets remain in place. We expect spending among these customers to catch up and be stronger in the second half of the year after delayed spending in the first half. Despite our revised revenue guide, our full-year EPS guidance, and free cash flow generation expectations remain unchanged. We intend to proactively manage our spend and working capital, and Amol will cover this in more detail. Even with short-term market challenges, our sources for growth remain intact. Our end markets are robust, with almost 80% of our business exposed to durable growth areas. This includes demand for QAQC testing of commercialized medicines, increased scrutiny of PFAS in food and water, and the testing of batteries used in applications such as electric vehicles. Our team has developed a strong commercial discipline that is supported by best-in-class, innovative new products that address evolving customer unmet needs. We're also seeing high single-digit growth in our recurring revenues, which are over 50% of our annual sales. Chemistry growth is supported by strong in-market activity, growth in biologic applications with our MacSpeak premier columns, and our e-commerce initiative. For service, we're seeing strong pull-through from our instrument sales, and increased service plan attachment is supporting the growth. We expect service plan attachment for our instruments to increase by another 100 basis points this year, building on the 350 basis point expansions in 2019. Our revitalized portfolio has been further strengthened with a recent launch of Alliance IS, which is our next generation intelligent HPLC system. We believe it is the most significant innovation to hit Pharma QA QC in the past decade, and it provides a major leap forward in lab productivity. Not only is the instrument easy to use with its large touchscreen interface, but can eliminate common user errors by up to 40%. It does this by guiding users between steps with a highly intuitive interface. It intelligently conducts a number of real time system checks before a sample is run. This helps ensure that the instrument is configured correctly for the method that is being tested. Before now, errors such as incorrect solvent or the wrong column being used are usually discovered after the sample has been run, which results in wasted time and a wasted sample. Given the strength of the Alliance brand and the significant new features that this instrument offers, we had a strong reception at its launch. Since quality testing is such a critical component of pharmaceutical manufacturing, customer interest has been strong, including from Janssen Pharmaceuticals, who noted that Alliance IS feels like the future is here and has already made plans to replace a large number of its LCs with this instrument. We now have not one, but two new industry-leading platforms for QAQC applications in pharma. Arc HPLC and its biocompatible equivalent, Arc Premier, and now higher-end Alliance IS, which sits at the top of the range. Last month, we also launched our Zevo TQ Absolute Mass Spec into clinical applications. Not only is this the most sensitive triple quad on the market for PFAS detection, where it has seen strong traction in food and environmental testing, But now, within clinical, it is up to five times more sensitive than other competing instruments in the segment. This sensitivity enables clinical labs to detect and measure trace-level analytes at lower detection levels than was previously possible. It also enables clinical labs to expand their test menu to include multiplex panels. Meanwhile, RTA Instruments' business launched a new microcalorimeter for battery testing essential for electric vehicle energy storage and electronics applications. This provides customers with a significant upgrade as it accelerates validation of battery safety, quality, and performance testing by up to 75%, while collecting up to six times more data than other calorimeters. Lastly, we also recently launched a new system monitoring software product on Waters Connect, first for us and unique to the industry. Developed in consultation with QAQC scientists, it enables real-time monitoring of all chromatography instruments controlled by our Empower software. It helps increase productivity of QAQC labs by allowing customers to analyze their instrument fleets at any time from anywhere to monitor uptime, usage levels, and real-time system availability. Each of these new products have been developed in close collaboration with our customers to address their most pressing unmet needs. They further support the strength of our revitalized portfolio. Earlier this year, we announced our intent to acquire Wired Technology, the recognized leader in light scattering. With more than 80% of its revenues tied to large molecule applications, Wired expands Waters' portfolio and increases our exposure to faster growth areas within biologics. It also increases our ability to build a business in bioanalytical characterization which is a US$1.8 billion total addressable market with a 10% to 12% projected annual growth rate. We remain on track to close in the second quarter of this year. We also expect the transition to deliver immediate growth and adjusted operating margin accretion. Now, I will pass the call over to Amol to continue covering our first quarter financial results and give additional commentary on our guidance. Amol?

