Q4 2020 Waters Corp Earnings Call
This conference call is being recorded if anyone objects. Please disconnect at this time. It is now my pleasure to turn the call over to Mr. Bryan Brockmeyer head of Investor Relations. Please go ahead Sir.
Thank you operator, good morning, everyone and welcome to the Waters Corporation fourth quarter earnings Conference call.
Before we begin I will cover the cautionary language.
During the course of this conference call, we will make various forward looking statements regarding future events for future financial performance of the company.
In particular, we will provide guidance regarding possible future results of the company and commentary on potential market and business conditions that may impact waters Corporation over the first quarter and full year 2021.
We caution you that all such statements are only our present expectations and the actual events or results may differ materially from those indicated and our forward looking statements for.
For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations see.
See the risk factors included in our annual report on form 10-K for the fiscal year ended December 31, 2019, and part one under the caption risk factors and.
And our most recent quarterly report on form 10-Q for the quarter ended September 26, 2020, and the part one under the caption risk factors.
Of which are on file with the SEC as well as cautionary language included in this morning's press release, including with respect to risk risks related to the effects of COVID-19 pandemic on our business.
We further caution you that the company does not intend to update any of the predictions or projections, except during our regularly scheduled quarterly earnings release conference call and webcast for.
Or as otherwise required by law and.
The next earnings release call and webcast is currently planned for May five 2021.
During today's call, we will be referring to certain non-GAAP financial measures.
Conciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and available on the company's website.
And our discussions of the results of operations, we may refer to non-GAAP results, which exclude the impact of items such as those outlined in our schedule titled reconciliation of GAAP to adjusted non-GAAP financials.
<unk> and this morning's press release.
Unless stated otherwise references to quarterly results, increasing or decreasing are in comparison to the fourth quarter of fiscal year of 2019.
In addition, unless stated otherwise all year over year revenue growth rates, including revenue growth ranges given on today's call.
And are given on a comparable constant currency basis.
Now I'd like to turn the call over to Dr. Lu the Berkshire waters, President and CEO for it.
Thank you Bryan and good morning, everyone.
Along with Bryan joining me on this morning's call is Mike <unk> waters, as Vice President controller and interim CFO.
Some of you may already know, Mike who has been a part of the waters finance organization for 16 years and.
And I'm happy to have him joining me on this morning's call.
I would like to start by thanking our employees around the globe for their hard work and dedication to what has been and extraordinarily difficult year.
It is one that has brought significant change and sacrifice from navigating the pandemic and resulting short term cost saving initiatives earlier. This year. The changes in leadership. The waters team has responded with drive determination and and indomitable spirit.
I'm impressed by and grateful for our team's resilience and commitment of our customers and to each other.
During today's call I will provide a brief overview of our fourth quarter and full year operating results as well as an update on the on the stabilization that we have seen in the LC market and a few factors influencing our thinking for 2021.
Mike will then review our financial results in detail and provide comments.
On our first quarter and full year financial outlook. We will then open up the phone lines to take your questions.
Briefly reviewing our operating results for the fourth quarter.
The revenue grew 10% as reported 7% on a constant currency basis and adjusted adjusted earnings per share grew 14% for.
For the full year revenue declined 2% and adjusted earnings per share was up 1% the.
And the strong finish to the end of a challenging year was driven by the pharmaceutical market improvement capital spending the company in the second half of the year strong strong execution and early contributions from our near term growth initiatives.
And more closely and our top line results first from a customer perspective.
Our largest market category pharma was the.
The primary growth driver and in the quarter with 15% growth and industrial market grew 5%, while academia and government declined 15%.
Now the geography on a constant currency basis sales in Asia were up 12% with China up 19%. Meanwhile, sales in the Americas grew 3% for the U S growing 4% and European sales grew at 6%.
From a product perspective of our waters branded products and services grew approximately 8%, while <unk> declined by around 1% on a constant currency basis.
While it's still navigating the global pandemic, we are seeing clear signs of improving customer activity positive growth trends and our recurring revenues and and evidence of stabilization and LC instrument demand.
Services grew 10% and consumables business grew approximately 14% driven largely by global pharma strength.
Including sales of our recently launched Premier columns, which performed exceedingly well in the first quarter on the market.
LC instruments grew most grew across most of our major geographies with high single digit growth.
This improvement and capital equipment purchases and reflects the combination of the return of some of the planned capital spending that was delayed from the first half of the year and normal pharma year end budget flush and early contributions from the LC replacement initiatives.
Following last June release of the arc HPLC system in the core H B and C market with a particular focus on the small molecule of development and QA QC space. We look forward for the continued expansion of our liquid chromatography portfolio.
On February 10th we will launch of acuity Premier.
Our next generation the <unk> system that offers customers and extraordinary breakthrough inefficiency sensitivity and overall capability.
This new system will benefit both large and small molecule discovery and development as well as biomedical research.
This new system is even more profound benefits when paired with our acuity opinion of columns, which I mentioned earlier and were launched and the fourth quarter.
The combined solution alleviate non specific binding of absorption of losses and provide a significant leap forward with enhanced reproducibility reduced passivation and and increased confidence and analytical results.
After a very strong third quarter of mass spec sales are about flat in Q4.
As you know the mass spec business can be lumpy, which we solve and biomedical research.
There are all the there was also a general softness of clinical diagnostics as budgets whenever tied to COVID-19 testing, notably however, mass spec sales for farmer customers grew double digits driven by the strong double digit growth of both <unk> and acuity.
Finally, the Ta revenues declined low single digits, which was.
Of which was much improved from earlier in the year, we saw the core terminal business start to pick up driven by market improvement in Asia and.
In particular life sciences, including pharma and medical devices grew double digits. Combined these comprised of approximately 10 to 15 per cent of D. Is total revenues. However, this was not enough to offset declines from Ta as industrial customers.
