Q3 2020 Waters Corp Earnings Call
Moving many of you.
Okay, great and visited customers Red and research conducted many deep dives with my colleagues around the globe.
Learning is far from done but today I can share with you. The idea that resulted from this deep transparency face.
First.
Waters has built a solid foundation with exposure to a number of attractive end markets.
Second despite the strong foundation, our momentum has stalled in the last few years.
Third and finally, we.
Were already developing a transformation plan with tangible short term actions that stake each of these in turn first we have a solid foundation in attractive markets. Our largest end market pharma is benefiting from growth of biologics and continued development of novel modalities. Moreover, our strong base and small molecules, which represents approximately 75.
To 80% of pharmaceutical industry sales will benefit from the growth of the arrows Oligonucleotides limited modern aesthetic therapeutics as well as the increasing potential for repatriation of small molecule management manufacturing.
We have a global footprint with 25% of our sales coming from China and India.
We have a solid base in these markets epic that has characterized by trusted brands.
Deep customer relationships and a culture that is rooted in science and engineering.
In my customer meetings waters employees are acutely aware of the issues facing our customers and are so tightly integrated with them that I often had a tough time distinguishing between our employees and that of our customers.
Finally, as we look to strengthen to further strengthen the states are high margin free cash flow gives us the flexibility to continue to invest.
Second.
Despite the strong foundation, we have underperformed, both our historical growth and that of the market over the last few years.
Our performance has trailed the market in LC mass spec and thermal analysis, we were slow to respond to the transition of food testing from government labs to contract testing labs in China.
Our product launches have not met expectations that we set.
Buyer cord wider product that clearly meets a need has been slower on the uptake than anticipated.
Our culture is one that appreciates deep scientific insights, but one that has lacked focus and urgency strategic.
Strategically the focus of our.
And the strategically to focus on our portfolio on LC as CMS internal analysis has limited our ability to keep up with the emerging brands like Bioprocessing contract manufacturing and testing our diagnostics. This is evident in our lack of exposure to tailwinds over 19 as compared to some of our peers.
Third.
So where to from here.
We are still continuing an in depth analysis and developing our transformation strategy. Some teams are already emerging and let me take these industry.
First in the near term, we're focused on making changes to regain commercial momentum second in the mid term. The focus is on the pipeline and organic growth within debt with intense focus and urgency and finally as we strengthen our organic growth. We will start examining strategic examine strategic investments. Let me give you some concrete examples on that in the near term.
First we're squarely focused on regaining our footing in LC instrumentation for instance, we have identified all the units in.
In both our installed base and in the larger empower network and implemented a specific program to upgrade and replace older systems with waters HDFC instrument portfolio, including with the new arc H. plc.
For example, there are thousands of alliance systems in service that are more than 20 years old and in need of an upgrade.
Second.
Approximately 20% of our consumable sales go through the E Commerce channel.
For many of our competitors. This number is over 50% in the near term the implementing actions to increase traffic to this channel such as increasing increasing paid search and improving search engine optimization.
Third our penetration in Seattle Channel plays our competition, we will increase our commercial presence to penetrate this growing check going channel at a level that better aligns with our peers.
As I mentioned earlier.
We still have a lot of faith in the success of bio card customers in Q accuracy are conservative and we need to spend a lot more time developing methods in collaboration with them and further developing enterprise level software to help them deploy the system seamlessly.
As you can see there.
There are near term actions that are backed by detailed targets and Kb eyes. However, I want to be clear. These changes will take time and will not significantly impact our results overnight, because especially as we implement these initiatives amid the background of COVID-19. However, I can assure you. The team is very engaged and have seen an impressive increase and drive and ambition in the.
Weeks that I've been here.
With that I'd like to pass the call over to Sherry Buck for a deeper review of the third quarter financials Sherry.
Thank you Dennis and good morning, everyone.
And the third quarter, we recorded net sales of $594 million, an increase of approximately 2% in constant currency.
Currency translation increased sales growth by approximately 1%, resulting in sales growth of 3% as reported.
In the quarter sales into our pharmaceutical market increased 4% sales.
Sales into our industrial market increased 3% academic governmental markets declined 7%.
Looking at our product line growth I recurring revenue, which represents the combination of precision chemistry product and service revenue increased by 5% in the quarter by instrument sales declined 1%.
As we noted last quarter, there was no year over year decline in the number of calendar days during the third quarter.
Immensely revenues were up 7% in the third quarter, driven by strong pharma market growth.
On the service side of our business revenues were up 4%.
On demand service bounced back to mid single digit growth along with continued growth and service plan revenues within the waters product line.
Breaking third quarter product sales down further sales.
Sales related to waters branded products and services grew 3%.
