Waters Corporation

to the Waters Corporation Fourth Quarter Earnings Call. Today, I am joined by Dr. Udit Batra, Waters President and Chief Executive Officer, and Amol Chabal, Waters Senior Vice President and Chief Financial Officer. Before we begin, I will cover the cautionary language. I would like to first point out that our earnings release and the slide presentation supplementing today's call are available on the Investor Relations section of our website at ir.waters.com. 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 that may impact Waters Corporation over the first quarter of 2024 and full year 2024. 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, our Form 10-Qs, 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 fourth quarter of fiscal year 2022 in organic constant currency terms. In addition, unless stated otherwise, all year-over-year revenue growth rates and ranges given on today's call are given on a comparable organic constant currency basis. Finally, We do not intend to update our guidance, 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 remarks. 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. I would like to begin today's call by expressing My gratitude to all my colleagues, 2023 was another transformative year for Waters. Throughout the year, our teams kept an unwavering focus on customers, launched innovative new products, and delivered strong business performance, all during highly eventful times with dynamic market conditions. As 2022 ended, the results of our transformation clearly showed on the top line. having delivered several years of very strong above average sales growth. Since then, in 2023, we've demonstrated our ability to manage exceptionally well through a downturn while continuing to make investments for growth. In 2023, we also initiated the next phase of our transformation with the acquisition of Viatt. This brings with it a new vector for value creation our shareholders through m a and were off to a great start as an added benefit it has accelerated accelerated our journey into high growth adjacent markets where we made continued progress with our organic investments over the course of the year we launched new and innovative products in 2023 including our alliance is next generation lc platform we expanded our zivo tq mass spec into clinical applications and developed size exclusion columns for viral vectors that pair with Wired Mall's instruments. We even had our first light scattering launch as a combined company with Datastar. Finally, we were recognized as one of the world's most sustainable companies, achieving a variety of ESG awards. This includes our top five ranking on Barron's most sustainable companies list, which scores over 1,000 publicly traded companies based on 230 ESG performance indicators. We're very proud of what we've achieved at Waters in 2023. Today, as I share our fourth quarter and full year results, I have three key messages. First, we've continued to execute well. Second, our transformation is contributing to our results. And third, we are well positioned for future long-term growth. Turning now to our results. In the fourth quarter, sales declined 4.5% as reported, which was in line with our expectations. Our non-GAAP earnings per fully diluted share landed at the high end of our guidance at $3.62, driven by strong margin performance. On a GAAP basis, EPS was $3.65. For the full year, sales declined 0.5% as reported and 2% in organic constant currency. Even with a constrained capex environment, all regions outside of China grew in 2023 in organic constant currency terms. As expected, Wired successfully delivered on target M&A contribution of 2.5% to sales. And with a strong EPS result in Q4, non-GAAP earnings per fully diluted share came in at $11.75, which reflects underlying growth of approximately 2% before FX headwinds of 3% and 1% dilution from the WIAT acquisition. I will now describe our sales results in more detail. The spending environment for instruments remained challenging into year end. However, Q4 revenue increased versus Q3 levels in all our geographies, even China, as we continue to execute well in tough macro conditions. Reported sales were 108 million higher in the fourth quarter than the third quarter. This reflects a 15% ramp that was consistent with our guidance for a muted year-end budget flush. For the full year, our organic constant currency sales grew 3% year over year, excluding China. As I mentioned earlier, the Americas, Europe, and Asia, excluding China, all grew in 2023. This took a lot of effort from our sales team who did a fantastic job capitalizing on the available opportunities in the market with our competitive portfolio. As a result, on a four-year stack basis, our ex-China growth remains at a healthy high single digits. A key challenge in 2023 was the abrupt turn we saw in China where conditions deteriorated as the year progressed. This was particularly the case in the pharma market where our revenues are most heavily weighted. For the full year, China sales declined more than 20% overall, which was a 5% headwind to our total growth. This brings us now to our margin performance. We believe that the best reflection of good operational execution is effective margin management when things slow down. During 2023, we saw volume and FX headwinds, while inflationary pressure continued. We responded with stronger pricing and added further discipline to our operational objectives. We