Q4 2022 Waters Corp Earnings Call
In a listen only mode until the question and answer session of today's call.
This conference is being recorded if anyone has any objections. Please disconnect at this time. It is now my pleasure to turn the call over to Mr. Kasper two door head of Investor Relations. Please go ahead Sir.
Thank you Catherine.
Everyone and welcome to the Waters Corporation fourth quarter earnings call. We are very pleased to be speaking to you from Santa Barbara. This morning worldwide technology is located.
Have a lot to cover today, given our exciting.
Given our earnings results and our exciting announcements.
Today I am joined by Dr. <unk> departure, while this president and Chief Executive Officer, and our Mall Chapel, Walters Senior Vice President and Chief Financial Officer.
Were also glad to be joined by what technologies, Chief Executive Officer, Jeff <unk> as well as its president Cliff.
Now before we begin I will cover the cautionary language.
In this conference call, we will make various forward looking statements regarding future events or future financial performance of the company in particular, we will provide guidance regarding future.
Possible results and commentary on potential market and business conditions, including with respect to the announced transaction with what that May impact waters Corporation over the first quarter of 2023.
Full year 2023, and 2020 for these statements are only our present expectations and actual events or results may differ materially.
For more details. Please see the risk factors included in our most recent annual reports on Form 10-K form 10, Qs and the cautionary language included in this morning's earnings release.
During today's call, we will refer to certain non-GAAP financial measures, including in our discussions of the results of operations reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and in the appendix of our presentation, which are available on the company's website.
Unless stated otherwise references to quarterly results, increasing or decreasing are in comparison to the fourth quarter of fiscal year 2021 and.
In addition, unless stated otherwise all year over year revenue growth rates and ranges given on today's call are given on a comparable constant currency basis.
Finally, we do not intend to update predictions or projections, except as part of our regularly scheduled quarterly earnings release or as otherwise required by law.
Now I'd like to turn the call over to our President and Chief Executive Officer of <unk> departure.
Thank you Kasper and good morning, everyone.
Before diving in I would like to extend our thoughts and our prayers to the thousands of those who are affected in Turkey, and Syria by the earthquake.
Today marks a major milestone and accelerating value creation for our customers and shareholders as we progress to the next step in the execution of our strategy.
This morning, we made the exciting announcement that biotechnology the recognized leader in nights Kathryn will be joining forces with waters, bringing with it a fast growing attractive business with key capabilities to accelerate our $1 8 billion double digit growth opportunity in bioprocess characterization.
More than 40 years ago, why it was the first commercially <unk> instruments, incorporating lasers as the light source ever since they are defined.
And redefined potato, capturing instrumentation software and services.
Along the way they've also added several related technologies, including dynamic light scattering commentary effector Mitre and field.
Origination.
The innovative products are used to determine the properties of novel Therapeutics, such as 10 in gene therapy.
Genes and proteins as well as synthetic polymers and nanoparticles.
Why it was the top asset and priority, we identified for bio analytical characterization, making the acquisition a significant step forward in this high growth Adjacencies.
I'd like to take this opportunity to invite Jeff and to say a few words about this exciting combination Jeff.
Thank you.
We are thrilled to be with you here today at this incredible moment for our company.
For over four decades, <unk> technology has delighted customers.
Industry, leading innovation and light scattering characterizing life enhancing large molecule therapeutics.
Our common scientific heritage deep mutual respect for science based innovation and a passion for customer success makes waters, the ideal steward to propel our family's legacy.
Through its next chapter.
Cliff would you like to add anything.
I would like to Echo your comments and also by fathers.
Dr <unk> sentiments.
We could not have been more excited but could not be more excited about this combination.
Waters will broaden its global reach scale and will accelerate deployment of <unk> technologies, and downstream and QA QC species integrating this technology onto waters well established empower platform.
One is such a natural and logical fit for us and this next exciting chapter in <unk> history.
Thank you Jess and thank you cliff.
We are honored to get this unique opportunity to carry forward into the future.
This combination is a fantastic opportunity to integrate our powerful analytical technologies, which are highly complementary to each other.
And as you highlighted Jeff our shared deep scientific culture, and common passion for customer success with accelerated integration and drive value creation for our customers and shareholders in the years to come.
Today what.
<unk> has a strong and growing portfolio of serving large money can separation and characterization.
Which are approximately 30% of our pharmaceutical revenues. These applications are high volume downstream workflows and biologic development in QA QC Central lab, using NFC, UV and LC mass spec.
Why it's significant exposure with a very fast growing biologic applications with builds on this presence and gift and we will give our customers an unmatched set of analytical solutions across large molecules, including gene therapy and viral vectors.
For Wyatt as Cliff mentioned this combination will provide expanded geographic reach and will accelerate the adoption of light scattering and downstream applications throughout established presence and empower informatics platform.
As you can tell us.
Very excited to share more details about the strategic benefits of this combination. However, this is our fourth quarter and full year earnings call and we have some excellent results to share with you first so now I will cover our key messages and financial results for the core business and.
And then we will continue outlining the value of this combination as we take this next step in the evolution of our strategy.
Looking at our financial results. We ended another very successful year delivering strong results in the fourth quarter with growth across our end markets. This was net by yet another outstanding double digit instrument growth quarter.
Our incredible performance, if you would not have been possible without our dedicated and talented colleagues.
<unk> numerous macroeconomic and pandemic related challenges throughout 2022, including global supply chain challenges Covid, lockdowns inflationary pressures and currency headwinds all while responding to high customer demand for our products today, we have three key messages, which reflect the strength.
In our core business and the exciting future that lies ahead.
We continue to deliver consistently strong execution you can see this in our 2022 performance, where we sustained strong growth after a stellar year in 2021.
You can also see this in our three year CAGR of approximately 9% in constant currency.
Where our results have placed us amongst the top players in the industry since the beginning of our transformation.
Second.
Revitalized portfolio has contributed to our growth and we expect this to continue.
New products have resulted in growth opportunities in large molecule applications DFAST and battery testing, while supporting strong core instrument replacement.
Third while we have accomplished a lot in the past two and a half years, we're now augmenting our organic efforts with M&A to accelerate our journey into high growth Adjacencies.
