Q2 2020 Waters Corp Earnings Call
HM.
[music].
Good morning, welcome to the Waters Corporation second quarter 2020 financial results Conference call. All participants will be in I'll listen only mode until the question answer session. Now the call. This conference is being recorded if anyone has any objections. Please disconnect at this time.
It is now my pleasure to turn off of a call Mr. Bryan Brokmeier head of Investor Relations. Please go ahead Sir.
Thank you operator, good morning, everyone and welcome to the Waters Division second quarter earnings Conference call before we begin I will cover the cautionary language. During the course of this conference call will make various forward looking statements regarding future events or future financial performance of the company in particular, we will provide commentary on potential marketing business can do.
Missions, the company expects for the third quarter and full year 2020 <unk>.
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 may cause our actual performance to differ significantly from Merck present expectations.
These risk factors included in our annual report on form 10-K.
Fiscal year ended December 30, Onest 2019, and part one under the caption risk factors and our most recent quarterly report on form 10-Q for the quarter ended March 28, 2020 in part one under the caption risk factors, both of which are on file with the FCC as well as the CFO.
Oh, sorry language included in this mornings press release, including with respect to risks related to the affects of cobot 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 a regularly scheduled quarterly earnings release conference calls and webcasts or otherwise required by law.
Our next earnings release call and webcast is currently planned for total were 27 2020.
During today's call will 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.
Our discussions of the results of operations, we may refer to non-GAAP results, which exclude the impact of items such as those outlined at our schedule titled reconciliation of GAAP to adjusted non-GAAP financials included in this mornings press release.
Unless stated otherwise references to quarterly results, increasing or decreasing in comparison to the second quarter of fiscal year 2019.
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 Dr. Flemming Ornskov waters chairman of the board.
Make a few brief comments Fleming.
Thank you, Brian and good morning, everyone I wanted to join at the beginning of this call for two reasons.
Sure, Thank Chris well, he's contribution to waters and second to discuss our leadership transition process and the appointment of we'll get back sure as waters next CEO.
I want to begin by thanking Chris for his leadership over the last five years and told his commitment to ensuring a seamless leadership transition through the end up this year.
Over the course of the last few months, which have been particularly challenging against the background global pandemic precedence kept the team focused on execution.
Throughout his tenure Christmas demonstrated that clear commitment to advancing a new product cycle that has been pod helped us to establish a strong foundation for growth.
As you know on July 15th we announced that it will be joining us on September 1st would it is a highly accomplished executives with more than two decades of leadership and operational expertise in our industry.
He has demonstrated a proven track record of delivering tangible financial and operational results as evidenced by his prior roles at Merck Kgaa headquartered in bottoms that Germany. Importantly, he also has a strong appreciation for all purpose culture and people we are cautiously.
He will help water was built on all foundation and it will show in our next chapter of innovation growth and shareholder value I know food. It is eager to get going and we look forward to introducing him. When he officially joins us in September with that I'll turn the call Ovature Kristin.
Jerry to couldn't talk the earnings call and QNX.
Thank you for the kind words flemming 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 that you and your loved ones are doing well as the world continues to manage through this truly extraordinary time of the global Cobot 19 pandemic.
It's amazing how much is happening on a daily basis, and I wish you piece and fortitude as we all work hard to improve bone health and economic conditions for everyone.
During today's call I will provide an overview of our second quarter operating results as well as some broader commentary on our business in the context of cobot 19 and describe the actions, we're taking to emerge from this period stronger than ever.
Sherry will then review our financial results in detail and update you on our financial actions as it relates to the balance sheet and cost structure.
We will then open up the phone lines and Sherry and I will take your questions.
To briefly review our operating results for the quarter Q2 sales declined 12% and adjusted earnings per share declined 2%.
Well Q2 was expectedly a bit softer than Q1 in terms of year over year grows. Our revenue result reflected modestly better market conditions than we had anticipated an increasing impact of new products as well as strong execution by our global sales service and operational teams.
During the quarter, we also executed well on our plans to achieve meaningful near term cost savings to ensure our financial strength and flexibility under a variety of recovery scenarios.
This combination of higher than expected revenue and the timing of our near term cost actions enabled us to exceed our margin and EPS expectations.
As we entered the second half of the year, we're focused on our recovery trajectory and normalizing our operating spend and investment in the business.
Im very proud of our team's execution across the business and this dynamic environment.
Looking ahead, well risks and uncertainties and our operating environment remain as a result of the cobot 19 pandemic. We believed that our end markets in additions in the second half of Twentytwenty than they did in the first half.
I will provide some additional color on this later in my remarks.
As we navigate the cobot 19 global pandemic, we continue to execute against our five point value creation model, which emphasizes our unique specialty positioning organic innovation operating excellence disciplined capital deployment in a sharp focus on people and culture.
That said I'd like to focus my comments today on our near term operating priorities relating to the coated 19 period that I outlined on our last earnings call.
We're making great progress against each of them.
First our top priority remains the health safety and well being of our employees and our customers.
Deliberate actions and cautions we have taken during the pandemic have minimize the infection rate within our employee population, while still enabling the organization to operate efficiently and effectively.
