Q4 2019 Earnings Call
[music].
Good morning, welcome to the Waters Corporation fourth quarter 2019 financial results Conference call.
Participants or you don't listen only mode until the question answer session.
Conference call. This conference call is being recorded if anyone has any objections. Please disconnect. At this time. It is now my pleasure to turn the call over to Mr. Bryan Brokmeier head of Investor Relations. Please go ahead Sir.
Thank you operator good morning.
Good morning, everyone and welcome to the Waters Corporation fourth quarter earnings Conference call before.
Before we begin I will cover the cautionary language during the course of this conference call, we'll make various forward looking statements regarding future events or future financial performance of the company in particular, we will provide guidance regarding possible features results of the company for the first quarter and full year 2020.
We caution you that all such statements are only our present expectations and that actual events or results may differ materially.
For detailed discussion of some of these risks and contingencies that could cause our actual performance to differ significantly from our present expectations see that risk factors included in our annual report on form 10-K for their fiscal year ended December 30, Onest 2018 in part one under the caption risk factors and the caution.
Gary language included in this mornings press release, an 8-K.
We further caution you that the company does not intend to update any of its predictions or projections, except during our regularly scheduled quarterly earnings release conference calls and Webcasts or otherwise required by law. The next earnings release call and webcast is currently plan for April 28 2020.
During today's call, we'll be referring to certain non-GAAP financial measures reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures our test to our earnings release issued this morning and available on the company's website.
And our discussions of the results of operations, we may refer to non-GAAP results, which exclude the impact of items such as those outlined in our schedule title reconciliation of GAAP to adjusted non-GAAP financial included in this mornings press release.
Unless stated otherwise references to quarterly result, increasing or decreasing our in comparison to the fourth quarter of fiscal year 2018.
In addition, unless stated otherwise all year over year revenue growth rates, including revenue growth ranges given on today's call. Our given on a comparable constant currency basis now I'd like to turn the call over to Chris O'connell waters, Chairman and Chief Executive Officer, Chris.
Thanks, Brian and good morning, everyone. Thank you for joining us today, along with Bryan Brokmeier joining me on this morning's call as Sherry Buck waters, Chief Financial Officer.
During today's call I'll provide an overview of our fourth quarter and full year 2019 operating results as well as some broader commentary on our business. Sherry will then review our financial results in detail in Summarizer first quarter and full year Twentytwenty financial outlook. We we'll then open up the phone lines to take your questions.
Briefly reviewing our operating results for the fourth quarter revenue grew 1% and adjusted earnings per share grew 11%.
The fourth quarter played out generally as we expected with mixed market conditions similar to those we experienced throughout 2019, but also with encouraging progress on key growth initiatives, particularly the positive impact of our new products.
In the quarter growth in large molecule pharma and biomedical research applications, driven by our new product offerings was largely offset by market conditions in our industrial markets, China and continued capital spending softness and small molecule pharmaceutical applications.
Looking at the full year 2019 in total revenue grew 1% and adjusted earnings per share grew 8%.
Macro factors led to a more variable set of end market conditions than we had expected entering the year.
Customers in key markets, we serve we're more cautious in their capital purchasing throughout 2019 and more willing to delay spending.
I'd like to review the three areas, where we were most impacted by this dynamic.
First government policy changes in China affected the food and pharmaceutical markets. As a reminder, China represents 18% of our global revenue and continues to be a key growth priority for the company.
Our business mix in China is unique within our global portfolio as well as within the industry with a higher concentration of our business coming from pharma and food testing.
In 2019, China revenues were flat year over year following double digit growth in nine of the prior 10 years.
In Twentytwenty, our initial view on China coming into the year is to expect stable and market conditions relative to 2019, driven by cautious, but steady pharma and industrial spending.
Moderate academic spending and stabilization in the food market.
That said, we're closely monitoring the Corona virus outbreak and it's too early to understand what impact. This rapidly evolving situation will have on our business. Therefore, no impact is included in our Twentytwenty guidance.
As always the health and safety of our employees their families and our customers is our top priority and we are taking appropriate caution in terms of employee travel and activities.
Second the global market for small molecule pharmaceutical LC applications were waters has unique focus and capability has been in a slower growth environment.
In 2019 are small molecule pharmaceutical business was down modestly inline with the overall market.
Looking ahead to Twentytwenty, our assumptions assume stable market conditions relative to 2019.
Meanwhile, we remain confident in the underlying secular growth drivers of the small molecule LC market, including steadily increasing prescription volumes as patient access to their medications rises around the world as well as increasing quality and safety requirements in all markets.
We continue to invest in advancing our LC instrument portfolio and are well positioned to benefit when demand normalizes.
And third Europe was flat in 2019, as industrial market headwinds offset academic and governmental strength.
Looking ahead, we're encouraged that clarity around Brexit could help stabilize the European macro environment.
The stabilization contributed to our fourth quarter improvement and supports our confidence in modestly better conditions within the region in Twentytwenty.
Market dynamics aside we remain sharply focused on our core growth strategy of organic innovation and are excited about the significant uptick in meaningful new product launches during 2019.
We are pleased with our market active development activities to date, and particularly encouraged by the increasing contribution of new products in Q4.
Most notably the bio accord cyclic imus snapped excess and our two new tandem quad mass spectrometer is all contributed more meaningfully to our growth in the quarter and we expect that this new product contribution will continue to ramp in twentytwenty.
We remain very excited about our technology roadmap and believe that we're not only at the front end of a major new product cycle, but also a durable improvement in R&D productivity and therefore, a more sustainable new product cadence into the future.