Thank you, Udit, and good morning, everyone. In the first quarter, sales grew 3% in constant currency. This came below our expectations due to the demand dynamics in our pharma business, which Udit outlined earlier. Waters division grew 2% and TA grew 10%. By end market, pharma declined 4%, industrial grew 3%, and academic and government was very strong at 45% growth. In pharma, weakness was led by China and the U.S. In China, we saw customers recalibrate their spending plans, and in the U.S., our large to medium pharma customers delayed spending due to macroeconomic caution. Our small biotech customers, which is a small portion of our business, scaled back spending to conserve capital in light of more pronounced funding concerns. In industrial, growth was led by Asia, which grew 6%, and the Americas, which grew 2%. In our waters business, we saw continued strong growth in PFAS testing applications. In TA, growth was led by thermal analysis and rheology. We have seen continued strong demand in secular growth drivers such as batteries and electronic testing. Academic and government had a great start to the year as elevated funding resulted in strong demand for our refreshed mass spec portfolio. strength was broad across all our geographies. By product, strength was broad across our high-res mass specs, such as cyclic IMS, and our tandem cards, such as TQ Absolute. Now, by geography, sales in Asia grew 6%, the Americas declined 1%, and Europe grew 3%. In Asia, China declined mid-single digits for the quarter. Excluding China, Asia grew mid-teens, with broad strength across our end markets. In the Americas, pharma declined mid-single digits, given delayed spending against a tough comp of over 30%. Industrial grew 2%, and academic and government grew over 25%. Europe grew 3% in the quarter, with strength also led by academic and government, which grew over 40%. By products and services, instruments declined 3% overall, but both our mass spec and TA instrument systems grew double digits. Recurring revenues grew 8% with chemistry up 10% and service up 8%. This quarter had one fewer day than the first quarter of 2022, which translates to a headwind of approximately 1% for our recurring revenues. Gross margin for the quarter was 58.5% compared to 58.6% in the first quarter of 2022 in line with our expectations. Operating margin for the quarter was approximately 26.8% compared to 30.3% in the first quarter of 2022 driven by sales mix and 120 basis points of unfavorable FX. Our effective operating tax rate for the quarter was 15.4%. Average share count came in at 59.3 million shares, which is about 1.6 million less than the first quarter of last year. Our non-GAAP earnings per fully diluted share for the first quarter was $2.49 in comparison to $2.80 last year. Foreign exchange headwind lowered our non-GAAP EPS growth by 8%. On a GAAP basis, our earnings per fully diluted share was $2.38. A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning and in the appendix of our earnings call presentation. Turning to free cash flow, capital deployment, and our balance sheet. We define free cash flow as cash from operations, less capital expenditures, and excludes special items. In the first quarter of 2023, pre-cash flow was $166 million after funding $34 million of capital expenditures, which represents approximately 24% of our sales. We maintain a strong balance sheet, access to liquidity, and well-structured debt maturity profile. This strength allows us the ability to prioritize investing in growth, including M&A, and returning capital to shareholders. We continue to evaluate M&A opportunities that will meaningfully accelerate value creation in well thought out attractive adjacent markets. In Q1, we repurchased approximately 173,000 shares of our common stock for 58 million early in the quarter. As we previously disclosed, we have since temporarily suspended our share buyback program for the remainder of the year so that we can use our free cash flow to fund the Wyeth acquisition. At the end of the quarter our net debt position was approximately 990 million which is a net debt to EBITDA ratio of about 1. Now I would like to provide our updated thoughts for 2023. Our end markets remain resilient and we expect our refreshed portfolio and growth initiatives to enhance our performance. However, as Udit covered earlier, we are revising our growth expectations to account for the scale back of purchases from our customers in China and the slowdown in small biotech. As a result, we are updating our full year 2023 organic constant currency sales growth guidance to 3% to 5% excluding VYAT. At current rates, currency translation is expected to have a minimal impact on full year sales resulting in full-year reported organic sales growth guidance of 3% to 5%. Consistent with our prior expectations, we expect Wired transaction to add approximately 2.5% to our full-year 2023 revenue growth. Therefore, our total reported sales growth guidance is now 5.5% to 7.5% versus 2022, including Wired. We expect organic gross margins to be approximately 58.5% for the year and organic operating margins to be approximately 30.5%. This is higher than our previous guide due to anticipated cost savings in our core business and an improvement in FX. This now translates to 50 basis points of margin expansion, net of investment in adjacencies, partially offset by an FX headwind of 20 basis points. As we previously mentioned, we anticipate the expected addition of Wyeth in Q2 of this year will be accretive to our full year 2023 adjusted operating margin by approximately 25 basis points. Excluding the Wyeth transaction, we expect our full year net interest expense to be approximately 40 million. Consistent with our prior expectations, the transaction is expected to add 40 million of additional interest expense for a total of 80 million interest expense. The full year tax rate is expected to remain at approximately 15.5%. Our average diluted 2023 share count is expected to be approximately 59.3 million given the temporary suspension of our share repurchase program. Rolling all this together on a non-GAAP basis, our full year 2023 earnings per fully diluted share guidance excluding the WIAT transaction, is projected in the range of $12.70 to $12.90, which is unchanged from our previous guide and includes a negative currency impact of approximately one percentage point at current rates. Including WIAT, non-GAAP full-year 2023 earnings per fully diluted share is also unchanged, projected in the range of $12.55 to $12.75. Looking to the second quarter of 2023, we expect the current market dynamics to persist in China along with the slowdown in pre-commercial biotech. We also expect cautious spending levels from our large pharma customers to continue until end of the second quarter before catching up in the second half of the year. Hence, we expect second quarter organic constant currency sales growth of 1% to 3%. At today's rates, currency translation is expected to subtract approximately one percentage point, resulting in second quarter reported organic sales growth guidance of 0% to 2%. Assuming a mid-May close, we expect the wide transaction to add approximately 1.5% to our second quarter revenue growth. Therefore, our total second quarter reported sales growth guidance is 1.5% to 3.5%, including Wyeth. Excluding the Wyeth transaction, second quarter non-GAAP earnings per fully diluted share are estimated to be in the range $2.60 to $2.70, with a negative currency impact of approximately three percentage points. including WIAT, which is expected to result in an EPS headwind of $0.08, second quarter non-GAAP earnings per fully diluted share is projected in the range of $2.52 to $2.62. Now, I would like to turn it back to Udit for some summary comments. Udit?