Turning now to our fourth quarter results revenue grew 3% as reported and 9% on a constant currency basis, we saw broad strength across our end markets and regions with.
Robust customer demand.
Industrial was again, our fastest growing end market up 14%.
Led by environment, investing which grew over 20% and da which grew mid teens pharma saw continued robust growth up 6% with strength in both small and large molecule applications.
Strength was led by Europe , which grew low double digits offset by headwinds in China.
Academic and government grew 8% as increased activity in funded funding resulted in strong year end spending in several of our geographies.
Instruments grew double digits led by mass spec new products contributed across our portfolio with <unk> acuity Premier and cyclic unit sales growing over 40%.
Meanwhile, our newest instrument launches zeebo TQ absolute zero at G. III saw excellent continued traction with very strong demand.
Recurring revenues grew high single digits supported by our E Commerce and service attachment growth initiatives our Q.
For non-GAAP adjusted earnings per share was $3, 80%. This is up 5% year over year, despite FX headwinds of 8%.
For the full year revenue grew 7% as imported and 12% in constant currency.
When are you going to do with a very strong year for waters will be executed well throughout the organization against a challenging macroeconomic environment.
Our growth was broad based across our geographies and end markets each of which grew low double digits or above.
This strength was led by instrument sales, which grew 16% for the year with LC mass spec and da systems, all growing double digits for the full year non-GAAP adjusted earnings per share was $12 and <unk> up 7% year over year, Despite FX headwinds of <unk> <unk>.
Percent.
As we enter 2023, our end markets remain robust and entity with strong customer demand for our products.
These attractive end markets have beautiful growth drivers and are well funded we.
We saw solid order growth in the fourth quarter and our backlog remains at elevated levels.
Expect the strong instrument sales, we saw in 2020 to drive future growth and Arctic cutting revenues.
So our end markets are healthy.
But again, our commercial momentum.
Innovation has been revitalized.
And we have strengthened our organization with new leadership capabilities, bringing a proven track record and transformation.
Now we're entering the next phase of our execution strategy as we accelerate our path toward faster growth.
This brings us now to the chart on the next slide as you can see biologics manufacturing is a complex process and we have shared an example, which shows how large scale monoclonal antibodies not produce.
It starts with the upstream production of the drug substance with raw material components fingerprinted and monitored during initial cell culture creation before.
Protein or antibody of choices produced.
And downstream manufacturing sales and debris are separated from the map in a series of filtration and separation steps.
Each step involves numerous stages of testing to ensure that the product is stable and effective than as the last step in QA QC.
Anil unified drug product is formulated and fitted in vials of Prefilled syringes.
Throughout the process different tools and technologies that are required for characterization, depending upon what you need to analyze.
Liquid chromatography with ultra light detection or LC <unk>.
Is used extensively across all policies all four stages.
At the same time mass spec is increasingly being used with <unk> seeing a lot of traction and cell culture media characterization loan collection and process optimization and both upstream and downstream manufacturing.
It is also seeing adoption in <unk> applications.
Details on this at the beginning of the year and have included a slide in the appendix.
In addition to LTE UV and SC MFS.
Powerful techniques, such as dynamic light scattering and multi angle light scattering are also used to give relevant information about the size.
They can innovate and aggregation of biologics.
By combining the data of each of each of these detectors are customers can develop a more comprehensive profiling of their biologics.
This is essential to speeding up the manufacturing part of our.
Process and reducing the cost of complex biologics, such as cell and gene therapies.
<unk> analytical characterization market is around $1 8 billion growing.
10% to 12%.
What is already has a strong established position in LC and LC mass spec.
But that's why our technology is a pioneer in Mexico.
And this combination is a fantastic opportunity to integrate our powerful analytical technologies, which are highly complementary to each other and will accelerate our journey in this opportunity.
Let me now ask Jeff to describe the company and its highly innovative portfolio Jeff.
Thanks again.
Why it is a remarkable company and we owe much of our success in high growth applications to our amazing team.
Our flagship technology is multi angled license scattering malls, which is used by leading biopharma biotech and academic institutions to measure fundamental properties of complex biologics, including cell and gene therapies mrna vaccines biopolymers.
Biosimilars and therapeutic proteins or.
Our base here in Santa Barbara, California, and have 225 outstanding employees of whom roughly 25% of phds.
Over the past 40 years, we've built Wyatt into the recognized leader in light scattering detection defining this segment very much like waters did for liquid chromatography and mass spectrometry.
Our sales have grown around 20% on a three year CAGR to approximately $110 million in 2022.
We're also a highly profitable business.
Adjusted operating margin of approximately 40%.
More than 80% of our revenues are at large molecule applications. Our biopharma customers are eager to use light scattering for QA and QC applications and has been keen for us to combine our software with empower.
Can only imagine how excited we are with this combination, which will add additional choices and capabilities for our existing customers and let us delight, even more back to you. Okay. Thank you, Jeff I look forward to welcoming our new colleagues and want us.
Let's now talk about some of the benefits that integrating by it and what does capabilities provide for our customers.
Existing waters portfolio.
System separate complex mixtures into individual constituents for bulk property analysis by UV and detailed characterization by mass spec.
These are properties, such as tighter aggregation and protein sequence.
The missing piece has been additional critical information about the impact going into Q like empty food capsid ratio audino associated viruses or the size of lipid nanoparticles.
Many therapies.
This will be augmented by Y X maus detectors, which would allow our customers to develop a more comprehensive critical quality attributes profile for their biologics. This is <unk>.
Central to fully characterizing their manufacturing process.
In each case for these tools to gain successful adoption and point of view settings. They must be number one sophisticated but simple for use in high volume applications, such as what we have already demonstrated with buy onboard.
Supported by leading service like what was already has to help run workflows and respond to evolving needs and number three and most importantly, they need to be connected to a permanent informatics platform. So that all of the data comes together in one place our ambition is to create an ecosystem of.
<unk> simple instruments have been all use empower to collect data and submit the regulators put differently than what was established for small molecules years ago.
This transaction will create a number of compelling revenue synergies and results in an attractive set of pro forma financials first from a geographic footprint. What those revenues are highly diversified and is why its presence is concentrated in the United States. This provides us an opportunity to expense.