Taking a closer look at the business starting with a review of our market categories at the corporate level sales to our broadly defined pharmaceutical category were flat for the quarter.
Graphic strength in Europe, and India was offset by a decline in sales into clinical applications as well as softness in our China pharmaceutical business, which is partly attributable to the difficult comparable quarter a year ago.
The global large molecule market and our performance within it remained robust supported by our focused investments in this category across LC mass spec and Chemistries.
Conversely, the global market for small molecule pharmaceutical applications remains softer than historical levels with flat revenue in the quarter.
For the full year, our pharmaceutical category sales were up 2%.
Sales to our worldwide industrial category, which includes the material science food and environmental markets were down 1% in the quarter with strength in food testing markets.
During Q4 offset by weakness in materials characterization.
For the full year, our worldwide industrial category sales were down 2%.
Sales to our academic and governmental categories were up 10% in the fall in the fourth quarter driven by the impact of our new technology, serving the pharmaceutical and biomedical research categories, particularly in the us and Europe.
For the full year, our academic and governmental category sales were up 3%.
Next I will review our sales performance by geography at the corporate level.
Asia, our largest region in terms of revenue was flat in the fourth quarter, China declined 3% as pharmaceutical growth declined modestly in the quarter on a difficult comp partially offset by stabilization in food markets.
Looking specifically at the China generic pharmaceutical market. The second round of the GPO process previously referred to as the four plus seven program played out as we expected.
In the third round is now underway.
Our customers are maintaining a pragmatic tone through this process and we continue to see those customers, notably local big pharma companies in some multinationals when tenders due to the programs increasingly stringent quality requirements and their benefits of scale.
We're also seeing strong demand for our chemistry offerings from this customer base, which we expect to continue as the GPO process supports rising generic prescription volume in China, bolstering our confidence that we will see increasing instrument demand overtime.
In India solid growth was driven by the continuing recovery in the pharmaceutical market, partially offset by food softness for the full year Asia grew 3% driven by solid growth in India, Japan, and Korea, while China was flat.
Turning to the U.S. revenue was flat in the fourth quarter as strength in large molecule pharma food and biomedical research was offset by weakness in small molecule pharma materials science and clinical applications.
Overall, the Americas declined 1% in the fourth quarter driven in part by expected weakness in Latin America due to the ongoing political instability in both Mexico and Brazil.
For the full year, the us grew 1% well total Americas revenue was flat.
In Europe sales grew 5% in the quarter result of solid year end budget spending by certain large pharma customers and continued strength in academic and governmental partially offset by a modest decline in industrial.
We saw particular strengthened demand for our new mass spec instruments from both academic and pharmaceutical customers for the full year sales in Europe were flat.
Finally, I will review product line dynamics within our waters and TV brands.
Waters branded instrument sales declined 1% in the quarter and 2% for the year LC instruments declined moderately consistent with broader market LC trends that we spoke about earlier.
Market dynamics aside we're confident that we can leverage our strong LC installed base and expanding product portfolio to support improving growth when customer LC spending pattern to recover.
In mass spec growth in Q4 was driven by our rich portfolio of new products as well as solid demand in the global food business.
Momentum continues to build for the bio cord has market development activities progressed, well across all geographies, producing a strong fourth quarter and furthering our confidence in a multi year revenue ramp.
The new cyclic Imus and send up excess made meaningful contributions to the fourth quarter and were a key reason for the strong academic and governmental growth.
Lastly, the addition of two new 10 quads strengthened our overall portfolio positioning us to benefit from any pickup we see in the global food and applied markets.
To attest to the enthusiastic reception of our new products. We've already received one major award for this and have to excess and two awards for the bio accord, including select Sciences scientist Choice Award for the best New drug discovery and development product for 2019, and Frost and solvents 2019, Global New product Innovation Award.
Waters branded recurring revenues, which reflect the combination of service and precision Chemistries grew 6% in the quarter and 5% for the year.
Chemistry strength was driven by our pharmaceutical business, we saw solid growth across our chemistry portfolio.
Moving HP LC columns application kits plc columns and bio separation columns.
Turning to our Ta product line sales declined 8% in the fourth quarter with T.A. instrument system sales down, 12% and service sales up 3%. The weakness was largely due to reduced spending levels by our largest polymer and chemicals customers, which was broad based across our instrument portfolio and geographies.
For the full year, our Ta product line sales declined 3% with Ta instruments system sales down, 5% and service sales up 3%.
Despite the challenging market conditions, we faced in 2019, we have strong confidence in our ta instruments team and product portfolio and expect to return to growth in Twentytwenty.
To recap 2019 challenges in the global macroeconomic environment impacted our customers who were more cautious in their capital purchasing throughout the year than we expected.
Returning to the Big picture, we remain steadfastly focused on executing on our five point value creation model.
As we have consistently communicated we aim to create shareholder value by one holding a leading specialty position in structurally attractive markets to executing a focus growth strategy driven by organic innovation.
Three seeking opportunities for continuous operational improvement in innovation channel and operations.
For maintaining capital discipline, and five operating with the performance oriented culture and management team.
Our goal remains to deliver strong sustainable long term growth, we're confident in the durability of the growth opportunity in our end markets as well as our consistent corporate strategy that is highlighted by innovation.
Accelerated R&D investments over the past several years, which along with a more disciplined approach to project selection and portfolio management is resulting in meaningful improvements in R&D productivity.
Looking ahead to Twentytwenty, we expect to realize further benefit of our recently launched products.
