Q1 2020 Earnings Call
Good morning, welcome to the Waters Corporation first quarter 2020 financial results Conference call, all participants will be Ana listen only mode and tell the question and answer session.
Of the conference of the conference call. The conference call is being recorded if anyone has any objections you may 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, everyone and welcome to the Waters Corporation first quarter earnings Conference call before we begin I will cover the cautionary language. During this but 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 comp.
And Terry on potential marketing business conditions company expects for the second 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 a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations.
Neither risk factors included in our annual report on form 10-K for the fiscal year ended December 30, Onest 29 team in part one under the caption risk factors and the cautionary language included in this mornings press release, including with respect to risks related to the effects of the Covidien 19 pandemic.
On our business.
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 as otherwise required by law.
The next earnings release call and webcast is currently planned for July 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 are attached to our earnings release issued this morning and available on the company's website.
And our discussions the of the results of operation, we may refer to non-GAAP results, which exclude the impact of items such as those outlined in our schedule titled reconciliation of GAAP to adjusted non-GAAP financial included in this mornings press release.
Unless stated otherwise references to quarterly results, increasing or decreasing our in comparison to the first quarter of fiscal year 2019. In addition, unless stated otherwise all year over year revenue growth rates, including revenue growth ranges given on todays call our given on a.
Currency basis.
Now I'd like to turn the call over to Chris O'connell waters, President 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 is Sherry Buck waters, Chief Financial Officer.
I hope you and your loved ones, you're doing well with is challenging time and staying positive as we all strive to overcome the global coded 19 public health and macroeconomic challenge.
Like most of you we're all working from home. So please bear with US if we encounter any unforeseen audio issues with today's call.
During today's call I will provide an overview of our first quarter operating results as well some broader commentary on the impact that Kobin 19 is having on our markets in business. Sherry will then review our financial results in detail and discuss our financial actions as it relates to the balance sheet and cost structure.
We will then open up the phone lines to take your questions.
As you well know the cobot 19 global pandemic is a significant challenge for the world that is putting extraordinary pressure on the economy, our customers employees and their families I.
I would like to personally extend my gratitude for the hard work and dedication that everyone has shown over the past few months.
I, just especially like to thank all of our dedicated employees, who have been working in our manufacturing facilities laboratories and distribution centers, ensuring that we can supply our products and expertise to our customers.
I also want to thank our talented field service engineers, who have been on the front lines installing in maintaining critical analytical instruments and data systems to support the ongoing work of our customers.
These efforts are incredible and truly inspire me, but they don't surprised me as I've consistently seen our great people step up to deliver benefit to our customers under all conditions.
To briefly review our operating results for the first quarter Q1 sales declined 8% and adjusted earnings per share declined 28%.
The biggest kobin 19 impact on our business in Q1 was China, which declined 45% in the quarter impacting total company sales by approximately eight percentage points in constant currency.
As severe containment actions were implemented in China at the time of the Spring Festival.
Economic activity in demand significantly decelerated and these conditions persisted through the quarter.
On a positive note it was encouraging to see flat sales ex China for the quarter and 4% growth ex China through week 12 of Q1 before broader containment actions went into place in the U.S. Europe in India.
Rapidly changing market conditions in these geographies during the final week of the quarter included declining access to customer sites as well as the inability of some customers to place and receive instrument orders.
Through four weeks of Q2, we have seen signs of recovery in China, and other parts of Asia and Europe.
So we expect that condition seen at the end of Q1 in the US India in some parts of Europe will persist into Q2.
Taking the second quarter likely more challenging than the first quarter.
As we operate in this fluid environment, we have five overriding priorities.
Number one putting the health safety and well being of our employees and customers first.
Number two ensuring business continuity.
Number three maintaining financial strength flexibility and liquidity.
Number four actively planning for recovery, particularly in maximizing the benefit of our strong new product flow.
And number five contributing our expertise and capabilities in the global fight against Cobot 19.
Let me say a little bit more about each of these five priorities.
First the health safety and well being of our employees and our customers is our clear top priority.
At every stage of the pandemic, we've taken decisive and appropriate cautions, including a mandatory remote work policy for all employees with the exception of manufacturing distribution in certain laboratory environments.
As well as bands on non essential travel and visitors into our facilities.
Early on we engaged a medical advisor to guide our policy deployment and we continue to take proactive measures to ensure the health of our global employee base and the safety of all customer interactions.
Our second priority is to ensure business continuity.
The vast majority of the markets, we serve most notably the pharmaceutical biomedical research food and environmental and clinical markets have continued to operate at various levels and we're working closely with these customers to ensure their seamless operation.
Over the last several years waters has executed on a digital workplace strategy focused on providing modern connectivity and collaboration tools to our employees.
Our strategic technology investments have enabled us to swiftly meet the remote working needs as the situation has escalated.
From a customer facing standpoint, we're leveraging digital demand generation activities, including virtual demos across all regions remote instrument installations virtual sales seminars online product training and a rapid acceleration in one to one communications over emails phone and video conferencing.
We also recently launched a new customer portal on waters dotcom, enabling a convenient and personalized online experience that's more mobile friendly augmenting the recent expansion of our digital commerce capabilities.
We're continuing to invest to provide our customers a similar world class experience through digital needs as they receive in person.
