Waters Corporation

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 Charbol, 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. 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 second 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 all 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 2023 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 is 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 the phone lines to take questions.

Thank you, Kasper, and good morning, everyone. We had a strong start to the year with sales coming in at the high end of our expectations, backed again by excellent operational performance. I want to begin today's call by thanking my colleagues for their continued focus on innovation and supporting our customers. These results reflect our drive to accelerate the benefits of pioneering science with our innovative portfolio. In the first quarter, market conditions were as expected with cautious customer spending and later than typical budget releases. But as budgets opened up, we executed well with sales landing at the high end of our guide. We also continued to deliver outstanding operational results. Earnings were above our guidance and margins expanded, even with volume and FX headwinds. This is a testament to our team, our resilient business model, and our operational initiatives. Waters is well positioned for future growth in our attractive secular end markets. In the first quarter, we added to our revitalized portfolio with new products that serve high growth areas. Turning now to our results. In the first quarter, sales landed at the high end of our guidance, declining 7% as reported, and 9% in organic constant currency. Our non-GAAP earnings per share exceeded our guidance at $2.21. On a GAAP basis, EPS was $1.72. Outside of China, sales declined mid-single digits as expected. In China, sales declined just under 30%, which was better than expected. Growth remained weak as our prior year baseline does not reflect last year's deterioration in market conditions, which became more pronounced in the second half. While instruments declined 25% overall, LC sales were slightly better than expected. Instrument weakness was led by mass spec, particularly for ANG-related applications, which had a tough prior year comparison from global funding and a China stimulus. Wyatt delivered a 3% M&A contribution to sales. We continue to see strong synergy performance and traction for our recently launched products such as Zetastart. Now, I will talk more about our operational performance. We believe the best reflection of good operational execution is effective margin management, particularly when things slow down. While facing significant headwinds from volume, FX, and inflation, we delivered yet another strong margin result. Our gross margin expanded 40 basis points to 58.9%, and our operating margin expanded 20 basis points for the quarter to 27%. This was achieved through a combination of our operational management initiatives across pricing, productivity, and proactive cost alignment. These initiatives position us well for resilience during lower volume periods and give longer-term opportunity when market conditions normalize. You can see further evidence of our operational performance in our free cash flow. We had an exceptional start to the year, generating free cash flow of $234 million in the first quarter, which was 37% of sales. With our excellent free cash flow profile, we made rapid progress in de-levering from the WIAT acquisition as we approach its one-year anniversary. We serve attractive secular end markets where testing volume plays a pivotal role in our business. This volume, which is correlated with global prescription consumption, is expected to accelerate in the future, supporting our strong long-term growth outlook. Our distinct advantage in downstream applications lies with our full ecosystem of products that complement our innovative instrument portfolio. In addition, we have strategically aligned with high growth opportunities that further enhance our core position. We had a busy quarter launching several new products that support a number of exciting high growth areas. At Analytica last month, we launched the Alliance IS Bio, a version of our groundbreaking next generation liquid chromatography platform suited for biologics applications. In the new HPLC, the new HPLC system combines advanced bioseparation technology, bio-inert surfaces, and built-in intelligence features. This helps biopharma QC analysts boost efficiency and eliminate up to 40% of common lab errors. We believe that the Alliance IS is the most significant innovation to hit pharma QA QC labs in over a decade. We're excited to bring this technology to routine testing applications for biologics. Supporting bioseparations, we launched a new set of size exclusion chromatography columns called GTX Resolve Premier. These columns enable scientists to quickly assess aggregate content integrity and purity of larger biologic particles. It covers modalities such as lipid nanoparticles, nucleic acids, and viral vectors and gives scientists a significant improvement in sensitivity and sample consumption while accelerating run times. This launch supports the development of these modalities into downstream high-volume settings where Waters has critical instrument technology like LC, mass spec, and light scattering, as well as highly innovative industry-leading software, chemistry, and service. To simplify the detection of PFAS, we launched Waters OASIS dual-phase analysis cartridges. This consumable streamlined sample prep for PFAS workflows when detecting concentrations in water, soils, biosolids, and tissues. It joins our comprehensive portfolio of solutions that support the surging demand for PFAS testing, which is a 300 to 350 US dollar million mark global market, growing 20% annually. In an environment of increased scrutiny, the ability to accurately test for PFAS at very low levels is becoming a critical compliance need for a broad spectrum of industries. Our ZEVO TQ absolute mass spec has leading sensitivity for detecting these anionic compounds. It can detect PFAS levels at as low as one part per quadrillion. Last month, in the United States, the EPA finalized an enforceable four parts per trillion limit of PFOA and PFOS in drinking water, which marks a significant regulatory milestone. Later this year, further regulations governing PFAS are expected across the globe. This includes the European Union, where REACH proposed chemicals regulation contemplates a PFAS ban on products manufactured as well as ones imported. In our TA business, we launched the RIO-IS, which serves battery testing applications when used with our hybrid rheometers. This real impedance spectroscopy accessory supports characterization of electrode studies, which can lead to more efficient battery production. I will now cover our 2024 full year guidance. With our first quarter results, we remain on track to achieve our full year revenue outlook, which is unchanged from our previous guidance at negative 0.5% to positive 1.5% growth in organic constant currency. We expect growth rates to improve over the remainder of the year and as our prior year comparisons, especially in China, get easier. We expect improving funnel activity to translate to orders as the year progresses. With our strong operational performance, we expect to build leverage in our P&L despite the flattish revenue guide and deliver 20 to 30 basis points of adjusted operating margin expansion while still reinvesting for growth. As a result, our adjusted EPS guidance is also unchanged at 0 to 3% growth in the range of $11.75 to $12.05. Now, I will pass the call over to Amol to continue covering our financial results in more detail and provide the rest of our guidance. Amol.