Sales of T. branded products and services declined 8%.
Combined LC instrument platform sales and L. CMS instrument platform sales were flat and T.A.S instrumentation system sales declined 10%.
Looking at our growth rates in the third quarter geographically and on a constant currency basis sales in Asia were flat with China up 3% sales.
Sales in the Americas grew 2% with U.S. growing 5% and European sales grew 5%.
Before I comment on our third 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 COVID-19 pandemic.
We are on track to achieve cost savings of approximately $100 million are the here relative to our pre covenants internal plan.
We achieved approximately 25% of our planned annual savings in the third quarter, bringing our year to date savings against our internal plan to 85%, what's the majority recognized in the second quarter.
Spectrum realized the remaining 15% in the fourth quarter.
Returning to our third quarter non-GAAP financial performance gross margin for the quarter was 55.8% compared to 58.2% in the third quarter of 2019 primary.
Primarily as a result of unfavorable FX as well as fixed cost absorption and sales mix.
Moving down the third quarter piano operating expenses increased by approximately 1% on a constant currency basis.
Foreign currency translation increased operating expense growth by approximately 2% on a reported basis.
The increase was primarily attributable to the timing of variable cost in the prior year quarter and FX.
In the quarter, our effective operating tax rate was 15.8%, which was about flat for the prior year.
Net interest expense was $7 million, a decrease of about $1 million.
Our average share count came in at 62.3 million shares the share count reduction of approximately 7% or about 4 million shares lower than in the third quarter of last year as a result of shares repurchased at 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 third quarter increased to $2.16 in comparison to $2.13 last year.
On a GAAP basis earnings per fully diluted share decreased to $2.03 compared to $2.07 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 on our balance sheet I'd like to summarize our third quarter results and activities we.
We define free cash flow as cash from operations less capital expenditures and excluding special items.
In the third quarter of 2020 free cash flow grew 53% year over year to $190 million after funding $28 million of capital expenditures.
Excluded from free cash flow was $7 million related to the investment in our Taunton precision chemistry operation and a 38 million dollar transition tax payment related to 2017 U.S. tax reform.
In the third quarter. This resulted in 32 cents each dollar of sales converted into free cash flow and 31 cents year to date.
Our increased free cash flow is primarily a result of our cost savings actions and improvements in our cash conversion cycle.
We continue to make good progress on our working capital improvement plan.
Accounts receivable days sales outstanding came in at 76 days this quarter down four days compared to the third quarter of last year and down 11 days from the second quarter.
Inventories decreased by $42 million in comparison to the prior year quarter, reflecting stronger revenue growth and 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 $397 million.
And debt of 1.6 billion on our balance sheet at the ended the quarter.
This resulted in a net debt position of $1.2 billion and a net debt to EBITDA ratio of about 1.6 times at the end of the third quarter.
We also have $1.2 billion available on our bank revolver for total available liquidity of $1.6 billion at the end of third quarter.
Our capital deployment priorities remain consistent invest for growth balance sheet strength and flexibility and return of capital to shareholders. We remain committed to deploying capital against these priorities.
Our future capital structure target of approximately two and a half times net debt to EBITDA remains unchanged, while our near term focus is maintaining financial flexibility and liked that variability and the macro environment.
Well our share repurchase program is paused during the fourth quarter. It still remains an important part of our capital deployment priorities.
We will provide an update on our capital deployment plans during our Q4 earnings call in February 2021.
Lastly, I would like to make a few comments on our outlook.
Market conditions remain variable largely due to the public 19 pandemic.
As a result, we're not in a position to provide detailed guidance.
However, I'd like to provide you with color on how we're viewing market conditions in the fourth quarter.
We assume similar levels of customer access as we saw in the third quarter, which reflects the challenging macro environment.
Outlook does not anticipate a return to lock down seen earlier in the year at the height of depends on mix and.
In addition, we believe that some delayed purchases from the first half of the year were realized during the third quarter and there is limited visibility into human capital budgeting plans for both pharma and industrial customers in the fourth quarter.
In light of these dynamics, we anticipate that fourth quarter revenue on a constant currency basis, well most likely decline at a low to mid single digit rate.
In addition, I'd like to provide a few other assumptions that will be helpful for modeling purposes.
Recurring revenue benefits from two additional calendar days in the fourth quarter of 2020 compared to 2019, which is factored into our outlook.
We now expect full year operating expenses be in the range of down 1% the flat year over year in constant currency.
For the full year at current rates currency translation is expected to be about neutral to sales growth.
To positively impact operating expense growth by less than 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 $38 million to $40 million, primarily due to lower debt levels.
Now I'd like to turn the call back to that for some summary comments [noise] student. Thank you Sherry in summary, we are pleased with the third quarter results, but market conditions remain variable amid ongoing comment.