And we're seeing great customer engagement.
A quarter and are actively mitigating potential risks.
Our third priority is maintaining our financial strength flexibility and liquidity under a range of business scenarios.
We are seeking to balance prudent management of all areas of our spend well continued to invest in growth initiatives.
We are taking a proactive approach to preserving balance sheet strength and liquidity as well as to appropriately right size.
Our costs structure.
For the unpredictable months ahead.
Specifically, we have pause to our share repurchase program until we returned to a more stable and predictable business environment.
We're also taking actions and twentytwenty that will reduce our costs structure by about $100 million as well as actions that will result in about $45 million of cash flow improvement from cap X. and working capital management.
Jerry will provide more details on these measures during her remarks.
Fourth we are actively planning for a variety of recovery scenarios with particular emphasis on maximizing the impact of our exciting new product cycle, including products launched in the last year as well as new technology coming to the market this year.
In the context of our costs measures R. and D. investments continue to be a priority.
Especially those that will contribute to near term growth.
We remain sharply focused on our primary growth strategy of organic innovation and it's stated before we have made durable improvements in r. and d. productivity positioning as well to benefit as demand normalizes and to the long term.
Finally, while we're not assuming a material financial benefit we have mobilize quickly to contribute our expertise and capabilities in the fight against covert 19.
We formed a covert 19 innovation response team to bring waters industry, leading expertise to the forefront of the global scientific surge to quickly and effectively deliver diagnostics therapies and vaccines.
Bike, sending our resources to scientists that are working on the challenging biology of the virus and pursuing a range of interventions. We know that we can help accelerate the push to defeat covered 19 a few examples include.
First waters donated columns service and instrumentation to hospital laboratories in Milan, Turin enrollment in Italy, and in Bordeaux, The all more say in Paris in France.
These donations are supporting drug monitoring and research for potential Corona virus therapies.
Second in the U.K. in Ireland, our team has been working overtime to quickly deliver specialized mass spectrometry instruments for researchers for measuring potential new cobin 19 drugs in experimental models are the Sars C.O.B. two infection.
And finally, we are providing are unique like can't analysis capabilities to vaccine developers <unk>.
<unk> the significance of like oscillation isn't antigen is underscored by numerous recent publications on the structural biology of the Sars C.O.B. to spike protein.
We are enabling high resolution high sensitivity molecular <unk> fingerprints just minutes versus the days typically needed with traditional approaches.
Turning the guidance as a result of the uncertainties surrounding the magnitude and duration of the code at 19 pandemic and its impact on our customers, we are withdrawing or prior twentytwenty guidance, which as a reminder, explicitly did not include any impact from the cobin 19 pandemic.
However, I will provide you with some color to help you better understand our current thinking.
We have built a range of scenarios by category categorizing each geography into one of three phases of the coated 19 pandemic containment recovery and return to growth.
Importantly, we anticipate that the previously mentioned cost actions provide us with adequate flexibility even in our most conservative scenarios.
Looking at the various geography is we believe that the U.S., India, Japan and parts of Europe are currently in the containment pays.
We expect these geography is to move into recovery in the second half of the year.
We believe the China.
Parts of Asia and.
In some parts of Europe are currently in the recovery phase and while there is a possibility for a second wave them the virus, we see them on and improving trajectory.
For geography is operating within that containment phase, we expect to continuing limitations to customer sites.
In these areas pharma production and Q.A.T.C. activity remains stable.
So we expect pauses and non essential customer spending.
At the same time, many resources in pharma R. and D. have shifted to cope in 19 related projects.
In terms of service, we're generating revenues through a mix of direct remote access to their facilities and we are seeing growth where customers have contracted service plans.
Per geography is operating in the recovery phase, we are expecting a pickup in demand for a recurring revenues and some stabilization demand for instruments.
That said, we anticipate that purchasing activity in governmental and academic markets may lag corporate customers.
When geography is enter the return to growth phase, we expect recurring revenue growth to normalize and for instruments to see grow supported by the release of previously budgeted spending.
As we look for signs of recovery in growth. We are closely monitoring service calls quoting activity recurring revenue trends in customer capital purchase implants.
Market dynamics aside we remain sharply focused on our primary growth strategy of organic innovation.
Looking at the water's product line, new products contributed positively to our performance and Q1, including the bio cord cyclic I.M.S. sent up to excess and our two new tandem quads furthering our confidence in a multi year revenue ramp for these products.
Our confidence and having the right technology at the right time has been bolstered by evolving customer needs. For example, we recently received multiple bio accord orders from a major global PHARMAQ customer as this unique system and application set is truly fit for purpose for certain coded 19 vaccine development and monitoring requirements.
In our T.A. instruments product line. The first quarter featured three important new product launches the discovery X. three differential scanning Keller remoter.
Discovery hybrid rheometers and the Tam for a micro X.L. ISO thermal micro Keller remoter <unk>.
Each of these instruments builds greater productivity and efficiency to the development of next generation high performance materials.
And we believe will further enhance our innovation leadership in the thermal analysis market.
In summary sales and our first quarter were impacted by the code in 19 pandemic.
Aside from China or largest geography is we're performing well until week 13, when many countries within them implemented containment measures, which impacted the close to Q1 and if created uncertainty in the near term.