Thank you, Udit, and good morning, everyone. In the first quarter, sales landed at the high end of our guidance range, declining 7% as reported, and 9% in organic constant currency. As Udit mentioned, end market dynamics were consistent with our expectations. Ex-China declined mid-single digits as expected, while China declined close to 30%, which was slightly better than expected. In organic constant currency by end market, pharma declined 6%, industrial declined 7%, and academic and government declined 30%. In pharma, Sales outside of China declined low single digits as we executed well in this CapEx-constrained environment. In China, sales declined almost 30% due to ongoing market challenges that are not reflected in our prior year baseline. In industrial, food and environmental applications grew mid-single digits with continued strong growth in beef-acid-related workflows globally. We also saw strong growth in battery testing within our TA business which has been a consistent growth theme. However, this strength was more than offset by weakness in core industrial applications, which are more cyclical. Our TA business declined high single digits overall, while chemical analysis declined high teams. In academic and government, growth was weak against a 45% comparison, as stimulus in China and elevated global funding in the prior year quarter draw lumpy spending patterns. By geography, sales in Asia declined 16%, the Americas declined 8%, and Europe declined 3%. By products and services, instruments declined 25%, with LC growth slightly better than expected. Within recurring revenues, chemistry grew low single digits and service grew mid-single digits, both of which were affected by low activity levels in China. The quarter had one fewer day versus first quarter of 2023, which translates to a growth headwind of approximately 1% for recurring revenues. Now I will comment on our first quarter non-GAAP financial performance versus the prior year. Despite headwinds from lower sales volumes, FX, and inflation, our team continued to respond to these challenges with resilience and commitment. Our focus on operational excellence with pricing, productivity, and proactive cost alignment allowed us to deliver first quarter gross margin of 58.9% and expansion of 40 basis points and first quarter adjusted operating margin of 27% and expansion of 20 basis points. Our effective operating tax rate for the quarter was 14.3% and our average share count was 59.4 million shares. Our non-GAAP earnings per fully diluted share were $2.21. On a GAAP basis, earnings per fully diluted share were $1.72. 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. Turning now to free cash flow capital deployment and our balance sheet. We define free cash flows as cash from operation, less capital expenditures, and excludes special items. In the first quarter of 2024, free cash flow was $234 million after funding $29 million of capital expenditures, which is approximately 37% of sales. 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 1.7 billion, which is a net debt to EBITDA ratio of about 1.8 times. This reflects a decrease of approximately 300 million as we delivered the Wyeth acquisition. As previously disclosed, our share buyback program has been temporarily suspended to enable us to pay down debt incurred as part of the Wyeth acquisition last year. We will evaluate the resumption of our share repurchase program throughout 2024 as part of our balanced capital deployment objective. Now I would like to share further commentary on our full year outlook and provide you with our second quarter guidance. We expect to see an improvement in sales growth over the course of 2024 as prior year comparisons, particularly in China, become easier and as improved funnel activity translates to orders. Our full year guidance is unchanged with 2024 organic constant currency sales growth expected between negative 0.5% and positive 1.5%. At current exchange rates, currency translation is expected to result in a negative impact of just under 1% on a full year sales basis. We expect wide transaction to add just over 1% M&A contribution to our full year 2024 revenue for inorganic sales incurred in the first four and a half months of the year. Therefore, our total reported sales growth guidance is unchanged at approximately 0% to 2%. Despite guiding to flattish sales, we expect to deliver a gross margin of 59.8% for the full year, which is a 20 basis points of expansion versus 2023. We also expect to deliver 20 to 30 basis points of 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 be 16.3%, and our average diluted 2024 share count is expected to be approximately 59.7 million. Rolling all this together on a non-GAAP basis, Our full year 2020 for earnings per fully diluted share guidance is also unchanged and projected in the range of $11.75 to $12.05. This is approximately 0% to 3% growth and includes an estimated headwind of approximately 2% due to unfavorable foreign exchange. Looking to the second quarter of 2024, we anticipate that cautious customer spending will persist. In addition, while the China Q2 baseline reflects the onset of weakness, it does not fully reflect the weakness we observed in the second half of the year. As a result, we expect China to decline mid-teens in Q2 versus 28% decline we saw in Q1. Given these dynamics, we expect to see an improvement in year-over-year growth versus the first quarter, and our second quarter organic constant currency sales growth guidance is projected in the range of negative 6% to negative 4%. At current rates, currency translation is expected to subtract approximately 2%. WIAT is expected to add approximately 1.5% M&A contribution for sales incurred in the first one and a half month of the quarter. Therefore, our total second quarter reported sales growth guidance is negative 6.5% to negative 4.5%. Based on these revenue expectations, Second quarter non-gap earnings per fully diluted share are estimated to be in the range of $2.50 to $2.60, which includes a negative currency impact of approximately 4 percentage points at current FX rates. Now, I would like to turn the call back to Udit for some summary comments. Udit?