Tom macroeconomic uncertainty lingering concerns around fourth quarter capital spending by both pharma and industrial customers and academic customer trends.
Overall, I believe that we have a solid foundation, but to return to or if there's other players in the food industry, we need to and brought improve our operational execution in the shock them and focus our focus our themes on what matters and then in the mid term not focus what they're doing to strategically building our portfolio with Dr. <unk>.
We will now begin the Q and a session.
Operator.
Thank you well, we'll now begin Dan's question and answer that question. Our first question is coming from the line of Picor Peterson from JP Morgan.
You May now open your line.
Hey, good morning, Bob Good connectivity in it I think there's always you talked about kind of the portfolio review no. Prior management had obviously acknowledge some share loss why wasn't part of the market is.
You look at the portfolio today has your view on the share loss differed from from what we previously from management how much do you think could be captured by revitalize the R&D organization can you talk a little bit more about upgrade opportunity you alluded to and you know where do you see gaps or potential divestitures. If it was on the table as well thanks.
Broad question cycle. Thank you very much and good morning.
Look I have been here only eight weeks and I've been I've been spending most of my time.
Listening and listening and learning but.
But let me start by re emphasizing that we have one of the best bases in the industry. If you ask me what do you want as a starting point I would have said pharma informatics in China and there you have it that's waters so that as I said, we have indeed lost some momentum in the last few years and I think you're right to call out the share.
Loss in L.C. in mass spec and and how much of a and some of the analysis.
We have indeed lost some of this momentum and we need to build it back step by step while the long term plan is far from complete some of these near term actions to address the commercial momentum on a really clear they've already actively started to work on identifying and replacing LC instruments at almost two decades old and move.
Cases, and the OCC H.B. as he is is because a good new product to do so from a channel perspective I.
I think we can increase our ecommerce presence given that that flows to 20, 20% of our consumable business goes through the channel and from a customer perspective, you have the opportunity to increase our penetration in Seattle is so in summary.
I would be beyond acting on a on some some shock them a shot them plans and overall, we hope that in the Macdermid being able to return to a sustained growth hopefully of in line with the market, but it's too early to get into any more specifics.
Okay, and then for a follow up to the questions. We've gotten a lot from investors are you know on the level of reinvestment that's going to be required. So I'm wondering from a higher level. I know you don't want to talk too much about 2021, but to what degree you know should we think about you guys sacrificing margins for growth going forward and really reinvest in more of the business and then number two on capital deployment.
I know, it's early you know you're not ready to talk about that but that yet, but you know you obviously have a good track record of Premier right and that's not the more cagey able to transform the deal. So how should we think about you know your broader views on M&A over the long haul would you consider something more transformative further down the road. Thank you.
They go thanks for thanks for the question I think the answer is as expected look everything's on the table I mean right now we're just delineating the plan all that focused on is to do.
Get going with the noted that moves and if some of them require additional investments to look at it and we'll look at the return and we'll do it from a long term perspective in rebuilding the portfolio. All options are on the table, but I think it's too early to comment on it I think the first need to get our operational execution back on track.
And we will continue to identify New York Dome actions and as we identify them, we will get going so I'm not waiting to finish the planning before starting starting motion. So basically that just given your people are examples of what we've already started so I hope that clarifies. The current gotten focus is really on getting the momentum back why.
Did we did the long term plan and that is that emerges will show share it with you.
Okay. Thank you.
Our next question is coming from the line of VJ Kumar needing your line is now open you may open up your line.
Hi, This is Daniel on for me Jay Thanks for taking the questions. So first any color on quantifying the instruments catch up benefit in Threeq you <unk>.
Is there any change to how you're thinking about the four key budget flush or is it the same as three months ago.
I think on the on the catch up no I don't think who will be able to quantify that for you any further as far as as as Q4 is concerned and you guys have looked for sure, but it's very very relieved unhappy with a low single digit growth that we've seen and it is better than anticipated, especially after the degree.
And in the first half so under the circumstances were quite happy with these results as.
As to Q4, while the long term prospects for the business are quite robust with solid growth in pharma and nice exposure to China, and India, It's really difficult to predict what will happen in Q4 get especially given the uncertainty that many customers are still facing due to COVID-19, and the fact that close to 50% of our sales for the full.
Third quarter comes in December we remain cautious. Additionally, as I mentioned, we had some catch up.
From the first half of the first off of the year in Q3, which might not repeat so despite all of this uncertainty our focus is really on on short term execution.
So really not much more to say about the capital outlay in Q4.
But the biggest thing totally on this one.
Thanks for the color and then my follow up any more color on the drivers of margins. It looks like your gross margins came in below Street models, but then you guys beat on the on the OLED line. So just any color on on drivers there would be very helpful.