Furthermore, we seek to supplement our organic innovation and growth by more actively deploying capital to purposeful M&A.
Over the past two years, we have strengthened our internal capabilities and built a robust acquisition and minority investment pipeline.
Last month, we announced the acquisition of Andrew Alliance broadening our technology portfolio to include advanced robotics and software that will positively impact our customers workflows across pharmaceuticals life Sciences and material science markets.
With that I'd like to pass the call over to Sherry Buck for a review of our Q4 and 2019 financials and our outlook for Twentytwenty Sherry.
Thank you, Chris and good morning, everyone.
In the fourth quarter, we recorded net sales $716 million, an increase of approximately 1% in constant currency.
Currency translation decreased sales growth by approximately 1%, resulting in flat sales as reported.
For the full year sales grew about 1% before currency translation, which decreased sales growth by approximately 2%, resulting in a full year sales decline of approximately 1% on a reported basis.
In the quarter sales into our pharmaceutical category were flat sales into our industrial category were down 1%.
Academic and governmental category grew 10%.
For the full year pharmaceutical market category grew 2%, our industrial market category declined 2%.
Academic and governmental category was up 3%.
Looking at product line growth, our recurring revenue, which represent the combination of precision chemistry products and service revenue grew 6% in the quarter.
Net sales declined 3%.
For the full year recurring revenue grew 5% our sales and spent product group declined 3%.
As we noted last quarter recurring sales were impacted by one additional calendar day in the quarter, which resulted in a slight increase in service revenue sales.
Looking ahead Theres, one less calendar day in the first quarter and two additional calendar days in the fourth quarter at 2020 compared to 2019.
Breaking fourth quarter product sales down further.
I was related to waters branded products and services grew 2%.
Sales Sta branded products and services declined 8%.
Combined LC and LC and this instrument platform sales were down 1% and instrument sales were down 12% for Ta.
Looking at our growth rates in the fourth quarter geographically sales in Asia were flat, but China declining 3%.
Sales in Americas were down, 1% with us flat and European sales were up 5%.
For the year Asia sales were up 3%, but China sales flat.
Sales and the America were flat with us up 1% and Europe sales were flat.
Now I'd like to comment on our fourth quarter and full year non-GAAP financial performance versus the prior year.
Gross margin for the quarter was 58.2% as compared to 59.9% and the fourth quarter at 2018.
On a full year basis gross margin was 58% compared to 59% in the prior year.
The lower gross margin relative to the prior year and both the quarter end the year, that's driven by foreign exchange rates lower fixed cost absorption and mix.
Moving down the fourth quarter piano operating expenses were 3% lower in the quarter and 1% lower for the year on a constant currency basis.
This was the result of lower variable expenses and disciplined spending controls throughout the year.
In the quarter, our effective operating tax rate was about 11% first at 12% and the prior year quarter.
For the full year, our effective operating tax rate was about 13%.
That against the prior year.
The lower tax rate versus our expectation is the result at the mix of profits and our tax jurisdictions and discrete items in the quarter.
Net interest expense for $10 million, an increase of about $9 million from the prior year as anticipated as was shifted to a net debt position over the course of the year.
Our average share count came in at 64.3 million shares a share count reduction of approximately 15% or about 11 million shares lower than in the fourth quarter last year.
This is the net effect of our ongoing share repurchase program.
Our non-GAAP earnings per fully diluted share for the fourth quarter increased to two to up to $3.20 in comparison to $2.87 last year, an increase of 11%.
On a GAAP basis, our earnings per fully diluted share increased to $3.12 compared to $2.46 last year.
For the full year, our non-GAAP earnings per fully diluted share were up 8% to $8.99 per share versus $8.29 last year.
Overall, the non-GAAP earnings per fully diluted share growth for the quarter and the year lets the result of lower expenses and our ongoing share repurchase program.
On a GAAP basis full year earnings per share were $8 in 69 cents versus $7.65 from 2018.
A reconciliation of our GAAP to non-GAAP earnings is attached the press release issued this morning.
Turning to free cash flow capital deployment, and our balance sheet I'd like to summarize our fourth quarter results and activity.
We define free cash flow as cash from operations less capital expenditures and excluding special items.
And the fourth quarter of 2019 free cash flow came in at $158 million after funding $54 million that capital expenditures.
Excluded from free cash flow was $19 million related to investment and our new Taunton chemistry facility.
And the fourth quarter. This resulted in 22 cents of each dollar sales converted into free cash flow and 24 cents for the full year.
Now I'd like to provide an update on our fourth quarter activities related to capital deployment, which we categorized into three areas investing for growth balance sheet strength and flexibility and return of capital to shareholders.
In terms of returning capital to shareholders, we repurchased 2.5 million shares of our common stock for $560 million in the fourth quarter.
These capital allocation activities, along with our free cash flow resulted in cash and short term investments at $337 million and debt of 1.7 billion on our balance sheet at the ended the quarter.
This resulted in a net debt position of $1.3 billion and a net debt to EBITDA ratio of about 1.7 times at the end of the year.
Looking ahead, we remain committed to deploying capital in the context of our three priorities and we'll continue working towards a capital structure of approximately 2.5 times net debt to EBITDA.
As a result, our full year guidance reflects about $800 million of share repurchases, but.
With approximately $200 million of shares during the first quarter.
Over the course, the year, we will evaluate our share repurchase program and provide updates as appropriate.
Turning to working capital accounts receivable days sales outstanding came in at 77 days this quarter up slightly compared to the fourth quarter last year.