Looking now and our geographies all major regions grew the Americas grew low single digits Europe grew mid single digits and Asia grew double digits and the U S. The growth was driven by pharma, which was partially offset by declines in materials science, environmental and academic and government.
The latter of the medical continued to decline if the boot.
Meaningfully relative to earlier and the year.
Europe also experienced strong pharma performance, partially offset by material science food and academic and government.
And both U S and Europe pharma growth was broad based including strength in big pharma large molecule customers genetics and contract losses.
China had an impressive quarter with strong double digit growth driven by continuing acceleration and pharma as well as strong environmental growth.
The pharma growth was driven by both small and large molecule of customers, including particularly strong growth and contract labs.
And there are also continued to grow double digits.
In summary.
And in the fourth quarter, we saw further relative strength and the market and benefited from strong year end spending trends.
Now for the year.
Our pharmaceutical market category achieved 1% growth with the U S Europe and India, all seem positive growth industrial declined three per cent for the full year and academic and government declined 16%.
Notably our pharma market category grew 10% and the second half compared for the first half decline of 8% of embark the strength and small molecules the industry recovered from Lockdowns.
Industrial also grew and the second half at 4%, while academic and government declined 12% compared to the first half declines of 10 and 22% respectively.
Geographically for the year Asia sales were down 4% for China, China sales down, 8% sales and Americas were down 4% for the U S debt.
One 2%.
Europe sales were up 2%, notably on our major geographies grew in the second half of the year with the U S up 4% and Europe up 6% following first half declines of 9% and 3% respectively.
China market grew in the second half up 11% reversing much of the sharp, 31% decline and the first half of the year.
Now.
I would like to share some of the progress we've made and our transformation program and several of the initiatives, we're putting interaction and are starting to contribute to growth first and I will talk about our instrument replacement initiative than our progress and contract and how the expansion followed by E Commerce, and lastly, I'll give you of bio CT update.
First as it relates to our instrument replacement initiative, which is the most advanced initiative underway.
We delivered our first quarterly LC instrument revenue growth and two years and our LC instruments when loss was the highest it has been and three years.
The initial customer feedback has been very positive on the Ark HPLC as well.
Second as part of our contract lab expansion initiatives, we have made important progress and targeting this high growth customer group, we've contacted a number of customers globally, particularly in China and have strengthened our value proposition.
With expanded alternative revenue and service offerings, which has which have been well received by the segment.
And is still early days, but we're pleased with the progress we're making.
Third our E. Commerce initiative is still in the early stages, but waters dot com traffic is up double digits, driven by search engine optimization and paid search.
And there isn't the one to one relationship between traffic and revenue increased traffic is an important for strep and driving revenue growth through the ecommerce channel in tandem with our E. Commerce actions. We've also enhanced our procurement platform on which we have expanded our coverage of customers leveraging this channel.
Supported strong E commerce, EPS strong E procurement growth, indicating that it's now easier to work with waters.
Fourth driving launch and launch excellence by record sales exceeded expectations and the quarter as our market development efforts and our specialist sales Martin model and have started to take effect, particularly in the U S and Europe. Many customers are increasingly adopting by record for manufacturing and several have placed follow on orders.
Once we get bio CT applications on and enterprise software platform. We believe we will be we will be seeing more follow on orders.
More importantly.
The customer activity continues to be encouraging, which makes us optimistic about 'twenty and 'twenty one.
Lastly, I'd like to highlight our efforts to help mitigate the public health crisis, and addition to the significant effort by our innovation response team.
Courage to see waters consumable expecting on QA QC methods for Covid vaccines and therapeutics. We're also seeing an uptick and COVID-19 driven demand for our instruments and consumables the speed in the fourth quarter, where Covid revenues contributed an estimated 1% to two percentage points for the growth driven by gross pharmaceutical customers developing ko.
And with vaccines, and therapeutics, who who saw meaningfully higher growth than manufacturers that don't have COVID-19 related programs and <unk>.
Summary, as I wrap up for 2020, they've done a great job at keeping our employees safe and our operations running.
Our teams have focused not only on getting products out the door.
But we have also assisted our customers engaged and COVID-19 related efforts. Meanwhile, our base business is showing signs of recovery and our transformation is well underway.
Turning to 'twenty and 'twenty one.
And while the business environment remains uncertain and we look forward the building on the fourth quarter momentum.
Mike will provide further detail on our outlook for 2021, which is based on three key factors one the assuming a gradual improvement in customer activity led by the pharma market.
Two we expect all major geographies to perform better than they did in 2020 led by growth in China.
Lastly, our near term growth initiatives and I'd expect it to continue to ramp up led by an LC replacement initiative, which we expect to increasingly contribute to the performance.
With that I'd like to turn the call over to Mike Renna for a deeper review of the fourth quarter, and 'twenty and 'twenty financials, and our outlook for 2021, Mike.
Thank you for it.
Morning, everyone.
Fourth quarter, we recorded net sales of $787 million and increase of approximately 7% and constant currency.
Currency translation increased sales growth by approximately 3%, resulting in sales growth of 10% as reported for the full year sales declined about 2% and constant currency and as reported.
Looking at product line growth, our reoccurring revenue, which represents the combination of precision chemistry products and services revenue increased by 11% for the quarter.
Instruments sales increased 4% for the full year reoccurring revenue grew 3%, but we've seen the sales declined 9%.
Chemistry revenue were up 14% and the quarter driven by strong pharma growth.
And the service side of our business revenues were up 10% of customers continue to reopen labs catch up on performance maintenance and professional services and repair of visits.
As we noted last quarter recurring sales were impacted by two calendar two additional calendar day and for the quarter, which resulted in the slight increase in services revenue sales.
Looking ahead, there are five additional calendar days and the first quarter and six fewer calendar days and the fourth quarter of 2021 compared to 2020.
