Q1 2023 Waters Corp Earnings Call
Good morning, welcome to the Waters Corporation first quarter 2023 financial results Conference call.
All participants will be in a listen only mode until the question and answer session of today's call.
This conference call is being recorded.
Anyone has any objections. Please disconnect at this time.
It is now my pleasure to turn the call over to Casper Trudi <unk>.
Of Investor Relations Sir Please go ahead.
Thank you Brad good morning, everyone and welcome to the Waters Corporation first quarter earnings call.
Today Im joined by Dr. Barbara Walters, President and Chief Executive Officer, and a more choppy waters senior Vice President and Chief Financial Officer before.
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 possible future results and commentary on potential market and business conditions, including with respect to the close of the <unk> transaction that impacts waters Corporation over the second quarter of 2023 and full year 2023.
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 report on Form 10-K, our 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 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 companys.
Site.
Unless stated otherwise references to quarterly results, increasing or decreasing are in comparison to the first quarter of fiscal year 2022. 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 our 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 <unk> to deliver our key messages for the quarter. Then a mall will provide a more detailed look at our financial results. After we will open up the phone lines to take questions.
Thank you guys and good morning, everyone.
This morning, I'll start by giving you color on our first quarter results as well as our updated guidance then I'll cover some of our recent product launches, including Alliance Ias and I will also provide an update on Wyatt.
First quarter results were below our expectations with revenue growth of 3% on a constant currency basis versus our expected 4% to 6% growth.
This was largely driven by weaker than expected demand for instruments in biotech and pharma, which I will cover in a moment.
As you know we had an extraordinary Q1 last year, we had 16% constant currency growth, even though our first quarter. This year was slower than expected.
<unk> represents a very healthy two year stacked growth up approximately nine 4%.
We also saw overall.
Good overall strength in our recurring revenues, which continued to grow in the high single digits as well as mass spec NDA, both of which grew double digits.
Our end markets remain resilient and our leadership team continues to drive strong commercial execution.
We have further strengthened our revitalized portfolio with a steady stream of innovative new products.
Finally, we've added M&A to our growth strategy with our pending acquisition of Wyatt.
And we continue to invest organically in our high growth Adjacencies, which are also on track and are gaining momentum.
Reviewing our first quarter results in more detail our performance was impacted by a combination of three factors first.
China was weaker than anticipated as pharma customers scaled back purchases.
Second while we have limited exposure to a pre commercial biotech we have seen a pronounced scaled back end demand from these customers as they have significantly reduced spending to conserve capital and third several of our large to medium sized pharma customers delayed timing of instrument orders due to macroeconomic caution.
Each of these dynamics occurred late in the quarter and led to instruments declining 3%. After they grew over 25% in the first quarter of last year.
By end market the impact was to our pharma business, which declined 4% overall.
This was offset by strength in the academic and government segment, which grew 45% and industrial which grew 3% while our recurring revenues remained strong across service and chemistry.
As a result of this lower than expected volume our non-GAAP earnings per fully diluted shares also came in below our expectations at $2 49 for the first quarter.
On a GAAP basis, our earnings per fully diluted share was $2 38.
As we look ahead.
We're assuming that spending among pharma customers in China will remain scaled back for the balance of the year.
And while our exposure to <unk> commercial biotech.
Is low.
We also believe that the slowdown in this space is likely to persist for the remainder of the year as a result, we're lowering our 2023 guide due to these two factors. We now expect our full year organic constant currency growth to be in the range of 3% to 5%.
Believe that large to medium pharma side budgets remain in place, we expect spending among these customers to catch up and be stronger in the second half of the year after delayed spending in the first half.
Despite our revised revenue guide full year, EPS guidance and free cash flow generation expectations remain unchanged.
We intend to proactively manage our spend and working capital in AMOLED will cover this in more detail.
Even the charter market challenges our sources for growth remain in deck I think markets are robust with almost 80% of our business exposed to durable growth areas. This includes demand for QA QC testing of commercialized medicines increased scrutiny of DFAST and food and water and the testing of batteries used in applications such as electric vehicles.
Our team has developed a strong commercial discipline that is supported by best in class innovative new products that address evolving customer unmet needs.