In the quarter inventories increased by $29 million in comparison to the prior year quarter, driven by planned inventory build related to both Brexit contingency planning and to support the continued ramp up our new products.
As we look forward to the year ahead, I'd like to provide some broader context on our full year 2020 guidance.
To summarize several points that Chris mentioned earlier, we expect increasing benefits from our recent new product introduction.
Hey instruments returning to growth.
Stable conditions, and the LC pharma market and stability in China, but note that potential impacts from Nick Corona virus outbreak has not been factored into our guidance.
These dynamics support full year 2020 guidance for constant currency sales growth of 1% to 3%.
At current rates currency translation is assumed to be approximately neutral to 2020 sales growth.
Gross margin guidance for the full year is expected to be in a range at 58% to 58.5%.
Every year, we look to balance growth investment and profitability.
Certainly we expect 2020 operating margins of approximately 30%.
Based on a combination of growth investments.
Normalization of variable expenses and disciplined expense controls.
Moving below the operating income line other key assumptions for full year guidance, our net interest expense a $50 million to $52 million.
Full year effective tax rate, a 14% to 15%.
And average diluted share count up approximately 62.5 million shares outstanding.
And lastly, modest dilution from the acquisition of Andrew Alliance.
Rolling all this together and on a non-GAAP basis full year 2020 earnings per fully diluted share a projected in the range at $9.15 to $9 in 40 cents, which assumes a negative currency impact on full year earnings per share growth at approximately one percentage point.
Looking at the first quarter of 2020, we expect constant currency sales growth to be flat to 2%.
Today's rate currency translation is expected to decrease first quarter sales growth by less than one percentage point.
First quarter non-GAAP earnings per fully diluted share is estimated to be in the range of $1.55 to $1.65.
At current rates the negative currency impact on first quarter earnings per share growth is expected to be approximately one percentage point.
Chris will now make a few summary comments Chris.
Great. Thank you Sherri in summary, our fourth quarter played out largely as we expected with a continuation of macro headwinds similar to what we saw throughout 2019.
That said, we saw an encouraging uptick of sales in our newly released products in the fourth quarter.
As we look to Twentytwenty, our focus is on execution to deliver improving growth and balancing our industry, leading profitability with the right investments to support our innovation strategy and long term growth as well as a consistent return of capital to shareholders.
With that we will now begin the question answer session.
As we are not always able to get to everyone's questions. Please limit yourself to one question and one follow up and if you have additional questions. Please contact the waters Investor relations team after the call operator.
First question is coming from DJ Kumar of Evercore ISI. Your line is open.
Okay.
Hey, guys. Thanks for taking my question, Chris just one on.
I appreciate all the colors on end markets on the guidance, especially when you look at the end markets rate.
Pharma industrial.
What are you assuming for 2020 are you assuming pharma in the some of the weakness we saw North America customers. They some of Thats coming back.
Industrial.
Any thoughts on.
How that segment is that going to shake out.
Did decline and then I had one follow up please.
Sure. Thanks for the question VJ.
You know, we had a really variable set of market conditions throughout 2019 and.
Certainly the.
The business mix, we have was particularly impacted in part by some of the geographic.
Considerations in China the large.
Mix, we have in L.C. small pharma and some of the industrial categories. As we turn the page to 2020, our starting point is really just a carryover of market conditions from 2019, we're not assuming.
An acceleration until we see clear change in the market.
Within each geography and category, we're looking to balance both the opportunities and the risks in with regard to pharma as you point out.
Our assumptions include continued robust performance in the large molecule pharma market, which is about 30% of our mix overall and continued softness in the small molecule market, which is 70% of our mix and Thats why we have.
Kind of a model review of though the pharma market at this point from an industrial standpoint, the biggest impacts we saw and you referenced they were in large.
Polymer and chemicals companies. If you look at our top 20 accounts say within Ta.
Those are the big global industrial polymers and chemicals companies, they were really soft through the year and particularly in the fourth quarter interestingly enough in T., we actually added more new accounts last year than we ever have to try to make up for that but when the very large companies are down its.
Challenging to overcome that and I would also say that we do support those same customers through our waters branded products as well and we saw the same exact.
Phenomenon on the water side as we saw NTA in that industrial polymers in chemicals. So again, our assumption there is we're not assuming a major rebound, but we are can.
Assuming stable conditions, and so until we see see some different conditions, where we thought it was prudent to just assume.
Continuation of.
Some of the continued some of the conditions. We saw 19 into the early part of 20 and I will update as we go long.
It's helpful and show you just on the EPS guidance here.
It looks like you're assuming.
Step down in margins here I'm. Just curious is this a continuation of the gross margin dynamic that we saw in 19 or is this step up in.
Maybe some of the commercial activities.
Support from new product launches and why what tax rate step up thank you.
Yep.
They've got a couple of questions buried in there you Chase I tried to cover them all the.
If you look at our gross margins and really our operating margins.
So our gross margin guide I'd say overall is really a function of our topline growth.
Peeling back down a little bit we think about our our gross margin.
The two biggest levers on our gross margin or volume leverage and FX and in years, when Weve had higher gross margins in that 59% range. We had mid single digit plus growth. So I'd say the gross margins really a function of our topline guide.
And similarly with our operating.
Margin and our operating expenses coming into 2020 really trying to strike a balance between growth investment in profitability and so we're continuing to invest in R&D and commercial capabilities. They also have some headwind coming into 2020 with normalization of our variable costs and some expenses for Andrew Alliance. So.