<unk> geographic footprint in Europe , and Asia, particularly in China.
Second <unk> instruments and size exclusion chemistry columns are sold together with light scattering instruments, we expect to see cross selling synergies with our liquid chromatography instruments and chemistry.
Third <unk> instruments and expertise with enabled walk us to meaningfully accelerate the high growth adjacency opportunity and <unk> activation.
So we gave our customers an unmatched set of analytical solutions across large molecule applications and will augment our ability to create a comprehensive bio analytical platform.
And fourth quarters.
Fourth wired portfolio is well established in upstream development setting.
For large molecule applications today.
What does empower platform as well as presence as well as our presence and expertise in high volume downstream recurring applications would accelerate the use of light scattering and biologics manufacturing and in QA QC.
Now with the pro forma.
The combination will increase our large molecule footprint to around 35% of our pharmaceutical revenues.
Increased exposure to these faster growing markets will raise the combined growth profile of the markets. We serve by at least 50 basis points.
We expect the transaction to contribute more than 60 basis points to our annualized constant currency growth over the next five years.
Also I expect it to add more than 50 basis points to our industry, leading adjusted operating margin.
Net we expect to realize a high single digit plus return on invested capital by year five.
Although we expect the wired business to grow low double digits in the near to midterm.
In addition, we expect this combination to create more than $70 million in annualized revenue synergies by year five.
Now I would like to pass the call to.
Walk us through further details on the financing.
We'll then you will then continue covering our fourth quarter financial performance and provide our guidance for 2023.
Thank you and good morning, everyone. It's been great to work with Jeff.
Mcgwire technology like <unk>.
Current quarter to the wide family for considering office, but I can stewards of their mission and legacy and for providing us disproportionately to create value put on our customers and for our shareholders.
Now I'll put the transaction highlights.
This 136 billion investment will result in immediate accretion of our revenue growth and our adjusted operating margin percentage. The synergies that would just described along with was highly attractive financials.
Victor to result in non-GAAP EPS impact as well.
<unk> first quarter of 2024.
Altogether as Luc mentioned this.
This combination is expected to deliver at a high single digit plus return on invested capital by year five.
We will fund this investment through cash on our balance sheet and existing debt capacity that is available on our new Walmart.
On day one.
At the EBITDA the issue will be around two three.
Temporarily suspend our share buyback program for the remainder of 2023 and will utilize our free cash flow to pay down the debt through the rest of the year.
We expect our net debt to EBITDA ratio to land at around one seven.
By year end 'twenty two 'twenty three.
The conversion is expected to close in the second quarter of this year.
Object to regulatory approval and customary closing conditions.
Now to our fourth quarter financial results.
We delivered an excellent close to a very strong year for waters.
Constant currency growth of 9%.
Waters Division grew 8% and Ta grew 15%.
By end market pharma grew 6% industrial grew 14% and <unk>.
Academic and government grew 8%, which boarded already color.
By geography sales in Asia grew 7% Americas grew 8% and Europe grew 11%.
In Asia.
Growth in the region overall was strong Japan grew 25% and <unk>.
India grew 15%.
China declined low single digits for the quarter.
Sharp increase in Covid infections.
And that resulted in delayed spending due to customer site closures.
These headwinds from the pools zero COVID-19 reopening to continue into the fourth quarter of 2023 before catching up throughout the remainder of the year.
In other regions. The U S grew 8% and Europe grew 11%.
And across end markets.
By products and services insurance group, 10% led by mass spec, which grew over 30%.
Recurring revenues grew 7% with chemistry up 8% and services up 7%.
Finally, <unk> grew 15%.
Double digit growth across.
Our major geographies.
Growth was led by sales in electronics and battery applications as well as strong growth in advanced materials and chemical testing.
Looking now at our full year results by end market pharma, 10% industrial grew 15% and academic and government grew 13%.
In pharma growth was led by large molecule applications, which grew mid teens, while small molecule grew high single digits.
By geography sales in Asia grew 12% Americas grew 14% and Europe grew 10%.
By products and services instruments grew 16% for the full year Rip liquid chromatography mass spec and Ta system sales all up double digits.
Recurring revenues demonstrate grew 9% supported by a strong launch of Max Premier columns in large molecule applications and further expansion in digital almost adoption.
So it grew 8% with continued expansion in attachment rates, which increased 150 basis points in 2022 and have increased 350 basis points since 2019.
Now I would 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, 4% up 140 basis points, what's the prior year, driven by sales volume and pricing, partially offset by inflationary costs.
For the full year gross margin came in as expected at 58%.
Operating margin for the quarter was 33, 7% growth of 100 basis points versus prior year, driven by gross margin dynamics.
For the full year.
Operating margin was approximately 32%, which was flat with last year.
On an underlying basis, we expanded operating margins by approximately 100 basis points.
Our guide of 20 to 30 basis points at the beginning of the year. This.
This is net of our investments in higher growth Adjacencies and despite the higher instrument mix in our revenue.
On an as reported basis, an expansion was offset by 80 basis points.
FX headwinds and 20 basis points of additional compensation to help our colleagues with the temporary impacts of inflation.
In the quarter, our effective operating tax rate was 17, 6% and for the full year. It was 15, 6%.
For the full year as anticipated our effective tax rate increased by 180 basis points, primarily due to change regarding the capitalization of R&D costs.
Average share count came in at $59 6 million shares which is about one 8 million.
Less than the fourth quarter of last year.
Our non-GAAP earnings per fully diluted share for the fourth quarter increased 5% to $3 84 compared to $3 67 last year.
Foreign exchange headwinds lowered our non-GAAP EPS growth by 8%.
On a GAAP basis, our earnings per fully diluted share was $3 81.
For the full year, our non-GAAP earnings per fully diluted share increased 7%.
$12 and <unk> was $11 20.
In the prior year.
The foreign exchange headwind lowering of non-GAAP EPS growth.
9%.
On a GAAP basis.
<unk> per share was $11 73.
Turning to free cash flow capital deployment, and our balance sheet, we defined free cash flow as cash from operations less capital expenditures and excludes special items.
In the fourth quarter of 2022 free cash flow was 145 million after funding $62 million of capital expenditures.