That said the water's business model has historically proven sustainable through challenging macroeconomic environments, driven by our global footprint.
Installed base of instruments strong recurring revenue mix and diverse largely regulated and markets.
These factors have had a limiting impact on periods of negative revenue growth and supported consistent free cash flow in most scenarios.
We are confident that are strong balance sheet access to capital focus on preserving flexibility in the quality and are robust new product flow will translate into a stains bounced back as market conditions allow.
With that I'd like to pass the call over Sherry for a deeper review of our first quarter financials Sherry.
Thank you, Chris and good morning, everyone. In my comments today I'm aware of you I first quarter result, and provide more details on the X.M.C.N. implemented to mitigate the impacts from the cup in 19 pandemic.
And the first quarter accorded net sales a $465 million, which is down 8% against the prior year and constant currency.
Fancy translation decrease cells grow by approximately 2%.
Melting any 10% decline as recording.
Excluding China, it's more significantly impacted by that covered 19 pandemic in the corner constant cranky sales for flat against the prior year.
As a reminder than previous patents for Q1 and pull your results excluded any impacts from the curve in 19 pandemic.
During the quarter sales into our pharmaceutical markets for down 6%.
Industrial category decline, 7%.
Sales since our academic and governmental category, we're down 22%.
Looking at product line grow I recurring revenue, which represents the combination of service and precision chemistry was flat in the quarter, but instrument sales decline 19%.
As we know that on our last earnings coffee train revenues during the first quarter 2020 or impacted by one last calendar day in the corridor, which resulted in a slight reduction in recurring revenue.
I think I had there was no you every year difference in the number of calendar day during the second or third quarters, but there are two additional calendar days in the fourth quarter of 2020 compared to 2019.
Industry revenue for down one per cent in the corner as weakness and academic and governmental offset PHARMAQ route.
On the server side of our business revenues were flat isn't it single digit growth and service contracts revenues were upset by decline and on demand service revenues and spare parts.
Breaking first quarter product sales down further sales related to waters brand new products and services declines 9%.
Sales at T., eight branded products and services to climb 4%.
Combined L.C. and L.C.N.N. instrument at home sales decline like 21% and T.A.S instrument sales decline by 5%.
Looking at growth rates in the first quarter geographically and on a constant currency basis sales in ancient were down 19%.
By 45% decline in China and sales in America is we're down 5%, but the 4% decline in the U.S.
European sales grew 4%.
Excluding China Asia was 2%.
Yeah, I would like to comment on our first quarter non gap financial performance versus the prior year.
First marching for the corner, 54.7% compared to 57% and the first quarter of 2019.
Lower gross margin relative to the prior year was primarily driven by foreign exchange rates and lower manufacturing six talks absorption.
Living down the first quarter piano operating expenses increased by approximately 3% on a constant currency basis and foreign currency translation decreased operating expense grow.
Proximately, 1.5% on a recorded basis.
And the quarter are effective.
Operating tax rate with 11.3% compared to 10.8% and the prior year as a result of discrete items and acquire your quarter.
That interest expense with $10 million, an increase of about $7 million as anticipated.
Our average share account came in at 62.6 million shares a share cat reduction of approximately 14%.
10 million shares lower than in the first quarter of last year.
Or non gap earnings for fully deleted share for the first quarter declined to $1.15 in comparison to $1.60 last year as a result of lower sales due to the coven 19 pandemic.
I got basis, our earnings perfectly diluted share declined to 86 cents compared to $1.51 last year.
Reconciliation of our gap to nine get burnings with attached to the press release issues. This morning.
Turning to free cash flow capital deployment at our balance sheet I'd like to summarize our first quarter results and activities.
You can find free cash flow is cash from operations, let's capital expenditures and excluding special items.
And the first quarter of 2020 free cash flow came in at $121 million after funding $31 million of capital expenditures <unk>.
Excluded from free cash flow with $21 million related investment and our Taunton precision <unk> chemistry facility.
And the first quarter. This resulted in 26 cents of each salaries sales converted into free cash flow.
During the quarter, we also deployed $80 million capital relating to the acquisition of Andrew Alliance.
Isn't that isn't it broadens our technology portfolio to include advanced robotics, and software that will positively impact our customers workflows across pharmaceuticals life Sciences and materials science markets.
In terms of returning capital to shareholders. We we purchased approximately 800000 shares of our common stock for $187 million and the first quarter.
Consistent with our previous they communicated by that clans.
These capital allocation activities, along with our free cash flow resulted in cash in short term investments $394 million and that at 1.9 billion on her balance sheet at the end of the corridor.
Resulted in the net debt position at $1.5 million, and then that that to eat that die ratio of about 1.9 times at the end to first quarter.
My Name's working capital accounts receivable day sales outstanding came in at 99 days this quarter up compared to the first quarter of last year and inventories increased by $11 million in comparison to the par you're quarter digit dislike demand related to cope with 19.
Waters has a strong balance sheet access to liquidity and well structured that maturity profile.
We have $1.2 million available liquidity at the end up first quarter inclusive of our bank revolver and about $400 million in cash and short term investments.