redoubled our productivity efforts, including the opening of our global capability center in Bangalore, India. And we undertook proactive cost alignment as the slowdown began to emerge. This resilience, focus, and commitment allowed us to deliver excellent operational results in our P&L. Our full year gross margin was 59.6%, which is 160 basis points better than the previous year. Our full year adjusted operating margin was 30.9%, which is 70 basis points of expansion. Now, let me share our progress with the acquisition of Viat Technology. The strong start to lead sharing between Viat and Waters allowed us to offset a slowdown in biotech spending, resulting in an on-target M&A contribution of 2.5% to our full year sales. I will now give some detail and how our revitalized portfolio and alignment with higher growth segments are contributing to growth as part of our transformation. Our strong results in 2023 were supported by our innovative portfolio, which helped drive customer spending. Our new products are gaining good traction in the market, including TQ Absolute, Alliance IS, and Maxpeak Premier Columns, as well as several of our high-res mass spec instruments, such as Cyclic, G3, and MRT. From an adoption perspective, this puts us in an excellent position when instrument budgets begin to normalize. Turning now to our adjacencies, we have continued to invest and expand into adjacent high-growth markets where our business model of solving problems in downstream regulated applications can be deployed. For bioseparations and bioanalytical characterizations, we've made organic investments, launched new products, and deployed capital to M&A. Large molecule applications are now 35% of our pharma revenues and expected to trend higher, up from around 20% just a few years ago. For diagnostics, we have invested in our clinical business and added workflows for specialty applications of mass spec. This has transformed related revenue growth from that of low to mid single digits to double digits in the past several years. Finally, our focus on batteries is paying dividends where very strong growth has remained throughout the year. Revenues from battery applications are now at over 10 times 2019 revenue levels, and our TA business is increasingly aligned with less cyclical, faster-growing applications. Each of these exciting growth areas is delivering incremental revenue to the company. Now I will share some facts supporting the long-term outlook for above-average growth and provide our 2024 guidance. Since 2010, waters has grown on average 6% in organic constant currency terms. For instruments, while the standard deviation is high, long-term average growth has been 5%. For recurring revenues, the standard deviation is much lower and the average growth is 7%. As we look ahead, several vectors make us confident that this growth could be even higher. The first is even faster volume growth in segments that we serve driven by global prescription drug sales, and environmental regulations. Second is increased use of analytical instruments for characterizing large molecules and novel modalities. And third is above historic pricing where we expect to sustain 100 basis point long-term tailwind in incremental growth. Let's take each of these growth vectors in turn. There are at least two key drivers of testing volume acceleration. The first is related to the adoption of GLP-1 drugs. where Waters' instruments and columns are specified into in-process testing and QAQC testing at the two leading manufacturers. We expect our position to contribute an average additional revenue growth of 30 basis points per year between now and 2030. The second is PFAS testing, where we've been gaining shares in a rapidly expanding market, in part driven by the sensitivity and compact size of our zero TQ absolute mass spec. We expect PFAS testing to contribute an additional 30 basis points to our revenue growth for the foreseeable future. Finally, Wyatt Light Scattering is a high growth business serving attractive large molecule applications. We expect it to contribute 40 basis points of core growth accretion to our business on an annualized basis. It also accelerates our ability to solve customer challenges in formulation development, bioanalytical characterization, and QAQC testing which has positive repercussions for our waters business as we increasingly tie our columns, LC, and mass spec into these workflows. I will now cover our 2024 full year guidance. We expect customer spending caution to continue in the first quarter of the year with slow budget releases for downstream instrumentation. We then expect to see a gradual improvement for the remainder of the year as budgets open up, market conditions improve, and as prior year comparisons become easier. We expect weakness in China to continue, particularly in the first half of the year, which also plays into the growth phasing of our guide. With this initial outlook for 2024, we expect fully organic constant currency sales growth to be between negative 0.5% to positive 1.5%. We expect continued strong operational performance to build leverage in our P&L with 20 to 30 basis points of further operating margin expansion while still reinvesting for growth. And we expect adjusted EPS growth of 0 to 3% in the range of $11.75 to $12.05. Now, I will pass the call over to Amol to continue covering our fourth quarter financial results in more detail and give additional commentary on our guidance for 2024. Amol.