Excluded from free cash flow was $8 million related to the investment.
Precision chemistry operations.
In the quarter, we continued to build inventory to secure supply and boost safety stock do you wouldnt strong instrument demand.
For the full year free cash flow was 506 million after funding $176 million of capital expenditures and includes approximately $100 million additional inventory.
Prior to year end.
Excluding excluded from the free cash flow was $32 million related to the investment in our funds and precision dentistry operations.
Appropriate million tax reform payment.
We maintain a strong balance sheet access to liquidity and a well structured debt maturity profile.
<unk> allows us the ability to prioritize investing in growth, including M&A, which will meaningfully accelerate value creation in rail total attractive adjacent markets.
In Q4, we repurchased approximately 475000 shares of our common stock for $149 million.
At the end of the current net debt position was approximately $1 1 billion with a net debt to EBITDA ratio of about 1.1.
Now I'll ask Lou.
Towards the year ahead, I would like to provide you with our thoughts for 'twenty two 'twenty three.
We have seen strong performance throughout 2022, driven by robust market demand excellent commercial execution across our geographies and new product introductions driving growth.
As we enter two into 'twenty three we expect our sales momentum remained solid in our view.
<unk> end markets and then on our refreshed portfolio and growth initiatives will continue to enhance our performance.
These dynamics support full year 'twenty three guidance.
Organic constant currency sales growth of 5% to six 5% excluding wire.
At current rates negative currency translation.
<unk> is expected to subtract approximately one percentage point, resulting in full year reported organic sales growth guidance of 4% to five 5%.
We expect the wire transaction to close in the second quarter of 2023 and depending on the timing, we would expect to add approximately 2% to 3% to a fully integrated three revenue growth.
Therefore.
Our thoughts.
<unk> sales growth guidance is 6% to eight and half percent versus 2022 including lab.
For the full year 'twenty to 'twenty three organic gross margin is expected to be approximately 58%.
Organic operating margin is expected to be approximately 30%.
Before ethics.
20 to 30 basis points of net margin expansion. After 70 to 80 basis points of investment in high growth Adjacencies and FX is expected to be a headwind of 50 basis points, particularly in the first half of the year.
The addition of Hawaii and Q2 is expected to be accretive to our fully integrated three adjusted operating margin by 20 to 30 basis points.
Excluding the transaction, we expect our full year net interest expense to be approximately $42 million.
The transaction is expected to add 27 million to 43 million of additional interest expense, depending on the timing of the close.
The full year tax rate is expected to remain at approximately 15, 5%.
Since we will be temporarily suspending our share repurchase program for the remainder of the year and using free cash flow to be around that.
Average diluted share.
Share count is expected to be approximately 59 $5 million.
Rolling all this together.
On a non-GAAP basis, our full year 'twenty to 'twenty three earnings per fully diluted share guidance. Excluding the transaction is projected in the range of $12 72.
<unk> hundred dollars and 90 cents.
This represents 6% to 7% growth versus last year.
And includes a negative currency impact of approximately three percentage points.
Current FX rates.
The <unk> transaction is expected to be accretive to EPS as early as in the first quarter of 'twenty 'twenty before.
And this is even.
Net share buyback suspension for the remainder of 2023.
Overall, we expect it to deliver a high single digit plus adjusted return on invested capital net opex by unify.
Due to interest expense incurred on higher debt balance and the suspension of share repurchase program. This year. The transaction is expected to result in a 23 EPS headwind of approximately 15.
Hence, including lab non-GAAP fully integrated into the.
Earnings per fully diluted share is projected in the range of $12 55.
To $12 75.
Looking to the first quarter of 2023 we expect constant currency sales growth to be 4% to 6%, which is 10% to 11% on a two year stacked growth.
At today's rates currency translation is expected to subtract approximately four percentage points. The result.
First quarter reported sales growth guidance of flat to 2%.
First quarter non-GAAP earnings per fully diluted share are estimated to be in the range $2 55.
To $2 65.
With a negative currency impact of approximately six percentage points.
Now I would like to turn it back to <unk> for some <unk>.
Somebody comments.
Thank you emel as I outlined at the beginning of our transformation journey and later at our Investor Day last year. Our first focus was to regain our commercial momentum and strengthen our organization with new leadership capabilities.
You have observed over the last two and a half years.
Have delivered incredible results with consistently strong execution and we have assembled an amazing leadership team that brings with it a proven track record and transformation, which is pivotal to driving seamless integration.
Our second focus was to revitalize our portfolio.
The success of our new product launches increased vitality index of our portfolio and the rich pipeline ahead of us underscores our accomplishments this year.
We're entering our next phase, which is to accelerate value creation for our customers and shareholders by adding a fantastic fast growing technology platform and increasing our capabilities to address high growth adjacent markets. So with that I'll turn the call back over to Kasper.
Thank you good with that that concludes our formal comments and we are now ready to open the phone lines for questions.
We'll now begin our formal question and answer session.
Please limit your questions to one and one follow up on the.
First question is coming from Scott <unk> of Barclays. Your line is open.
Great guys. Thanks for the question here.
So I guess before we get into why it can you kind of give us a sense on.
Continued instrument strength you guys hear it a lot.
Visibility here, how the backlog bill.
Mass back up over 30% from the strength in the business building here the last six months.
Any any kind of color here, we can get going forward on that on the new instrument launches there and the revitalization.
Sure sure Luke. Thank you for the question so instrument growth in the quarter again finished with double digit instrument growth for the year at 16% and it's really across the board rate for the full year Youll see mass spec went into the Twenty's da in the high teens as he also in the double digit range.
And this is largely due to the success of our commercial initiatives, which were around instrument replacement.
And really focusing on our new product launches and <unk> seen a complete revitalization of the portfolio, especially on the mass spec side, where we've gained traction in biologics application Wade does EOG three with the bio cohort.
Recently with the cyclic and the ZIP mortgage absolute for food and environmental applications and the like on the sell side. The same thing with arc HPLC and acuity Premier. So youll see very strong new products coming through which are gaining traction now as we look ahead.
Others are as strong as ever.
We see very very healthy backlog going into the year and as we look forward. The end markets are still very robust right. So we don't expect.