Our multi phased safe returned to workplace process is well underway with teams returning to our major facilities in several stages.
Our second priority is to ensure business continuity.
Our service engineers have consistent access to customer sites globally in order to maintain service and install instruments, while our sales reps have less consistent access given the very pace of recovery across our geographies.
Salesforce access has been improving however, as customers continue to ramp up their laboratory operations.
That said, our strategic technology investments over the last several years are paying off asked majority of sales service and scientific activities with a hybrid in person in digital effort.
We have been customers through virtual events, and we're restoring normal interactions with sales reps and regional specialists where possible.
Operationally, we have confidence in the continuing stability of our supply chain.
Distribution processes.
Our third priority, it's maintaining our financial strength and flexibility and liquidity even in our most conservative forward looking scenarios.
Exiting the second quarter, we are on track to achieve our 100 million dollar cost savings plan for the year relative to our prior internal forecast.
We are nearly complete returning those employees on temporary 90 day furlough to work.
We have restored full hours in salaries and we have now reoriented our focus towards investment in the business in the second half to enable our returned to growth.
Jerry will provide more details on these measures crews during her remarks.
Our first priority is to accelerate our recovery.
Focusing on actions we can control.
In particular, we are taking direct action to a maximize the impact of our strong new product cycle.
The target our R&D efforts on near term product introductions.
The service our installed base either remotely.
Oh and D focus our sales efforts on customer labs that are open to operation.
In Q2, we saw an increased contribution from our recently launched mass spec products while launching.
An important new LC instrument more on this in a few minutes.
Finally, we're continuing to contribute our expertise and capabilities in the global fight against overnight team.
Our customers have responded enthusiastically to our offers of deep scientific and technical expertise across a range of coded 19 therapy and vaccine candidates under development.
In particular, our unique system solutions have been very useful in critical workflows, including peptide mapping like Ken analysis and oligonucleotide analysis.
Well the short term revenue impact is minimal these efforts have been deeply appreciated and a greatly advanced relationships across our customer base. While also advancing the fight against Cobot 19.
Now I would like to make a few comments on our outlook.
As we outlined last quarter, our planning scenarios are based on a categorization of each geography into one of three phases of the cobot 19 pandemic containment recovery and returned to growth.
We currently believe that all of our major geographies have now transition to the recovery phase.
As a result, and as I mentioned before we believe the second half will be modestly better than the first half. However, we don't anticipate that quarterly revenue growth will turn positive until 2021.
From an end market perspective.
Encouragingly, our top global pharma accounts grew in the second quarter and year to date.
In addition, cxos in large molecule pharma customers are recovering nicely, while generic and specialty pharma suitable customers are still operating with more constrained capital budgets.
Looking ahead, so we expect most pharma customers to return to normalized operations. This fall risks and uncertainties certainly remain particularly in Q4 around meaningful year end budget.
Leases that we typically see.
Our industrial markets are recovering more slowly with customers generally operating under tighter capital budgeting restrictions than in pharma.
Notably because these customers provide less recurring revenue than our pharma customers returning to normal operations doesn't immediately result in a corresponding return of spending in the form of capital equipment.
Within the industrial category materials science lands are operating at higher activity level than food and environmental labs, and we expect them to return to normal levels more quickly.
Lastly, academic and governmental markets are lagging corporate customers and are expected to be the slowest to recover.
Many academic labs remain closed were only partially open well governmental business has been significantly impact by delayed tender activity.
Turning now to our geographies all major regions of transition from containment to recovery phase with each seen steadily increasing customer activity throughout the quarter.
A number of countries, including China other countries in Asia and parts of Europe are moving through the recovery phase more rapidly.
On the other hand, the United States, India and remaining parts of Europe are progressing more cautiously through these various stages of easing restriction.
In aggregate as we look to the second half of the year, we are expecting improve.
Demand across the business in particular for instruments as we expect a gradual easing of capital spending constraints in all of our end markets.
Looking specifically at China.
The pharma market is leading the recovery with solid growth in large molecule pharma and cxos.
Generic pharma remains under pressure as customers remain cautious on capital spending in the context of both the G.P.O. program implementation and the coated 19 pandemic.
That said China's pharma recurring revenues grew in the quarter across both large and small molecule, which we expect to continue bolstering our confidence that we will see increasing instrument demand overtime.
China's food and environmental markets were down in the second quarter, reflecting the continued funding pressure that is impacting government labs, partially offset by growth within independent labs.
Elsewhere in Asia recovery is a mixed picture with strength in certain geographies, such as Korea and slower recoveries in other regions, such as Japan and India.
Turning to the U.S., we're seeing a dynamic and somewhat uncertain environment with various states experiencing increasing Coca 19 cases over the past several weeks and therefore are seeing rollbacks of previously implemented reopening plants.
The pharma market is leading the recovery driven by large molecule customers.
Capital spending is slowly but steadily improving and we are seeing strong customer support for our new products.
Elsewhere in the Americas, Latin America remains very soft.
Lastly in Europe recoveries in the countries of southern Europe in Northern Europe are lagging those in eastern Europe and Central Europe.
I'm a suitable markets are recovering more quickly than other markets with Q, a QC reporting growth in the second quarter.