Hi, and thanks for the question I see now so if you look at our gross margins came in at 55.8% and they were primarily two big drivers around that about half of that impact was driven by FX and then the rest of that was primarily strength and primarily mix due to the strength in our MSR portfolio.
Oh, sorry about that yeah.
It's double digits and just if you step back a little back and look at our gross margin performance over the course of the year as it's it's been variable to the propriety of factors.
Whether it was impacted by I told Ed a second quarter you know our gross margins were up really helped by our cost actions and so I really step back and look at our year to date gross margin performance, we're at 56, and a half versus 58% last year and about 100 basis points of that was really due to.
FX factors, so as I look at the top line being down and the 6% range through year to date I think we've done a pretty good job of managing the costs and the in a challenging environment. So those are the primary drivers for our Q3 gross margin.
[noise] awesome. Thank you just on.
Yeah.
Our next question is coming from the line of Michael Cohen from Bank of America. Michael. Your line is now open you May now raised your question.
[noise]. Thanks, This is Mike on for Derik.
Firstly that I wanted to follow up.
Earlier comments, you had some interesting specifics on the bio cord.
Just given its been promised for so long as the next major future growth driver I'm just curious what specific steps do you think you've outlined to accelerate that and to get that.
To deliver.
Promise and it's interesting you also flag the acuity and the time it took for that the ramp up and obviously the major contributors today is that something we should.
Just as a road map for bio course, specifically and you know how do you feel with that being a major growth driver going forward.
Well thanks, Thanks for the question the.
Let me first start by saying that that is it clear unmet need in QSR QC release of biologics and this is especially apparent to me given my previous background in Bioprocessing bio.
Bio card is exactly the right product to fill this gap I've had a chance to talk to some of my some of some of the customers and many of my colleagues who are using spinal cord for testing of biologics.
And with its simplicity and dedicated work flows in that died mapping glycan analysis in fact, MOSFET nautical nucleotide analysis. This is the right instrument to bring it to CMS into cubic you'll see.
And I want to make sure that I stated that before I before I made any other cautionary statements. In fact, we exceeded bio card virtually all large pharma is already.
However, as you know it takes years for new product embedded itself in the Conservative you wake you see environment and as I mentioned, a good due to close to four years.
You can start to use that as a as a reference but I'm sure. We'll dig out although references of products that have taken probably equally long in that space. So while the product is very good.
I don't expect it to move the needle in the short term over the long term. It has very very good prospects and we continue to develop its applications. So I hope that gives you color on bio board in terms of specific steps ready, it's it's about talking to the customers getting exceeded and doing the market development Ah cautiously and.
And diligently that's why we are focused now.
Okay. Thanks, that's really helpful. I don't want to speak on some of the new product launches in the pipeline.
Meanwhile, has had a pretty steady cadence.
Cadence of products in the last 12, 18 months or more on a mass spec side. The fourth series cyclic the fanapt excess im.
Im wondering as we reexamined that portfolio. So we're way off the road map.
Is there any promise and these products. It was somewhat of a pipeline that you think you can point to wonderful Memorial day holiday, we said on the on the innovation front.
Oh, It's also very good question look apart from bio for you you mentioned the refresh of the mass spec portfolio, both on the high rise and cyclic and snapped.
And on the tandem Quad and this is he will TQ S GC easy low Dqs schools.
And Coincidently all of these products have done very well in Q3. This is why we see double digit growth of mass spec.
Hi, Rez mass spec in the U.S. and invest in Europe, and tandem core and are found in broad portfolio for food safety testing and traditional Chinese medicine in a in China. So we're we're seeing some good uptake for these products. So the focus on new product development will continue and on the L. seaside you'll see an architect plc launch and this is real.
Only a major contributor to our survival and I would say less decline in the L.C. instrument space that you saw in Q3, and we are continuing to focus on that so.
In a nutshell, even than even a higher focus on portfolio development.
And secondly, realizing the full potential of the launches that have taken place not just bio covered but also the rest of them aspect portfolio as well as the L.C. and the consumables portfolio.
Thanks for that and congrats.
Okay.
Our next question is coming from the line.
<unk>.
Calling Dougherty your line is now open.
Hi, This is Ryan on for Doug. Thank you for taking my questions.
Following a person then last question I just want to confirm again really encouraging mass spec commentary can you talk a bit more about how you view the portfolio today versus competitors and do you believe that water is a physician to at least maintain mass spec share moving forward occur. After these new product launches or do you believe that more work you did on mass spec innovations. This is Dan.
Return to market growth.
Okay I'll go back to saying I've been here only eight weeks and.
I'm still listening and learning so I have the full right to change my view I say [laughter] anymore.