Breaking fourth quarter product sales down further sales related to waters branded products and services grew 8%.
While sales of Ta branded products and services declined 1%.
Combined LC and LC Ms instruments sales were up 5%.
And while Ta system sales declined 4%.
Now I'd like to comment on our fourth quarter and full year non-GAAP financial performance versus the prior year.
Gross margin for the quarter was 59, 2%.
The increase compared to the $58 two and the fourth quarter of 2019.
Primarily due to the higher sales volume and FX.
And on it a full year basis gross margin was 57, 4% compared to 58% of the prior year and lower overall sales volumes and 2020.
Moving down the fourth quarter P&L operating expenses increased by approximately 6% on a constant currency basis.
8% on a reported basis.
The increase was primarily attributed to variable expenses related to the strong sales performance for the year operating expenses for 1% lower before currency translation and flat.
And the quarter and for the full year our effective.
The operating tax rate was 14, 9% and 14, 8% respectively, an increase from last year at the comparable period included some favorable discrete items.
Net interest expense was $7 million for the quarter <unk>.
The decrease of about $3 million and anticipated on lower outstanding debt balances.
Our average share count and at $62 5 million shares and reduction of approximately 3% for that.
2 million share is lower than in the fourth quarter of last year.
This is the result of shares repurchased through the end of the first quarter of 2020 subsequent to which we paused our share repurchase program.
Our non-GAAP earnings per fully diluted share for the fourth quarter increased 14% to $3.65 and.
The comparison to the $3 20 last year.
On a GAAP basis, our earnings per fully diluted share increased to $3 49 compared to $3 12 last year.
For the full year, our non-GAAP earnings per fully diluted share were up 1% at.
At $9.05 per share versus $8 and 99% last year.
GAAP basis full year earnings per share were $8 of 36 cents versus $8 69.
2019.
A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning.
Turning to free cash flow of capital deployment, and our balance sheet I would like to summarize our fourth quarter results and activities we.
We define free cash flow as cash from operations for less capital expenditures and excluding special items.
For the fourth quarter of 2020 free cash flow grew 52% year over year to $240 million after funding $47 million of capital expenditures exclude.
Excluded from free cash flow was $19 million related to the investment and our time precision chemistry operation.
And the fourth quarter. This resulted in 30.
And with each dollar of sales converted into free cash flow.
For the full year and 2020 free cash flow generation was $726 million after funding of $172 million of capital expenditures.
This represents the 26% increase and 31 cents per dollar of sales converted into free cash flow.
Excluded from free cash flow was $70 million related to our investment and our constant chemistry operation and a $38 million transition tax payment related to the 2017 U S tax reform.
Our increased free cash flow is primarily a result of our cost actions cost saving actions and improvements.
Cash conversion cycle and the.
Fourth quarter accounts receivable day sales outstanding came in at 70 days down seven days compared to the fourth quarter of last year and.
Inventories decreased by 16 million of comparison to the prior quarter prior year quarter, reflecting stronger revenue growth and revise production schedules.
What does the maintains the strong balance sheet access to liquidity and a well structured debt maturity profile and we ended the quarter with cash and short term investments of $443 million and.
And debt of $1 4 billion on our balance sheet at the end of the quarter.
All of it and a net debt position.
And $13 million and a.
Net debt to EBITDA ratio of about one one times at the end of the fourth quarter.
Our capital deployment priorities remain consistent and Thats it.
The growth.
Balance sheet strength and flexibility and return of capital to shareholders.
We remain committed to deploying capital against these priorities as such our board of Directors has approved the two year extension of our January 2019 share repurchase authorization that was set to expire at the last month.
As of today, we have one 5 billion.
Remains available under the program for share repurchases.
And we look forward to the year ahead, I'd like to provide some broader context on our thoughts for 2021.
The business environment remains uncertain and we are assuming a gradual improvement in customer activity led by the pharma market.
We expect all maintenance you are pleased to perform better than they did in 2020 led by growth in China.
Our outlook does not anticipate ever kind of locked down and seen in 2020.
We had a 1% tailwind from Covid related revenue and 2023 quarters of which was and the second half of the year. We expect a similar revenue impact in 'twenty, 'twenty, one, including a 1% and 2% growth tailwind and Q1.
We anticipate the first half growth tailwind will moderate through the remainder of the year.
The improved execution on our near term growth initiatives contributed to our fourth quarter growth.
And to also benefit from capital spending that the delayed from the first half and and the second half of the year.
Which we don't expect to continue in 'twenty and 'twenty one.
The second half of 'twenty and 'twenty, one we'll have to contend with the challenging comp, resulting from the revenue shift that took place in 2020.
These dynamics support full year 'twenty 'twenty, one guidance for constant currency sales growth of five 8% at current rates of positive currency translation for 2021 sales growth is expected to be one to two percentage points.
Gross margin for the full year as expected the and the range of 57, 5% to 58, 5%.
Every day, we look to balance growth and investment and profitability. Accordingly, we expect 2021 operating margins of 28 per cent to 29% based on the combination of growth investments and normalization of COVID-19 related cost actions and disciplined expense controls.
Moving now below the operating income line other key assumptions for our full year guidance, our net interest expense of $35 million to $38 million, a full year tax rate of between 15% and 16% which includes our new five year tax agreement with the Singapore that will expire in March two 2026.
The restart of our share repurchase program and 2021 that will result, and an average diluted 2021 share count of 61 to 61 5 million shares outstanding.
For the course of the year, we will evaluate share repurchase program and provide quarterly updates as appropriate.
Rolling all of this together and on a non.
Non-GAAP basis full year 2021 earnings per fully diluted share a projected and the range of $9 30 to.
Two $9 57.
And it seems the positive currency impact on full year earnings per share growth of approximately three percentage points.
Looking at the first quarter of 2021, we expect constant currency sales growth to be.
