Waters Corporation

Good morning, everyone, and welcome to the Waters Corporation Second 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. We will provide guidance regarding possible future results as well as commentary on potential market and business conditions that may impact Walters Corporation over the third quarter of 2024 and full year 2024. These statements are only our present expectations and actual events or results may differ materially. Please see the risk factors included within our 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. Reconciliations to the most directly comparable GAAP measures are attached to our earnings release and in the appendix of the slide presentation accompanying today's call. Both are available on the investor relations section of our website. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the second quarter of fiscal year 2023. In addition, unless stated otherwise, all year-over-year revenue growth rates and ranges given on today's call are 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 earnings release as otherwise required by law. I'll hand it over to Udit to deliver our key remarks. Following that, Amol will present a more detailed overview of our results and guidance. After, we'll open up the phone lines for questions. Over to you, Udit.

Thank you, Kasper, and good morning, everyone. We achieved strong results in the second quarter that exceeded both our top line and bottom line reported guidance. I want to begin today's call by thanking my colleagues for their dedication to commercial execution, operational management, and innovation. This enables us to deliver differentiated performance and accelerate the benefits of pioneering science. In the quarter, year-over-year organic constant currency sales were 500 basis points better than Q1 levels. We saw a steady improvement in customer spending throughout the quarter with a strong finish in June. orders outpaced sales for the quarter as we built good momentum for the second half of the year. We again delivered resilient operational results with earnings surpassing our expectations. This reflects the strength of our downstream business model, progress on our strategic and operational initiatives, and our indomitable spirit. We also continued our steady stream of new product launches, releasing further innovations that address key customer needs. Waters now has a highly competitive portfolio serving attractive end markets. We expect this to benefit us as the market recovers and the instrument replacement cycle picks up pace. As we continue to build the Waters of the future, I would like to welcome Rob Carpio, who has joined us as the new head of the Waters division. Rob is a talented leader and a seasoned operator with a record of delivering strong financial results and transformation in life sciences. With his appointment, he will further enhance Waters' performance and long-term growth strategy. Turning now to our results. In the second quarter, sales declined 4% as reported and 4% in organic constant currency. Our non-GAAP earnings per share was $2.63. On a GAAP basis, EPS was $2.40. Excluding China, sales declined in low single digits. Growth was consistent with our expectations across each of our end markets. Customer capex spending is showing early signs of improvement. In China, sales declined in the low teens, which was better than expected. Growth rates improved in all end markets compared to the previous quarter, especially in pharma and in industrial. While the stimulus measures Measures announced by the Chinese government this year are still in the early stages of implementation. We are having active conversations with customers who stand to benefit from these initiatives. So far, this has led to improved quoting and funnel trends in the region. These opportunities are expected to begin converting to orders in 2025. Overall, instruments declined 17% and recurring revenue grew 5%. Wyatt delivered a 2% M&A contribution to sales, which was better than expected. It marks a strong close to the first year following the acquisition, where synergies were delivered well ahead of schedule. Wyatt operates in high-growth markets, serving large molecule applications, especially across cell, gene, and RNA therapies. Altogether, it should deliver 40 basis points of annualized accretion to the total company growth in the near to mid-term. I will talk about our operational performance. Margins remained resilient as we again successfully counteracted volume, FX, and inflationary headwinds with solid operational management. Our gross margin for the quarter was flat at 59.3%, and our adjusted operating margin was solid at 29.2%. Even with recent progress, our work is far from over. We have a runway towards further long-term margin expansion driven by our strategic and operational initiatives. This includes areas such as productivity enhancement where we have various programs that are still in the early stages. At the same time, our focus on pricing continues to yield contributions that is well ahead of historical levels. Looking forward, we feel very good about our future margin opportunity given our recent success in preserving and expanding our margins during challenging business conditions. Beyond 2024 levels, we expect to deliver a more pronounced impact on our long-term margin performance, particularly when more typical volume leverage returns. In the second quarter, we launched a steady stream of new products, solving the unmet needs of our customers. At ASMS in June, we unveiled the Zivo MRT, which is now our highest performing benchtop mass spectrometer. It builds on the multi-reflecting time-of-flight technology pioneered by the Select Series MRT, which has greater throughput and a more compact form factor. With up to six times greater resolution and two times better mass accuracy