We're also seeing high single digit growth in our recurring revenues, which are over 50% of our analyst sales.
Chemistry growth is supported by strong end market end market activity.
Growth in biologic applications with our Mac speak Premier columns, and our E Commerce initiative.
Service, we're seeing strong pull through from our instrument sales and increased service plan attachment is supporting the growth.
Spect serviced by an attachment for our instruments to increase by another 100 basis points. This year building on the 350 basis point expansion in 2019.
Our revitalized portfolio has been further strengthened with the recent launch of Alliance Ias.
Which is our next generation intelligent HPLC system. We believe it is the most significant innovation to hit the <unk> in the past decade, and it provides a major leap forward in lab productivity not only is the instrument easy to use with its large touch screen interface, but can eliminate common user errors by up to <unk>.
40%.
Does this by guiding users between steps with highly integrated highly intuitive interface. It intelligently conducts a number of real time system checks before.
Simple is run.
That helps.
Ensure that the instrument is configured correctly for the <unk>.
<unk> that is being tested before now at our such as incorrect solvent or the wrong column being used.
Unusually discovered after the sample has been run which results in wasted time and wasted sample.
Given the strength of the alliance brand and the significant new features that that this instrument offers we had a strong reception at its launch.
Since quality testing is such a critical component of pharmaceutical manufacturing customer interest has been strong including from Janssen Pharmaceuticals, We noted that alliance Ias pains like the future is here.
And has already made plans to replace a large number of its agencies with this instrument.
We now have not one, but two new industry, leading platforms for QA QC applications in pharma arc HPLC and its biocompatible equivalent at Premier and now higher and alliance, which sits at the top of the range.
Last month, we also launched Opdivo <unk> absolute mass spec into clinical applications.
Not only is this the most sensitive triple quad on the market for DFAST detection, whether testing strong traction in food and environmental testing.
But now within clinical it is up to five times more sensitive than other competing instruments in the segment. This sensitivity enables clinical labs to detect and measure trace level analytes at lower detection levels than was previously possible. It also enables clinical labs to expand their test menu to include multiplex panels.
Meanwhile.
Our Ta instruments business launched a new micro calorie major for battery testing essential for electric vehicles energy storage and electronics applications. This provides customers with a significant upgrade as it accelerates validation of battery safety quality and performance testing by up to 75%, which.
While collecting up to six times more data than other gathering matters.
Lastly, we also recently launched a new system monitoring software product on waters connect a first for us and unique to the industry develop.
Developed in consultation with QA QC scientist it enables real time monitoring of all chromatography instruments controlled buyout empower software. It helps increase productivity of UA QC labs by allowing customers to analyze that instrument fleet at anytime from anywhere to monitor uptime usage levels and real time system availability.
Each of these new products have been developed in close collaboration with our customers to address their most pressing unmet needs there.
Further support the strength of our revitalized portfolio.
Earlier this year, we announced our intent to acquire biotechnology the recognized leader in light scattering, but more than 80% of its revenue state large molecule applications why it expands what are this portfolio increases and increases our exposure to faster growth areas within biologics.
It also increases our ability to build a business in bio analytical characterization, which is a $1 8 billion U S. Dollar total addressable market with a 10% to 12% projected annual growth rate.
We remain on track to close in the second quarter of this year. We also expect the foundation to deliver immediate growth and adjusted operating operating margin accretion.
Now I will pass the call over to AMOLED to continue covering our first quarter financial results and give additional commentary on our guidance.
Thank you and good morning, everyone.
In the first quarter sales grew 3% in constant currency. This came below our expectations due to the demand dynamics in our pharma business, which we did outlined earlier.
Adams Division grew 2% and Ta grew 10%.
By end market volume declined 4% industrial grew 3% and academic and government was very strong at 45% growth.
In pharma weakness was led by China, and the U S. In China, we saw customers recalibrate their spending plans in the U S at large to medium pharma customers delayed spending due to macroeconomic caution.
Small biotech customers, which is a small portion of our business scale back spending to conserve capital in light of more pronounced one big concerns.