Seven per cent the 10% at today's rates currency translation is expected to increase the first quarter sales growth by approximately three percentage points.
The first quarter non-GAAP earnings per fully diluted share are estimated to be and the range of $1 50 to $1 60.
At current rates the positive currency impact on first quarter earnings per share growth is expected to be approximately 15 percentage points.
Now I would like to turn it back to eat it and for some summary comments.
Thank you, Mike and summary, we're pleased with our resilience and the second half of 'twenty and 'twenty and the strong finish to the year, which is a true testament to the determination of this team and with the <unk>.
Environment remains variable pharma markets have shown resilience and our transformation program is already demonstrating the results and contributing to growth.
Despite the challenging environment and the progress we've made as an organization over the last five months is nothing short of extraordinary.
I remain ever more confident in the team and our portfolio and our market position.
And there remains a lot of work to do but we have a tremendous opportunity in front of us to turn the business around with that we will begin the Q&A session operator.
Thank you and we'll now begin our question and answer the question.
As a reminder, if you would like to ask a question. Please press star one our first question comes from Vijay Kumar from Evercore ISI. Your line is now.
Hey, congrats on a good price here.
I guess.
When you look at.
The revenue guidance here for sure the color on curtailments.
What is I guess on the go forward basis. When you think about some of the growth initiatives you guys from 19 is waters now and.
Five of 7%, maybe perhaps in the car.
About what the medium term algorithm for the for the company.
Thank you. Thank you Vijay and first let me say I'm Super pleased with how these how the finished the year looking.
Looking ahead.
<unk> guided we guided about you guided I think more prudently and then than not I think.
Have I would say vs.
We expect the basis of the guidance for the for the full year, which is about five to eight per cent is continuing strength and pharma.
And if.
And and there are three factors if they if they go better and would tend towards the higher end of the guidance of both in the mid in the short and the midterm first the company of the other markets beyond pharma second.
<unk> tailwind from a from a COVID-19 for.
From from from COVID-19.
And programs, where we had seen on the unexpected and could even more stronger contribution from our turnaround program. So I think I would simply say of the guidance is prudent and.
And we see several triggers that should allow us to get on the higher and if the.
And if they're done and the right direction.
Got you and and then one quick follow up on the margins, but I know theres been some debates and well on the margin we set for the company.
And I guess when you look at the and.
And correct me, if I'm wrong, I think I heard plenty of nature of 29% margins for fiscal 'twenty one.
Is that the new base and option of waters, and we expanded margins off of from the new base.
And so we do I think.
And I think you from looking at it probably much too closely it's actually on the simple the cost actions that we've taken and 2020 come back into the base and then that should allow us to go from there further on but Mike did you want to provide more color on that.
Sure.
So definitely our operating margins are being impacted by the normalization of those cost actions that were put in place for the second quarter. As a result of the COVID-19 pandemic these costs or temporary and.
And they include of furloughs and salary reductions, but they have been restored already and are already.
And that benefit the sales growth so.
It will put a drag on our 2021 operating margins, but as we return the growth and we return to more of our historical geographic and product mix and the.
Future, we believe that our margins will get back to those historical levels and maybe you can expand if we can get the higher level.
Fantastic guys and thanks again and then.
Nice price here.
Thank you Richard.
Thank you and our next question comes from theory, Dubai from Bank of America of your line is now open.
Hey, good morning.
Couple of questions I guess, the first one could you talk a little bit more about the.
The LC.
Cycle and some of the benefit near the specifically.
So just curious about what of your pharma and installed base is alliance versus the various acuity generations and what's actually.
Essentially the amenable to upgrade.
And just trying to get some sense of.
Where you are in the process of.
And potentially replacement cycle and the Skus seafood.
Great.
Sure.
Thanks Jack.
The LC replacement initiative, the one that I introduced and are in the call and earlier.
<unk> is off to a wonderful as all of the wonderful and start if you look at the HPLC to <unk> mix of our installed base and I would say roughly 53% to 47% H B and C. D E F E N.
And in terms of Dimensionalize and get and remember, we talked about alliance and particular instruments that debt on.
And our limited service.
Assuming there and about 8000 and also of them. We expect 10 to 15 per cent of those to be replaced.
The initiative and itself is off of and excellent to an excellent start I mean, we've contacted over 60 per cent of those customers already.
Received rather positive feedback and.
And I would say a couple of facts and one <unk> of course has been quite a bit and the replacement, but what we've seen in Q4 is the highest win loss ratio of that we've seen and over three years for LC instruments. So this bodes well for the initiative and we're seeing other positive positive uptake.
Second you asked the question on Premier we launched Premier columns and AR in Q4, these non especially designed for from.
Molecules that are that ive of affinity from for for for metals, and we've designed the non adopters surface, which increases the efficiency of the separation and and Youtube and what is the obligation of the application and this actually squarely targeted towards larger molecules.
And oligonucleotides and the uptake has been excellent and I would say, it's even if you get even more interesting when we take the technology and implemented across all of.
Or you'd be LC instruments, which is acuity from here and that's set to launch on February 10th the free market works.
Very good and I expect that to do just as well. So I hope that gives you more clarity on the LC and also on from here.
Yeah, No I appreciate the detail of that when it's very helpful and just Cal should we think about the tax rate.
Beyond 2021.
Mike.
For getting to the 15 and 16%.
We've obviously.
I mentioned that we actually have a new agreement came of course of that.
And we will help to maintain our current tax profile.
Between 15, and 16, but obviously with all the new tax legislation that could possibly come down the pike.
It was maybe a different story, we are looking at it.
Obviously, there's the rate increase from <unk>.
21 per cent and the U S. The 27.
And we estimate that the impact would be about the 1% increase and the future to our tax rate overall worldwide if that would happen.
Congratulations.
Thank you very much and I'll get back in queue.
Yeah.