Our recent European performance has been stronger compared to the Americas, because many European countries have been more effective managing Copa 19 containment efforts and European customers are adopting some of our new mass spec technology at a faster rate than other geographies as we typically see.
Aside from these current market dynamics, we remain sharply focused on our primary growth strategy of organic innovation.
We believe we are well positioned to leverage our robust in growing new product pipeline as demand normalizes and we expect continuing increases in contribution from new products.
Looking at the waters product line, there was increasing evidenced subtraction of new products throughout the quarter, particularly bio accord and cyclic imus.
In addition, we launched six new instruments year to date have received very positive initial feedback.
These new product launches are highlighted by the arc H.P.L.C., a rugged reliable and modern age plc system that is a significant advancement and enhances our strong technology leadership position in the core liquid chromatography market.
In our Ta instruments product line, the three new products launched last quarter at Pittcon have received strong customer interest material science markets have been challenged but these products are poised to support future growth and market share gains.
In summary, the sales in our second quarter continued to be impacted by the Kobin 19 pandemic. All revenue result reflected modestly better market conditions than we had anticipated an increasing impact from our new products as well as strong execution by our global sales service and operations teams.
We also took decisive actions to manage our cost to ensure the largest portion of our twentytwenty savings plan in the second quarter, which as expected with some more challenging environment in the first quarter.
This combination of better than expected topline performance with the benefits of our cost containment efforts enabled us to exceed our margin and EPS expectations.
While the risks remain with the uncertain trajectory of the global Cobot 19 pandemic, we expect market conditions to improve modestly in the second half versus the first half of the year and therefore have accelerated our growth investments to take advantage of opportunities as demand recovers.
With that I'd like to pass the call over to Sherry Buck for a deeper review of our second quarter financials Sherry.
I'm, a 13% as recorded.
In the quarter sales into our pharmaceutical market declined 10% sales into our industrial market declined 13% for academic and governmental markets declined to 21%.
Looking at our product line growth a recurring revenue, which represents the combination of precision chemistry products and service revenue declined 3% in the quarter what instrument sales declined 23%.
As we noted last quarter, there is no year over year difference and the number of calendar days during the second or third quarters, but there are two additional calendar days in the fourth quarter of 2020 compared to 2019.
Chemistry revenues were down 4% in the quarter, driven mostly by weakness and academic and governmental.
On the service side of our business revenues were down 2% as mid single digit growth in service contract revenues were offset by a decline in on demand service revenues and spare parts.
Breaking second quarter product sales down further sales related to waters branded products and services declined 12%, while sales of Ta branded products and services declined 20%.
Combined the LC and LC MST instrument platform sales declined 24% and th instrumentation system sales declined 20%.
Looking at our growth rates in the second quarter geographically and on a constant currency basis sales in Asia declined 12%.
China down 20%.
Sales in Americas declined, 15%, including a 14% decline in the U.S. and European sales were down 9%.
Before I comment on our second quarter non-GAAP financial performance versus the prior year I'd like to update you on the progress of our cost actions in response to the coated 19 pandemic that we shared with you during our last quarterly earnings call.
We are on track to achieve cost savings of approximately $100 million for the year relative to our prior pre coded internal plan.
We achieved about 60% of our planned annual savings in the first half of the year, which was better than expected as we focused on aligning our operations and investments with our growth challenge in the second quarter.
This result flow through our piano and is the primary driver for favorable performance in gross and operating margins versus the second quarter of 2019.
Looking ahead, while we plan to maintain strong operating discipline through the ended the year a significant portion of our cost actions were enacted for 90 day period and our nearly complete.
Poised to returning from temporary 90 day furloughs, and we restored reduced work hours in salaries to normal levels.
As a result, the second half of the year will not reflect the same level of savings reported during the second quarter as Weve reorient, our focus towards growth investment in the business and the second half.
We anticipate the remaining 40% of our cost savings to be achieved in the second half of the year.
This plan reflects our core assumption that the business moves through the recovery phase and business conditions improve in the second half were monitoring our business conditions, and we will adjust our plans as are appropriate based on the pace of the recovery.
Returning to our second quarter non-GAAP financial.
Performance gross margin for the quarter was 59% compared to 58.4% in the second quarter of 2019, primarily as result of our cost savings actions.
Moving down the second quarter piano operating expenses decreased by approximately 13% on a constant currency basis and foreign currency translation decreased operating expense growth by approximately 1% on a reported basis.
And the quarter, our effective operating tax rate was 15.4% compared to 15.7% in the prior year.
Net interest expense was $9 million, an increase of about 3 million as anticipated.
Our average share count came in at 62.2 million shares a share count reduction of approximately 11%.
Up 7 million shares lower than in the second quarter of last year as a result of shares repurchase through the end of the first quarter of 2020.
Subsequent to which we paused the share repurchase program.
Our non-GAAP earnings per fully diluted share for the second quarter decreased to $2.10 in comparison to $2 in 14 cents last year.
On a GAAP basis, our earnings per fully diluted share decreased to $1.98 compared to $2.08 last year.
A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning.
Turning to free cash flow capital deployment, and our balance sheet I'd like to summarize our second quarter results in activities, we define free cash flow as cash from operations less capital expenditures and excluding special items.