In industrial growth was led by Asia, which grew 6% and the Americas, which grew 2%.
Our water business, we saw continued strong growth in refresh testing applications.
<unk> growth was led by thermal analysis and rheology, we've seen continued strong demand in secular growth drivers such as batteries and electronic testing.
Academic and government had a great start to the year.
Elevated funding resulted in strong demand for our refreshed mass spec portfolio.
Strength was broad across all our geographies byproduct strength was broad across our high res mass specs, such as cyclic IMS and in tandem Cogs such as PQ absolute.
Now by geography sales in Asia grew 6% the Americas declined 1% in Europe grew 3%.
In Asia, China declined mid single digits for the quarter.
Excluding China Asia grew mid teens with broad strength across our end markets.
In the Americas pharma declined mid single digits, you wouldn't delayed spending against the tough comp of over 30%.
Industrial grew 2% and academic and government grew over 25%.
Europe grew 3% in the quarter with strength also led by academic and government, which grew over 40%.
By products and services instruments declined 3% overall, but both our mass spec and Ta instrument systems grew double digits.
Recurring revenues grew 8% with chemistry up 10% and services up 8%.
This quarter had one fewer day than the first quarter of 'twenty, 'twenty, two which translates to a headwind of approximately 1% for our recurring revenues.
Gross margin for the quarter was 58, 5% compared to 58, 6% in the first quarter of <unk> 22 in line with our expectations.
Operating margin for the quarter was approximately 26, 8%.
<unk>, 3% in the first quarter of 2022 driven by sales mix.
20 basis points of unfavorable FX.
Our effective operating tax rate for the quarter was 15, 4%.
Average share count came in at $59 3 million shifts reaches about one 6 million less than the fourth quarter of last year.
Our non-GAAP earnings per fully diluted share for the first quarter was $2 49.
In comparison to $2 80 last year.
Foreign exchange headwinds lowered our non-GAAP EPS growth by 8%.
On a GAAP basis, our earnings per fully diluted share was $2 <unk>.
A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning and.
The appendix of our earnings call presentation.
Turning to free cash flow capital deployment, and our balance sheet, we define free cash flow as cash from operations less capital expenditures and excludes special items in the fourth quarter of <unk> 23 free cash flow was $166 million after funding $34 million of capital expenditures, which represent.
Approximately 24% of our sales.
We maintain a strong balance sheet access to liquidity and well structured debt maturity profile.
And allows us the ability to prioritize investing in growth, including M&A and returning capital to shareholders.
To evaluate M&A opportunities that will meaningfully accelerate value creation, and we'll talk about attractive adjacent markets.
In Q1, we repurchased approximately 173000 shares of our common stock for $58 million early in the quarter.
As we previously disclosed we have seems temporarily suspended our share buyback program for the remainder of the year. So that we can use our free cash flow to fund the wire acquisition.
End of the corridor mix.
The position was approximately $990 million, which is a net debt to EBITDA ratio of about one.
Now I would like to provide our updated thoughts for 2023.
Our end markets remain resilient and we expect our refreshed portfolio and growth initiatives to enhance our performance.
We will.
Covered earlier, we are.
Revising our growth expectations to account for the scale back of purchases from our customers in China and the slowdown in small biotech.
As a result, we are updating our full year 2023 organic constant currency sales growth guidance to 3% to 5% excluding wired.
At current rates currency translation is expected to have a minimal impact on full year sales, resulting in full year reported organic sales growth guidance of 3% to 5%.
Consistent with our prior expectations, we expect wired transaction to add approximately two 5% to a full year 2023 revenue growth. Therefore, our total reported sales growth guidance is now five 5% to seven 5% versus 2022.
Including wired.
We expect organic gross margins to be approximately 58, 5% for the year and organic operating margins to be approximately 35%. This is higher than our previous guide due to anticipated cost savings in our core business and an improvement in FX is now translates to 50 basis.
Points of margin expansion net of investment and Adjacencies, partially offset by an FX headwind of 20 basis points.
As we previously mentioned.
We anticipate the expected addition of wired in Q2 of this year will be accretive to our full year granted 23, adjusted operating margin by approximately 25 basis points.