About our portfolio I am excited by what I see especially on the mass spec side I'm excited by the breadth of the portfolio, we have if I'm not mistaken it as one of the widest in the industry.
Ranging from high res too.
Tandem quad and to also a biotech order the first first in some of our first in class I feel reasonably well positioned there.
It does not mean, we will stop our investment investment in the area I don't ask me how fast we will.
Get back to our original show we are intensely focused on realizing the full potential of these products as you already saw in Q3. The commercial teams are very focused on this our collaborators are getting very good feedback on a on the on the product launches. So I'm I'm very optimistic, but I would say it's early.
Days and I want to learn more before before I can give you any more concrete compute information.
Got it and then on L.C.. So some competitors have talked about share gains in chromatography. In recent years I believe this is the first time at waters has acknowledged LC market share loss did I hear that correctly and if so can you talk about why you believe water just losing share I don't see what actions can be taken separate from a more active focus on upgrading older.
Yes.
Yeah look I mean, I cannot judge what the exact loss anything shed is but we definitely have lost some momentum in the last two years I think that you can you can be certain of combating are comparing our results to our boss and perhaps even even some competitors and I would break the action down into into three buckets.
Well, they're very focused on rebuilding our <unk> based.
They focused on rebuilding our portfolio and you saw what I, what I talked about on the Ark H.B.L.C. and this will allow us to replace the already installed base in alliance, which is now roughly two decades old. So this is something we have a lot of attention focused on secondly on the consumable side, a primerica a premier columns were.
Just launched and these are for metal loving analytes, and oligonucleotides or some of those which are which I don't need to tell you our our auto strong contributor to growth in the future.
And then and then finally, we think from a channel perspective, we are we have been underrepresented in the Seattle, Seattle Channel and the teams are highly focused on developing that so it's an auto comprehensive examination of our L.C. presence.
And those are really putting all delevers ranging from portfolio to portfolio both on the instrument on the hardware side.
On the hardware on the consumable side from a channel perspective. This is a sea autos.
And also for me from a from a geographic perspective and the last thing I'll mention is is is that on that many of our competitors have a significant portion of their consumables business going through E Commerce and given my recent experience on E. Commerce I believe we can they can take some short term tactical actions to start catching up I mean, 20%.
Our revenues in country.
With that let's go through E commerce, and so many of our competitors, it's close to 50% so a pretty broad based.
Bush doors, LCM and I'm confident that who will start to see some some shift in momentum.
If I could sneak in one more.
You talked in your prepared remarks about water is.
Inability in recent years to keep up with emerging trends like bio processing contract manufacturing and diagnostics do you believe that you have the.
The right products to more aggressively go after those opportunities I know, it's a matter of commercial execution or do you believe that base.
Gaps in what is called credibility to address those emerging trends. Thank you.
I think the Antos a mix right, so and it and as I said, it's only been eight weeks. So it's it's a it's a it's with all the necessary caveats look the onset of the mix from the overall, we are very happy to have about 60% of our business go to pharma pharma remains the most attractive end market.
80% of that business is focused on large molecules like which as you outlined is the fastest growing segment now that said the.
The small molecule segment of pharma is also very attractive I mean look it's still 80% of the pharmaceutical companies revenue and it and Thats in small molecules with recent with recent events Antivirals have grown quite rapidly has oligonucleotides and we've seen that show up in our in our business.
In small molecule. So small molecules is not something that we shy away from but your question was more around our portfolio towards towards biologics. So 30% of our business is is 30% of a pharma business is.
Focusing not on that direction and we intend to continue to innovate and continue to push organically on that on that side and once weve. Once you've done that once we feel comfortable and confident with our commercial execution given our existing portfolio.
Look I portfolio expansion and there will be a time for it it's just simply not today and I don't have any specifics on that front I simply simply mentioned that because you. When you look at what does the results. It's very much a core business performance and they're very happy with it.
We don't have a lot of good 19 tailwind in our you know there's also whatever change in momentum you see is meaningful and sustainable over the long term because we were really getting it from the core business.
Next question.
Thank you. Our next question is coming from the line of Dan Brennan from you'll be asked Dan. Your line is now open you may now raised her question.
Hi, This is Nathan on for Dan I guess, just start things off can you break down the pharma growth in the quarter I guess between small and large molecule and then I guess what percentage of pharma customers are back in the lab, how much did that change from Q2.
Plus percent returns similar to your expectations.
I didn't understand the second part of your question. So I'll start with the first one and then I'll give you the opportunity to come back a small versus large.
Both small molecules and large molecule pharma saw very nice growth and regionally, especially in in the U.S.
And in Europe, It was actually double digit across both of both of those both of those segments in fact, our top.