We made good progress in the quarter on our capital expenditure and working capital improvement plan shared during the last quarterly earnings call and we also remain on track for the full year.
And the second quarter of 2020, our free cash flow came in at a $175 million after funding $46 million of capital expenditures.
Excluded from pre cash flow was $23 million related to the investment and our top precision chemistry operation.
The second quarter. This resulted in 34 cents of each dollar of sales converted into free cash flow and 30 cents year to date.
Our strong free cash flow was primarily result of cost savings and actions implemented in the second quarter.
Turning to working capital accounts receivable days sales outstanding came in at 87 days this quarter up eight days compared to the second quarter of last year and inventories decreased by $8 million in comparison to the prior year quarter, reflecting revised production schedules.
Waters maintains a strong balance sheet access to liquidity and a well structured debt maturity profile.
We ended the quarter with cash and short term investments of $356 million and debt of 1.7 billion on our balance sheet that the ended the quarter.
This resulted in a net debt position of 1.3 billion and the net debt to EBITDA ratio of about 1.8 times at the end of the second quarter.
We also have $1 billion available on our bank revolver for total available liquidity of $1.4 billion at the end of the second quarter.
In terms of returning capital to shareholders, while our future capital structure target of approximately 2.5 times net debt to EBITDA remains unchanged, our near term focus is maintaining financial flexibility and preserving liquidity.
As a result, our share repurchase program remains on hold until we see a more stable and predictable business environment.
We expect the actions we've taken will continue to provide us with adequate flexibility under a variety of potential recovery scenarios.
Given the uncertainty surrounding the magnitude and duration of the cobot 19 endemic and its impact on our customers, we're not providing full year guidance.
However, there are few data points that will be helpful for modeling purposes.
Due to the timing of for cost actions as discussed earlier, we expect full year operating expense growth and the range of negative 1% to positive 1% year over year in constant currency.
For the full year at current rates currency translation is expected to decreased sales growth by about one percentage point and to negatively impact earnings per share by about three percentage points.
For the full year net interest expense is expected to be in the range of $40 million to $42 million, primarily due to lower interest rate.
Now I'd like to turn the call back to Chris for some summary comments Chris.
Thank you shared in summary, while the second quarter was challenging as we expected we were very pleased with our results, which were driven by modestly better market conditions than we anticipated increasing impact from new products in the strong execution by our team.
We're looking forward to the back half of the year and we're optimistic that the company is well positioned to return to growth in 2021.
Before we take questions I would like to add a few brief comments on our upcoming CEO transition.
It has been the honor and privilege of my career to serve as the CEO Waters Corporation.
I have loved every single day, working incredibly talented and committed group of colleagues.
Together, we have significantly advanced waters to over the course of the last five years, including we've transformed our organic innovation engine and established an unprecedented new product pipeline.
And supplemented our technology portfolio through external investments and tuck in acquisitions.
We have implemented a new capital deployment framework with increasing emphasis on growth in that.
Estimates, while also returning capital to shareholders.
It's talent organizational capability and technology infrastructure.
Two we did bottrell on September Onest, knowing that the waters just moving forward from a strong foundation.
I extend my warm welcome and best wishes to it and my gratitude to our board of directors for giving me the opportunity to serve as CEO of waters.
Finally, I want to thank our investors in the equity research community it is going to pleasure to.
Who work with all of you and I wish you with that Sherry and I will now begin the question and answer session. As we are not always able to get to everyone's questions. Please limit yourself.
The one question and one follow up please contact the waters Investor Relations team after the call.
Thank you [laughter], we will now begin.
My to ask a question. Please press star one on mute your phone and record your name.
Well clearly.
Our first question or core ISI. Your line is open.
Hey, guys.
Wishing you all the best you know nothing.
The next phase a few career.
I do feel like off part of the story that's missed out here as you know.
Product cycles that we've seen hopefully.
Food over the coming years.
On the topic of adopting a new products to think that with some comments on the call about how a new products that came in better than expected into Q.
And why wouldn't this continue into the back half.
Because I think.
Fascists, maybe on third quarter cap.
No perhaps due to.
Color I think off would be helpful.
Thank you very much VJ for the comment to the question and you're right the heart of our strategy.
Investment that has grown consistently at twice the rate of sales growth. So over the past five years and is now producing.
This I'm really great stream and new products and so you know I made the comments on the call not just on products that we have launched like bio accord.
The cyclic and some of the tandem quads last year, but also like the RPH plc, and then other systems and more that's coming so we we do have a lot of confidence in the new product pipeline as it relates to the contribution directly that.
In particular bio cord and cyclic have really took a oh.
Strong step forward in the second quarter.
With regard to orders in supply that but.
But we're really I think.
Gum coming into the power curve on on those products and and feel good about our pipeline for the remainder of the year I I tried to comment that that we do expect a continuation of positive.
In the second half of the.
The vitality index.
Well contribution that we've seen.
Oh, you know that said my my comments on the on the market conditions of the second half are important because you know well.
We are seeing recovery and all of our geographies that market's as you know there are a lot of puts and takes and.
They're likely to be setbacks, and so our argument everything just progress on a strip.
