Waters Corporation

Good morning and welcome to the Waters Corporation third quarter 2024 financial results conference call. All participants will be in a listen only mode until the question and answer session begins. This call is being recorded. If anyone has objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Casper Tudor, head of investor relations. Please go ahead, sir.

Thank you, Julie. Good morning, everyone, and welcome to the Waters Corporation Third 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. 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 Waters Corporation over the fourth quarter of 2024, full year 2024, and 2025. 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 third 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 or as otherwise required by law. Now, I'll hand it over to Udit to deliver our key remarks. Amol will then present a more detailed overview of our results and guidance. After, we'll open the lines for questions. Over to you, Udit.

Thank you, Kasper, and good morning, everyone. Our team delivered very strong results, very strong third quarter results with revenue, margin performance, and earnings per share all significantly ahead of our expectations. Sales were well above the high end of our guidance range as each of our three reported regions returned to positive growth. Strength was led by our pharma and industrial end markets, both of which saw liquid chromatography return to positive sales growth. Together with an improvement in mass spec, instrument growth turned positive in the quarter, which exceeded our pace of recovery. We also built excellent momentum as we delivered mid-single-digit quarter-over-quarter revenue growth, while orders outpaced sales for the second quarter in a row. In addition to the positive strength in instruments, we saw an acceleration in recurring revenue growth, which grew a healthy high single digits. This was led by 8% growth in our chemistry consumables portfolio. Within our P&L, our sustained focus on operational excellence led to better than expected gross margin and operating margin results. Coupled with the strong top line performance, we achieved adjusted EPS growth that was over 10% higher than the midpoint of our guide. Results like this in dynamic market conditions take exceptional dedication from all our colleagues. I would like to take a moment to commend our team for their commitment to commercial execution, operational management, and innovation. This enables us to deliver enhanced performance and accelerate the benefits of pioneering science. On the subject of innovation, we too made excellent progress and further strengthened our alignment with higher growth testing areas that will augment our future growth. We continue to expand our innovative portfolio with new product launches that solve customer and met needs in both our core markets and in our high growth adjacencies. Turning now to our results. In the third quarter, sales grew 4% as reported and 4% in constant currency. Our non-GAAP earnings per share was $2.93, up 3% year over year. On a GAAP basis, EPS was $2.71. In the quarter, market conditions and customer spending trends further improved. We continued our path of strong commercial execution and converted opportunities well. We drove strong results as customers were drawn to the innovative new products in our revitalized portfolio. After seven quarters, of LC decline, instruments grew 1% as pharma and industrial LC growth turned positive. Mass spec also performed well in the quarter and grew low single digits, led by strength in industrial and applied applications like PFAS testing. Recurring revenues grew 7%, led by 8% growth in our consumables business. Breaking out our results by end market, we saw a broad improvement in sales growth. as each of our end markets turned to positive growth. In particular, we observed large pharma spending, better large pharma spending, where our revenue is tied to QAQC applications and capex spending trends. By geography, each of our reported regions grew. While China was a slight headwind to sales, we still grew mid-single digits on a both China and ex-China basis as further stabilization in China posed less of a headwind to our overall results. This is while not yet seeing sales contribution from stimulus. I would like to share more in-depth commentary on what drove these strong results. Within LC, orders of Alliance IS significantly increased as our new flagship HPLC product grew to a greater percentage of our HPLC volume. This occurred not just within replacement, but within opportunities tied to installed base expansion, particularly among those in large pharma. We've continued to expand capabilities on Alliance IS by adding new detectors like the photodiode array or PDA and by introducing the Alliance IS Bio earlier this year. Alliance IS has already been trialed by most large pharma customers over the past 18 months. With the improvement in customer capex spending, we've noticed a notable upshift in the speed of adoption, indicating a promising future for this instrument system. In mass spec, the ZIVO TQ Absolute saw a significant ramp up in customer adoption. With unit sales growing more than 70% year over year, this system was our best selling mass spectrometer in the quarter. Impressively, it exceeded the combined sales volume of our other tandem quad mass spectrometers for the very first time. Zevo TQ Absolute's rapid success has been a threefold dynamic. First, strength has been driven by continued rapid growth in PFAS applications. We see PFAS testing as a 300 to 350 million global market opportunity, growing 20% annually. Meanwhile, our PFAS-related revenue has grown by over 40% this year. This is attributed to the competitive strength of this system, which is known for its sensitivity in the market. Second, we've also seen strong adoption of ZOATQ Absolute in quantitative pharma applications, such as for impurity quantitation. This includes analysis of genotox, impurities, proteins, and peptides. Similar to PFAS applications, its value proposition of leading sensitivity together with its sustainable design is resonating well with our customers. It is 45% smaller and uses 50% less nitrogen and electricity than comparable tandem quads. This has opened up new opportunities for us in this segment and enabled us to expand our market position. Third, the IVD version of our Zevo TQ Absolute instrument has seen strong growth within clinical applications after we launched it into that space last year. With its ability to analyze trace level analytes at lower detection limits, it has been an instant success. It has achieved notable traction across a number of testing areas, but especially in endocrinology and for the development of high-value complex tests. This is part of a very deliberate push as we expand the competitive position of our mass specs, consumables, and software within clinical testing workflows. In the quarter, total clinical revenue grew low double digits, driven in part by strong sales of the system within the second. Our results were supported by the strength of our innovation in chemistry, In the quarter, MaxPeak Premier columns, which are relevant for large and more complex molecules, grew over 40%. The benefits of our MaxPeak Premier technology are unique to the market and were a key driver of us winning multiple GLP-1 related opportunities. As we've previously mentioned, our columns have been spec'd into methods for majority of the commercially available GLP-1 related injectables on the market today. We're extremely pleased with how well our chemistry portfolio aligns with the expected volume growth of large and small molecules. Now, I will talk more about our operational performance. Margins remained resilient as we maintained a successful focus on operational management. Our gross margin expanded 20 basis points to 59.3%, and our adjusted operating margin was a solid 30.8%. 