Thank you, Udit, and good morning, everyone. We delivered a solid close to a tough year in the fourth quarter with sales that were in line with our expectations despite continued market challenges. In the quarter, sales declined 4.5% as reported, which aligned with our expectations for 15% increase in reported revenues versus Q3. Organic constant currency sales declined 8% against the high single-digit growth comparison last year. We did observe a budget flush in the fourth quarter as sales grew across all geographies in Q4 versus Q3. However, this year's budget flush was more muted than typical, consistent with our expectations. Our YF acquisition delivered excellent results again, adding over 3% growth to the reported sales. In organic constant currency by end market, pharma declined 11%, industrial declined 4%, and academic and government declined 9%. In pharma, our results were impacted by a further weakening in China, which declined 45% for the quarter. Outside of China, pharma sales declined 4% as instrument sales were impacted by a muted budget flush in line with our expectations. In industrial, growth was flat outside of China against a tough high teens prior year comparison. China declined approximately 20% as weakness has broadened into non-pharma segments due to weak economic conditions. Overall, we observed continued strong growth in PFAS and battery-related applications, which have continued to partially offset weakness in more cyclical areas. In economic and government, our ex-China business continued to perform well with mid-single-digit growth. However, this was more than offset by a decline of almost 40% in China where demand has deteriorated after the benefits of stimulus ended in the second quarter. By geography, sales in Asia fell 16% as China weakness more than offset mid single digit growth in the rest of Asia. The Americas declined 2% and Europe declined 6% driven by this year's muted budget plus dynamics. By products and services, instruments declined 20%. Recurring revenues grew mid single digits with continued high single digit growth outside of China. There was one additional day in the quarter versus the prior year. Looking now at our full year results, by end market, pharma declined 5%, industrial was flat, and academic and government grew 10%. Excluding China, Pharma and industrial grew low single digits, and A&G grew mid-teens for the year, each reflecting solid results against double-digit comps. Now by geography, sales in Asia declined 7%, with China declining more than 20%, while Asia ex-China grew high single digits. The Americas grew 1%, and Europe grew 2%. By products and services, instruments declined 10%, which is primarily driven by China. Excluding China, instruments declined low single digits in 2023, reflecting healthy high single-digit four-year CAGR. Recurring revenues grew 6% overall and high single digits outside of China, with robust growth throughout the year. Chemistry growth has been supported by strong customer demand for max peak premier columns serving large molecule workflows and adoption of e-commerce. For service, growth has been supported by expansion of plan attachment. In 2023, we exceeded our objective for a further 100 basis points of service plan attachment and delivered a 200 basis point increase for the year. Now I will comment on our fourth quarter and full year non-GAAP financial performance versus the prior year. Despite headwinds from lower sales volumes, FX, and inflation, In 2023, our team responded to these challenges with resilience and commitment. Our continued focus on operational excellence with pricing, productivity, and proactive cost alignment, together with lower incentive compensation, allowed us to deliver a fourth quarter gross margin of 61.2% and expansion of 170 basis points, and fourth quarter adjusted operating margin of 34.9%, an expansion of 120 basis points. For the full year, our focus and effort resulted in gross margin of 59.6%, an expansion of 160 basis points, and an adjusted operating margin of 30.9%, an expansion of 70 basis points, which is after reinvesting in our high growth adjacencies. Our effective operating tax rate for the quarter was 17.1%, 50 basis points below prior year quarter. For the full year, it was 16.2%. Our average share count came in at 59.3 million shares, which is about 300,000 less than the fourth quarter of last year. Our non-GAAP earnings per fully diluted share were $3.62. On a GAAP basis, our earnings per fully diluted share were $3.65. For the full year, our non-GAAP earnings per fully diluted share were $11.75. Foreign exchange headwinds lowered our non-GAAP EPS growth by 3%, and there was a 1% dilution from the Wyeth acquisition. On a GAAP basis, EPS was $10.84. A reconciliation of our GAAP to non-GAAP earnings is attached to this morning's press release and in the appendix of our earnings call presentation. Now turning to free cash flow capital deployment on our balance sheet, we define free cash flows as cash from operation less capital expenditures and excludes special items. In the fourth quarter of 2023, free cash flow was 192 million after funding 42 million of capital expenditures. For the full year, free cash flow was 554 million after funding 161 million of capital expenditures. Excluded from the free cash flow were payments of 72 million related to tax reform, 26 million for Wyeth assumed liabilities, and 16 million related to investment in our Taunton Precision Chemistry operations. We maintain a strong balance sheet, access to liquidity, and well-structured debt maturity profile. This strength allows us 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. At the end of the quarter, our net debt position further declined to $2 billion, a net debt to EBITDA ratio of about two times. This represents a decrease of approximately $150 million during the quarter as we delivered the Y attack position. As previously disclosed, Our share buyback program has been temporarily suspended to enable us to pay down debt incurred as part of the wire transaction. We will evaluate the resumption of our share repurchase program throughout 2024 as part of our balanced capital deployment objective. Now, as we look towards the year ahead, I would like to provide you with our high level thoughts for 2024. Similar to others in the industry, our growth in 2023 was slower than usual, driven by unprecedented weakness in China and cautious spending from customers in other regions. We view these market conditions as temporary and anticipate a gradual recovery in sales growth throughout 2024. While our customers remain healthy, market uncertainty still remains and necessitates prudence in our guide. These dynamics support full year 2024 organic constant currency sales growth guidance of negative 0.5% to positive 1.5%. At current exchange rates, currency translation is expected to result in a negative impact of just under 1% on full year sales. We expect wire transaction to add approximately 1.3% M&A contribution to our full year 2024 revenues from inorganic sales incurred in the first four and a half months of the year. Therefore, our total reported sales growth guidance is approximately 0% to 2%. We expect to extend our strong margin performance into 2024 and deliver a gross margin of 59.8% for the full year which is 20 basis points of expansion versus 2023. We also expect to deliver 20 to 30 basis points of additional operating margin expansion versus 2023, resulting in an adjusted operating margin of slightly over 31%. We expect our full year net interest expense to be approximately 80 million. Our full year tax rate is expected to remain largely consistent with 2023 levels, at 16.3%. Our average diluted 2024 share count is expected to be approximately 59.7 million. Now rolling all this together on a non-GAAP basis, our full year 2024 earnings per fully diluted share guidance is projected in the range of $11.75 to $12.05, which is approximately 0 to 3% growth. and includes an estimated headwind of approximately 2% due to unfavorable foreign exchange. Turning now to our expectations for the first quarter of 2024, we believe that customer budget release timing will be slower than typical in the first quarter. In addition, current levels of market weakness in China are not fully reflected in last year's first quarter comparison. Last year's deterioration picked up significantly in the second quarter and thereafter. The first quarter also last year benefited from ANG stimulus in China. As a result, we expect our China business to decline approximately 40% year-over-year in Q1. Given these dynamics, we expect organic constant currency sales growth in the range of negative 11% to negative 9%. At current rates, currency translation is expected to subtract approximately 1%. while Wyatt is expected to add approximately 3.5% to sales for the quarter. Therefore, our total first quarter reported sales growth guidance is negative 8.5% to negative 6.5%. Based on these revenue expectations, first quarter non-GAAP earnings per fully diluted share are estimated to be in the range $2.05 to $2.15 which includes a negative currency impact of approximately four percentage points at current FX rates. Now I would like to turn the call back to Udit for some summary comments. Udit?