The puts and takes in that everything doesn't go perfectly yearend budget flush and.
Particular will release year on budget so.
That's really.
The reason for overall tone on modest but boat, but from a new product standpoint, you know we believe that.
So that story is very much intact and actually getting more exciting.
That's helpful, Chris and not one that quick one for Sherri I think all you mentioned topics for the year.
At the midpoint is not flattish.
On the dollar basis.
You know considering that second half, perhaps revenues were still looking at that down in second half of the implied opex growth in second half implies a you know earnings I'm still to be into negative territory.
I just want to make sure I have the math right or not the earnings trajectory to for second half.
[noise] I'm guessing VJ I'll, just as you know we implemented in the number of temporary cost actions.
Earlier this year many of them were 90 days I.
60% of that that we achieved in the first half and <unk>.
40% in the second half and so we tried to give you some some data points around the operating expenses and so were expected of 1% tips.
Positive, 1% I'm kind of year over year full year on a constant currency basis operating expenses.
Gotcha, Thanks, guys.
Our next question comes from Derik de Bruin <unk> with Bank of America. Your line is open.
Hi, good morning, everyone.
Worried.
Sure so.
Hey, Chris just.
Remind me.
What are the capabilities of.
The arc that you think you would drive.
I sort of replacement cycle, I'm, just sort of comparing it to.
Well why in San ingest water.
Basic question of like do we expect at some point and upgrade cycle within your pharma customers for doing here you can see just a just a little bit more color on that thanks.
Hi, before sure I'm sure. Thanks Derek.
You know as you know we have a very very strong installed base and franchise with the alliance H. plc as well as with the acuity you plc of course on the higher end and you know over the years, we've introduced intermediate technology, and what you might call. The U H plc category and that's the arc acuity our platform. What we've done is built a sort of a ground up new.
To sort of arc range program, but targeted at the H.B.L.C. market, which allows method transfer from any direction, but really a modern chassis and interface really in the heart of where the core businesses and so we think thats going to be a very important step forward in our core each.
If you will see franchise will allow the seamless transition of that large alliance base over time.
Bolts mixed and matched as well as new installs. So you a lot of the a lot of the follow on innovation, we've been doing in L.C. In recent years has been more than you plc category.
And we've had a lot of good refresh should be acuity line and this is a very significant advantage plc franchise with full method.
Transfer of in both directions.
But I thought that wasn't with it was basically Wellington.
Yeah and its.
And again this is Ah that's true, but this is a broader based product more for the core Allied space. It's also higher pricing Alliance and has a number of key target applications in quality control laboratories, such as that's release testing on small farmers. So.
Hi, this provides a much grip.
Peter coverage and ease of transition in that environment.
Right and so any share. It can you help me think about the gross margin going forward.
I mean, obviously, the real water with cost savings come out with it and it's much better than we thought could how do we should we think about that at some to cost come in.
Back in.
Yes, Hi, Derek I'm, sorry, I was thinking about gross margins in the second half and as you noted there in a in my prepared remarks, we did.
We still do have some remaining cost actions are they wont wont be a significantly impacted on the becomes more of a factor of our volume.
Mix effects in fixed cost absorption so.
So just maybe to look at our first half performance our gross margins in Q1, we're about 55% largely that was a pretty depressed gross margin from it being a small quarter would have some fixed cost absorption and kind of a onetime FX translation. Our Q2 was at 59% in was probably.
Higher just driven by the a benefit of our temporary cost actions. So if I were to to look at a full year gross margin I would book and then it between kind of that high and low with our Q1 in Q2.
Great. Thank you.
Back in acute Chris Good luck on your next endeavor. Thank you. Thank you very much Dirk.
Thank you. Our next question comes from Tyco Peterson with JP Morgan Your line is open.
Hey, thanks.
[laughter] <unk>, he's sort of ballpark of free you up here.
Thank you all can be able to pop and its laughter.
[laughter] work in a quote would project.
Really I.
Okay, perfect Sad to report or South stream Clay you see but are you willing or press exactly the ball a little cooked as well.
Oh, Hey, Tyco I think I heard the gist of the question about the pace of the farmer recovery and projects across different sectors I'll take a first crack at that and then maybe you can follow up and maybe.
Good or maybe your line will be a little better or my line there or is it maybe but yeah pharma is as I mentioned, let me just comment on on pharma because pharma was you know are one of our better categories and we've seen from the beginning has clearly been reading the recovery.
You know encouragingly the recurring revenue on a worldwide basis in pharma or was it was positive in the quarter and Ah instruments were negative, but not as negative as the overall the overall a business and and so in that.
The way, we do see both the activity levels as well see investment levels in pharma picking up.
As I mentioned, a we track our top global pharma accounts were generally the largest multinationals and they actually group investment from Cxos.
Whose and and even in markets like the U.S., there were a bit slower to recover in the quarter.
Large molecule pharma was recovering more quickly well, we see some of that capital pause on the more on the small mall generic side, we've done a lot of research and I'm sure being if you will have arc of our customer labs in generally.
Labs or pharma labs are operating across the world at about two thirds of their pre coded levels right now, but more than three quarters of those slabs expect to be more at normal levels sometime in the fall.