Cross the board they are pretty robust industrial industrial pharma itself as.
As well as academic with additional funding, but as we look ahead I would caution against using the 16% and extrapolating I think we've been saying this for a while these are incredible growth numbers on a stock basis, you're looking at double digit growth for instruments, but we cannot expect the instrument growth to continue at a double digit level I mean, the long term average.
There is around 3% to 4%.
If I were to just dig into the guide a little bit and when you say five to six 5%. So the five if you just take the higher end.
And then make it consistent let's say recurring revenues and the lower end <unk>.
Consistent with the instrument growth.
In the future long term averages for instrument growth of between three and 4% at 100 basis points of.
Additional commercial execution and another 100 basis points.
So pricing and there you have the five ish percent instrument growth. So we think it.
Long term, we should be seeing healthy instrument growth.
Several comments would say hey, you know you've seen see these significant instrument growth whether it come crashing down not at all we don't see any signs of that we do see it reverting back to sort of long term growth opportunities and we think we will out execute the overall market growth with our commercial initiatives with our new products.
And with additional pricing.
Alright, great.
Just a quick follow up on that.
Can you clarify if orders grew faster than sales and then I'd love to dig into why we're so where that fits into the overall characterization portfolio. So you have the <unk> on the raw materials on the upstream where would why it's light scattering technologies.
Kind of fit into the overall instrument portfolio and the bioprocess and workflow.
This is <unk>.
Asked a question. So the orders are growing very nicely, Luke and we've been saying that for a while and they continue continue to do so now moving moving onto Dubai look.
It's a perfect strategic fit we have been talking about bioanalytical characterization of one 8 billion market growing 10% to 12% and <unk> 110 million I mean, the hygiene many.
Is that accretive to us.
The industry on margins, 40% margins and growing at a 20 ish percent CAGR right. So terrific terrific financial profile. When you look at the Bioanalytical space and you talk about <unk> as he mass spec LTE <unk> and mass spec are used to characterize sequence of the proteins and configuration of the proteins.
The chemical composition that exquisite techniques to characterize the composition of the molecules and the composition of raw materials upstream downstream process development and of course in QA QC light scattering on the other hand gives you biophysical characterization the size of the molecule.
The level of aggregation of the molecule think of think about monoclonal antibodies and proteins and even more exciting. These days is what it does for us in.
In viral vector therapies empty versus fluke assets <unk> allows you to get out that lipid nanoparticles how aggregated.
Wed characterize.
They are with mrna molecules.
Super exciting applications, and our customers and Jeff and <unk>.
I have been asking us are their customers have been asking us to integrate it with a compliant software platform. So they can use it in QA QC applications. It is already used by significant but by a significant number of large pharma.
And at line testing tool so super excited highly complementary it gives you even a better footprint of biologics.
Dream is and our ambition is to make large molecule characterization similar to small molecule characterization as we've done in the past.
The next question is coming from Vijay Kumar of Evercore. Your line is open.
Hey, guys congrats on that.
Transaction then.
Two questions.
First maybe on the guidance here.
The five to six 5% guide for the year.
What does that mean for pricing in China outlook.
Okay.
FX headwinds came down y.
Yeah, Thanks Martin headwind.
So ill comment a bit on.
On China first and what we expect what we expect that our non pass it onto a mile or two.
Pick it up from there.
Okay.
Q4 in China.
Is especially has been especially dust with 50% to 75% of our colleagues.
At any point in time being infected due to the reopening and despite that if you take.
Remember last year, we had a shipment delay from third quarter to fourth quarter. If you take that into account China grew roughly four ish percent despite despite that headwind.
Expect.
Colleagues to of course enjoy the Chinese new year, the connect with their families. After several years and that we see the same with our customers. So step by step I think China will open up we expect better growth in the second half of the than the first half.
But vijay as you can imagine it's anyone's guess how fast this comes back.
Currently assume a high single digit ish sort of growth for the full year with the second half of the year being stronger than the first half I'm already going to talk about the guide and effects.
Yes, so I mean look we did ASIC situation has improved versus what we said at the end of Q3 earnings call.
We're looking at a 1% headwind on sales and about 3% headwind on EPS, the 3% headwind on EPS translates to about 50 basis points headwind on operating margin and the reason for that is I mean U S. Dollar progressing really extending throughout the course of 2022 and then it sort of weakened towards the end of 2022.
But where it is today it is still a significant headwind for the first half of the year or into 'twenty, three and that is sort of playing through the numbers and the reason there isn't a headwind on the operating margin as we are one of the most geographically diversified companies in the sector.
A lot of revenue coming out of markets like Japan, and China, and while we are operationally hedged.
Do you like Euro and pound, we still have significant profit there. So if you have a headwind that profit strings and then we don't have the level of cost structure.
In these other markets like China and Japan.
Which then creates a higher.
Flow through on our operating margin versus our sales profile by a little bit and Thats why you see the headwind on FX on operating margin.
Yes.
On pricing.
Roughly 300 basis points for this year, we expect 200 basis point as an assumption for 2023 and you can imagine that's largely because the inflation is still not gone second.
Our new products definitely should command a higher margin as you go forward and then finally the themes of the muscle through this very very difficult times on passing on pricing.
It wouldn't seem season and the second one as I said I mean, we had 80 basis points of headwind on FX and the business was resilient at sort of offset it pretty much all of that impact and delivered a flat operating margin dollar goes back to where it started back in 2022 I mean, all of the work is done in terms of margin expansion now going into the year, we feel very good about.
Our margin profile is.
Okay. That's helpful.
One quick one on <unk>.
The acquisition.
<unk> million dollars of revenue synergies, that's a big number relative to its revenue base.
Can you give us some background on how well with this asset.
What kind of due diligence was done.
License revenue mix is coming from established Biopharma versus early stage.
What gives you the confidence in the revenue synergies.
It's about our questions.
I can take them one after one after the other 80% of the applications for <unk> in large molecule applications.
OLED screen on we were pretty clear on Investor day, the screen a lot of targets and I can tell you without reservation in bio analytical biophysical characterization that this is the number one asset that we had at our mines.
We spoke with Jeff and I spoke with cliffs and we started our discussions this is not something that's unknown to us we've known this company really well.