Given the uncertain global business environment related to the coded 19 pens and make an anticipated impact on our business. We've implemented a comprehensive programs reduce our costs base and had revised our capitals appointment plans to better on line or operations in investments within near term growth challenge.
That's a walk you through these actions.
From a P.N. out perspective, we've taken actions reduced their cost structure by approximately $100 million for the year.
We've reduced the base salaries of R.C.E.O. Executive Committee and Vice Presidents as outlined in the press release issue. This morning.
Implemented a combination of furlough reduced work schedules and salary directions across the organization or 90 day period, and we're just not essential operating expenses implemented a hiring freeze and adjusted certain benefit programs.
From a capital deployment perceptive.
Ice or current your plans to better aligned operations and investments with the current operating environment.
His actions will improve cash flow by about $45 million over the remainder of the year.
Delayed certain capital expenditures by continuing to maintain business plan objective.
Revise production plans to better aligned with are updated demand forecasts to reduce inventory taken other actions to reduce working capital requirements.
In terms of returning capital to shareholders.
Our future capital structure target approximately 2.5 times net debt to eat it die remains unchanged our immediate focus is on maintaining financial flexibility and preserving liquidity.
As a result, we have temporarily pause share repurchases and so we see and more stable and predictable business environment.
Additionally, we suspend it our previous pull your guidance that we shared and R.Q. for earnings call three purchased $800 million that shares during 2020.
We expect these actions will provide us with adequate flexibility under a variety of potential recovery scenarios.
There are closely monitoring our business conditions, and well Jesse's action plans as appropriate.
It's Chris shared earlier due to the fluid environment related to cope with 19 will not be providing the usual financial guidance that we normally do.
However, there a few data points that might be helpful for full year modeling.
Current rates currently translation is expected to decrease cells grow by about one percentage point.
And to negatively impact earnings per share by about three percentage points.
That interest expense is expected to be in the range of $40 million to $42 million, primarily due to lower interest rates.
I'd like to turn the call back to press for some summary comments press.
Thank you Sherry.
We moved through Twentytwenty and our management of the Cobin 19 crisis, we were staying focused on her long term innovation strategy and investments that support.
<unk> recovery as market conditions improve.
We are confident in the durability of the opportunity in our in markets are strong market opera are strong market position and are consistent strategy.
That we will now be getting the question and answer session. As we are not always able to get to everyone's questions. Please limit yourself to one question one follow up and a few of additional questions. Please contact the water Investor relations team after the call.
Operator.
First question is Derek Debruyne Bank up America.
Oh.
Hi, Good morning, So can you talk a little bit more about some the recovery in your emerging market. Just basically just questioning you mentioned you saw some pick up in China, and and some took up into the middle European geography is can you talk a little bit more about that and says what you're saying.
Sure Yeah, Thanks, Derek and hope you're well, we we have [noise].
Established a a really robust framework for how to think about recovery and you know as as you might imagine it's not a one size fits all approach every geography is really undergoing a different dynamic as it relates to two primary dimensions of recovery. One is you know the overall spread of the virus and and what the low.
Goal public health responses and the other dimension being you know the knock on effects of of that approach to the local economic conditions and there's obviously a wide range of programs around around the <unk> around the world you know, China, which I went through this first I would characterize as.
I'm seeing a a steady recovery.
That continues to gain traction at this point in time about 90% of our customers in in the pharmaceutical sector have restarted production.
And there's been a very phased approach affecting both the customer operations as well as even our own offices and employs as they as they go serve there are some geography said about spec more quickly. If you look at Korea is an example, which actually is now a number five country in the World you know.
You is you know from from the papers they had a very assertive testing policy and program early in the early in the process and they're they're really back almost in the return to growth phase. The the European countries are referred to Europe is very much a mixed bag. Some some countries a including the U.K. and.
Trees in southern Europe like Spain.
Italy, France are very much still and containment while other countries in central.
Europe, and even eastern Europe, Germany, Austria, and Switzerland, Denmark et cetera are more in a recovery phase again very very local dynamics. There. It's it's also hard to categorize them in emerging in developed for the reason I just stated in Europe, but also another example of an emerging markets.
That was actually doing very very well into one until the end of the quarter was India.
Where India as you know at at that point time, the last week in March went into severe lockout bode. They still are in that mode, and so well India had a very strong start to the year you know, they're very quiet now and hopefully those measures will be effective in in hastening there Ah recovery in the in the back half of the year.
So it's really quite different depending on where you are in the world in our model looks at a.
You know a number of scenarios a base case scenario a conservative scenario in an optimistic scenario for each country around the world depending on where they are in those in those recovery phases and obviously most of our focus is is on the base case in the conservative case in terms of our modeling and cost actions.
Not spending too much time on the optimistic scenario otherwise you know go in in the in the case, where opportunity Materialises faster. You know we are prepared to take advantage of that so they just requires a very agile management process and we feel good about the way we're approaching it.
Great.
One follow up if I may the you talk a little bit about what you're seeing with your chemical and smear industrial customers. Just as you know obviously were protection recession or we're going to me recession scenario, how are they thinking as we sort of beyond the the initial covered impact or you see people pulling back heavily on <unk>.
Lands there thank you <unk>.