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. We remain on track to deliver adjusted operating margin expansion this year. We also expect our 2024 result to be a good base for future long-term margin expansion. We also have long-term margin expansion opportunities from our strategic operational initiatives, which are focused on areas such as productivity enhancement, cost management, and pricing. As we look ahead, Waters is well positioned in attractive markets where testing plays a pivotal role in driving long-term growth. This volume growth is expected to accelerate in the future led by, first, continued growth in GLP-1 adoption within pharma and PFAS-related testing within our non-pharma segments. Second, new volume growth from an increased incidence of drug development and novel drug approvals as new molecules progress through the pharma pipeline. And third, Future volume growth drivers for generic molecules are becoming more pronounced, particularly due to the aging global population. In addition, a number of key blockbuster drugs will soon be reaching patent expiration. So this gives us a tremendous long-term opportunity for installed-based expansion as we sell new testing capacity associated with these growth vectors in years to come. Customer fleets have aged after weak macroeconomic conditions have put temporary constraints on customer capex spending for downstream instrumentation. This deferral of routine instrument replacement within our existing installed base has created a catch-up opportunity that lies ahead of us. Expected instrument growth for 2024 still equates to a low single-digit CAGR versus 2019 levels. This is significantly below the 5% long-term average growth rate that we've observed on a pre-COVID basis. So looking at the facts, while no two macro environments are the same, instrument down cycles have lasted between four to seven quarters. A catch-up in growth has then subsequently followed as new instrument replacement cycle emerges. As I mentioned earlier, Last quarter marked the seventh consecutive quarter of LC instrument decline. Market conditions remain dynamic, and it is still early days, but our third quarter results and improving funnel trends, especially conversion, indicate that we have taken a further step towards recovery. With our strong commercial execution, category-leading portfolio, better pricing levels, and exposure to Pharma QA QC, we are in an excellent position to capitalize on these future growth opportunities. Turning now to our new product launches in the quarter, we continued a steady stream of new product launches in our core markets, addressing top customer needs. This includes a high throughput rapid scan calorimeter that enables precise thermal stability of high concentration biologic formulations. We also launched the TA Instruments compact discovery rheometer. This expands our rheology portfolio with an easy to use product for routine quality control testing within manufacturing settings such as batteries, pharmaceuticals, and food. It offers similar performance to viscometers used in R&D settings, but at a price point that is competitive with those in downstream settings. In our high growth adjacencies, we are actively shaping the waters of the future and increasing our alignment with nascent, higher growth testing applications where we have a unique right to win. Today, I will share an update on bioseparations. Approximately 50% of the drugs in the pharma pipeline are now large molecules, which includes a wide range of novel modalities beyond monoclonal antibodies that each have their own unique challenges. Given the high future growth potential and significant unmet needs that exist within separating and purifying these molecules, we have directed organic investment to solve these challenges. With the initial progress we've made over the past few years aligning our overall chemistry business to biologics, approximately 40% of our pharmachemistry revenue now comes from large molecules. As we continue to gear our business towards future growth in novel modalities, we expect this number to rise further, particularly as we now spend approximately 70% of our chemistry R&D dollars on large molecule-related applications. Last year, we launched our our first set of in-house developed enzymes for antibodies in areas such as peptide mapping and antibody drug conjugates, which have achieved great initial success. Last month, we expanded our offering further, launching our first enzymes and reagents for novel modality-related applications. This includes areas like cell and gene therapy and RNA-based therapeutics such as CRISPR, oligonucleotides, and mRNA. We continue to build key capabilities across each class of next generation therapeutics with the objective of building a comprehensive portfolio that is molecule agnostic and can support the journey of any modality into high volume settings. I will now cover our 2024 full year guidance. While market conditions remain dynamic, customer capex spending has continued to improve, especially in Pharma QA QC. With our strong funnel, we expect these trends to progress into the fourth quarter and result in 5% to 7% constant currency growth. This is while still making prudent assumptions around fourth quarter seasonality at equivalent levels to last year and well below typical levels. Given our raised outlook for the fourth quarter and better than expected third quarter results, we're increasing our full year guide. Our updated full year 2024 organic constant currency sales growth guidance is now negative 0.9% to negative 0.3%. We're also increasing our full year 2024 adjusted earnings per share guidance to reflect our improved sales growth expectations and continued strong margin performance. The midpoint of our full year 2024 adjusted EPS guide is now $11.77, which is flat to slightly positive versus last year, and is a 1.4% growth rate improvement compared to our previous guidance. Now, 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. Amol?