That's our inputs for our guide at 30% operating margin.
Moving onto the tax rate that you asked about.
We ended the quarter fourth quarter tax rate more favorable than we were expecting that was due to some discrete items in the quarter as well as the mix of our profits in our tax jurisdictions and we're not expecting that to repeat in 2020. So after we came out of tax reform.
We're really looking at our tax rate for the business to be in that range of 14% to 15%.
Alright, thanks, guys.
The next question is coming from Tycho Peterson Jpmorgan. Your line is open.
Thanks, Chris I'll start with the guide if I go back to a conference couple of weeks ago, you were highlighting mid single digits I know thats of maybe longer term target, but if I think about the drivers here you've got new products. You did highlight easy comps can you maybe just.
When you have you talked about what it takes to get this business back to mid single digit and how much you're expecting from new products. This year in other words is the portfolio declining if you back out some of these new product launches and then also on gross margins is there any pricing headwind in there I know you called out ethics and fixed costs, but was there any pricing sensitivity is not.
Sure. Thanks Tyco appreciate the question, yes, absolutely we think.
We think the underlying market dynamics are and fundamentals over the long term are really strong the underlying secular demand drivers.
Our unique competitive position in our strategy would over time under more normal market conditions scenario continue to support a mid single digit kind of long range target and and that's exactly what we were talking about your conferences is our belief in our confidence in the underlying fundamentals of the market on a long term basis.
And clearly the difference between that and our immediate near term outlook is simply a function of.
Some of the challenges that we faced in the markets, where we are particularly exposed and and to be.
To not assume that those change overnight that.
As I mentioned before that the starting point is more of a carryover from the conditions that we saw in so in terms of what it would take to get back up into the mid single digit plus.
As really a normalization in demand in a couple of key market segments, notably the small molecule pharma segment.
Certainly general conditions within China.
Returning to reasonable growth and and the stabilization of the industrial markets. We don't have to get huge growth out of the industrial markets. We have to get modest growth out of the industrial markets and then more of a historic norm in terms of the pharma business.
As I mentioned before the large molecule pharma space is continue to stay robust for the market and for waters through this whole period, and so it's really about that small molecule space.
Perking up and certainly with some of the deferred investment in that space, We do see pent up demand building, but until we see it come back into the market will remit will continue to remain cautious as it relates to pricing there's nothing unusual.
In terms of pricing.
Our assumptions, we have seen quite stable pricing on the instrument side, we continue to put small increases through on the recurring revenue side and despite the gross margin dynamic Sherry talked about an FX and all these other things we've seen no deterioration in our trade margin. So.
Anyway, that's how I'd summarize all of that.
Hey, this is Don I, just like we had on on that gross margin for the quarter just to break that down a little bit.
Gross margin in the quarter was impacted by about 90 basis points of FX and the remainder of that.
Large gross margin year over year was fixed cost absorption and mix.
Okay, and then just to flush out a couple of pressure points you highlighted for China is your assumption for 4.7 that round three doesn't present, an incremental headwind and then.
Any budget delay issues, we heard about that.
End market from some of your peers and then Chris separately, you flagged clinical soft Im just wondering if you can elaborate on that issue. Thanks.
Yes, let me try to cover those tyco in terms around three on the GPO. The four plus seven let me just quickly summarize it was about a year ago that we were coming to grips in the market was coming to grips with what was really a pilot phase of the four plus 725 drugs in 11 cities. The second round extended that same set of 20.
Five drugs to 27 provinces.
More widespread and accounted for multiple winners per.
The third round bidding has been completed their hair 33 drugs that have been bid.
And this is across 32.
32 provinces and so.
I think as I said in my prepared remarks, so we've seen a pragmatic response.
From the from our customers in this clearly there is a a shift in the market underway from a a market that was more purely focused on generic drugs.
To a market thats being encouraged to us to scale in that way and maybe in a more price competitive way to bend the cost curve on generic drugs, while encouraging investment in the innovation sector and actually a lot of our customers are quite excited about that possibility and there's a couple of other regulations coming into the market that should support that including the 2020.
CHP or Chinese pharma.
Modernization of Q QC methods as well as revised drug administration law, which encourages more R&D. So I think taking all that into account.
Our assumption is for stability, but not necessarily a big bounce back.
We think the foundations are being put in place for.
For sustainable growth picture in the future and we're investing to take advantage of that where it comes I think you asked about.
Hi, and capital purchases.
As well if I understood the quick question correctly.
Towards the end of year, we actually saw a nice improvement in our high risk mass spec sales because of our new product.
Launches.
The cyclic imus and the snapped excess in the high resolution category.
Finished the year on a strong note those were back half product introductions and we're excited about a reestablished leading position in that space and think theres opportunity this year.
But we also saw a lot of encouragement.
No encouraging activity on the bio cord, which continued to ramp through the year effect. We saw we sold more units in Q4 of bio cord than we sold in the first three quarters combined.
So we think we have a good good momentum there and baking that all in we are assuming about a point of new product.
Increment in our in terms of our results into into 2020.
Your last point I think was on clinical.
You know that tends to be a fairly lumpy business. It's a smaller part of our business overall about 6% of our revenue it does get baked into our trade class reporting number on pharma. So it it was a slight detriment to farm up.
We grew we've grown over more rolling periods.
A couple three year periods, the clinical business pretty consistently and pretty well and clinical business remains a priority for the company.
And we think there's theres going to be ramping demand overtime for mass spec Mount mass spec base.
Assays, particularly newborn screening and therapeutic drug monitoring.