Thank you, Amol. So to summarize, despite a slower than expected start to the year, our end markets are resilient and we expect to see increased strength in the second half of the year. While we have revised our revenue guide, we're maintaining our full year EPS guide due to our robust financial model. And the acceleration of our growth strategy remains on track with continued progress on all of our high growth adjacencies and with our pending acquisition of wire technology. I would like to take this opportunity to thank our colleagues around the world who continue to demonstrate the indomitable spirit of Waters with their focus on strong commercial execution and revitalized innovation. We also look forward to welcoming our future Wired colleagues. Finally, I'm proud to share that Waters continues to be globally recognized for its strong ESG profile, placing at number five on the Barron's 100 Most Sustainable Companies list for 2023. This is the second year that we've been placed in the top 10 after receiving more than 20 awards in 2022, recognizing the company for excellence in product innovation, leadership strength, and commitment to social and environmental responsibility. We look forward to continuing to demonstrate our commitment to leave the world better than we found it. So with that, I'll turn the call back to Gaston.

Thanks, Udit. That concludes our formal comments, and we're now ready to open the phone lines for questions.

Thank you, we will now begin the question and answer session. To ask a question, please press star one and record your name at the prompt. You will be allowed one question and one follow up. If at any time while waiting in queue your question has been answered, please press star two to remove yourself from the queue. Once again, that is star one for questions at this time. And our first question today will come from Luke Sergot of Barclays. Your line is open, sir.

Great, thanks. Good morning, everybody. So I want to start off on the academic and government strength that you guys saw in the quarter, particularly in China. You guys called that out, but it was strong across every region. So did you guys see any push-outs in there from the 4Q? Just talk about what you're seeing there as that kind of goes forward so this isn't just a one-time thing.

Sure. Thanks, Luke, and good morning. It's a great start to the year with about 45% growth, and this is largely due to the elevated global funding that we're seeing across the globe and the strong demand for high-res mass spec portfolio. Now, this growth was, of course, led by China, which grew over 80% versus previous year. And, of course, we saw the same thing happening, not to that same extent in magnitude, but in the U.S., in India, and in Europe, all had a nice growth, well into the double-digit territory. So academic and government, as you know, is a segment that's rather lumpy, so I would rather not extrapolate Q1 to the rest of the year. So we assume that we will see the second half that will become more normalized, and the full year will be more in the low double-digit routine range, given such a strong start to the year.