Yeah. Thanks to Eric you know, it's a bit of a it's a bit of a mixed bag on the industrial side is you know about half of our industrial businesses food environmental and environmental piece, that's actually been reasonably robust through this and about half is the material science you know the chemical and polymer piece overall, the industrial category for us in the court.
There was down about the same as far my and the mix of that was you know China, taking a bigger hit a U.S. down you know in that in that mid single digit range actually Europe grew on the industrial side in the corridor and so it is a little bit of a mixed bag we're seeing.
We're seeing some industrial customers.
You know hold back you know, we don't really see many outright closures per se and we <unk>, we have seen some investment on the polymer side you know <unk>. These markets were pretty soft last year and we believe there's some pent up demand and you know, we're actually seeing I would say reasonable tone in the in the industrial and markets although.
As you know those are those markets are a lot more instrument oriented with less recurring revenue, particularly in the T.A. instrument side. So you know watching a carefully but.
You know at this point, it's probably too hard to overly generalize, there's pockets of strengths and weaknesses there.
[noise]. Our next question is <unk> your lights up and.
Wanting goes thanks, Chris So I'm a farmer sorry can you just talk a little bit about how things look if you separate out large molecule, which I think is about 30% or so or the mix from small molecule.
And then what your expectations look like if you if you're just trying to assess the components of farm and demand this year Bye bye pipeline.
Sure.
Yeah. So farm, thanks, Dan I hope you're well the the on the farm side of the business, which is a little more than half of our revenue and as you quickly point out it's about a 70 30 split we we're actually seeing really solid pharma business through the week 12, we were we were up in the mid single digits I'm on both the small more.
All and and large mall little bit better. So you know some some some decent started to the year before a lot of the containment activities outside of China that is a those numbers are outside of China.
China, obviously is a real outlier for the quarter.
And so you know the way we're looking at that is the the the manufacturing Q.H.U.C. part of the business. We've seen continued operations we've seen growth in in a in Q. eight Q.C. outside of China.
We've seen a fairly steady recurring revenues, although you know more growth, where we have contracted service plans and where there's more full production.
Some some cute Q.A.Q.C. has been on split shifts or rationalize capacity, we see that in the contract segment as well, but you know, we're we're basically expecting to see reasonable reasonably stable conditions on the Q.A.Q.C. side.
The on the innovation side much R. and D. does continue some of it has been diverted to to co business. You know there's more than two 200 trials underway for coping 19 therapies and up to 100 different vaccine programs out there right now six of which are already in trials. So.
As I alluded to in my remarks, you know we've seen some some nice response Ah you know in that segment. You know obviously trying is a big part of the the overall form of picture and that's a that's really colored R.R. Q1 results, but you know we're we feel you know we're we're glow.
Add that we have such a nice concentration apartment or overall portfolio and expect that to be a reasonably stable market as we as we move through this and and improve over the course of the year.
Okay I appreciate that color and then Sherry any help you can offer in terms of the extent to which the 100 million will flow through r. and d. versus S.G.N.A.
And then on the hundred million and there is there a back half awaiting that we should think about where the cost savings are you looking to have the portion of the cost structure in the current quarter match, what you're trying to do overall, how aggressive you've been into cue.
<unk> great. Thanks, I'm happy to answer that so the costs access we put in place.
Related to and play related action through salaries for those work schedules really trying to to write size, particularly in the second quarter as we expected to be more challenging likely then Q1 and then other just not essential cost that that we can differ so the hundred million dollars in cost.
The base against that is really against our internal a plan that we've been working on for the year 2020.
The savings would flow through about three quarters of it and flow through operating expenses and about a quarter of it would flow through a cost of goods sold.
As far as the timing, we we didn't see some benefit of it and Q1 and we see plan to see about a third of those costs actions flow through and Q. too kind of that 90 day period, we talked about with some of the actions and that would flow into a little bit of key three but then the remainder of that would be in in the second half.
Okay, Thanks, very much be well guys.
<unk>.
X. question. Please.
Six questions from tackle Peterson J.P. Morgan.
[noise] say good morning, you know cricket you haven't preannounce fix it or last seven this is I think but you know given the magnitude unique environment and the fact, most your peers did print out I'm just curious why he didn't feel this was warranted to get out there how did I call and then secondly, if we think about China I. Appreciate the color can you talk a little bit more on pharma versus food in China and instruments in considerable.
Maybe a little bit more color on on from the markets and then any color you can provide an april trends in the U.S. and you're up relative to your last two weeks March.
Yeah, Yeah. Thanks, Tyco you know, it's you know, it's it's been a a very fluid environment here and as we noted you know <unk> call. We didn't include.
The any impact of cold in in in our guidance and you know as I as I mentioned before you know other than a China, which I think you know we all knew was was in in a challenging environment. In Q1, you know we were actually operating you know within our plans really true almost until the end of the quarter and so.
So as we close the Bucks, we just felt that we'd be better to issue our results. When we saw the the biggest and fullest picture possible.
Of both what happened in the quarter and our expectations going forward and you know try to incorporate all the different steps were taking to navigate you know the environment and.
And so that's that's why we took the approach we took in terms of China in color on on some of the different categories. You know farm a if you look at the overall trying to result of down 45% you know pharma was in roughly in that range farmers about half of our business. There you know the <unk> the food the.