than competitive systems, the Zevo MRT sets new industry standards for high resolution at blazingly fast speeds. So far, our customers have been impressed by its capabilities. It will serve Discovery and other upstream pharma workflows where it will accelerate R&D times for new drugs. This includes areas such as metabolite identification, where resolution, accuracy, and speed are all critical value drivers. We also launched the latest evolution of our Acuity QDA mass detector, one of our all-time best-selling analytical instruments. The QDA2 provides a 20% enhancement in mass range, which benefits routine identification and analysis of large molecules. It also has excellent green credentials consuming up to 70% less energy than competing products. This is a benefit of increased importance to our customers. Most importantly, the QDA2 runs on Empower, which allows for seamless regulatory submission of compliance-related data for large molecules. As we look ahead, Waters is well positioned in attractive markets with secular growth drivers where testing volume plays a pivotal role in driving long-term growth. Our full ecosystem of instruments, informatics, advanced chemistry, and leading service positions us very well to help ensure the safety of medicine, food, and water, and batteries in electric vehicles. Along with our business model, the regulated and recurring nature of these applications results in excellent profitability and free cash flow generation. In recent years, we've made meaningful progress in aligning waters with faster-growing large molecule applications. Now over a third of our pharma revenues comes from large molecules and novel modalities. At the same time, future testing volume is expected to grow faster than historical levels with increased prescription volumes including GLP-1s and areas such as PFAS testing. With our revitalized portfolio, we are in an excellent position to capitalize on these growth opportunities. Over the past several years, we've launched multiple innovative new products that have enhanced our competitive edge and created better pricing levels. Serving our core, our next generation LC platform, Alliance IS serves routine QA-QC analysis for both large and small molecule workflows, where innovation helps to drive instrument replacement. It also includes our Zevo TQ absolute mass spectrometer, which is seeing rapid growth in areas such as PFAS testing. Within our high growth adjacencies, we've launched new products into bioanalytical characterization, battery testing, and clinical applications, all of which are gaining traction given the critical unmet needs that they solve. Finally, recent deferral of routine instrument replacement has created a catch-up opportunity that lies ahead of us. Weak macroeconomic conditions have put temporary constraints on customer capex spending for downstream instrumentation. Historically, this dynamic has lasted for four to seven quarters and has been followed by a catch-up. Looking at the facts, while no two macro environments are the same, Q2 marks the seventh consecutive quarter of ELSI instrument decline. Expected instrument growth for 2024 equates to a 1% CAGR versus 2019 levels. This is significantly below the 5% long-term average growth rate. Improving funnel trends are a positive leading indicator that we are approaching the early innings of a recovery and initiation of a new replacement cycle. I will now cover our 2024 full year guidance. While customer activity is showing signs of recovery, we're adding caution to our guide. Accordingly, we are revising our full year 2024 sales guidance to assume a more gradual pace of improvement in the second half of the year. As a result, our revised fully organic growth constant currency sales guidance is negative 2% to negative 0.5%. With our commitment to excellent operational performance, we expect to build leverage in our P&L and deliver an adjusted operating margin of around 31%. Therefore, our updated adjusted EPS guidance is in the range of $11.55 to $11.65. I will pass the call over to Amol to continue covering our financial results in more detail and to provide further details on our guidance.

Thank you, Udit, and good morning, everyone. In the second quarter, sales exceeded our guidance range on a reported basis, declining 4%. Organic constant currency sales also declined 4%, which was a 5% improvement in growth compared with Q1 levels. We saw a steady improvement in customer spending throughout the quarter with orders outpacing sales. M&A contributed 2% to sales, covering Wyeth results in the first month and a half of the quarter. This was better than expected as we were able to accelerate revenue synergies as part of our integration. We are pleased that within the first year of the acquisition, Wyeth is already EPS and margin accretive, and our M&A execution remains well on track. Overall, FX was a 2% headwind to the second quarter sales. In organic constant currency terms, by end market, pharma declined 4%, industrial declined 4%, and academic and government declined 16%. In pharma, sales excluding China declined low single digits, while in China, sales declined low double digits. In both cases, this reflects an improvement in growth rates compared to the previous quarter. In industrial, sales declined 1% outside of China, led by low single-digit growth in the Americas. We again saw strong growth globally for PFAS-related applications, which has been a consistent tailwind for environmental testing. In China, sales declined low double digits, which was also an improvement in growth rates compared to the previous quarter. For our TA division, sales were flat, driven by improvement in segments such as electronics, advanced materials, and chemicals. In academic and government, growth remained weak as stimulus in China and elevated global funding drove lumpy spending