Yeah like I said, one thing we were really encouraged by particularly as we move through the quarter is that the chemistry revenues remained more resilient than we expected and service revenues were more solid than we expected and so that to us indicates.
Utilization to the base and pointing towards some investments later you know we still think all the same things about underlying demand characteristics in small and large mall pharma.
For different reasons going into the future and they're just positioning all of our new technology to take advantage of the continued recovery.
You know in a in pharma you know I'd say I'd point out in particular in China, We had strong recurring revenue growth in pharma.
Even though instrument growth has been under some pressure and Europe was also positive in terms of recurring revenue growth in pharma with U.S. slightly negative, but overall worldwide positive. So that's a pretty good indicator and so maybe if there's something I missed about your question you can try another shot their final workers downstream to see.
So it looks like there's an opportunity here right.
[laughter], they've actually been a crappy work yeah.
Yeah.
You're right about 70% of our.
Business overall in pharma small percent of all pharma businesses, either late stage development or to a QC and then.
We do see opportunity there I mean, we last year so.
In some of that downstream environment, where where pharma investment has been.
And tilted more towards the research side some of the areas that we.
Of our biggest areas of strength balance less invested in and so we think.
Thank you.
In the there is pent up demand building and that the nice step forward in recurring revenues relative to our internal exit.
Patients for the quarter and expect some of that pattern to continue. So so we know that volumes of lar of sort of small molecule drugs.
Our steadily markel digits in that.
Ultimately will create demand on the instrument.
Side and we're as his strategy has been all along we want to meet that demand with a really refresh new product line you know as it normalizes.
And then lastly, Chris on China Pharma was back on line last quarter it.
It was a piece of the recovery there.
Actually I'm, China exceeded our expectations Tyco in the quarter from from a overall.
You're right about 90% of our pharma customers reported being.
It doesn't mean, they're operating at 90% Pasadena, but oh, they're trying to customers continue to pick up and so if I look at our first quarter and our second quarter I mean any metric whether its total revenue.
Or instrument revenue or recurring they were all.
Like I mentioned earlier on pharma recurring China pharma recurring was up strong double digits in pharma overall recurring was.
That recurring revenue.
You know was a helpful.
Really what will turned out to be.
Minimally instrument demand continues to <unk>.
Did in Q2 as it was in Q1.
Okay. Thank you.
Yep.
Our next question comes from that question Colin of Cowen Your line is open.
Hi, good morning bricks and good luck on your future endeavors right I wonder.
Your commentary regarding the second half outlook.
Take a look at street consensus numbers, if there were a little recurrent revenue growth in the Hong.
Fourth quarter.
I can see why you have to expert in you're up against a really favorable comparison.
Since her gradual improvement over the course of the yard to talk a lot about your product momentum over the course of this call.
What specifically are you using or your earned that would make confident enough to say today that you think.
For revenues declined year over year, given given every although it's early late July.
Yeah I.
Doug I think that's a very fair question, then and obviously the bar in the kind of environment we are.
But on a day to day, a week to week basis and.
The you know a lot of our thinking on the back half years, just at its thinking about trends and dynamics over the course of a half and we do expect better conditions in the second half versus the first while which is why we except continued pop.
But you know obviously we.
Assumes everything goes right and all the recoveries are on you know.
Some kind of a a straight line more uncertainty than usual on your end budget release and so.
You know.
Like a fourth quarter of a year ago. There was you know there was a.
Budget release type activity and.
The thing that is more at risk this year than typical years, but we'll just have to wait and see.
Usability and Q3, we do on Q4.
For at this point and we'll just continue to try to provide clarity on how we think that's going to shape up as we move through the year.
Okay.
That's helpful. Thank them for that and then pivoting back toxic yard that for cost actions during the quarter made a lot of France.
The on currency or the current environment.
On the other hair cut pretty aggressively in a short period of time me I've heard you got 50% to your target.
Well that you're talking about last quarter.
On the not included our.
Brian at 4 million sequentially Ascom out of your sales decline.
Recognizing occurring.
Ramp from investment activity and Andrew.
Yes, I got pretty quickly.
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There should we have any confirmed that there could be a refund in new York.
For current and over for water for social workers for trajectory of these Andrew Jeffrey given how important investment.
Very arguably our in the context of reinvigorating company growth to levels that approach those are pure.
You know a it's interesting question and you know, we obviously thought a lot about how we wanted to shape the cost plan Olive Sherri review, but you know we knew.
To the second quarter that that would probably be a period of most <unk>.
Nick and topline challenges. So we did want a front end the savings keep in mind that the vast majority of our.
And so by by really.
Savings that we wanted to achieve over the course.
So the whole year within a within a period, we were able to do quite a bit that up very quickly I think we manage.
As I mentioned are back salaries hours or risk.
Stuart.
And you know we also did a lot of work around our R&D near term R&D.
He portfolio to Orient those investments towards.
Products, they're going to have a bigger impact at about a really even better now than we had a cut.
That's played it coming into the year I'd also requirements and the remote work we've been.
And I think remarkably and surprisingly efficient and productive working from home for those who are not required to be at that facility. Even our R&D teams I had been amazingly productive or not just on the software side, but even on the core design side, So I think where emerging from this.