Really well for a significant period of time and what what what.
What else does on the on the chemical characterization on the compositional characterization.
<unk> does for using light scratching for for physical characterization, so with 80% of their revenues coming from large molecule. The growth is roughly 20% on a three year CAGR margins are accretive to our margins and as I said before this is not something that we see in the industry as much.
$10 billion in sales already it will be accretive to our revenue growth and margin growth drive revenue and margins on day one.
And they tend to the $70 million it comes across four dimensions first.
Why it is heavily concentrated in the United States and to some extent in Europe with the best in less than 20% of their sales coming from APAC and as you know with waters.
Geographically quite diversified with APAC constituting 40% of our sales, we think theres, a significant opportunity to expand and so many more customers in fast growing areas across the globe.
Second.
We want to provide customers with many more choices issue. If you look at lights catching instruments, especially maus. It is sold with FCC columns and waters has leading SEC columns in the industry.
<unk> is used as a separator before you in certain products and certain molecules into flight scheduling for characterization not dissimilar to mass spec, we think the attachment rates could be significantly higher as we do.
Do the software integration across the two companies number three.
Stocks.
On the journey of building, a bioanalytical platform with a suite of products that all eventually have.
One compliant software that can be used across <unk>.
To submit data to regulators and then finally.
There is an immediate opportunity to serve our customers really big pinpoint of taking malls into QA, QC and who better than waters to show that that journey through so that's why we.
We think by year five there is a potential for 70 plus million in synergies and even higher if the bioanalytical platform starts getting established <unk>.
And we do inbound integration faster. So thats I think gives you a gives you color across the synergies we get.
The next question is coming from Mac Sykes of Goldman Sachs. Your line is open.
Hi, good morning, Thanks for taking my questions Congrats on the acquisition in the quarter.
Just if you could help us put a kind of a finer point on services and chemistry growth in 'twenty three.
I heard your comment about think about it sort of at the high end of your of your guide, but just given the instrument growth that you've seen in 'twenty, two and previous to that.
Should we be thinking about services and chemistry growth in 'twenty three.
So it's a great question look I mean, it's a proven valued at this stage on <unk>.
Services in particular, right I mean service definitely will benefit from an incredible growth that we've seen.
In instruments over the last two years. In addition, we've increased our attachment rates by a 350 basis points. Since we started our transformation journey roughly two.
Two ish years ago, but I think at this point in time, especially given the uncertainty we see in China. We think it's a prudent starting point to assume what we've assumed for service and for MSG I mean, it goes from strength to strength, we've seen on e-commerce platforms do extremely well.
We now have about 35% of our sales linked to ecommerce, we intend to increase that number higher Matt speak premier columns, and the pipeline looks extremely good, especially serving larger molecules and complex therapies and now with a deeper understanding after the after the acquisition closes of the biologic space. We think there is a significant growth opportunity there.
As well and there too we are a bit prudent thinking through what the rest of the year holds especially in China. So I think that's how I would look at it right so really positive but.
But really thinking through.
<unk> will emerge in China in <unk>.
Progresses, we will have more information great and then just one quick follow up on Europe , obviously very strong growth there in Q4 and for the full year.
Obviously, a mild winter there so things seem to be better than expected could you just talk about what youre, assuming for Europe this year and.
Kind of thoughts in terms of <unk> and.
End market demand within Europe for 'twenty three.
Yeah look I mean, Europe has been a stand out across the board it right through the to the early parts of the pandemic and then of course this year itself and also on a stock basis. It looks extremely good and the full year.
Full year numbers for Europe .
Double digit range as you as you've seen.
As we look ahead, I mean, not assumptions are still sort of going back.
To market plus in Europe , which is mid to mid to high single digits for.
For the balance for the balance of 2023, the orders look extremely good across all end markets and I'll remind you that that Europe is more heavily weighted towards pharma and then in the mass spec space Europe came out really really strong, especially with applications in food testing for the <unk> absolute and environmental testing, which is.
Where we saw the first and the fastest adoption of.
The MOSFET portfolio, so mid to high single digits with all the puts and takes really excited about what we're seeing in terms of mass spec, especially in pharma and industrial.
In Europe .
The next question is coming from Dan Brennan of Cowen Your line is open.
Great. Thanks, Thanks for the questions and obviously congrats on the quarter and the steel maybe just one on one to start off.
Just kind of a multi part of your obvious question is the company has been growing 20 Youre guidance is 10 to 12 is that just prudence or is there any colbert and the number just kind of why.
Why that Delta and then could you just clarify like what percent of their business you said, 80% is biologics.
What percent of that is actually used in manufacturing whether on a clinical basis on commercial basis versus R&D today.
So look.
Yes.
Firstly, thank you for your for your question you can imagine that we're just getting into the integration and there is of course, a little bit of food in spirit.
And we want to make sure that we start off on the right foot.
The integration goes we don't expect the business to slow down, but that's the low the low double digit guide has that in the assumptions.
And in terms of biologics.
Bulk of the applications are in large pharma.
In discovery and development.
And in <unk>, an online and offline testing so.
I think thats, where youll see most of the applications and increasingly now more weighted towards <unk>.
17 therapy applications, whether these small particles need to be characterized really well.
And before they are injected into into people. So I hope that gives you gives you more color, we don't intend to break down the biologics piece, but you can imagine it's mostly.
The late stage and testing and QA QC ammo.
Not much COVID-19 and the number of sites, so it's pretty clean in that sense, so as well.
We've put into that and then on the second piece I mean.
Light Sky thing is further along in terms of upstream of adoption in Baltimore on that considering I mean.
Just mentioned customers eager to take it downstream and now with this and with our platform, we wouldn't be able to accelerate that journey.
And then Jonathan.
And one last thing Ive used type scratching myself and my Phd I didn't want to let the cost finished without stating this.
You're doing my Phd thesis if on this call.
Of course, it's great and but for the life of me I don't understand all the equations that I was using.
I see.
So super excited even at a personal level to get access to the technology.
Great and then and then just maybe one on the instrument outlook.
Kudos the growth's been outstanding.