So tends to be a lumpier business and.
Well, we stay very focused on building our technology portfolio there.
The next question is coming from Dan Brendan Yes. Your line is open great. Thanks, Thanks for taking the questions.
Yes, I wanted to address the kind of the L.C. small molecule market, where you have obviously highlighted that you're feeling the pain more than peers could you discuss a little bit about.
Market conditions versus share loss.
You know anything on the relative market share trends and then and then importantly kind of what drives the improvement here what are the sign post towards like why this market. The kind of will recover I know you talk about pill count and generic in population growth, which sounds great, but that's really hard pressed to distill that back to the model, particularly as there's all this excitement over burgeoning biologic pipelines. Thanks sure.
Yes, Thanks, Tony I think is we look at the overall market we've seen.
Consistent feedback from a lot of different sources that the small market has been.
In a tougher growth environment recently, and what's most different about waters is that we have such a large exposure there with pharma being about 55% of our revenue overall and small mall being 70% of that were simply more exposed.
As you know we have a unique mix that's in our LC business Thats pharma heavy in his QC heavy.
And so where we play in what we see we see our share as as very stable, we're specked into the majority of workflows and within our installed base.
The purchasing.
Can come and go with capital purchasing cycles, but we see the underlying utilization very clearly with our service in our chemistry business and our chemistry business by the way in pharma has remained.
Very solid through this cycle.
Chemistry is in pharma on a global basis.
As is consistently up in the mid to high single digits, which underscores the stability of that installed base and so.
Our focus is.
Simply to continue to serve our customers and position ourselves to take advantage of when demand returns certainly there there have been some unique factors.
In the form LC market.
The the Tailwinds, if you will in the middle part of the decade, particularly in China, and India yielded to some headwinds as we got to the end of the decade.
With China, and India and on top of that the us generic market has been a tougher environment.
In the last year with with a spike in user fees and some litigation noise in the environment. So I think we understand it all very well.
We think the market is fundamentally attractive as you point out of your question.
We've continued to invest in our portfolio.
And we're expanding our technology portfolio and LC and we're excited for a rebound of that market when it occurs.
Okay, Great, Chris and then and then maybe just one follow up to take this question just on new products I know youve.
Talked about a point contribution it still seems pretty modest given the number of new products and the time spent highlighting the unique features here. So could you just flush out some details maybe a little bit I know you don't want to given to fund the we've done the math behind that but what can be impact be larger and what should we look for.
As kind of signposts towards the success of these new products sure sure. What we're committed to continuing to update these on a quarter to quarter basis, and like I said.
The product launches, particularly the mass spec side last year were spread across the year the larger systems geared towards the back half of the year, while the bio accord came in earlier and was a market development process.
That really begin to bear some some meaningful fruit by the end of year I'd say in very simple terms, Dan the overall impact of the new products is somewhat impacted by the market conditions that we face.
In our business.
You can see segments, where those products have a more prominent impact have done better such as the governmental and academic category the large molecule category.
And so you know as as market conditions.
Improve we should see a bigger impact of new products, but like I said at the top of the call. The the prudent assumption heading into the year is starting point, that's more of a carryover of those market conditions.
Until we see the change clearly.
In our business and so.
We.
Have taken I think a pragmatic approach to forecasting the impact of the new products, but.
Our continued to be very very excited about them and certainly the innovation strategy generally in the.
The gains in R&D productivity, we're achieving inside.
Our really motivating the team and.
Making us excited for what's ahead as market conditions stabilize.
The next question is coming from Derek from Bank of America. Your line is open.
Hi, good morning.
Morning.
A couple of questions. So first one is.
They are interrelated. The first one is the contribution from the Andrew that sort of embedded into.
Your M&A for revenue contribution in 2020, and then I just sort of looking at the guidance you've given for the share buyback roughly $800 million for the full year.
200, the first quarter.
Our math is are taking about two times levered by the end of the years for achieving $400 million to $500 million out there and going back to the first comment on the M&A is that is that $405 million slug.
Money on the table for potential deal activity to sort of get to the tune to half times or is it should have time some of the future.
Just sort of general thoughts on sort of what's involved the math.
Thanks, Jerry I appreciate it let me make a couple of quick comments on Andrew and then Sherry can talk a little bit buyback program in the and the leverage targets and so forth.
And I'm happy to add to it as well, but Andrew lines. We're super excited about that technology, one of the most consistent things that I've heard from customers.
As I as I go around regularly is the the pressure point on sample preparation and sample automation on the front end of lot of analyses and Andrew is truly a next generation technology platform and robotics, but also in.
Cloud ready software.
Tied altogether and to automate and replicate experiments.
In a much more effective way.
We're not going to breakout.
Revenue at this point, it's fairly modest in the big scheme of the world.
And we're also trying to get a handle on.
You have the opportunity not just to sell Andrew products, but the beneficial impact that will have on pulling through waters instruments, which.
As a big part of our.
Our logic.
The integration is going really well in fact, the Andrew teams in town and I had a chance to sit down with them yesterday and the.
People within our chemistry organization that are that are leading the charge as well as the Andrew people couldn't be more excited.
Everybody from the organization is staying and working very closely together to take advantage of the opportunity.
So we'll give it will give updates as we move along and.
Forward to sharing some more that technology with the investment community.
Yeah, and Derek just to follow up on that.
Casing question is if we came out of tax reform.
We started working towards more optimal capital structure and we've been executing against that plan over the last couple of years with that higher return of capital through share buybacks.
So as we look at going into 2020, there's a variety of factors that we look at.