Really well I think we feel good about the fact that weve actually front loaded this because it does clear the played a little bit to to to be in more investment mode right from the start of the second half and that was our plan all along and you know I think we feel very good about how we manage through that so maybe ill share to comment further.
I know, it's Chris bases excited I'm to be.
Back and and I'm in Q2, and why they still some flexible pellets up.
Well the unknowns in the second half yeah were resuming projects that we can put on hold and accelerating and the workforce is excited again to get back to business.
Okay. Thanks very much.
Personally I'm sorry.
Thank you. Our next question comes from Dan Leonard with Wells Fargo. Your line is open.
Thank you. So so could you elaborate on on month to month business trends within the quarter and maybe what the exit rate looked like exiting June or even early July.
Hey, Dan sure you know, we generally don't want to provide too much of that and obviously your quarter end activity always Ah you know has an impact but.
What I'd say is that a second quarter typically the first had a much lower a effect of the typical year end capital purchasing given the environment and so there was a little more balance in that sense, but you know a lot of the interesting insights a of that question are probably more on a geography based.
Yes, and you know maybe what I'd call out as an example.
Is the the U.S.
Which which actually started quite slow because of the level of containment efforts, we saw in April and particularly in the recurring revenues of chemistry.
But the U.S. was very soft in April and then I'm better in May and actually quite encouraging in June so we saw.
You know that type of progression in a market that obviously went through quite a bit of change in terms of the overall operating environment I'm I guess the other thing I'd say is that we track service data are really really closely.
And.
You know things like service case rate customer access and that data indicates that customer activity really in all major geographies, starting with China, and then across a Europe, India. The Americas improved as we move through the quarter.
And you know in many geographies that service.
You know case rate data and customer access data is heading towards normalization. So that's probably the best indicator. We have overall activity and access is the is the ability of the service for up to get in there and those were consistently better month to month in each major geography.
Okay. Thank you for that color in my follow up is a bit similar to doug's question I'm, hoping to get a bit more color or elaboration on on the decline in the R&D spend it's 15% dollar decline year on year and in your comment that your Reorienting some things in the R&D budget is there anything.
Maybe specifically we might have been looking forward that Wisconsin impossible to get an update on the progress of waters connect thank you.
Yeah, No I don't a you know I don't think there's anything really to read into that a lot of the cost savings in different functions reflect you know the the labor labor savings component and.
R&D is often.
You know, we actually feel like net net we improve your R&D.
Pipeline, particularly in the near term and there was nothing.
Major from a from something that in terms of what will affect the revenue in our off the books. If you will we were very efficient during this period.
And it's not a mode you want to operate in ER on an ongoing basis, but our team really rallied and like Sherry said people are really excited to be back.
You know waters connect a you mentioned.
Is obviously, a major software platform and you know as I alluded to and even stated lever engineering is actually got up during cold.
But with remote a work and we continue to meet or waters connect platform and are in a really excited about what that means.
Strategically for the company in the future.
Great. Thank you.
Thank you. Our next question comes from steep Michelle.
Research Your line is open.
And and Chris Let's say a thanks for all your.
The time working together and then this type of relationship.
Oh. Thank you I wanted ask about a couple of things still on points that have been.
China presume I direct your way on the other is on the.
Cost savings program, which I am I direct to Sherry.
Chris as it relates to China, it's a very different operating environment relative to the rest of the world stimulus with.
Hi, there going about the monetary stimulus.
Well at the same time there are some fiscal challenges can you talk about how to what extent that's put away and then if you wouldn't mind elaborate a the G.P.O. dynamic.
No the same but hadn't heard.
Much of thus far and then for Sherry before I jump back in in Q.
Maybe a little complicated as you think about that.
Cost savings that you've implemented vis vis your thinking about 20 to 21 or beyond.
You hold on to.
Overtime. Thanks, a lot Stephen I'll take the first one of in Cherry can take the second so.
Environment, but is also one we obviously know very well.
On the stimulus side, it's been a boon to the markets there and.
But I, what I would say that a lot of our assumptions for the back half of the year do.
Not anticipate a meeting impact of that type of or fiscal stimulus. If you will.
Or monetary stimulus.
The one factor that would be.
Helpful. As we recover in China would be for the government tendering activity, which certainly can be related to the stimulus. So that's the piece that's held us back in China.
But a lot of the the is the more.
Tangible improvement in market conditions.
You know the busy sector, if you will and so our assumptions in China, just continue to call for that steady ramp back up of not just customer.
On the labs, and let me also clarify or an answer the second part of that on the G.P.O. just to be really clear what that is the G.P.O. now is now the common name that we used to referred.
Two.
The four seven competitive bidding process.
Pilot program at the beginning of last year was originally called for plus seven now its commonly known as GP.
You know and it is ground says you know there was a a first national round or what some people called second round late in 19, which was the same 25 drugs.
Through the pilot in the 11 <unk>.
That extended 27 provinces and then there was the third round or what they call. The second national G.P.O. around which happened earlier this year actually change in January which extended to 25, new drugs in 32 provinces are all provinces and about approximately.
Doubled the value of total sales going through.
You know as I've said many times before we think this is a real positive long term.