Just wondering on the 5% instrument outlook I mean, the message to become accustomed to waters exceeding the numbers that you put out and there's still a lot of really positive momentum there. It looks like it's around 8% four year CAGR. If you want to look at that just kind of give us a sense of what's baked in on the 5% maybe for Mastec specifically.
And is there.
At 8% CAGR I know, you've kind of talked about the 3% to 4% long term trend and you are trying to be prudent here, but just maybe give us a sense on.
What the mass that contribution is and to the extent we were to get 12 months out would it be stronger than that like where do you think the biggest opportunity would be for that thank you.
Then same thing right I mean, we don't expect mass spec.
Fall off the cliff the applications are tremendous.
The five ish percent I mean, the math is pretty simple right I mean, 3% to 4% long term growth under 100 basis points of pricing in addition to the past.
And about 100 basis points of commercial execution and innovation in that in that number.
And you can imagine I mean look coming off such really really strong growth over the last two years.
We think the growth will start to normalize now that said there is also a bit of prudence with China built in right. I mean, China has been one of our fastest growing markets and I think at this point in time, we feel comfortable saying look it's a high single digit market by the end of the year I put a company goes faster of course, there is theres upside in it.
It is more traction for new products that as upside.
It's a great place to start the year and we will keep you posted as as more facts will factor too much.
The next question is coming from Derik de Bruin Bank of America. Your line is open.
Hi, Good morning, and thank you for taking my question can we talk a little bit about the pharma business. Please.
The 6% growth in the quarter, a little bit lower than we were looking for can you unpack that talk about what was the potential impact.
From China.
What are you seeing demand at Crs and <unk> I mean, thats been a driver if they pulled back on capital spending at all and just sort of your major peer in LC has talked about.
Some of the slowing of the replacement cycle in LC in pharma in the second half of the year, just sort of wondering what youre going to bake in for that so just a little bit more color on your foreign business. Please. Thank you Jeremy. Thanks for the question look I mean pharma is it because of healthy end market, we see no lb.
<unk> and pharma, especially as we are in the late stages of pharma rate discovery.
Late stage development in QA QC.
From.
A numbers perspective.
On a full year basis, it's double digit growth for the Q. It came in at 6% largely because of China. If you exclude China. It's also a double digit growth.
That should hope you hope hopefully give you some clarity on what youre seeing in pharma going forward, we don't see the demand abating at all we see significant demand for our products.
On the instrument side, especially mass spec.
To some extent as these are the new products as well.
See very nice traction on the consumable side and service should benefit from really strong instrument growth that we've seen over the past two years, so really no.
No slowdown, especially as the portfolio now even more so goes towards large scale large molecules, especially biologics.
On mass spec on LC with the instruments, especially like acuity premier for consumables, especially with Mack speak.
And with respect with the bio CT gaining increasing traction with.
With the GT kudos and gaining more and more traction we feel fairly good about what we see.
Pharma going forward that will be a <unk>.
On on slowdown on LTE cycles.
Look I mean, we don't expect.
Any of the instruments to be overall growing between 16 and 20% like we've seen in the last last couple of years I mean, that's that's.
Always been very clear about it where the new normal lockers.
It's something that will emerge over the next next few months, but it's not going to go back to zero or negative negative growth that definitely 100% certain night. So that's why we've guided 5% to six 5% and Dan had asked that question earlier on what is the justification for five weeks.
It is a prudent starting point for the year.
Paul anything to add on the instrument side.
Thank you.
The next question is coming from Rachel <unk> of Jpmorgan. Your line is open.
Great. Thanks for taking the question do you guys think you back from the quarter and the deal.
Just kind of wanted to follow up on some of the China comments, you talked about China, returning to high single digit growth for the year in 2023, what it really wanted to dig into the expectations embedded into that one key guide for China. He noted that China declined low single digits in <unk>.
To continue into <unk> could you just give us some color on you expect further.
Further sequential declines in China, and then how much of a headwind do you think China will be about 46% growth that you've guided to for <unk>.
Yes, so I mean look we <unk>.
Some of the headwind we saw in China in Q4 to continue into Q1.
Our adjusted Q4, when you adjust for that shipping was sort of 4% and we think sort of a Q1 in China would be similar and then as we know China bounces back very quickly and so we expect that trend to sort of catch up through the remainder of the urine.
People are back to work.
In terms of end markets. Rachel this is a bit in terms of end markets in terms of what we see is visibility that is no signal that the fundamental demand for our products in China is slowing down there is no no such signal.
So we feel very good about China.
It's a good place to start at the beginning of the year towards a high single digit ish growth and as I mentioned that a company is faster and of course, you expect faster growth.
The next question is coming from Josh Waldman Cleveland Research Your line is open.
Hi, guys. Thanks for taking my questions.
Did I appreciate you were reviewing your Phd since before the call.
Covering all your basins.
Just two questions for you.
Hey, good.
Wondering if you could give us an update on where you think water use in the LC replacement opportunity maybe comment on what portion of the LC sold in 'twenty two we're in the acuity arc platform versus the legacy Alliance.
What do you think that could look like in 'twenty three.
Just curious your thoughts on if we do see a slowing in the LC replacement cycle.
Kind of broadly.
Do you think water is pushed to rotate customers into the new RLC platforms could elongate that refresh.
So Josh Thank you for your comment on the LTE replacement cycle.
And I guess overall of the instrument replacement cycle.
We've been pretty clear almost one third of the way through.
In 2022, when we started about two years two ish years ago. So there is a pretty significant runway.
These things don't go in a smooth smooth way at night. So they go.
Given that these are large large orders they go in a lumpy lumpy cycle, albeit SCB mass spec beat acuity arc.
So I think thats. The first comment on what you should expect in terms of the smoothness of the growth.
Second in terms of what has accelerated the growth and how the replacement cycle. That's happened undoubtedly the introduction of arc HPLC.
Given the customers a more of an impetus to replace the old alliance instrument and that has helped us quite a bit some of them will also replace it with the acuity nine which is more the <unk> space, but like for like.
There are equal number of customers who've gone from alliance to alliance.
Our customers have gone from alliance to arc, and then fewer have gone from the Lions tour acuity acuity Ed I'll remind you is is that <unk>.