okay great and then when you guys talked about the on the guide down part being from biotech customers and part being from large pharma kind of pushing out their spending can you help size what those actually were and contributed to the to the guidance cut for the year so so Luke look I mean if just to sort of take a step back the full year guide for the full year guide we have assumed three to five percent in constant currency right and on a two-year stacked

basis, this is still high single digits. We think like the first quarter, the spending at Chinese CDMO customers and the pre-commercial biotech customers remains constrained for the balance of the year. And to remind you, on the China side, we've grown the CDMO presence over the last two years. We've actually tripled that business, right? So it's gone dramatically up. So we think Like the first quarter, the spending in the Chinese CDMO customers and the pre-commercial biotech customers will remain sort of muted. On the other hand, we're assuming that the large pharma customers who've delayed orders for instruments will come in the second half of the year. And here, over the last two weeks, I've personally spoken to several large customers, both in the U.S. and Europe, to understand the situation. And the funding remains very much intact, and the POs were simply delayed. So we're expecting those to come largely in the second half of the year. So then the 3 to 5 percent guide would then imply that for the full year, China will grow in the low single digits versus our previous assumption of high single digits. Pharma will also remain in the low single digit category with combined pressure from China, CDMO, and pre-commercial biotech. And instruments for the year will grow flat to low single digits and recurring revenues in the high single digits. So I hope that gives you a flavor for the drivers of the full year guide and how we stepped it down. Amol, do you want to comment on the quantitative aspects? No, I think you covered it well. Yeah. Super. Thank you.

The next question will come from Vijay Kumar of Evercore ISI. Your line is open.

Hey guys, thanks for taking my question. Udit, back to some of your comments here. What is that water's exposure to this emerging biopharma? You know, was it down, you know, 50%? Any directional sense on that? You know, what the business did? And in this, you know, why... you know, I understand they have exposure to large pharma. Is there any risk here on why it's, you know, what is why it's exposure to emerging biopharma?

So let me, so Vijay, thank you for the question. First on the biotech exposure, our biotech customers, broadly speaking, constitute between 10 to 15% of our pharma business and with more heavier weight waiting in the U.S. and China where the biotech industry is even more developed. Pre-commercial biotech, which is where we saw the slowdown, is a subset of this and is roughly half of it. So if you do the math, that's roughly 5% to 7% of our pharma business, and largely focused on the US and in China. So during Q1, pre-commercial biotech companies, of course, got extremely cautious and virtually halted their instrument purchases, especially later in March. We're starting to see some relaxation. but we've assumed that this situation will persist for the balance of the year. And over the long term, I don't need to remind you, the biotech industry plays an extremely important role in the innovation that we see across healthcare, and they remain our very, very strong customers. Now to your question on Wired, roughly 80% of the Wired business is focused on biologics applications. WIAT has historically been very strong in academic and government and for biologics applications for characterizing large molecules like cell and gene therapy and proteins and monoclonal antibodies. We expect this business for the balance of the year, once the close happens, to remain in the low double-digit category. And as Amol said, this would add roughly 2.5% to our incremental revenue for waters for the rest of the year. So we expect this to continue to remain extremely strong for the balance of the year.

Understood. Then Amol, one for you. The second quarter EPS guidance implies, I think, the operating margins in Q2 to be roughly similar to Q1. Given you retraced the annual EPS guidance, it looks like back half has to be like low 30s operating margins. That's a massive step up, I think 500 basis points or 600 basis points if I'm doing the math correctly. What is driving the second half margin expansion versus first half? Is there any synergies being baked in from this via transaction, or perhaps is Waters contemplating any restructuring actions?

So there are a couple of things, Vijay, that play into the second half of the year, right? One is the volume in the second half is typically higher than the first half, and that produces some degree of volume leverage, and our gross margin profile in the second half is likely better than that in the first half. We also benefit from exchange rate in the second half. Remember, in the first half, FX is still a headwind. In the second half, FX is a tailwind. And three, given the revised sort of the demand outlook, we plan to proactively manage our costs and intend to keep our operating expenses relatively flat in the second half versus the first half. And if we are able to do that, then it

allows us to produce the kind of margin expansion and eps that we've guided for the second half the next question will come from dan brennan of td cowan your line is open great thanks uh thanks guys for uh the question um maybe the first one just on the guide just wondering um was there a discussion maybe to cut beyond the three to five Just wondering, you know, you're kind of ripping the band-aid off here, given some of the factors you pointed to. But do you feel that guide provides a still healthy cushion, given all the uncertainties you were flagging? You know, it's still, as you pointed out, it's still kind of in high single-digit to your stack, which is above your long-term LRP. And you do have these factors in your banking on a recovery in the back half of the year for large pharma.