Food business suffered primarily because a lot of the import export restrictions that went into place put a bit of a hold on laboratory type activity and so you know food was down you know in in in similar ranges and you know academic and government. Obviously, a was was the area of of of greatest weakness.
In China, It's a lot of universities were closed for the bulk of the quarter and the government was delaying tenders and we do expect that that government environment, you know, where there is quite a bit of food business as well to continue to remain soft as a as the country looks at recovery that recovery shouldn't.
The led by the more the industrial corporate sector, particularly the pharmaceutical business you know in terms of the the instruments and to be recurring revenues. You know we saw impact on on both on both parts of that business you know certainly to the extent we were serving customers.
In an operating facilities had access we were able to maintain some recurring revenues. Although as you know that contract and service plans are less of a mix in China than they are in other parts of the world. So we saw it also in the you know on demand service and into parts spare parts business, but you know trying to went through a pretty significant locked down where a lot of activity.
On on hold and that activity is coming back as I mentioned, which is you know steadily being mad manage very tops down in that in that environment in that operating environment, and we expect to improve direction Lee into two and recover you know more fully in the back half of the year.
And then on the [noise] under 100 million across the out obviously, a lot that's focused on salaries and and I'm. The hourly workforce can you just give us comfort that that's not going to pack. Some of the gross initiative grow condition is given that you know even now share lost in in the past how do we get comfortable that you're not cutting a into potential you know on growth opportunities going for.
Board.
Yeah, Yeah, that's that was our guiding principle of course, you know we we wanted to match some of our spending needs. We you know we made some calculations as I alluded to for you know when a conservative scenario, how do we maintain the financial flexibility that we've always enjoyed and so we modeled some numbers for the year and said how do we pull that in.
Two a short concentrated period and we looked at it programs full capital and and projects that that we're going well that we had an ability to still meet our objectives on and just take a temp ticket temporary pause and obviously shared the the burden of of salary reductions are hours reductions across you know much of.
The workforce, but are one of our guiding principles has been to sustain that momentum we have in a in new product commercialization.
And in fact, we we believe we found ways notches to sustain or their true pipeline, but actually to enhance it for benefits to give us benefit in the second half of the year and so we've taken a very very thoughtful.
Approach, we took time to do it the right way and we've you know stay very very close to our entire employee base and with with tons of communication in context, and you know feel feel good about the balance that we struck there, but you know our growth initiatives are primary growth in there.
Additives are very much you know intact and as I alluded to in the in the remarks our product.
A portfolio, particularly the mass spec side, where we had acknowledged some share pressure in recent years is is doing very well it did very well and q. for it it let our you know let our performance through much of the first quarter until you know until the containment measures Ah It in and you know when we look at our pipe line strength.
In the future you know, we do see the benefit of our new products.
[noise] [noise] next question please.
Our next watching some ducks Hancock on a company.
Ah Hey, good morning, everybody in a glass glad to hear doing well. So you talked about holding back on working capital spending.
I'm thinking that means building left and then Tory if if we were to move into recovery him quickly than expected, which would obviously be great news for all of us.
Is there any concern that you wouldn't be optimal way positions <unk> and along those lines, if you're working assumption that instrument revenue that you expected in the first half, but isn't coming in do there's a pandemic.
Isn't necessarily going to come back in the second half as customer through challenges and and the hangover associated with what's going on right now.
Yeah sure dug happy to it you know we think we have a lot of room on our inventory and yeah I'll, let sherry add to this if she'd like but you know the inventory management piece. You know is certainly prioritizing, making sure we have plenty of capacity and.
And in some of the faster moving technologies ones, where we have visibility to pipe line. So you know we match her inventory goals in inventory reduction goals as needed against you know dynamics you know in terms of where we expect our pipeline to be so even with some of the smart working capital spend management, we think will be.
Ugly able to be responsive into play off and in fact, if [noise].
Conditions allow and that's why we've actually as I alluded to before assembled a an optimistic case scenario. So well you know we're focus more on our base case for planning at our Conservative case for liquidity management and financial flexibility. We are we do have her eye on on what that would look like and make sure that you know we wouldn't Miss a beach.
Should things improve a little bit faster relative to yours. The second part of your question dug where instruments got that we expected in the first quarter or even in the second quarter, given the near term caution.
Are are less likely you know, we really believe and all of our pipeline analysis says that those are delays are not cancellations, we still think that.
You know when we look at our quoting activity and our sales pipeline in our order book you know while they do reflect that near term caution you know in general I'd say and particularly among our pharmaceutical customers. There's a there's an optimism about the future in in an intent to returning to investing for growth in you know in the foreseeable future, obviously, we'll update that as we.
As we move to the year, but you know we see more more of a pause in in that spending and don't have any real evidence of of any cancellation type activity in in in scale.
Okay. That's that's super helpful and just a quick follow.
Regarding recurring revenue I mean that that was nearly floundering a quarter I I know there were some pressure and and geography is beyond China late in the corridor I'm just wondering along those lines if you'd be willing to quantify how recurring revenue trend did real late in March globally and early April and.
There's any ability to to use that as a lot during crowd into how you're thinking about recurring specifically on the second quarter. Essentially you don't have things kind of at least leveled off at late April level. Thank you.