Thank you, Amol. So in summary, another transformative year for Waters. We will continue to navigate the current market environment well and deliver earnings growth for our shareholders in 2024. Before I close, I would like to share a few updates on our ESG efforts. We've made strong progress towards our environmental goals with 77% of our electricity now sourced from renewable or low-carbon sources. In 2023, we started working with the Science-Based Targets Initiative to build on this progress and develop further emissions reduction targets. We've also enhanced our climate-related disclosure with our PCFD-related reporting. Waters was recognized as one of the best companies to work for by the U.S. News and World Report, and we achieved a perfect score of 100 on the Human Rights Campaign Foundation's Corporate Equality Index. We're also proud that our governance has been recognized. Waters Board of Directors was named the 2024 Public Company Board of the Year by National Association of Corporate Directors New England Chapter. So with that, I'll turn the call back over to Catherine.

Thanks, Udit. That concludes our formal comments. We are now ready to open the phone lines for questions.

Thank you. Our first question comes from Vijay Kumar with Evercore ISI. Your line is open.

Hey, guys. Thanks for taking my question. Udit, just on the annual guidance here, at the midpoint, I think it's about 50 basis points growth. What is the guide assuming for price, and can you talk about you know, end markets, you know, pharma, government, academia, industrial sort of assumptions. I know you gave the China assumption. China is expected to be down. But could you just parse out between China versus non-China for those end markets?

Sure. So thanks, Vijay, for the question. And good morning. Look, I mean, a couple of high-level comments and then I'll go to the end markets and I'll let Amol comment on the pricing question. The 2024 guidance in general assumes that the trends that we saw in 2023 continue in large part, right? So you start off just looking at what happened in 2023. Outside of China, all end markets and geographies grew low single digits or thereabouts, right? So all geographies were low single digits and we assume the same trend for the balance of the year and all end markets were in the similar sort of zip code. And in China, we assume roughly sort of mid-teens to high-teens decline for 2024. Now, when you do the arithmetic, you basically look at the comps. The first half of the year will be slower than the second half, right? The first half of the year has significantly higher comps when you look at the academic and government stimulus, especially in China. And then the second half of the year, that alleviates, so you start to see a bit of a growth. So now to your question on the full year and the assumption for different end markets. So the full year, pharma, we are expecting to grow low single digits. And this is, again, on the back of what we saw in 2023. Industrial was flat in 2023 for the full year. We expect it to be there or thereabouts low single digit growth. And A&G with a very strong year, roughly 10%, 12% for 2023. we expect it to be a low double-digit decline. Basically in China declining quite significantly because of high comps and the rest of the world you sort of go back to the long-term trends of low single-digit growth. So really overall expecting the same execution that we saw in 2023, basically really nice performance in markets outside of China with low single-digit growth in China. mid-teens decline, and by end market, sort of similar trends, strength continuing in pharma due to our QAQC focus. Amol, on the pricing.

Yeah, thanks, Vijay. And look, on pricing, you know, when we started 23, we started with an assumption of 200 to 50 basis points. But as the year panned out, our team gathered strength quarter after quarter, and you see full year we finished about 300 basis points on price, right? Now, long term, we've said we'll do about 100 basis points better than what we've historically done. And historically, we had done 50 to 75 basis points. So that's where our guide assumption is starting, roughly around 200 basis points of pricing gains in 2024. But again, the underlying trend is, I mean, we're doing better than that. And where better to see it, right? I mean, it reflects loud and clear in our gross margin expansion, which is where it should show up. Yeah.

And then I think just to sort of emphasize that point even more. What gives me sort of a lot of confidence is what we saw on our gross margin and our operating margin. I mean, in such an environment, I mean, we took proactive cost actions, operating margin for the full year expanded by 70 basis points and gross margin by 160 basis points. I mean, you can talk a good game on pricing, but at the end it has to show up in the P&L and that's what we're really proud of.