Our priorities for our business standpoint.
Our performance et cetera, and they're really looking at and repurchases. This year of about $800 million then.
That would put us based upon our guide we gave today and the low two times leverage ratio and so.
Factors that could increase as towards our I'm kind of near term goal of two and a half times.
Could be M&A opportunities. So we just look at all the different factors and this is where we set our guide for the full year and we'll look at it each quarter and make adjustments there.
Rates as we go through the year, yes, Derrick as you know it's hard to forecast that well, we do have a good pipeline. We are very very selective. We we have been involved in a number different situations and chosen to move forward just very selectively but it is purposeful and it is proactive and.
We'll just have to take it as it comes but continue to focus on those investments in terms of what they can do for our growth.
They can do for the accretion of EPS over time as well as the returns on invested capital, which are key metrics there.
The next question is coming from Doug Schenkel Cowen Your line is okay.
All right. Good morning, Thank you for taking your questions guys.
I I just wanted to start on margins and then I just wanted to ask a couple of clarification questions. As we think about the outlook for growth in 2020, so start starting on margins.
As I'm sure you guys. Appreciate the key pillars bear thesis on waters over good times and bad.
He has been the argument that you're pretty close to peak operating margin and I can see where your guidance for 2020 feeds into this a bit, especially given I think this would translate into your four of operating margin coming in between 30 and 31%.
How would you address that argument and building off of this how would you like investors to measure the success of your plan 2020 investments and and over what timeframe.
The third part of this is.
For 2020, specifically.
And this is really just to clean up how much of an impact as Andrew Alliance have on operating margins.
Yes, Hi, this is Jerry I'll start off.
Maybe with that last question there about Andrew Alliance, we Havent done at breakout all that detail line items, specifically theres some impact on operating margin operating margins and operating expenses.
And we gave and our guide that it's.
Slightly dilutive to our overall s., so a modest amount there.
And when you think about you know our margins at that 30% margin one of the things we have in 2020 here as.
Some normalization of prior year variable cost, that's a headwind for us, but as we look at our overall operating margin than getting beyond the 30%, it's really a function of our topline growth. So as we get back to our goal of being mid single digits or above that's when we have opportunity.
For higher operating margins and expansion and Adam So that's kind of the fact around that as far as now measuring some of the investments, we're making I'd say two key areas, where we're investing for growth is.
Continuing to invest in our R&D pipeline, and that's really continuing to keep our product pipeline robust and bringing new products to market and that will play out I'm going to topline growth and also were investing in commercial capability. So now tools for our salesforce that Sars Salesforce dot com and again.
Should play out and topline growth metrics so.
Thats kind of how we're looking at.
The investments, we're making on in the business.
Okay.
Thats helpful and.
In terms of 2020 growth.
You are targeting 2% total revenue growth I think you talked about new products given you about a point.
Did that LC is expected to be stable.
TJ is expected to return to growth.
I think just by process of elimination. This this leads us to conclude that you're expecting another year of moderating growth for waters recurring revenue I just wanted to make sure we're not missing something up here and I guess cutting to the chase do you expect waters division recurring revenue to get up until the 4% to 5% range or right. Now are you embedding in assumpo.
And I was going to be a little bit lower than that.
Yes, let me, let me a ticket comment on that Doug and share it can add to it as well.
Your piecing apart the math and certainly.
As weve.
Said, we are assumption coming into the year as stable conditions.
Nothing really better.
From the standpoint of that type of conditions, we saw until until it actually comes through in the business plus some benefit of new products and.
Actually our recurring revenue assumption is very consistent in the coming year with where we Ben.
We saw solid recurring revenue performance in 2019 with with some improvement over the course the years some steady improvement over the course the year in a really solid Q4, but all in the recurring revenue assumption stays about the same and really that does imply.
An instrument assumption that is flat to maybe slightly down at the midpoint, but.
We think thats prudent and.
Consistent with.
What we saw.
In the in the prior year before the effect of new products. So.
I think a very balanced outlook that balances opportunity and risk and obviously looking forward to updating that over the course of the year.
The next question is coming from Dan curious Stifel. Your line is open.
Good morning, guys. Thanks for the questions Chris just following up on the bio cord, obviously, one Q can be.
Choppy spending quarter in pharma just given the budget situation. So are you expecting.
Bio accord performance to be up sequentially do you think that new product momentum has placements or were contributions up quarter over quarter or is the fourq you to one Q spending dynamic the bigger factor there.
Yes, Thanks, Dan.
Thanks for the question Yeah Bio corridor, we thought was a good story over the course of the year a lot of excellent foundational work.
Throughout to get more as many customers exposure to it as we could.
To work into some budget cycles for potential a year and money and we saw a nice benefit there.
Like I mentioned, we we sold more bio courts in Q4 than we sold in Q1 through three combined you know as it relates to Q1.
We've seen.
Quite a.
Stable or modest purchasing.
Dynamic in Q1 on a fairly regular basis and so.
We're not making any huge assumptions for Q1 as you know from our topline guide of a flat to 2% we're expecting.
Hey, a modest quarter in in Q1 consistent with.
Sort of prior year experienced but.
So we're not.
Not necessarily expecting a sequential move on bio cord from Q4 to Q1, but certainly we're expecting a nice sequential move from 19 to 20 for the year overall to be very positive for bio cord.
Okay, and then sure and maybe just staying with profitability. This this could be a little bit of a topline, but if you just look at the combined margin profile of the bio core the cyclicality CMS and the scenario.