Yeah. So I'll, just maybe a little bit of color and that think so you have the recurring revenues you know for the quarter were you know we're we're we're flat. It should you as you mentioned and we were trending better than that toward you know to the end of the quarter. We you know we we normally do have purchasing activity at the end of the quarter I consume bubbles just as we do on instruments.
Not not to the degree, but you know that definitely affected it is affected it and you know, it's it's a little bit of a mixed bag on on recurring revenue from the standpoint of of service. There's two big pieces of the service. There are those contract the service plans, where we're seeing consistent growth in normal historical levels and then you have the on demand.
In service, which includes spare parts in a meaningful way, where you know as our as our service engineers can't access many customer sites. We obviously have have weakness in in those areas and so you know you know in general you know the early patterns and in April reflected sort of where we were.
Towards the end of the quarter, particularly in our largest geography is outside of China, whereas China. We're seeing you know clear evidence of our increasing access of our service engineers into a customer accounts over over time here on an upward slope you know we've seen continued containment measures and some of the other.
Parts of the World. So I think that dynamic of a mix between contracted service plans on demand you know chemistry, you know heavily utilized some certain areas and held back in other areas will probably persists for a little while here into the quarter and we'll certainly update you on that as we as we get more information next score.
[noise]. Our next question is the D.J. Kumar Epicor I.S. high.
Hey, guys. Thanks for taking my question, Chris up maybe you could start up I I don't think I heard you guys mentioned the exit fair you know in in.
X., China, you know I I know you mentioned you know Puerto Rico from March was was you know materially worse, but with at the bottom have we seen you know the rest of the work we just step below that those levels her on the upper trends.
Or perhaps you know coming in better or worse any comments on drugs or create I think would be helpful.
Yeah I you know think C.J. The question. Appreciate it you know I I don't think we want overly get overly precise on early trends. In April is is you know our personal at the bar quarter is is the latest of three you know in general terms you know what Mike.
Comments earlier, where that you know, China and parts of Asia, even parts of Europe seem in improving trend, whereas the U.S. other parts of Europe, India have seen the continuation of the type of containment measures. So it's really all about it'll as we get in deeper into the second quarter it'll.
Oh really be about the.
The restrictions the lifting of restrictions.
Promulgated by both governments as well as corporate policy in terms of getting people back to work in scaling up production facilities and and that's going to look different in pharma companies and contract companies and industrial companies and so you know I I don't want to you know put too much credence in in early you know April result.
Other than you know we expect for the for the immediate near term some continuation of what we saw towards the end of the quarter with with somebody improvements noted.
That's that's helpful. And then maybe as a follow up to that you know when you look at them and markets. We've heard in a perhaps some <unk> bye bye consumers on you know pillows respiratory trucks or not Italian quick of drugs and maybe he'll come on this going up what is the implication.
That <unk> I guess, when you look a small molecule consumer business and academic and <unk> is that couldn't we should extrapolated from China to other parts have to work you know that's much worse than the pharma. Thank you.
Yeah. It's it's an it's a really interesting question I think it's it's probably bit of a reach to try to draw too many conclusions between consumer behavior in the short term and something like consumable usage in our business I I look at it more as something that colors. The overall pharmaceutical industry you know as we look at.
It you know big pharma right now, there's there's a lot going on and and most cases.
No. The production continues there's there's clearly more of a focus in the form of companies had existing drugs versus new product launches simply because their teams can't you know fully get out there and and launch new products. Obviously, there's a there's a covert 19 focus with new trials with research on immune modulation and.
Hallmark or analysis.
But but clearly you know some of the stay at home type borders you know have resulted in pure doctor visits for normal routine type healthcare and and medical therapies and to some degrees. That's coloring you know big farmers mindset is they navigate through this process, so but you know to boiled.
That all the way back to consumable <unk>, you know I, I'd, I'd say or consume bubbles revenue and to to to some extent as well the instrument purchases are reflecting more of just the cautioned that most of our our customers are.
Are taking stepping through this but I will say that you know every single one of our customers. We've stayed very active with even if remote we've had extremely positive interactions.
With a with them and and had some real breakthroughs in terms of how to serve them effectively at a distance.
[noise] I next cautious I'm, Dan at brand N.U.P.S.
Great. Thank for our thanks for taking the questions christened Cherry and Brian Chris I wanted to ask your I know you pull gyn for 2020, obviously, you've given a bunch of color regarding trends between geography, and kind of customers, but I'm wondering giving you did discuss you know several scenarios that you're kind of mapping for different.
Customers and geography, <unk> any way to think about a broader range of outcomes in two q., obviously not going to give us a single Guy that you know single number for guidance, but I'm wondering if there's any a kind of broad range that you could kinda offer speak to about you know how we should think about that.
You know I think we'd probably want to stay shorter that Dan for now I I'd, rather just provide qualitative you know.
Description of how we're thinking about those ranges you know obviously a base case type of type of scenario, where you know we have you know more of an an expected progression of these countries through recovery <unk>, sorry, containment recovery and returned to growth.
<unk>, a conservative case scenario, where if we see you know the the you know persisting low level to demand for instruments and and high levels of containment you know and obviously building our financial plans off of a conservative scenario and then an optimistic case to say what if it comes back faster and there's some pent up demand.