Thank you and our next question comes from Tycho Peterson from JP Morgan and now open.
Hey, thanks.
And I think one of the questions for all going to get is just on the sustainability of the instrument strength and particularly on the LC strength, especially after the last quarter you expected the moderation in the fourth quarter and could you just talked about catch up spending and <unk>.
It sounds like you mentioned normal budget flush and the kind of planned spending and the LC replacement initiative is the big driver of show why should we expect the moderation going forward on the instruments side of your and early innings of the LC replacement cycle.
The.
Tycho the are there being prudent with with what we are guiding at this stage right. I mean, so if you just look at the older. Let me start with the overall commentary of the night, then I'll comment more on and C and D and the instrument replacement of the other initiatives in particular.
And if you if you just look at how we have guided we say look towards the end of the year we should.
And what does it is as you know underperformed and the last few years, we would want to reach market a market growth of above and the next 12 to 18 months and these initiatives will help us right. So if I just break it down.
<unk>.
Our initiatives to better than planned if other end markets recover and we continue to see COVID-19 tailwind with the.
And that we would be on the higher end of the guide and that should set of debt should set us up for very nicely for the future and so.
One of the LC instruments replacement cycle of its concerns and the early stages of the innings I mean, it's it's a good start but it's the start all of the same I don't want us to get overconfident with one data point of view.
I believe the execution is very good we have a good a good feedback from you know good feedback from our customers I do believe especially with arc H B and C. The launch of from unit will continue to see strength and LC, but I would and I would still want to remain prudent and so as I said it's.
It's one data point, it's a good data point, but I would I would not want to.
Extrapolate just based on one day the point at this stage.
Okay and then one other question we've gotten a lot of the turnaround plan is on kind of a refocused selling effort, whether it's penetrating cfos are pushing more of an attach rate or trying to drive the replacement cycle as you alluded to the feed.
And the market over the last couple of years and as your competitors are selling better products cheaper now you highlighted and the acuity of Premier arc and the bio CT and I'm. Just curious if you still think theres and innovation GAAP and the market or how you feel about the current state of instruments.
As it stands today versus just vs competition.
Yeah, and I think thats lets take it let's take it.
Across the portfolio right. So I've had the chance to examine the portfolio of I would say again for you Rick.
Remember the turnaround plan.
This is the first of all classes on the short term commercial momentum and I think you would agree that that gives us freedom to act and we get our processes and systems.
And then refocus on the portfolio and said there would be more to say about the portfolio and the future Buck. The current assessment suggests the following right.
And just if you just look at the instrument portfolio of our mass spec portfolio has has been completely refreshed with five new launches in 2019 alone and we've talked a lot of about <unk>, but also our tandem quad portfolio with the Zebra line has done and done quite well, especially if you look at the uptake for the traditional Chinese medicine, the medicine and China.
And and small molecule organic testing for that portfolio for the mass spec portfolio of boat on tandem Quad and high rise and I feel good about of course, there's always more to do but it's sort of it's a very very good start.
And if I move to LTE, you talked a bit about arc HPLC and premier both are significant steps forward for our portfolio and as I mentioned earlier, we're thinking of for your thinking of how to re imagine D&C and so.
The instrument, especially and the cubic you'll see space and there'll be more to say about that and the next few years that programs went underway if I'm moving to the consumer growth side, both for small and large molecule and pharma our portfolio is very well set I wont speak much about the small molecule and I think of that is that is that has been understood but on the large molecule side on acuity.
Columns, and particular I've been designed for large molecules and piece of it for proteins for peptides for Oligos and now with the launch of Premier that's even strength and strengthens the position further and so.
Across the portfolio on the instruments side on the consumable side and the service. We continue to look for better options. I believe we're doing we've done a lot we're doing a fair bit to continue to refresh the portfolio and going forward and then of course, there and of course things to do to enhance the portfolio, but I don't feel.
For the second that we are disadvantaged versus <unk> versus competition and the market. So I think for the short term I believe with the hand debt, we have the can fight pretty well.
Okay. That's helpful. One quick one before I hop off just on the share repurchase I'm curious as to the kind of the thought process. The I wonder if there's been criticized and the pasture and buying back a lot of stock, especially as revenues were going along the way I don't think it would be penalized for reinvesting more so just talk about that tradeoff between repurchases and maybe investing more and business Yeah look I mean the.
Yeah, and I would like.
And that my comment a bit more and in a minute, but at the high at the high level.
We don't feel that there is any limitation for us to invest look I mean, we just wanted to take it one step at the time.
I mean, the waters has industry, leading margins superb cash flow. So there is incredible flexibility to invest we simply wanted to make sure that we do it and the right way and the right area of site and again coming back for the transformation program. The first focus was to get the sales momentum back the tree, which are off to a good stock and one or two data points don't make a trend.
Keep we'll keep at it we will focus on the processes and the systems and then there'll be there'll be enough time to think about enhancing the portfolio both organically and inorganically. So there is no no no limitation on that front and started the share repurchase program is concerned it's part of our overall capital allocation philosophy. It is of.
Lever, but don't assume that that's the only lever we have Mike do you want to comment on the priorities for a minute.
Sure I would just add debt, we do have a strong flexible balance sheet.
And we also generated a ton of free cash flow.
And we generate about 25% of each sales dollar gets converted into free cash flow, but we.
And we can do that and obviously our debt capacity to both investing in growth both organically and inorganically, but we can also return value to shareholders we have.
Our share repurchase program over the course of the years and.
And Dave beneficial to our shareholders.
And we bought back it's been in place for about 18 years, now and we bought back close to $9 billion. So.
As we move forward through this year, but certainly we're still in the Pea.
The endemic here and we'll evaluate.
And how much and when we actually will buy during the course of the year, but again, it's about being flexible we bill.
And we do have that flexibility and strength.
And do a couple of different things.
With respect to capital.