Yeah. So, Dan, thank you for the question. clinically dissecting what happened in Q1 and why it came below our expectations with a 3% or so growth. And the reasons that I outlined, the slowdown in Chinese CDMO customers, the slowdown of purchasing of Chinese CDMO customers who largely serve US and European pharma customers We think that will persist for the balance of the year. We think the pre-commercial biotech spending will remain muted, and at least that's what we've assumed. Even though we see some signs of that improving, we've assumed that that remains muted. And then thirdly, we expect the deferral of purchases of instruments in large pharma customers to come back. And we looked at this super carefully, and I personally spoke to some large pharma customers They have the budget, they have the funding, it simply was caution to delay the purchases. And now with a very strong revitalized portfolio, we feel very good about being able to compete for orders across the instrument portfolio. So you put it all You put it all together, you basically see that the instrument growth will be flat or low single digit at most for the full year. Recurring revenues which have gone from strength to strength is over 50% of our business gets into the high single digit category. Pharma, which has been our sort of strongest grower for many, many years, we also assume in aggregate will be flat to low single digits. And China, again, a strong growth driver, will end up flat to low single digits. So I think we've been rather cautious about our guidance, and we've taken all the factors into account. And as you said, I mean, the full year stack looks very good, just given the strength we've built from a commercial perspective and the strong innovative portfolio that we have put forth in the market. And with the close of Wyatt, that should add a little bit more momentum.

Great. Thanks, Judith. And maybe just as a follow-up, just on instruments, so flat to low single, that's, you know, kind of a high single-digit stack against what you guys did. You know, you guys obviously had tremendous growth there. Can you just unpack that a little bit? It sounds like Mass Spec doing terrific. Could you just give us a flavor for, you know, the relative contribution between Mass Spec and LC, and if you want to give us any, you know, regional, you know, I don't know how far down you, you know, the hole you want to go, but just give us a sense of what's incorporated into that low single. Thank you.

The instrument sales for this quarter declined roughly 4%, right? And as you rightly pointed out, this is on the back of a 26% growth in Q1 2022, right? So pretty strong comp. Now, mass spec grew high teens, so strength to strength, and on a multi-year basis, it's a high teen growth. TA grew double digits, while LC declined in teens. Now to your question on LC, or deeper question on LC, the sales were impacted disproportionately by the decline that we saw in the purchase by pharma customers, and these are Chinese CDMOs serving US and European customers, as I mentioned, the pre-commercial biotechs, and also the delayed orders that I talked about for large pharma, so disproportionately impacting LC. Now, just to put this all in a bit of perspective, You see in an instrument business, we will always see fluctuations. But what is important to remember is that over the long term, our instrument business has grown in a 4% to 5% range with a gross margin of roughly 60%. It's a pretty attractive area to be in. We, during this time, looked at our instrument growth rates for the last 20 years. Starting in 2004, we basically looked at every year. And you come away with just two very simple insights. First, the average growth hovers around 4% to 5%. Second, there is a fluctuation around this mean, which generally gets exaggerated around economic slowdowns, like in 2008 and 9, 2011 and 12. But the volume always returns within one to two quarters. So whenever there is a delay, especially in the case of LC, which is over 70% of replacement business, this fluctuation always subsides and you return to your average of about four to five percent. So we're pretty positive and we feel very confident about the deferred businesses coming back, especially now given our terrific commercial execution that you pointed out and our renewed portfolio, especially in the small molecule LC segment where RKH PLC now is augmented by Alliance IS. We should see the instrument growth returning back to normal before long. So for the full year, Dan, we've basically assumed still a flat to low single-digit instrument growth in aggregate and recurring revenues at the high single-digit range, where in the second half of the year, you'll start to see trends that are more like pre-COVID times, right? So I hope that gives you a bit of flavor on what the assumptions are and how we've thought about it.

The next question will come from Matt Sykes of Goldman Sachs. Your line is open.

Hi, good morning. Thanks for taking my questions. Maybe just to dig a little bit more on the large pharma side, it's quite clear your expectations for the second half recovery, and this is a delay. I'm just wondering, just given some of the news we've seen from some of the larger pharma about rationalizing their R&D spend, has there been any kind of reprioritizing of those R&D budgets, whether it's Inflation Reduction Act, you know, prompting them to move into large molecule or anything like that, or you truly see this as sort of a temporary delay in terms of ordering?