Excluding the wide transaction, we expect our full year net interest expense to be approximately $40 million.
System with our broad expectations. The transaction is expected to add $40 million of additional interest expense for a total of $80 million interest expense.
The full year tax rate is expected to remain at approximately 15, 5%.
Our average diluted 2023 share count is expected to be approximately $59 3 million given the temporary suspension of our share repurchase program.
Rolling all this together on a non-GAAP basis, our full year 2023 earnings per fully diluted share guidance. Excluding the <unk> transaction is projected in the range of $12 70.
To $12.90, which is unchanged from our previous guidance and includes a negative currency impact of approximately one percentage point at current rates.
Including why non-GAAP full year 2023 earnings per fully diluted share is also unchanged projected in the range of $12 55.
$12.75.
Looking to the second quarter of 2023, we expect the current market dynamics to persist in China, along with the slowdown in pre commercial biotech. We also expect cautious spending levels from large pharma customers to continue until end of the second quarter before catching up in the second half.
Hence, we expect second quarter organic constant currency sales growth of 1% with 3%.
At today's rates currency translation is expected to subtract approximately one percentage point, resulting in second quarter reported organic sales growth guidance of zero percent to 2%.
Assuming a mid may close we expect the wide transaction to add approximately one 5% to our second quarter revenue growth.
Therefore, our total second quarter reported sales growth guidance is one 5% to three 5% including wired.
Excluding the wide transactions second quarter non-GAAP earnings per fully diluted share are estimated to be in the range $2 60.
To $2 76, with a negative currency impact of approximately three percentage points.
Including wide, which is expected to result in an EPS headwind of eight since second quarter non-GAAP earnings per fully diluted share is projected in the range of $2 52 to.
To $2 62 things.
Now I would like to turn it back to <unk> for some summary comments. Thank you Rommel so to summarize despite a slower than expected start to the year. Our end markets are resilient and we expect to see increased trend in the second half of the year.
While we have revised our revenue guide we are maintaining our full year EPS guide due to our robust financial model.
And the acceleration of our growth strategy remains on track with continued progress on all of our high growth Adjacencies and with our pending acquisition of biotechnology.
I would like to take this opportunity to thank our colleagues around the world who continue to demonstrate the indomitable spirit of waters with their focus on strong commercial execution.
And revitalized innovation, we also look forward to welcoming our future by our colleagues.
I'm proud to share that waters continues to be global globally recognized for its strong ESG profile.
<unk> at number five on the Barron's 100, most sustainable companies list for 2023. This is the second year that we've been placed in the top 10 after receiving more than 20 awards in 2022, recognizing the company for excellence and product innovation leadership strength and commitment of social and environmental responsibility.
We look forward to continuing to demonstrate our commitment to lead the world better than we found it so with that I'll.
Done the call back to the past.
That concludes our formal comments and we are now ready to open the phone lines for questions.
Thank you.
We will now begin the question and answer session.
To ask a question. Please press star one and record your name at the prompt you.
We will be allowed one question and one follow up.
If at any time, we're waiting in queue. Your question has been answered.
Please press start to remove yourself from the queue.
Once again that is star one for questions at this time.
And our first question today will come from Lukas <unk> of Barclays. Your line is open Sir.
Great. Thanks, good morning, everybody.
I want to start off on the academic and government strength that you guys saw in the quarter, particularly.
In China, you guys called that out but it was strong across every region. So are you did you guys see any push outs in there from from the <unk>.
Just talk about what the.
What youre seeing there is that kind of goes forward. So this isn't just a onetime thing.
Thanks, Luke and good morning look.
It's a great start to the year with about 45% growth and this is largely due to the elevated global funding that we're seeing seeing seeing across across the globe and the strong demand for our high res mass spec portfolio.
Growth was of course led by China, which grew over 80% versus previous year and of course, we saw the same thing happening not to that same extent and in magnitude, but in the U S and India and in Europe , All Hasnt had a nice growth well into the double digit territory, so academic and government as you know in the <unk>.
That's rather lumpy, so I would rather not extrapolate Q1 to the rest of the year. So we assume that we will see the second half that will become more normalized and the full year will be more in the low double digit teen range, given such a strong start to the year.