China is trying to scale, it's its generic drug supply and give many more people access so volumes are going up there's been an almost an inordinate profit pool. There that is is targeted and and even with cheap.
Fuel prices the generic our industry's profitability in China is now probably on par.
With the rest of the world not ahead of the world. So.
We don't think its devastating any way in fact, we think it's very much in keeping with the economics of other health system ban on on balance more successful with the winners of these tenders since they tended to be larger companies and.
And so you know all of our beliefs about the GPR program as it rolls forward and even reflects in provincial kind of most systems remain and you know we've seen that the the positivity in terms of our recurring revenue and and believe that portends future are rising demand for instruments. So.
Anyway, all Oh, I'll pause there on the G.P.O. and handed over to Sherry on the on the outlook for cost savings selling into the future.
Yeah, Hi, Dave second look at that the cost savings that you know we took against our original plan from a year a lot of those had to do around actions around our salaries hours and adjusting the workforce. During this you know second quarter, where we were a little bit more challenge the other buckets of our cost savings.
You know how to do with Nondiscretionary traveled the kinds of things are locked down so I would say in general that we would expect.
These were temporary.
Our next year or normalized obviously during this time, we've learned how to be more efficient and effective using digital and and video and that type of thing, but I'd say largely I'm, we'd expected to come back next year.
Alright, thanks, rather holiday thing every morning.
Thanks, we probably have one more time for one more question, we can squeeze in.
Thank you. Our last question comes from check me and whatnot Nephron Research your line is open.
Yeah. Thank you good morning.
Chris I'm sure I was hoping you ride a little bit more color just around the expectations for capital equipment in the second half of your I know, it's you know tricky given the progress of lab closures, but.
Maybe some color around the how order trends were in the second quarter and.
I'm, just what you're seeing a cross academic and industrial.
Customers would be helpful.
Sure Jack a happy to take that.
So capital equipment or you know as we look at the quarter I'm you know, we modeled certain demand for instruments, we actually came in a little bit better than our model in the second quarter.
And so conditions were slightly more favorable in the quarter relative to capital purchasing than we expected and we expect that to continue and so while we still see some year over year declines in capital spending in the back half of your you know it's on a it should be on a much improved trajectory and you know side.
As mentioned.
Before here the largest uncertainty on that a as we look out into the rest of the year is really around what with year end kinda budget activity looks like the typically a we see in this industry.
You know that's led by pharma as I mentioned pharma instruments were better.
Then the rest, but if you look at the.
Industrial an academic side you know those have been held back.
In part because on the industrial labs, I'm, particularly in the food environmental area, there's been less activity. Some of that's government activity, which has been a little slower government and academic and then generally the government and academic sector.
Well actually turning out better than we expected in the quarter.
You know is still curtailed by delays in university reopening the sand restrictions to government funding, particularly tender programs. So yeah. I think we're just stepping through this you know we do expect modest improvement in that environment over the quarter with the caveat on the end of the year and we'll see how plays out.
Yeah, I think that's all fair and then.
I can appreciate we still expect.
Revenue to decline in the second half the year I was hoping to get just a little bit more color on chemistry sales.
Within the quarter, just a the performance for pharma and.
It was demand starts to stabilize into the second half so the or do you think chemistry could actually turned positive in the third quarter or do you expect that to be negative as well.
Yeah sure that's a good one to close on because the strength of our chemistry franchise and that is a leading indicator on business coming back overall, so we actually headed into the quarter.
With an assumption on chemistry that we are pretty handily beat our chemistry performance was actually quite a bit better in the quarter than we expected and that actually improved through the quarter, a little bit as I mentioned in one of the previous questions on gating.
You know we are our outlook for the remainder of the year assumes sort of the continuation of where we band with a a little bit a modest improvement in.
You know certainly a you know as we as we see more laboratory operations moving towards.
Normalization you know some of the.
Assumptions that we made on ER volumes, and then purchasing activity around customers should continue to sort of brightness as we move over the.
Core so the quarter and certainly could envision that particular type of category turning positive as we get towards the end of the year and in general with recurring revenue as well. So we do see I'm sort of the lead the lead back if you will to positivity in growth probably for showing itself through the chemistry.
Line and the service line and a in getting could be I could see that the is we get towards the fourth quarter. So.
Anyway, we feel really good about that franchise and and it is a bit of a leading indicator as to where the business is headed so.
So maybe I'll I'll pause there Jack I know, we're a little bit over time, Thanks, Chris call you got it. Thanks. So thanks, everybody for your Great question. So in conclusion for the second quarter those sales in the overall first half of the year were negatively impacted by cobot 19 pandemic, our team continued to execute well.
We've seen an increasing contribution from new products and global market conditions improved more than we originally anticipated during the second quarter.
So although the trajectory of the global Cobot 19 pandemic remains uncertain, we do expect market conditions to improve modestly in the second half of the year. Yeah. There's always remain sharply focused on executing on our primary growth strategy of organic innovation and we believe we're well positioned to leverage our significant new product pipeline as demand norm.
Wise, it's so on behalf of the 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 Q3 Twentytwenty call, which we currently anticipate holding on October 27th Twentytwenty. Thank you and have a great day.
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