Our pharma customers top 25 pharma customers grew up in the mid teens.
And in China also we saw a low single digit growth in large molecules and small molecules or mid to high single digits. So really nice broad based growth and you can also see that reflected in our consumables trend and again looking at China. This was in the high double digits, so nice growth across both small.
And large molecules as many of our pharma customers started to increase their experiments in labs.
I didn't catch your second question would you mind repeating it.
Sure. The second question was focused more around how many of your pharma customers are back in the lab and how did that trend kind of to your prior.
Prior expectations, but I guess just to add on to that keep.
Can you give a little more.
Color on the low single digits. Most mid single digit decline you expect in Q4 kind of whats baked into pharma and industrial growth expectations and I guess, how much of that kind of how do you expect from two extra days.
So I'll start with the first one and I'll, let sheree comment on on the on the Q4.
In terms of customer activity or I can give you three sort of dimensions. The service dimension, the consumables consumption dimension and.
And access to our for sale sales teams that start with presumably I mean, we've seen the experimentation go up in the labs and consumables growth is.
Mid to high single digits in on and well into the double digits for China, so across all regions, especially in pharma, we start to see activity in the labs as measured by our consumable revenue as far as our service access for our service teams is concerned we saw strong return to normal, especially in China and in Europe, and increasing steadily in the U.S.
But I would not conflate that with pretty pandemic levels like self service engineers have a very different experiences isn't it was it customers apart from.
MPB and doing testing before they go to many customers the duration of the visits are much shorter as customers have them in and they want them out after a certain specific period of time, so while the overall activity and access to labs for service Engineers has increased it is too.
Not like it used to be prior to the pandemic and then finally from a direct sales perspective, our sales engineers.
I would say have 15% to 20% access, especially especially in the U.S. and in rest of Europe versus what they used to prefund ethnic and they have really leveraged.
The leverage Webinars and a lot of virtual interaction and many of them. In fact I was with the sales team in the U.S. recently and so many of them say look I hope the customers are.
Willing to engage in the same way even post the pandemic because this is highly efficient and effective it prevents unnecessary travel then you don't need to and of course, there's no substitute for face to face interaction and when we're able to do it yet that said there are some benefits that are coming out. So I hope that gives you more color on the on the access for the Q4.
Question I'll pass it on to Sherri.
Thanks in it and as we are looking at our Q4 I'd I'd say first of all just as we saw our Q3 results. We were pleased with the trends that we saw there and if they get mentioned we did see in the Q4 sorry.
Realization of delays in the first half so there's quite a few variables that are really happening and as we look into Q4 and the visibility to your end capital budget plans, and it's very limited and especially in pharma and industrial and you know we do think we'll still continue to see the same level of customer access, but just did.
It has different Variabilities, where you know guiding or have a outlook as low to mid single digit rate growth I'm, not really breaking down that visibility into the end markets and just because of a lot of differences there, but you know some of the trends. We saw in Q3, we would expect to see continue to see some other.
Thanks in the pharma business.
Thank you.
Our next question is coming from the line of Dan Leonard from Wells Fargo. Your line is now open.
Thank you also for starters, indeed, I appreciate youre your repositioning on the bio core messaging yeah. How are you thinking about waters connect which means the other half are put on a path to so a couple of years ago at the industrial that.
Yeah look I mean, Dan, especially thanks for your question and your interest in informatics. It. It's early days I mean, I haven't yet been able to dig into each and every area in the in the business to the extent I would like but on on our informatics informatics.
Presence overall first firstly in in this particular in this particular quarter.
I've seen I'm seeing some nice a return to growth very much tied to our mass spec instruments I can break it down EW and that that that growth has especially come on the back of a on the back of mass links and unified as I think about what does connect and my early Oh here.
In addition, the ambition is to set up a connected system across all all our different all our different platforms. It brings in power New Genesis unify Mossley control Genesis together in a in a single platform.
The early uptake in in some of our customers has been has been good especially for for a certain mass spec instruments in the bio code is also on the on the same platform they've gotten very good feedback it's been quite robust, but the rollout. So continue so it's early days, Dan, but the early feedback on water.
Connect has been has been quite good and that I've experienced that personally with some of my my old friends and customers at.
I recently visited just to give you. An example, I recently visited.
He more centered in Cambridge.
And we have some customers from from nearby come over and ER and use the bio Gord I.
As well as some of our more recent masback launches and.
It's really a seamless it's really a seamless experience, but more on that later as I as I learn more and you'll hear more about it as it gets rolled out.
More from customers, but early feedback is very good and what disconnect is already out there.
Okay. Appreciate that and then maybe for my follow up you mentioned in opportunities in Repreve repatriation of small molecule manufacturing can you elaborate a bit on that more how would you frame that for investors.