That materialises sooner you know the those those are just qualitatively how we're looking at at this point I think it's premature to to you know.
Been too much time, describing what those numbers look like and we'll obviously try to do more that you know as as we move through the year, but you know as I as I alluded to in my remarks, you know we've seen you know periods of a macro economic pressure historically in different scenarios and you know we have always benefited from the underlying strength.
In demand characteristics in the end markets that we choose to focus on him and so were you know we're planning for you know a solid rebound when market conditions a lot.
Okay, Great and then and then maybe just on the industrial and market you had a comment earlier that counted fairly.
Okay, and constructive but didn't sound like you know verification would be that things would worsen materially I'm. Just wondering could you break down a little bit within industrial your exposure to chemical given what's going on with a little prices and spreads.
And [noise] environmental I believe you had a favorable comment about the trends in the corridor and obviously broadly for thermal for T.A., maybe could you ever total flavor.
For what's going on we're gonna industrial and does he Oviedo nine experience with how you are brought her industrial <unk> business performed.
Server predicate at all or or or is it. There's this mixtures two different it use that kind of help us think about the impact in 2020 and 2021.
Yeah, Yeah, I know, it's a really interesting thing to dig into you know the industrial category is about 30% of total revenues, which is you know in rough terms half and half between two and environmental in materials science.
Materials science tends to be the more cyclical peace and you know the majority that is chemicals and polymers. You know we've seen I mean, the technical side of the businesses smaller piece polymers, the bigger piece, especially advance polymers and you know we've seen sort of okay customer activity in that area.
The chemical area is a is generally smaller and you know, it's probably too hard at this point for us to draw direct correlation between what's going on some of the energy markets and that right. Now M.T.A. is a is the biggest piece of the materials as you know and is more effective then waters generally with with fewer.
Occurring revenue sales capital equipment sales or 80% of that and you know we've seen Ah you know more cyclicality in that in that business as you know although.
You know, we feel really well positioned in that area I mentioned three new products that are exciting and T.A.. We have the strength of the discovery line. We've got a you know a gradually improving mix towards high Tech I performance materials pharma and even consumer products and so I think we're we're we're better position.
And in the materials sector relative to where we have been historically and even some of our peer groups because of some of the investments. We've made there. So you know we're we're watching it carefully obviously expecting a you know the mm mm you know the form of part of the business to lead the recovery as it as it happens.
But you know fill fill very good about our our overall materials material science industrial portfolio like I mentioned the industry. The the the food could be pretty lumpy, especially with the big concentration in China and on the material side. We've seen you know actually some reasonable demand you know through cycles in recent years with.
A lot of what we're doing.
You know on on on applications people us another type of applications the that that have been invested in by by governments municipalities.
You probably have time for one more question leaf.
I didn't care yard with Jeffries your lights, helping.
[noise] I think someone stood two questions <unk> 'cause you touch on government academic trends geographically was that in market fairly weak throughout that period of digits. We have more precipitous follow up toward the end of the core and then it could you just remind us in terms of your service next to the break dumped we contracted versus break.
<unk>.
Yeah, Yeah. Thanks, Brent appreciate the questions and first of all an academic and government you know that was though that was the weakest. So the categories as as we mentioned it it was geographically the most week in China, where we saw you know a bigger decline in the government an academic business.
Relative to even the overall business and that was a function of the fact that most universities were closed in China for much of the first quarter and you know the majority of government tenders. You know were delayed. So you know that was a pretty clear line and and you know in China historically, the academic and government business is a bigger mix.
Of our overall business in part because of the government food labs, and that's nearly a quarter of our business.
Shortly in China, So that that had a big impact we actually saw some more actually better performance.
Kind of Flatish to slightly up in the U.S. in academic and government. We were we were doing pretty well.
And that did have an impact at the end of the quarter, but that that business. You know was a was performing reasonably well, but have limitations to customer sites in the in probably the immediate future and then Europe was you know appeal to the overall European performance of up 4% for the quarter that was led.
By strong farm, you know modestly positive industrial and offset by negative on academic and getting government.
Europe, which was more cautious environment in that in that sector in the corridor.
You know relative to the service Ah contracted plans you know generally run.
In the sort of Ah you know 40 per cent ish plus range in the developed markets and less that in in emerging markets. So with you know you know between a 3rd% to 40% or so of our of our service businesses in the contract and service plans with the remainder being on demand.
Parts and.
You know lines of that.
Nature. So you know we've we've continued you know in all those categories although.
Operating environment right now we are executing to five overriding priorities as I mentioned number one.
And putting the health safety and wellbeing of our employees and customers first number to ensuring business continuity number three maintaining financial strength flexibility and liquidity number four actively planning for recovery, particularly in maximizing the benefit of our strong new product flow.
Number five contributing our expertise and capabilities and the global fights against covert 19, we're confident in the strength of our business and we're taking a pragmatic approach to preserve our balance sheet strengthen flexibility, including the most significant off cost actions in the history of the company. Our goal is to position waters to recover quickly and sustainably.
When market conditions allow.
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 second quarter 2020 call, which we currently anticipate holding on July 28th Twentytwenty.
Makes everybody and have a great day.
And thank you. This task include today's conference call you may disconnect headlines and thank you for your participation.