Absolutely. That's helpful comments. One for you, Operating margin expansion, that's pretty impressive considering revenues are almost flat-ish here organically. Is that all being driven by gross margins? I think in the past you noted FX could have an impact on gross margins. Maybe just talk about what's driving OMX and FX assumptions on margins.

Yeah, look, I mean, you know, we expanded our full-year margins by 70 basis points. And on a constant currency basis, that's 120 basis points of expansion because we had a good 50 basis points of FX headwind during the year. The negative leverage from volume was partially offset by mix and AIP. So net, it was negative 40 basis points. Pricing added 110 basis points. Freight and material savings, another 60 basis points. Cost actions added another 60 basis points. And then we invested about 70 basis points in nurturing higher growth adjacency. So that's roughly the breakdown.

All hands on deck, basically.

Okay, thank you. Our next question comes from Matt Sykes with Goldman Sachs. Your line is open.

Hi, good morning. Thanks for taking my questions. Maybe just the first one, a higher level question, Uda. Just on the replacement cycle impact? Just given the outsized growth we saw in instruments during the sort of COVID period, what kind of impact do you think this has had on replacement cycles, particularly in biopharma, given a lot of the spend was concentrated there? Do you think the replacement cycle has been pushed out, or do you think that you'll see that impact of that coming back in this year, or is it more of a 2025 impact?

Yeah, it's a great question, Matt, and thank you for that. So let me start by first just talking about what we have seen in Q4, right? You would have seen that Q4, our sales ramped from Q3 to Q4 by about 15%, right? And this is typical in a QA, QC driven business. I mean, it's muted versus historical trends, which are roughly 24% for waters. But in a QA, QC driven business, you do see a ramp in replacement towards the end of the year, right? So that trend is very much intact especially outside of China, right? So there is, it's I think naive to think that replacement cycles have suddenly stopped, right? This Q4 ramp tells us that replacement cycles are still ongoing. Now the question, the underlying question is what are driving these replacement cycles and how do you trigger them, right? So in a muted capital, in a muted CapEx environment, the conversations we've had with customers on replacements have largely centered around new products, right, RKH, PLC, and Alliance IS, which have both gained a lot of nice receptivity, right? So new products allow you to continue to have that conversation, and you see that reflected in our sort of pharma results outside of China and as you compare it to our peer group. Now, to your question on did we see an outsized replacement during the post-COVID years, I mean, it's very difficult to tell. We think it was more a pushback from the depression that you saw during COVID and outsized execution that we saw due to the replacement cycle that we had not had from 2018 to 2020. So pent-up demand sort of helped us get really outsized growth. Now, to corroborate that point, if you just look at LC, LC is 70% a replacement business. And if you look at how we ended the full year, 2023, right? LC, and again, one should look at long-term trends, on a long-term basis is roughly 1% growth on a four-year CAGR. So LC is growing roughly 1% on a four-year CAGR basis, which is well below the long-term average of about 4% to 5%. And you add pricing, so it's actually 4-ish percent sort of below in volume versus the long-term trend of 4% to 5% LC growth. So we do expect LC replacement to start imminently. Now, don't ask me exactly when that infection point is. Short term, we have a ton of visibility with a lot of data and a lot of conversations with customers. Long term, we think the trends are going to revert back to the mean or even better, given what we've talked about in our prepared remarks. The infection point, you don't get any extra marks to call it. So in 2024, we've assumed the same trends as 2023 to persist. But definitely, we believe ELSI is due

uh to come up uh in in growth rates so long answer but i hope that gives you a lot of context on how we're thinking about it yeah that's great color thank you and then just a quick one on on pfas you mentioned the slide deck that the market is starting to expand into food which is probably earlier than we had expected just given the potential size of the market of food relative to water one how how big do you assume the food market to be over long term and two how much are that 30 basis points annual contribution from PFAS actually comes from food relative to water in your assumption?

Early days, Matt, I mean, we've assumed roughly 50 to 75 million for now in the food market. And over time, we expect it to expand. As you well pointed out, that could be a pretty significant market. We want to be a bit cautious here, right? So the 30 basis points is largely on the back of water testing and not much from food testing at this point. But that said, the PFAS market is super dynamic. So we've gone from water testing to expansion into food testing, into tissue samples, into soil samples, into sewage, and into industrial companies sort of purchasing mass specs to analyze their effluent stream. So it's a market that's going to significantly expand. We're a bit cautious in trying to guess exactly what that size is. What we're focused on is sort of going after each and every opportunity in these in these segments, and you see that with roughly 40% growth. So, stay tuned. I mean, as we find out more, you'll progressively see the increased market sizes or better information emerge.

Thank you. Our next question comes from Rachel with JP Morgan. Your line is open.