Thank you and our next question comes from Doug Schenkel from Cowen Your line of.
Good morning, and.
Thank you for taking my questions.
And and recent discussions you acknowledged the waters over the last several quarters and sort of instances been losing market share and.
And we've talked about the SBA and a function of strong competitors really targeting waters for a long time and and finally make some progress especially of disrupting.
Typical replacement cycle, where you would.
And kind of half of the home field advantage and.
Place and the replacement box I'm, just wondering where and where do you think you are and the process of taking steps to reverse the trend.
How much investment of time is required pursuant of the reversal and then keeping in mind that it was a pretty strong quarter should we put much weight on Q4 results and the context of assessing your progress with these efforts.
Thanks, Thanks, Doug.
It's it's it's a good quarter, it's a strong start to other initiatives and especially the LTE initiative, and which we've talked about a fair bit.
The basic assumption is and as you mentioned is that there is the replacement cycle and the.
Placement cycle and of our instruments and the positives I mean, we knew about it and have you been at it for a while but I think the focus that we have now and you'd say well what are you doing differently I think what we're doing differently from the past, which starts to show show the starts to pay dividends is that we're using and we know exactly where these instruments are there.
And I look at the database with target and our reps do those exact John will go through those exact customers.
And.
In addition, armed with arc.
Arc H B and C. As a as the new product in addition to our value proposition with Premier and we feel our full portfolio weighted.
The E&C with from here with our service offering is.
He is off to a good start and this replacement cycle I don't want to get too far ahead of ourselves and I won't speculate.
Too much on the future, but this data point looks good and leading indicators in terms of orders also look good.
In terms of how you should think about it and the future I think I'd rather share of the fact after after the after we're done rather than speculating, but all I can say of the data points. We have at this point in time the positive both in terms of one of the customers other seating.
The new proposition and how they are targeting the customers. So I mean and in general I would remind you that waters is and LC company right anytime we do something on the LC or our whole team our sales team our services team get Super enthusiastic and.
And we're seeing some of that some of that and the and the results. So I'll stop there and of course, the happy to answer any follow ups.
And that was Super Super helpful. Thank you for that and and then I guess.
This is the kind of been touched on and some of the earlier questions, but I still think its worth revisiting.
If we just think about what we've heard and <unk>.
Terms of some of the early updates from some of the other larger tools companies. They are significantly accelerating investment and the current environment essentially taking the COVID-19 related windfalls and reinvesting a lot of that cash flow and growth initiatives.
In response to that do you see the need to increase the investment to essentially help maintain your competitive position and kind of building off of the last question.
Or do you think thats not necessary and not something that drove you to the kind of being reactionary in terms of how you looked at your investment plan for 'twenty and 'twenty one.
And again, a very perceptive question and look at it.
And you somehow answer to your question and the last comment I mean, we will not be reactionary to anything.
And I think R&D and having been a researcher and myself for a good part of my career I mean, we wanted to focus on fundamentals. If you wanted to focus on technology development and what does the technology oriented companies, who will stay true to the problem solving that we have to do now for some frac site.
If you look at the R&D productivity and recent times.
The mass spec portfolio has been completely renewed both on the high risk side as well as on the tandem quad the site and to provide you more color on the tandem quads.
We're seeing very good very good uptake of the ones in particular as I mentioned earlier in China the.
And we wanted to we wanted to continue the work on our software all of those tandem quads to even increase the uptake and and pharma the M. P J and sort of it is as well so I feel the have done a good job and refreshing the mass spec portfolio and we also know what we need to get done specific to the end of the funding those programs very well.
And especially on the informatics side for.
For the for mass spec bio of cord is another case and point I mean, as you know <unk>.
And CMS and <unk>, you'll see us from all of the Holy Grail and.
And the industry to be able to take large molecules for the same place for small molecules are and and release testing and we have and robust and reliable and instruments and bio of course, which is starting to see for very good uptake and we have of really clear road mapping and increasing applications and improving the software on that front as well and that is very well funded.
Now turn to.
Because he has he side I mean the.
And we redoubled our efforts on that front, both on the commercial side, but also on the R&D.
On the R&D side and the question of turning on most of the right to the right programs and they're on.
On the consumables and in particular and the launch of Premier and has been has been received very well and the market for expanding that technology into our full instruments space and that should be that is something that the market is I think looking forward to have of non non adjunctive surface for field instruments.
And then again and that is a strong effort on the software and site as well.
To take empower and to the cloud and and and and expand the applications there.
And then finally if.
If I turn to the service side and there we're always looking at better value propositions and here. It is not necessarily of product based innovation, but it's the service based innovation and many of our customers are asking us for more flexible and value propositions, especially especially.
And when it comes to.
And when it comes true I would say almost on a card services.
Based on the utilization and we are offering those and those value propositions as well and so I've gone on long, but just to give you a flavor of that the.
The R&D programs are based on specifics and not what appears to be popular and we will not be shy and increasing that funding.
And you'll hear more about about debt as we go forward.
Thank you and our next question comes from Dan Arias from Stifel. Your line is now open.
Good morning, guys. Thank you alluded on the specialty selling effort that you've kind of honed in and out of the need and you just sort of share some thoughts on how we should think about the scale and the magnitude of that portion has been and what percentage of reps.
And you see from now that we might be thinking about is focused on either of a particular product or.
Particular application.
Sure.
And use that as an example of as an example than when we were talking about talking.
And talking about bio CT and particular right I mean products that require a deeper explanation of products that could benefit from our customers.
Our customers being coached on how to use it how to develop methods on them and for bio CT and particularly on and I'll just use that as an example, that's all for an excellent start right. So the Vietnam.
Of you've done specialty reps and we've created the specialty that steam and done them towards.
Specific customers, especially ones with large molecule and then oligonucleotide applications and they've gone and and development of coach with these customers.
And in many cases, we have follow on orders as well.