That's a great question. I personally then decided to speak to several of the large pharma customers both in the U.S. and in Europe, and basically we find that the budgets are still very much intact, like many companies like us as well. We're being more cautious with capital spend and we're taking longer to approve capital spend and that's what's happened in large pharma as well. So there is no talk of not doing replacements or not adding instrument fleets that they had planned altogether. Second, what I'll remind you is that our business is more heavily weighted towards the QA QC segment, which is more proportional to manufacturing volumes, right? And so R&D spend, if it comes under pressure, does not impact, especially our LC business, which is more weighted towards QC and especially on the small molecule side. So really no real indicator there that that would slow down. And finally, Matt, feel extremely good about our commercial execution that has demonstrated what we've been able to do over the last two to two and a half years. where we have really grown rather nicely with all the instrument replacement initiatives, also on the consumable side, which remains extremely strong. And consumables, I'll remind you, is an indicator of pharma activity, right? If that is growing high single digit, what you find is there is significant activity still occurring with the pharmaceutical customers. So we believe it's just a matter of time. that the instrument orders that were delayed in large pharma will come back. So we have a lot of corroborating evidence that suggests that this is coming back. But we've been rather cautious, even though we see some indicators of it coming back already, we've been rather cautious to assume that most of the spend will come in the second half of the year.

Great. Thanks. That's very helpful, Kolar. And then just my follow-up would just be on the industrial end market. You've done a really good job in the past of kind of decomposing the subsegments there, and you talked about strength. in batteries and PFAS, but maybe could you talk a little bit more about the sub-segments where you're seeing some maybe softness and where you're seeing continuous strength?

Yeah. So, I mean, just taking a step back, Matt, the industrial segment of waters has dramatically changed over the last 15 years or so, right? I mean, basically it's now constituted heavily of food and environmental And the TA business has 40% of it is in the more resilient segments, like batteries, also serving some parts of life science out of TA. Now, to just decompose the results for the quarter, the industrial business grew roughly 3%. It was led by TA, again, which grew almost 10%. And PFAS testing, which we've talked about several times in our previous discussions, which continues to grow really, really rapidly. And in TA, roughly 40% of the business is now in the more resilient segments with batteries really continuing to grow nicely. So when I double click on TA, I mean, it has the same sort of dynamics that the waters division does, right? So we've really increased our focus on commercial execution, new products, especially ones relevant for high growth areas for thermal analysis and rheology. And we just talked about our new battery calorimeter that sets a new standard in testing batteries and their efficiency and effectiveness. It's just been launched. So we feel very good about where the TA business stands going forward. So if I just put all of that together for the full year, we're assuming a mid-single-digit growth in our industrial business, led by the strength that we continue to see in TA and PFAS testing.

The next question will come from Derek DeBrown of Bank of America Merrill Lynch. Your line is open.

Hi. Good morning, everyone. Good morning, Derek. Hey. Udit, I have a question for you. I mean, you know, I've been covering waters for a long time, and, you know, we've seen some of the spending patterns before. I mean, historically, pharmas have delayed their budget releases in Q1, you know, and things pick up in 2Q. But by the same token, if we're going back to sort of like historical seasonality, you know, 3Q then is always a crapshoot in terms of what spending is because you won't have any real visibility until September. So I'm just sort of, you know, why are we not back to some of these sort of seasonal patterns and then, you know, you're – and everything essentially ends up riding on the fourth quarter and like this. I'm just very curious, you know, are we – Is there anything more different going on here than just return in normal seasonality?

That's a fantastic question, Derek, and I expected you to ask something that relates to the history of waters in general. Look, you're totally right. We think the second half of the year will start to approximate what we've seen in the past. That's why if you just look at the growth rate of the second half of the year, it's between 4% and 7%. Instruments now starting to traverse into the low to mid single digits, and consumables well above our historical averages traversing at the high single digits. So it does start to look like historical patterns. And if you just now look at the specifics, as I said, we basically said, look, the CDMO spending in China, the pre-commercial biotech is not coming back. Now, you can call that super conservative or not, up to you. but we just said, look, that's not coming back for the balance of the year. That's what we want to assume for now. With pharma, we've said, based on the visibility we have with those customers, and I've personally spoken to several of them as well to just gain confidence, we're already starting to see the orders released. Now, it's anyone's guess if it comes in Q2, Q3, or Q4, but again, we've been cautious and said, look, it will come in Q3 and Q4 rather than in Q2, right? So I think that's the dynamics, but it does return second half of the year starts looking awfully like pre-covered times and then when you do the full year math right you look at waters i mean you see us on a stacked two year four year stack basis traversing high single digits and i'm all already talked to you about the margins the margins are 330.5 i mean that's a pretty good business right a high single digit 30.5 margin so we expect to be able to overcome these challenges for the balance of the year. And I mean, this is the best visibility that we have at this point in time, given the conditions.