Great. Good morning. Thanks for taking the questions. I just want to dig into this 1Q guide a little bit. You know, this is weaker than, you know, most of us had anticipated. appreciate that the market's pretty dynamic and you have some really difficult comps in China during 1Q. But are there any other one-timers in terms of why you would have that level of sequential step down? And was there any pull forward that may have helped 4Q that led to that softer 1Q guide as well?

Yeah, no, Rachel, thanks for your question and good morning. I mean, the one-timers are largely in China, right? I mean, you had the stimulus last year in ANG and The level of weakness we are seeing now in China, last year's Q1 baseline doesn't reflect that at all. In the rest of the world, we are assuming customers will be slow out of the gate versus what we typically see. And that's based on the trend that we saw in Q4, where the budget flush was muted. And that will somehow, we think, reflect in how quickly budgets are released to customers. And that's sort of playing out in the guidelines.

Yeah, so Rachel, just to sort of build on what Amol has said, really no different than what we saw in Q4 overall, right? I mean, Q4 was almost 7.5%, 8% down versus previous year, and we're assuming at the midpoint of the guide, Q1 is roughly 10% down. We expect, as Amol said, the trends from Q4 to persist into Q1, right? Low single-digit-ish growth or flat growth in ex-China, and in China, roughly 40%. decline due to the heavy comps, especially from A&G last year where the benefit of the stimulus was coming through. So no real challenge. I'll just sort of say one more thing. In pharma in China in particular, we're starting to see a bit of stabilization. We're starting to see biotech spending start to reemerge. We're starting to see CDMO spending on recurring revenues. We're also in the branded generic segment, which is roughly 50% of our pharma market, where more and more cities and more and more hospitals are starting to open up. So we see that trend, but we are cautious in calling that at this point in Q1. So Q1, basically similar trends to Q4.

And just keep in mind, Q1 is our smallest quarter, right? So small changes have a meaningful impact on the pattern. Thank you.

Great, that's helpful. And then just my follow-up on this assumed gradual improvement that you guys are embedding throughout the year. Can you just dig a little bit more into those assumptions? Which markets and which geographies are you assuming more of an improvement than others? You talked about some of the China and the comp dynamic. So how much do comps really have to do with that improvement that you're expecting throughout the year as well? Thank you.

Yeah, I mean, great question. And look, I mean, we've sort of looked at it from various different vantage points. If you look at sort of how we've performed ex-China, we've grown sort of low single digits and we expect that to be the case for the full year with some slow out of the gate with how the budgets are released in Q1. And then you sort of face a muted budget flush baseline towards the later part of the year. China, you know, you will see decline as we talked about in Q1 because the baseline is pretty strong. But as we get into the second half of China, we think things will normalize because a lot of the demand slowness is reflected. So if you sort of look at it from that vantage point, for the first half, we sort of decline mid-single digits. For the second half, we sort of grow mid-single digits. When you look at it on a five-year stack versus 2019, roughly it's mid-single digits growth both for the first half as well as the second half.

Similar trends in Q1, in the first half and second half, just the arithmetic is that the comps in Q1 are higher than, the comps in the first half are higher than the second half.

Okay, thank you. And our next question comes from Doug Shankle with Wolf Research. Your line is open.

Okay, good morning, guys, and thanks for taking the questions. Actually, I want to look at China a different way, and I'm just doing some quick math on the fly, which is always dangerous. But one thing, as I look back the last few years, I've noticed is I think Q1 revenue in China is typically about 70% of Q4 revenue in China, just kind of thinking about the historical sequential pattern to the extent you can do that over the last few years, given how different that has been. But if we use that as precedent, it seems like you're essentially embedding that pattern into your guidance this year again. So when I keep that in mind and I look at Q3 and Q4 revenue in China, which were about $100 million each, Well, the comps are really tough and the growth is not going to look great in the first half of the year. Are you at some level kind of assuming a normalization of sequential growth over the course of 2024 relative to Q4 on a sequential basis?

Yeah, it's a great question and welcome back, Doug. Look, you nailed it, right? I mean, we've And when we gave our Q4 guidance also last year, there was a lot of questions on how did you come up with the guidance. And we use similar sort of math. You basically look at 15 years of data, which is what we have, and you look at sequential changes mathematically. Then you look at the funnel itself and then look at what the funnel is saying in terms of the orders. And third, you have conversations with customers. And during a difficult time, The visibility, I mean, ironically, people say visibility is pretty low. Well, visibility in the short term is incredibly high. We just don't like what we're seeing. And so people keep saying visibility is low. The visibility is pretty high. Analytically, we're looking at things very carefully. We're talking to a ton of customers. We're just executing really, really well, just getting every opportunity that's in front of us. So to answer your question, yes, we are using that math of sequential delivery. sequential growth quarter on quarter, and that's embedded in the full year guidance. Now, if that improves, I mean, I'm sort of anticipating the next question. If that improves, of course, you'll see upside, right? And we are starting to see trends from Q4, especially in China, look a bit better in Q1, especially in the largest end market, which is pharma. In the ex-China geographies, in Q1 we've assumed that the same trends continue from, from Q4 and customers are cautious, like they were cautious in Q1, which is what we are sort of hearing from many of our customers. They want to see how Q1 lands, uh, before they start releasing CapEx. But you, you've got one of the elements of our, uh, guide philosophy nailed. Yes.