And to just come back for the facts I mean by and for bio cohort of Q4 was the best quarter since its launch by by several fold. So.
And so we think this approach is working now in terms of what fraction of the total field force is especially of the vs versus most of the generalist the.
Most of that's half of technical training.
And and.
The reasons waters has been successful and the market for so long is because of.
Before and for it because of our technical capabilities and how we are able to partner with our customers and now the basically day and a few of them on specific specific methods I would say, we will continue to expand it and if it if it works more growth continuing to expand our specialty specialty field force for more complex applications and bio CT is just the start.
And that gives you a bit and get more clarity I don't want to quantify the fraction of field force that are gone and specialty.
We will basically its the pilot and it seems to be showing the results and we'll continue to expand and.
The larger and larger number of customers and targets.
Yeah, Okay. That's helpful.
Okay, and then maybe just one on margins as it relates to the product mix. When you. When you look at the collective gross margin profile for the last tranche of new products. That's been developed by our core cyclic IMS and act excess.
HPLC is there are different.
Different profile of attached to that and aggregate relative to the rest of the portfolio is such that if you guys are successful and we do see some new product acceleration. There. We should think of that of the mix factor that works in your favor and then along those lines. You have mentioned that there is some other new things that you have and the hopper and.
And there are a conscious effort to design and add things to the portfolio that are at a higher level of profitability than say the the credit sensor platforms.
Thanks excellent excellent questions and I'll give you a general answer to your for your second question and then let Mike give you a bit of specifics on how we're seeing the margin evolution.
In general.
The.
The simple way to think about it is consumables and recurring revenues have a bit of of higher margin than debt instruments and overtime instruments has the demand rises and.
You can see more leverage and the P&L and you'll have higher unit, so, hence and two and to start to see better and better margins over time. So you start up for the lower margin with instruments and that goes up over time and.
The consumables and informatics you already see a nice.
Starting point and so the launch of Premier.
The more informatics solutions better so there's definitely gave of lyft and instruments and the at the beginning might and.
And I'd start off with the lower starting point, but then would would go up rather rapidly out of the demand goes up and we're seeing that already and many of our platforms.
Mike do you want to comment a bit more on on the margins and the evolution of especially on the gross margins.
Sure.
What I will add is that obviously one of the new product introduced.
We don't have the advantage of taking costs out so over time over the next couple of years. After the product was introduced typically able to low.
All of the cost to produce the product, which will help the margins significantly also obviously the more.
Even if the elite.
Who did alluded to that we pushed through the plant will also help margins. So the combination of those two generally improves, especially on the instruments side as well.
And we move out for one of two years after we launch.
But in general I mean, just to just to expound on your question earlier and give you something specific in general it is a good assumption that we are introducing products that have a higher margin profile.
And the Boston I think that's a reasonable assumption.
Thank you and our next question.
And from Steve Willoughby from Cleveland Research. Your line is now open.
Good morning, Thanks for taking my questions.
I had a couple of maybe just one or two just starting for Mike Mike just wanted to double check that we heard you correctly as it relates to some of the guidance for the first quarter.
Did you say that you expect the 15, one 5% benefit to EPS from FX and the first quarter.
15%.
Wow Okay.
And then I guess.
Alright, and upon that and that was very small so.
The power of the dominate a little bit so that's the pressure to be tobacco.
Okay very good thank you.
Just the.
Two questions for you then as it relates to the sort of looking forward one.
How are you thinking about.
Instrument growth versus reoccurring growth and 2021, and maybe if you if theres any comments on the strong 14% chemicals growth you saw in the fourth quarter average.
And how sustainable that sort of brokers and then the second question is just you previously you've made some comments about sort of.
And some of the largest orders in company history here recently, but I'm just wondering if you could provide any more color on that was.
Something you think is the change or sustainable or is it just happened to be kind of a one off here and the most of them.
And couple of months.
Steve Thank you for for both of those questions.
First on instrument growth versus recurring you saw in the fourth quarter that the recurring revenues for double digits instruments for what.
For mid single digits, and and I think going forward also we I mean, if you. If you just think through what we're thinking.
And what we are hoping to see and the future I mean do you expect that pharma continues and you should see a similar sort of some of their sort of mix going forward as well with a pharma continues its strength and as the other end markets recover the.
Expect a bit of a bit of upside to it.
And if you just done a bit towards.
I think other than giving you the issue of and they give you a bit of specifics on how one could think about it. If you just take of I think of our applications and pharma and for both small and large molecules and the needs of give you a bit of the of the portfolio that and.
Gross towards that right So force for small molecules.
And as that neither of us, especially as.
Genetics consumption and and.
Products for Covid, especially therapeutics small molecule therapeutics rise vs.
C R and C portfolio with HPLC and particular going up.
And then if you turn the large molecules you can start with consumables and and and then the reason I'm, giving you. The specifics is just to give you color of that on both fronts that is there is reason to believe that and.
And that we should see some some from optimistic optimistic development and on the on the consumable side for long.
MS molecules first time in the current acuity columns will you be LC have been designed in particular for large molecules.
And that's with proteins and peptides and black and and and also on the goes with the near getting launched first as the column the techs.
<unk> has got very good traction, especially for oligonucleotide and.
Applications and now the.
Now it goes into the instruments space. So its rather broad based if I just take the LC example, both from the <unk> side and the HPLC side and for mass spec as you.
Already know myocardial <unk> have done pretty well for large molecule applications and Q4, so really really broad based I would not.
And speculate on one of the other what I would say Q4 give you a good indication of what we should see what we should see even going forward if not better.
Now in terms of large orders and to give you and give you a color.
On my comment.
And large orders previously.
And with the.
And as he the placement of initiatives, we've had some customers come in and.
And ask us to replace the full fleet and that has resulted and some of the largest orders and this is why I'm rather optimistic about this this initiative. So that's.