Yeah. And I mean, absolutely. I mean, just sort of looking at it, you've historically gone through a couple of years of like double digit growth in the business and then it goes to mid single, then it comes back double digits and then it goes through, it goes to these processes. So, I mean, it seems like a trajectory as far as we exit 23 would be back to that you know, 3% to 5% growth in the instrumentation business than whatever the augment is on the consumables business, right? So 7%, 8% in that range, right? That's probably the best way to sort of think about next year.

Yeah, I think, I mean, I can't give you details about next year, but just to give you sort of broad strokes at this point, we think that our instrument business is super healthy, right? So... Is it three or is it five percent? I cannot judge, but it's a good starting point. We think our consumables business has been traversing on a stacked and a double stacked, meaning two and four-year stacked basis on high single digits. Now, it seems a bit higher than previous growth rates. Now we've augmented our business with Wired, which would add more to the growth rate, right? So that's a low double-digit grower and exposed to expose more to biologics. And you put it all together, I mean, instruments are mid-single digit, recurring revenues are high single digit. You sort of end up at a weighted average, which is mid to high single digits. That's what we are saying. And remember, we said 5% to 7% growth. In the mid-term, starting to end with more moves towards high growth adjacencies, that growth even expands, and we're able to maintain our margins because we are rather careful about how we invest in the business, and it's about a 38% or 30.5% margin. So you start to see the algorithm come back, but with a bit more strength given what we've done on the commercial side and how we've been adding adding strength on the consumables placement through e-commerce, service attachment rates, which are higher than ever, and then the new product portfolio, which is completely revitalized. So we think it will be there or thereabouts, but probably a little bit better given commercial success, given innovation, and the fact that we have Wired, which is a faster-growing business in the segment.

The next question will come from Josh Waldman of Cleveland Research. Your line is open.

Hey, guys. Thanks for taking my questions. A couple for you. Rudy, I guess just another follow-up on your comments on large pharma. I think you said you have orders or quotes in hand at this point. I guess just curious if you could comment on the magnitude of these orders. And then maybe what customers are telling you with respects to year-over-year growth in their budgets. And then I guess in reference to the four-year guide, if the opportunities do convert, it sounds like you're starting to see, do you think there's upside to the guide? And then on the flip side, if they don't, do you think you have to trim the guide going through the year?

So maybe I start with the very end and then work towards the front on the pharma customers. Look, Josh, we've done a very clinical analysis on the drivers of what's happened in Q1, right? And we've been super transparent about where they've come from, right? The Chinese CDMOs, the emerging, the pre-commercial biotech, and those two we don't expect to see coming back for the balance of the year, even if there are indications that that starts to relax towards the latter part of the year. On the pharma spend, we have a significant amount of corroborating evidence that from the field, from my personal conversations, from looking at the data, especially in what we're seeing on a commercial, from a commercial perspective. And I'll remind you that we are still very much a QA, QC focused company. So the commercial volumes continue to rise as they are in pharma. New products keep coming through. We expect to see that spend continue in the way that it has. So we feel reasonably comfortable that that the spending will come back for the balance of the year. Again, how it's distributed in Q2, Q3, Q4, it's not straightforward, but we are assuming that it's in the second half of the year. And that brings us to the full-year guide, which is the 3% to 5% or a two-year stacked growth rate of high single digits. So I hope that gives you color on how we are thinking about the full year and where we see strengths and where we have sort of analyzed it and said, look, we're not bringing this back into the equation.

Got it. Then Udit or Amal, I wondered if you could comment on how price is tracking year-to-date versus your expectations. I think you previously said 200 basis points this year. Is that still the right way to think about it, or does the softer demand environment here in the near term put pressure on that?

I mean, at this point, Josh, price is raising a little above 200 basis points. Based on the dynamics we are seeing in the market, our teams are doing an excellent job holding on to that, and that's what we're thinking for the rest of the year.

Yeah, and Josh, to build on the price comment, we expect that the strength that we've built in execution of implementing pricing changes will stay with us. Second, our portfolio, which is really reinvigorated across the board, right? So we've talked enough about the mass spec business in the past and the Zivo TQ Absolute, the G3 Q-Talk, which now helps customers transfer their methods much better from development into QAQC or to the BioAccord. We've talked about the impact of our MaxPeak Premier Columns. So innovation across the board and now more recently with LC with the Alliance IS and also DA for battery applications. We see innovation across the board and this customers do want these products. They meet very significant unmet needs and they're willing to pay a premium to access these products. So the commercial strength that we've built over the last two years plus revitalized portfolio makes us confident that we can continue to pass on price in a very significant way.

The next question will come from Rachel Vattenstahl of JP Morgan. Your line is open.