Okay. Super helpful. And then, um, Udit, either for you or for Amal, I was wondering if you'd be willing to delineate between large and small molecule growth on the chemistry side. I'm just curious how that's been trending and what's incorporated into guidance. That may be cutting things in an unfair way, but if you're willing to indulge us, I think that would be really interesting just to hear how that's been trending and how you're thinking about it for 2024. Thank you.

I think let's look at Clean results ex-China, which is where things are not affected by shutdowns and the like, right? Overall, I mean, I can give you the overall statistic. Back in 2020, the revenues from biologics out of our total pharma revenues were less than 20%. Now that number is in excess of 35%. 400 basis points of that is wired. but the rest of it is the base organic acceleration in large molecule applications. Now, I can't tell you off the top of my head how much of that comes from chemistry and how much of that comes from instruments. It's a mix, I would argue. At this point, it's basically a mix of the two, BioChord sort of picking up, Zivo G3 picking up, But in chemistry, what I can tell you is roughly 70% to 80% of our R&D spend is now on large molecule and biologics applications. Maxpeak premier column in its third year is growing in excess of 30%. We've introduced a new gene therapy column. So really, really pleased with what we're doing on large molecule applications with 35% of our pharma revenues now coming from biologics.

Okay, thank you. The next question comes from Dan Brennan with TD Cowan. Your line is open.

Hi, this is Tom Stevens. I'm with Dan Brennan today. Thanks for taking my question. I guess my first one is just on the industrials guide and, you know, given the strength of that category with PFAS testing and battery testing alike, what kind of gives you confidence that momentum kind of continues in the back half and why we shouldn't see maybe a rest of the world cyclical slowdown. So that would be my first one, and I've got a couple others to follow up.

So Tom, thank you for the question. Look, I mean, industrial finished 2023 roughly flat, right? And flat in a year where there were significant macro challenges, right? And this was largely due to PFAS and battery testing offsetting the other macro-sensitive segments in our industrial business, right? And TA, and we've not talked about that business in a while, but the TA business for the full year grew 3%, right? In a year where growth was very difficult to get, and that number includes China, right? Now, as you look into 2024, we assume that the full year will be there or thereabouts, low single-digit growth, ex-China growing low single digits, really on the back of PFAS battery and a bit of recovery on food and environmental. And China really now, given the large comps in 2023, in the negative territory, in the low to mid single digits. So expecting 2024 to look similar to 2023 overall, especially ex-China. A little bit of stronger sort of comps in China make maybe a bit of muted growth. So you should assume that industry will be sort of flat below single-digit growth in 2024.

Great. That's really, really helpful. You know, just to pivot to LCs and that kind of long-term trajectory, could you remind us kind of what the net contribution of China was, you know, in the kind of prior four years on a trend basis. And then maybe how you think that kind of long-term market trajectory is different with a potentially muted China going forward and or you're kind of mixed into kind of larger molecule applications.

Yeah. So look, I mean, China, if you look at 2019 or 2022 was roughly 17 to 19% of our revenue. Now where we finished in 23, it's about 15% of our revenue. When you look at sort of, there are different issues compounding the current situation in China, but we generally feel, barring maybe one or two smaller issues, most of these issues are cyclical rather than structural. So for example, CDMOs, struggling with overcapacity as well as geopolitical challenges, or branded generics pulling back spend because of anti-corruption campaigns, or industrial business, especially food and environmental slowing down because of government pulling back reimbursement. We think these issues are largely cyclical. They will all come back. It's just a question when, and it's very hard to predict when that will happen. On the other hand, the biotech funding and the resultant volume they placed on Tier 2, Tier 3 CDMOs, that we think is structural. And in the near term, they're not going to be at the levels of 21, 22 spending. But at least on that issue, which is structural, the good news is We think we found the bottom on that issue because newer molecules are starting to see funding. But there is going to be sort of 30 to 40 million correction to our 22 baseline. The remaining issues we think eventually will come back. And that's the business that is today. And then as we said before, right, what we are super excited about is this whole push for innovative medicines. And there's a whole new vector opening up in China. And we think that will create significant value. And we absolutely want to be part of that equation. And we are taking steps so that we have local presence and participate in that journey more closely.