And that gives you more color on the chemicals vs and I'm not sure what you're referring to and the 14%. So I don't know Mike. If you have any comments on that I don't I don't know what the what that is it for into the chemicals growth of 14%.
I'm not sure either.
Steve and I hope that gives you.
The pillar.
And our next question comes from Puneet, Bobby and.
SBB Leerink your line is now open.
Yeah, hi, thanks for that.
And first of all congratulations this is the.
Impressive quarter.
And thanks for all of the work that you can put in and each of the bumps here. So first one based on.
And what you were saying there and correct me if I'm wrong and.
Here's to me that the China pharma recurring revenue sales and especially columns and small molecules and then services grew very strongly and the quarter.
Obviously, you highlighted the growth in China. So I'm wondering what has changed in your approach and China in terms of commercial execution or is the largely.
Mark and driven growth that we're seeing.
The piece I'm across the peers as well.
And so correct me if.
If I'm wrong on any of those assumptions and what I'm seeing and then that the light also of what are there any incentives and the fourth quarter that drove this growth in that geography.
So thanks for your for your question Puneet and China look on the in there for.
Extremely happy with the quarter.
And it grew slightly shy of 20 per cent. After I would say of very difficult first half of the year and social and we're very happy with the momentum and nicely and that largely led by and by farm of both on the small and monarch and and I just wanted to go for it and a very broad based growth across the portfolio.
Across instruments.
Both mass spec as well as LC.
Consumables and services, especially the cutting revenues did that.
The tubular and especially in the pharma.
Especially in the pharma segment so that's.
And I feel really good about about that in terms of changes I mean, it's a it's it goes back to what we talked about earlier really focusing the the field on what matters and as I mentioned earlier as soon as the author of the words and see it.
And waters.
We have a genuine enthusiasm across the organization and I'm going to have not just not just of portfolio, but our service teams are state of the art.
So I think having the organization focused on the LC, giving them arc HPLC as and new product and it was especially designed for for China.
And in particular nature of giving the market the LC and from here to grow out of kind of have these conversations with the and see customers has been has been a has been a terrific initiative.
Secondly, I'd also mentioned.
After the XO or LC seat the.
Contract testing and contract research organization of initiative, that's also done rather well and China. Our team has gone out to meet contract manufacturers the.
The increased penetration and contact testing organizations and the food segment.
It's again, one data point, but it's a good data point.
And I'm reluctant to start extrapolating too much but it's a good data point that gives us confidence that activity is at a higher level and all that sort of incentives are concerned they are not.
The different than they have been in the past. It's just a question of focus, but giving the teams new products, giving them clarity on which customers to go after.
And and and working with them to succeed and I think are the key success factors I would point to.
And operator, we have time for one more question.
Thank you and our final question.
And from Dan Brennan from UBS. Your line is now.
Great. Thank you. Thanks for that thanks for taking the question I kind of hopped on late but I was hoping and then we spoke a lot about.
Asia, and China, but was hoping to dig in and a little bit more of their if you don't mind could could could you just kind of break apart kind of China, because there was a lot going on and the last couple of years for waters that particularly on the food and the pharma side much of it.
And I know you've addressed that a little bit but can you just walk us through a little bit how you think about the opportunity going forward for waters in China, and maybe some of what and the strategic and.
And initiatives that you have ongoing I know youre talking about a bigger portion of the contract research organization, but I'm. Just wondering if you can kind of maybe peel the onion a bit more on China for us.
Sure sure.
And then.
Very good question and in China, and we talked a bit about in the past about what has caused the slowdown right I mean, the slowdown was led.
And by the food segment, but also a bit of a slowdown and pharma and a focus on front of mine. So I again, and let me break it down a bit across the different initiatives.
The pharma, we expect our focus with LC with the arc HPLC the with the launch of our th P&C and Premier and the replacement initiative.
It should give us should give us good tailwind and pharma going forward.
And for the food segment.
Of really focused on expanding our coverage for the contract testing organizations and remember I mentioned, we went a little bit late and following that trend. The team has has.
Has gone and reached out to each and every one of those customers and.
And now we have to make sure of that our value proposition to work before we start to see meaningful growth in that area.
And then.
Across clinical China is one of those market for that and the possible very well and that in that segment and this year.
Seen some headwinds, especially on the especially due to due.
Due to the diversion towards towards COVID-19 testing, so I expect that to come back so across the board we see some some good opportunities in China and now talking at the at a bit of a higher level and.
And the pharma industry and China U.
If you look at the look of these the latest five year plan.
It calls for.
Gross for having roughly 45% of of course, all of the production for biopharmaceutical soccer and locally in China.
For China Us and today that number is.
20 of between 20 and 25 per cent. So there's there is commitment and and B, the Chinese government and the Chinese economy.
To increase the pharma consumption, so if he feels rather well placed.
And with our portfolio with our commercial focus to go after the opportunity and pharma as well as and food and from a portfolio of perspective, our cash because he was specifically designed for the Chinese and see market of.
All of the tandem quad portfolio is doing the other than for traditional Chinese medicine, and food testing and environmental investing in China. So I feel very good from a portfolio perspective and from a commercial perspective on the base, we've set but it's the only said it's a good start it's the start all the same sort of bit prudent about what people want and what we've what we wanted to see and the future.
And.
Okay.
And that was the final question.
Thank you very much.
And so as we and as we conclude thank you. Thank you all for for joining today and I want to tanker and one of the tank car team for doing such of such a stellar job and the first.
In the in the fourth quarter and.
And we're looking forward to continuing and.
And the effort and the strength and the strength as the as we go forward.
Like the thank you for your continued support and interest and waters and we look forward to updating you on our progress and Q1.
And the Q1 'twenty 'twenty, one zone, which is currently anticipated.
On the fifth 2020 of them. Thank you and have a great day.
Okay.