Yeah. Its look again, it's it's it's early days then I mean, we've been we've been hearing that.
Been hitting all the conversation for many of our menu for customers that there is a potential opportunity to repatriate.
The production of small molecules, we've talked to some of our sort of all academic collaborators also on continuous processing a small molecules. So there is a there is a lot of a lot of interest, but no real concrete opportunities yet.
To quantify what exactly that opportunity would be so you can imagine as that happens and if it happens and as that happens.
It does is very well positioned to serve as the Qs you see for lighter, especially for L.C.N.M.S. in.
In that space. So early early indicators and that was only to floating to some of the indicators and direct conversations I had with some customers, but no quantification today.
Okay I appreciate the thoughts thank you.
You're welcome.
Our next question is coming from the line of <unk> <unk>.
From Wolfe Research. Your line is now open you may never answer your question.
Hi, good morning, and thanks for the time here just two for me one is.
When when I hear your prepared remarks about strategy. It makes a lot of sense. So when I think about what might be a little different for the water's approach your relative to others.
The size of your installed base is clearly one of the big Delta is relative to what some others might be thinking about.
But what I wonder if you could give us a little bit of an appreciation for some details around why it is that that's something that you can come to catalyze a lot when it hasn't happened previously and how do you do that in the field and how do you think about the competitive dynamics going after.
This replacement cycle in that space why would that be different from other verticals and then I do have a follow up thank you sure.
Sure look I wouldn't call. It a a strategic initiative I would call. It a tactical no regret move then you learn that abruptly over over 8000 of your alliance instruments in the field are over 20 years old you. Obviously asked the question can you can.
And you're going to replace it and then I was presented with that fact I asked him what can we do to replace it as their custom are there customers, who would want to do it and the obvious answer is yes, I mean, they should but we havent really gone after it specifically so if you ask me about the tactical execution.
We have done we have the name says it goes with the customers who have these alliances two months as you well know from your waters history would be 80000 also installed base 8400 is is about.
Think about 8400 is.
The Alliance base, which is 21 years old so we know exactly where they are and the intent is to go and have a conversation with the customers, especially now I feel more confident when I saw the results for arc H.B.L.C. given its superior performance for that particular segment I would think that that is an input as to to move customers do it for.
In a competitive standpoint, we feel very well positioned because customers had a very good experience with alliance over the over the years, it's a robust instrument, especially with Mpower as it's a informatics backbone.
And we we think that the transition is possible now don't ask me if it all and what what fraction at what rate. This would happen. This is why I'm I'm I'm not giving you concrete time.
Timelines and concrete concrete quantification of how fast this will happen, but it is something that we feel that has the potential to do to catalyze growth.
Okay. Much appreciated and then I wanted to follow up on the commentary regarding expectations for the for the fourth quarter, it's always difficult to forecast the fourth quarter because of yearend dynamics and of course this year is more difficult than the most.
But just to make sure that people have as much of a.
A calibration as they can for how things are evolving I wonder if you'd be comfortable speaking to the order trends.
Ricky are here in October or even a new indications of interest just to give folks a sense for how things are evolving.
Because it's not necessarily true that you're seeing any kind of pulled back in a situation, where just because of budget flush dynamics before Q might in fact be down year on year, and then I'll jump back in queue. Thank you.
Let let sheri.
Comment on on Q4 had true yeah I see thanks for the question I'm sorry.
As you look at our waters business and how quarters play out in a much of our business is done in the last month of the quarter, you know coming into this quarter I mean market conditions are still pretty similar and things are kind of progressing as we expected that and it's really too early to to pinpoint that really given the.
The variability, but some of that again expect coal then et cetera.
And you know I say you know, we're very much focused on on our execution and we have several leading indicators that we're looking at as far as access to our service and to some labs and other things that we will monitor and execute but you know we're just really.
Focus on those things and just with the visibility in the variability there are providing that kind of an outlook for the fourth quarter. You know I mean, Steve just to just to embellish just a little bit I I think.
No real change in trends, but we are cautious because 50% of the revenue Machete has informed me comes in December for Q4, and it's very much dependent on the capital outlays. So it's very difficult to predict especially in this uncertain environment, how much of that capital outlay is going to be.
And that's the number one reason why they feel feel a bit cautious I'm really I mean nice momentum into Q3 in a nice shift from you.
Q1, and Q2, and we're all hoping that it remains but difficult to predict.
Got it that's great color. Thank you again.
Our next question is coming from the line of sung Ji Nam Angie airline is now open you may now rates are question and by the late seventies from <unk>.
Oh, thanks for taking the question.
Sherry could you help me reconcile that.
The decline and the growth in the industrial segment and also the decline in the.