patterns and a tough 21% comparison in the prior year's quarter. By geography, sales in Asia declined 3%, while sales in America and Europe both declined 7%. By products and services, instruments declined 17%. Chemistry and service both grew 5%. There was no change in the number of days versus the prior year quarter. Our commercial initiatives continue to support robust recurring revenue growth despite ongoing headwinds from China. Within our service business, we have already achieved our goal of increasing service plan attachment by a further 100 basis points this year with service plan revenue growing high single digits in the quarter we are now targeting an additional 50 to 100 basis points of service plan attachment over the remainder of the year now i will comment on our second quarter non-gap financial performance versus the prior year despite headwinds from lower sales volume fx and inflation our team continued to respond to these challenges with resilience and commitment Our focus on operational excellence with pricing, productivity, and prudent spend management allowed us to deliver a resilient margin performance in the quarter. Gross margin was flat at 59.3%, and our second quarter adjusted operating margin was 29.2%, as expected. Excluding FX, both gross margin and adjusted operating margin expanded 40 basis points year over year. Our effective operating tax rate for the quarter was 16.5%, and our average share count was 59.5 million shares. Our non-GAAP earnings per fully diluted share was $2.63. On a GAAP basis, earnings per fully diluted share was $2.40. A reconciliation of our GAAP to non-GAAP earnings is attached in this morning's press release and in the appendix of our earnings call presentation. Turning now to free cash flow capital deployment on our balance sheet. We define free cash flow as cash from operations, less capital expenditures, and excludes special items. In the second quarter of 2024, free cash flow was $143 million after funding $36 million of capital expenditures. On a year-to-date basis, free cash flow is $377 million, or 28% of sales, resulting in free cash flow to adjusted net income conversion ratio of 131%. We maintain a strong balance sheet, access to liquidity, and a well-structured debt maturity profile. This trend allows us to prioritize investing in growth. We continue to evaluate M&A opportunities that will enhance value creation for our shareholders. In the second quarter, we continue to deliver while paying out this year's tax reform payment of $96 million and other items totaling 30 million. As expected, at the end of the quarter, our net debt position was approximately 1.7 billion, which is a net debt to EBITDA ratio of about 1.7 times. As we continue to deliver our balance sheet, we will evaluate the resumption of our share repurchase program throughout the remainder of the year. Now I would like to share further commentary on our full year outlook and provide you with our guidance for the third quarter. While business conditions showed signs of recovery in the second quarter, we are adding caution to our guide. As a result, we are revising our full year 2024 sales guidance to assume a more gradual pace of improvement in the second half of the year. Our updated guidance assumes relatively flat quarter over quarter revenue progression in Q3 versus Q2 It also implies a weaker than typical budget flush dynamics in the fourth quarter. Despite that caution, we are still expecting the business to return to growth in the second half of the year. Given these dynamics, our revised full year 2024 guidance is for organic constant currency sales growth between negative 2% and negative 0.5%. At current exchange rates, we anticipate the currency translation will negatively impact full year sales by approximately 1.5%. Meanwhile, M&A contribution from wire transaction has added 1.3% to our full year from inorganic sales incurred in the first four and a half months of the year. Therefore, our total full year 2024 reported sales growth guidance is in the range of negative 2.2% to negative 0.7%. With our commitment to excellent operational performance, we expect to build leverage in our P&L, even with the reduction in our guide. Consistent with our previous guidance, gross margin for the full year is expected to be approximately 59.8%, which is 20 basis points of expansion versus 2023. Adjusted operating margin is expected to be around 31%. Below the line, we expect full year net interest expense to be approximately 77 million. Our full year tax rate is expected to be 16.3%, and our average diluted 2024 share count is expected to be approximately 59.4 million. Rolling all this together on a non-GAAP basis, Our full year revised 2024 earnings per fully diluted share guidance is projected in the range of $11.55 to $11.65 and includes an estimated headwind of approximately 3% due to unfavorable foreign exchange. Looking to the third quarter of 2024, we anticipate that customer spending will remain cautious but show further signs of recovery. We expect an improvement in year-over-year growth compared to that in the second quarter as previous year comparisons, particularly in China, become easier and as continued improvement in funnel activity translates to orders. Given these dynamics, our third quarter organic constant currency sales growth guidance is projected in the range of positive 1% to positive 3%. At current rates, currency translation is expected to subtract approximately 1.5%. Therefore, our third quarter reported sales growth guidance is negative 0.5% to positive 1.5%. Based on these revenue expectations, third quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $2.60 to $2.70. which includes a negative currency impact of approximately two percentage points at current FX rates. Now, I would like to turn the call back to Udit for our closing comments.