Great. Thanks for taking the question. So one year on instruments declined 3% during the quarter, but you made a comment of how the dynamics really started late on in the quarter. So can you walk us through what was the exit rate for instruments and then how have orders looked during April-May timeframe? And then as a follow-up, you mentioned that instruments are expected to be flat or low single digits for the year. So what's embedded in that guide for instrument growth during 2Q?

Sure, Rachel. Thanks for your question. Look, instrument sales declined about 4% for this quarter, right, and on the back of the 26% in Q1 2022. mass spec, as I mentioned earlier, grew high teens, and TA grew double digits, while LC is the one that declined in teens. And to your question on how these were and where this came from, I mean, it's the same drivers that I mentioned earlier. They were impacted disproportionately by the decline in the Chinese CDMO customers who were serving U.S. and European pharma companies, pre-commercial biotech, and some delayed orders in large pharma. As we think about the full year, we feel quite confident that the deferred business is going to come back given what I mentioned in response to the previous questions and also the fact that we have an excellent commercial organization and a new portfolio that basically allows us to place these instruments. For the full year, we are assuming a flat to low single-digit growth in instruments. And, of course, high single digits for consumables. And you'll start to see, to Derek's question earlier, the second half of the year look awfully like pre-COVID times. I hope that gives you clarity.

Yeah, and then just a follow-up here on biological analytical characterization. Can you just talk about what the adoption of that portfolio is by Accord and then also how wide its adoption rate is trended in recent months? You talked about the opportunity here for bioanalytical characterization is that, you know, adoption rates will increase over time. But just given that characterization isn't required for bioprocessing right now, is there a risk that that could be an area where pharma really starts to rationalize spending and that that could pressure new customer wins? And then ultimately, what could that do for growth rates in BioAccord and Wyatt this year? Thank you.

So, Rachel, thanks for that question. Look, I mean, about 40% to 50% of the pharma pipeline is now biologics. A good portion of that is cell and gene therapy molecules, which are curative, not just treatments. These are fantastic drugs, and we're doing all we can to help our customers take these to the market. Unfortunately, the characterization techniques for these have not moved at the pace that they should have historically. Now we have the tools like LC-MS, like LC-UE, like light scattering, and like our MaxSpeak Premier columns, that will allow our customers to characterize these molecules much better, to move them faster through the pipeline and reduce costs dramatically. So we see that demand really, really picking up, right? So when we did the analysis, we said, look, this is about a 1.8 billion market that is going well into the double digits. Now with The addition of Wired, we now have a world-class portfolio with the simplest LC-MS instrument in BioCord that has very good adoption for raw material testing, for in-process characterization of cell lines, and now rapidly moving into QA-QC, and I've given some examples of that also in the past. Second, LC-UV remains a characterization technique that many of our customers use to release biologics. And thirdly, now with Wired, multi-angle light scattering that we now intend to attach to our SEC columns, as well as our LCs, we think this has very, very good prospects going forward. And when you talk about Wired, Wired has historically grown in the 20% range, and our assumption is As we look at the balance of the year and after the deal is closed, our assumption is still that it's a low double-digit grower with a 40 percent margin for the foreseeable future. So we feel very good about this area and biologics in general and the business that we're building in bioanalytical characterization.

The next question comes from Patrick Donnelly of Citi. Your line is open.

Good morning. You have Lizzy on for Patrick. Thanks for taking my question. So I guess first on pre-commercial biotech, can you talk a little bit about how that trended throughout the quarter? Did the weakness mostly stem, you know, later on in the quarter, in February, March, or was it kind of, you know, even throughout? And then I want to follow up.

Thanks. Sure. Look, I mean, this really came in the month of March. I mean, our pre-commercial biotech, as I said before, is roughly 5% to 7% of our overall pharma business and largely focused in the U.S. and in China. Now, to double-click on the U.S., these companies are mostly in the Cambridge and San Diego, San Francisco area, right? And we saw really their spending almost halt in March given the financial crisis that many of the companies were going through. Some of that has started to relieve, but we saw that that segment really slowed down quite dramatically in the month of March. And then that has persisted into, we are assuming that that is persisting into Q2, especially for that particular segment.

And that was our final question for today. I'll turn it back over to the speakers for closing remarks.

Thank you very much for your participation and questions today. And on behalf of the entire management team at Waters, I would like to thank you for your continued support and interest in the company. Thank you and have a wonderful day.

Thank you all for your participation on today's conference call. At this time, all parties may disconnect.