The decline in the tea business that I'm, sorry, if I missed it what they're largely due to the material science segment being weaker and then food and environment and Diamond up high single stronger.
Sure Firstly on on the on the beer segment or CNG.
On the D.A. business view has continued a and 8% or so decline as we as you mentioned.
And China was really the bright spot with mid mid teens gold I, especially in the semiconductor space and the U.S., but low single digits. The other regions continue to decline and that affected the overall number and you're right to say that it's especially in the materials.
Under polymer segment.
Hi, I must say you didn't ask but I'll tell you I had a chance to visit my colleagues at the Newcastle handbags virtually I.
I am so excited about the technological depth and the leadership and rheology in Calgary military and mechanical analysis I also spoke to some of my word professors mechanical engineer by training, both undergrad and graduate school and our academic collaborators and we see it terrific future for structured property relationships that we are.
That they're measuring the da so there are short term challenges and and we've been pretty transparent about those but I believe the future of this business is really really really good as far as other other.
Other commentary on the industrial segment I mean, we saw.
And then you would you would recognize that we report food and our industrial and especially food safety in China food.
Food in a in the United States boat. So saw growth and this is what also drove the industrial segment. In addition to the semiconductor growth that you saw that we saw in China Europe was a flattish in a in the industrial segment.
I hope that gives you the color you wanted operator, we have time for one more question.
Thank you God. Our last question is coming from the line of Japanese yen. Jackie Your line is now open and by the way taxes from Nephrectomies rich.
Thank you good morning.
Food it I wanted to push you a little bit more on some of the urgency around business investment. If you look across the landscape now you mentioned, how some of the tools companies. Your peers are seeing big Kobin tailwind and they're also making pretty significant investments back in their business. So just.
Help us understand why does it make sense for you to push ahead with some of the cost savings programs from earlier this year, when you're trying to reposition yourself for better growth.
Yeah.
I should have I should have expected that question from here [laughter] stuck on the cost savings part and then I'll give you a view on how I see future investments and some concrete ideas. There. Please go ahead Gerry.
Yeah. So you know as we at the beginning of the year and exercise that have an impact and we felt like it was important to.
Take these cost actions as we were going into Q2, particularly as being that it's our most challenging quarter and.
So most of those cost actions have been completed through the end of July, particularly around employee related items as the pad.
Yeah, furloughs back and Overstored hours in salaries and you're right. As we were doing this that we are also looked at projects that we could continue to support and prioritize and so it's a largely those are behind us there's still a few things and fourth quarter, but you know things that we delayed we don't feel like you know impacted near term milestones.
I think we're very well positioned from both our cash flow results that we had this quarter as well as you know from a balance sheet to look at the right investments in the business for growth and like.
That carry on those some of those not sure Jack on the on the investment side look there's as I mentioned there is need for commercial investment on on the CRM side, we are underrepresented in that segment virtually globally.
So as soon as we quantify what that looks like by region in Europe, We've already started.
As other regions come forward I mean, we would be looking to support that second on E. Commerce, we are underrepresented in the market versus versus our peers and I have some history in that area. So I can tell you that there will be some investment in E commerce as we come back first read the existing platform.
Especially increasing paid search and search engine optimization, and then revitalizing the platform in them and to make them that will require investment.
And I mentioned replacement of the old Alliance systems would arcades plc and and other.
With other other hardware that too will require a specific training and focus from our field force under getting ideas for investments that I expect to be able to leverage the existing infrastructure there, but it doesn't need for investment we will not shy away from it these are value, creating initiatives one doesn't need to be a rocket scientist to understand that and then.
On new product development, I mean, while I have not finished examining our product development data. It is absolutely clear that more effort needs to be placed in market development.
Okay, and just on a disciplined buyer of course, but there are other launches also that have taken place recently on the mass spec side on the high rise on tandem quad they require market development that would be investments in that direction.
Both from market development standpoint, and investments in commercial infrastructure, we will not shy away from any value, creating ideas and I'm already rattled off a few and it's only been eight weeks since I've been here I see tremendous tremendous opportunity.
In our in our business.
At this point.
I want to.
Go towards concluding the the call. Thank you all for your participation. Despite the uncertain environment created by COVID-19, and the challenges that waters has faced in the last couple of years I have never been more confident in my decision to join this company I hope that was about him to all of you in the in the in the statements that.
I made there is an incredible amount of talent in our organization and we have a tremendous opportunity in front of us to turn the business around with improved execution in the short term and then a renewed focus on growth both organic and other strategic investments in the future. So on 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 Q4 2020 call, which we currently anticipate holding on February 2nd 2021. Thank you all and have a great day.
That concludes today's conference. Thank you all for your participation you may now disconnect.