Z platform, whereas arc HPLC was specifically designed for high volume small molecule applications and QA QC and it's a directed direct sort of replacement for alliance. So I hope that gives you gives you a bit more color, but I think the rate assumption would be alliance to <unk>, an alliance to alliance and.
And acuity.
Minority of applications.
Yes.
The next question is coming from Jack Meehan of Nephron Research. Your line is open.
Good morning.
Congrats on the deal had just a question on that which is could you tell us what is their mix today of instruments versus recurring do you think there is any opportunity.
That over time.
And then just one clarification the $70 million of revenue synergies that we would have been.
Low to mid teens growth, you talked about or would that be additive.
Yes, So let me quickly cover the second one.
The low double digit growth that we're talking about at the Standalone business to 70 million synergies.
You're talking about sort of incremental to that.
On the first question Theres roughly about 75% of the revenue is instruments roughly.
For two days.
Traditionally call recurring revenue, but as you.
Nor with waters, we think <unk> and also the recurring.
And again, there is a great opportunity on that not just on the night Catherine platform, but also the HPLC and <unk> columns that go with it.
But with such.
Such a significant service team around the globe, essentially Chile 2000 people.
We believe that there is a significant opportunity to increase the service attachment rates.
And in addition about 14500 sales.
Field sales representatives should help us increase penetration.
And Geoff as mining is I would say this is Scott.
Cutting deeper into into into our collective customer segments. So extremely extremely excited about the opportunity there, but as I've always said, we think of instruments as recurring just as much as we think of service.
And consumables just record over a longer timeframe and if youre disciplined.
We can make sure the deal.
The next question.
<unk> is coming from Patrick Donnelly with Citi. Your line is open.
Hey, guys. Thank you for taking the questions.
Maybe one on the industrial piece, that's been a pretty nice growth in the quarter I think in the mid teens.
Can you just talk about what you're seeing there I mean in the <unk>.
Last quarter, you talked a little bit about PFS testing environmental.
Nice tailwind.
So maybe just talk through what you're hearing from the customer base their expectations into 'twenty three.
Sure.
Thanks for the question Patrick Industrial for the year is just on the fact, I mean grew 15% and we saw nice.
High teens in the U S mid teens in Europe , China high single digit to low teens, despite the lockdowns and industrial across the board right, so applications and food testing.
<unk> absolute with DFAST testing was excellent the VA business with battery testing.
Especially with the introduction of our new powder Rheometer, we see incredible opportunity there to increase penetration of our existing instruments and that's been going extremely well and electronics electronic chemicals testing has also been doing extremely well in the <unk> business, which has been in the high teens in the industrial segment, so industrial okay.
All regions.
Across the food and environmental segments as well as material segment has been doing extremely extremely well. So I hope that gives you color on how we explain the results so far going forward with the new products. There is a lot more runway for <unk> absolute and defense applications.
And of course to take debt instrument into the pharma space.
Incredible opportunity.
But we.
We are seeing really really good traction of our products in the battery testing value chain, all the way from raw materials to process development not unlike bio processing.
Two now establishing.
Online outline testing with our instruments for several of our customers. So also going forward really healthy.
The outlook and I think the only.
Students that we sort of built in is what we expect in China, China is a pretty strong growth in that segment as well and we want to make sure that we get more data before we before we start reaching out.
The next question is coming from Puneet pseudo SBB Securities. Your line is open.
Yes, hi.
And Jeff Congrats on this acquisition.
Hate to see light scattering.
Outlook going into QA QC, so keeping maybe my first question there.
When we look at.
The downstream QA QC and late stages.
When you look at the five five years 70 billion synergies is that sort of the timeline you were thinking about moving light scattering into.
These applications.
Could you maybe elaborate.
What is needed to integrate malls and to empower.
Power and what's the sort of the outlook and power.
Potentially becoming sort of the backbone for bio molecules with bio Gordon light scattering and last one if I could squeeze in any thoughts on the China alone stimulus benefit.
For 2023, thank you.
Yes, So first to your first question Puneet. Thanks for the question. So your first question on light scattering in its application and biologics lifestyle thing is actually further ahead than mass spec.
In late stages of characterization of particles as you can imagine.
The project is being biologics here as you can imagine proteins when theyre purified can sometimes appear as aggregate and this can create severe immunogenic responses in patients and so <unk> is the is the is a technique of choice to ensure that the.
Proteins that the consumer's therapeutics are vital vectors for cell and gene therapy.
Not aggregated this as the instrument of choice for that so that is a pretty significant penetration and in some large accounts.
And key account for light scattering, we see a lot of opportunity in that area.
To expand geographically and also to take it into key accounts that waters has had and relationships Eduardo especially in QA QC.
To your question on empower.
And I would think about software in two to three steps. The first step is to make sure that the instruments talk to each other.
Work has been ongoing for a while as a company have collaborated over the years.
And so there is a data rich that would be built by the seamless database. So our customers can transfer data from one instrument to the other and control one instrument from the software off the other.
The final piece is of course on empower and our compliance offset that is that is an ambition that we have or for instruments across the board not just light scheduling for mass spec as well as <unk>.
<unk> and several other instruments and that's the journey that debt.
We have started with the waters connect platform. The architectures are either open. So you can imagine over the next one to two years you should start to see.
<unk> progress in that in that in that direction subsided slightly longer term than the immediate talking of instruments to each other and transmitting data from one to the other I mean, just to clarify that on the $70 million that we talk about is really looking.
Assuming that is the time, but it's super early days on empower and most of that is coming really from tropical expansion.
FCC column in HPLC attachment. So the first two synergies geographic expansion segment expansion.
Attachment over the next five year period to get us to close to $70 million and the loss to the larger sort of opportunities are more ambition with the bioanalytical platform.
And taking malls into QC with empower is something that we expect in the latter part of the five year period, but not a significant contribution to the 70 million.
And then the last piece on China.
Early days, we are still evaluating.
To put a number of anticipated.
Yes.
So at this point I want to thank you for your participation and all your questions and on behalf of our entire management team on behalf of Jeff Cliff and the wire timely I would like to thank you for your continued support and interest in our company. Thank you very much.
Yes.
This will conclude today's conference all parties may disconnect at this time.