And just to sort of embellish on that, Amol's covered it extremely well. Tom, LC, as I mentioned earlier, I mean, two or three facts to keep in mind. On a long-term basis, it's traversing well below our long-term averages, right? So in general, On a four or five year stack basis, you should expect LC to be mid single digits. It's actually flat to 1%. You look at that number for 2023, LC overall declined almost 10%, 11%. And bulk of that decline came from China, right? So China declined roughly 34, maybe actually close to 40, 45% in LC. Outside of China, we were sort of low single-digit decliners in LC. So to your question on how will the recovery be impacted with coming back to growth in China, we expect that in the first half of the year, we'll see similar trends that we saw in the second half of the year in LC. In the second half of the year, we will start to see a bit of a relief and growth. And as we talk to our customers, to our largest customer segment, which is pharma, we're starting to see biotechs start to spend again. We're starting to see CDMOs, especially recurring revenue, come back. And in branded genetics, more and more hospitals are opening up. So it's going to be a mix of replacement cycles beginning again in ex-China markets and in China recovery in pharma. So put those two together, and you should start to see LCA come back. We're not assuming that in our guide at this point, but definitely there are trends in that direction.

Thank you. Our next question comes from Catherine Schulte with Bayard. Your line is open.

Hey, guys. Thanks for the question. Maybe first, just touching on some of your commercial initiatives, any comments on what you're targeting for service attachment rates or e-commerce improvements in 24th?

Sure. Thank you for that question, Catherine. So really continuing the trend, right? So we went from what 20, it's for e-commerce from about 20% to 35% already, 35 plus percent already in e-commerce. And we expect that to grow closer to 40% by the end of 2024. And in service attachment, I mean, having already seen roughly 500 basis points of service attach increase from the time we started the initiative three years ago, We are planning for another 100 basis points of service attachment increase in 2024, so continuing on with our commercial initiatives.

Thank you. Our next question comes from Derek DeBrown with Bank of America. Your line is open.

Hi, good morning, and thanks for taking my question. So I've got a couple. Could you comment on order trends in Q4? If I missed it, I apologize. I mean, did you see orders pick up sequentially? And how should we think about the tax rate sort of in 2025 as we work through the Pillar 2 stuff? And I have one more follow-up.

Sure. So I'll start with the order, and then I'll let Amol talk about the tax piece. Orders are in line with sales again, Derek. So no real difference between the two for Q4. And the trend from Q3 to Q4, I mean, it's almost a 15% ramp from Q3 to Q4, same thing we saw with orders, really as expected. So Q4 really landed as we had talked about. Amol on tax. Yeah, Derek, great question on tax.

So look, I mean, if you trace last few years with us, The tax rate has gone up roughly about 150 to 200 basis points and bulk of that is really coming from the US R&D capitalization. And as a company, we've sort of taken a position that section 174 changes have an ongoing effect on our P&L and absent of future legislation, we are not excluding those charges from our non-GAAP P&L, which is different from some of us in the sector, right? But we think those expenses are part of our non-GAAP P&L, and that's the bulk of the change. The other things that are creeping in there is Singapore going from 0 to 5%, and Ireland adopting Pillar 2 going to 15%. I think 25, the big one is will Singapore adopt, and in what form, and in what offsets they provide when they do adopt that. So that remains to be seen. We are closely watching that. And as that plays out, we will provide more commentary when that happens.

Great. And one final one, if I may. You know, I would have expected, you know, Wyatt was a great deal, nice fit in. Your leverage is down. I would have expected you to potentially restart the buyback program. Could you just sort of talk about what other technologies you could potentially be thinking about in terms of how to augment? You know, it's... I'm just sort of curious in terms of what your capital deployment outlay is. Thank you.

So, look, I mean, Derek, fantastic question. I mean, our goal in bioanalytical characterization is to make it as simple as it is in small molecules. The QAQC environment for large molecules and cell and gene therapy should become just as simple. And to do that, you need to take some mature, so some high-end technologies simplify them, move them into downstream applications, so they're simple to use. LC is already there. MassSpec with BioCord has made great strides. Light scattering is ahead of MassSpec, so it's going to enter QA, QC sooner. And there are a couple of other technologies like Raman, like cellular analysis that also belong in the QA, QC and the process analytical testing domain. But all of this hinges on having a simple software that the regulators trust, like Empower. So our single largest initiative with WIAT, after delivering our commercial results, is to get WIAT light scattering software onto Empower. And we will have a beta version of that by the end of the year. And I think that's the primary requirement for QA, QC, and large molecules to become like small. So stay tuned, a really exciting area, and we're investing in the future while we're navigating the present really, really carefully.

Thank you very much. That concludes our Q&A session. I'd now like to turn the call back over to Udit to deliver our closing remarks.

So thank you, Kasper. Thank you, Amol. Thank you, everyone, for listening. Look, it's 2023 has been an unprecedented and challenging year. We've navigated extremely well. As you look at our results outside of China, every end market, every geography grew, which is unusual in this environment amongst our peer group as well. And what is even more pleasing is our focus on cost management. So really, third 70 basis points of margin expansion in a year where the top line went down dramatically is quite an achievement. And we've done that while setting ourselves up very well for the future. We expect the long-term growth of our business to be very much intact and accelerate based on what Mol and I described to you. So thank you again for your interest and your attention.

Thank you. And that concludes today's conference. You may all disconnect at this time.