Is that any different than the corporate average I'm just trying to understand if there's a benefit to be had their new product introduction new product contributions pickup.
I think as we look at our new products, obviously, when we are bringing new products to market are looking our customer demands and and have five financial hurdles for those business cases, and so I'd say that.
No the operating margins on that particularly some of these mass spec products.
Our at or a little bit above our company average.
Okay. Thanks much.
The next question is coming from Paul Knight of Janney. Your line is open.
Hey, Chris you had mentioned in your comments that you see the more sustainable market.
Introduction or a more sustainable new product introduction cadence.
Can you talk to that statement is there, obviously bio cord seems to be pacing well.
What else is a.
Different that you make that comment.
Sure.
Absolutely Paul Thanks, Yeah, we've done a significant amount of work in the R&D function across the company and are really excited about our platform strategy. So we've done a ton of work in the last four years to establish next generation.
System components that can really serve as the foundation for systems.
More of a systems architecture with our products.
Where we effectively moved from a kind of a spot innovation model of one instrument at a time to families and value streams of instruments that can be produced more repeatable cadence into the future and bio cord is a really good example of that so the fundamental architecture, a bio cord, which has a common system controller or a new.
Software.
And firmware architecture.
And new hardware components that are durable overtime.
Can be spawn.
On a routine basis to bring more capability into the market the original bio cord launch.
Little a little about a year ago now.
Carried three core applications of protein peptides and Glycans.
We successfully launched a new application in December at the end of the year for oligonucleotides, which is a really significant need in the marketplace.
And has been very well received by our customers and.
And the bio cord platform, we will spend again.
Sometime this year and so as I commented before bio cord as a family as a value stream is a platform that we can we will spend five to seven eight to 10 different versions over the coming years, depending on customer needs.
But to bring new capability of the marketplace on a routine basis. You can you can certainly apply that that same thinking for systems architecture to our other value streams and see where we may be going into addition to that.
We've had the chance to largely complete development and begin the early product commercialization process on waters connect which is our next generation software platforms. So we've done a lot of the foundational work to move towards a more sustainable cadence of new product introductions based on more of a systems philosophy and excited about what that will.
Yield.
I think we have time for one more question.
The next question is coming from Steve Bruce Shaw Wolfe Research Your line is open.
Hi, Thanks for squeezing me in here I was going to ask you Chris one about the topline and then I had a couple of margin questions for Sherry. If we have time to that on Chris I Wonder if you could put a little bit more color around the trends and Ta did the the dynamics that you saw in the quarter with some of your larger chemical customer.
Those were those inline with expectations, where there was a surprise and how do you expect that to play into the first half of 2020.
Sure.
Like I mentioned, Steve the the trends and Ta, we're very much dominated by large polymer and chemicals companies.
About two thirds of our revenue in Ta is sold into the polymers and chemicals world and as you might imagine we've got some some large accounts in that space I would say it was softer than we expected coming into the quarter, but directionally consistent.
We saw those trends really all year long.
Among those top customers and that's why I made the comment earlier that we spent a fair amount of time actually creating new accounts and that's actually exciting for the future because we've opened up some new ground, but.
Some of the newer smaller accounts that were added in greater number than ever before just can't make up for the big large customers, which we expected to be soft at the end of the year, but ended up being a lot softer than even our forecast.
I think when we step back and look at the Big picture those customers are still great customers. We have a very strong leading market share position and all these technologies very strong and stable team and and so looking at a year ahead, we expect those type of market conditions to stabilize.
As I mentioned also we we did see a lot of the same patterns.
In our advanced Palmer characterization product line and some of the other things we do on the water side, an l. CMS.
In some of those similar types of accounts. So I think we understand the picture pretty well and we're just focused on returning that.
The other thing we're going to benefit from into this coming year as we've got some exciting new product launches that we'll talk more about as we get into the year.
Okay. Thank you for that and then Sherri as we're all trying to get to underlying margin and spend trends I Wonder if you might take a stab at just speaking to the underlying ex currency operating expense growth. If it was hey, you know we didnt have.
Andrew added in the year would operating expenses accelerate and by how much and then just for those who are wondering about mix dynamics. You can you remind us what the mix spread is at the grocery EBIT line between the T. a business and the waters business. Thanks, so much.
Yeah, and just maybe to add Peel back a little bit your question on the operating expenses.
[music].
You know over the course that year.
Andrew now without Andrew lines, if it has a a modest impact so really that the bigger drivers as we look at the increase in our operating expenses and related to our operating margin guide.
Israeli and investments, we're making in their business, both R&D and commercial capabilities and then normalization.
Variable expenses from 2019 or are the bigger drivers on operating expense and operating margin.
And then could you repeat your second question.
Well I think we I think we might be.
Finishing the call here, so I think we're a little bit overtime, and maybe maybe Steve's microphone is not live there.
So let me let me just wrap up the call and Steve We can certainly follow up on your question offline here as well as everybody else, but I want to thank everyone for your participation and questions. Despite the more challenging capital purchasing dynamics in 2019, we remain focused on executing on our innovation strategy.
And we are excited with our early progress while our end markets have shown some near term volatility we're confident in their long term growth potential and continue to invest for growth in R&D commercial operations and purposeful acquisitions. So on behalf of our entire management team I'd like to thank you for your continued support and interest in waters. We look forward to updating you on our progress during our.
Q1, Twentytwenty call, which we currently anticipate holding on April 20, Eightth Twentytwenty. Thank you and have a great day.
This will conclude today's conference all parties may disconnect at this time.