Okay, Great and then when you guys talked about the guide down.
<unk> being from biotech customers in part being from large pharma kind of pushing out their spending can you help size, what those actually were and contributed to the guidance cut for the year.
So Luke Luke.
Just to sort of take a step back the full year guide for the full year guide, we've assumed 3% to 5% in constant currency and on a two year stack basis. This is still high single digits.
We like to be.
Like the first quarter.
Spending at Chinese CDM or customers.
And a pre commercial biotech customers remained constrained for the balance of the year and to remind you on the China on the China side.
We've grown the <unk> presence over the last two years, we've actually tripled that business sites that's gone.
Dramatically up so we think like the first quarter the spending in the Chinese CDN loyal customers and the many commercial biotech customers will remain sort of muted on the other hand, the assuming that the large pharma customers delayed orders for instruments will come in the second half of the year and here over the long.
Two weeks I've personally spoken to several large customers both in the U S and Europe to understand the situation and the funding remains very much intact and appeals were simply delayed so we're expecting those to come.
Largely in the second half of the year.
So then the 3% to 5% guide would then imply that for the full year, China will grow in the low single digits versus our previous assumption of high single digits.
Pharma will also remain in the low single digit category with combined pressure from China, <unk> and <unk> commercial biotech.
And instruments for the year will grow flat to low single digits and regarding revenues in the high single digits. So I hope that gives you a flavor for the drivers of.
The full year guidance and how we step it down already you want to comment.
Comment on the quantitative aspects.
Yeah. Thank.
Thank you.
The next question will come from P.
Vijay Kumar of Evercore ISI.
Your line is open.
Hey, guys. Thanks for taking my questions.
Back to some of your comments here.
What is that loggers exposure to this emerging biopharma.
Was it down.
50% any directional sense in now.
What the business did.
Yes.
In this.
Why.
I understand they have exposed to large pharma is there any risk here on why it would.
This is why its exposure to emerging biopharma.
So let me simply say thank you for the question first on the biotech exposure our biotech customers.
Broadly speaking constitute between 10% to 15% of our pharma business and with more heavier weighting in the U S and China, where the biotech industry is even more developed.
Pre commercial biotech, which is where we saw the slowdown in the subset of this and is roughly half of it. So if you do the math, that's roughly 5% to 7% of our pharma business and largely focused on the U S and in China. So during Q1 pre commercial biotech companies have.
<unk> got extremely cautious and virtually halted the instrument purchases, especially later in March.
Turning to see some relaxation.
We've assumed that this situation will persist for the balance of the year.
So and over the long over the long term I don't need to remind you. The biotech industry plays an extremely important role in the innovation that we see across health care and they remain our very very strong customers now to your question on wired roughly.
Roughly 80% of the wired business is focused on.
On <unk>.
Biologics biologics applications Wyatt has historically been very strong in academic and government.
And for biologics applications, we're characterizing large molecules like cell and gene therapy and.
<unk> and <unk>.
<unk> gene therapy.
<unk> and monoclonal antibodies.
We expect this business for the balance of the year.
Once the close happens remain in the low double digit Lola low double digit category again as a mall said this would add roughly two 5% of our incremental revenue for walk us from the rest of the year. So we expect this to continue to remain extremely strong for the balance of the year.
Understood.
One for you.
The second quarter EPS guidance.
Implies I think the operating margins in <unk>.
Roughly similar to Q1.
Given you reiterated the annual EPS guidance it looks like back half has to be like low 30% operating margins Thats, a massive step up I think 500 basis points or 600 basis points, if I'm doing the math correctly would.
What's driving that second half margin expansion versus first half is there.
Any synergies being baked in from this pipeline that you or perhaps it's waters contemplating any restructuring actions.
So there are a couple of things that play into the second half of the year right. One is.
The volume in the second half is typically higher than the first half and that produces some degree of volume leverage and our gross margin profile in the second half.
Slightly better than that in the first half.
We also benefit from exchange rate in the second half.
Remember in the first half FX is still a headwind in the second half FX tailwind and three <unk>.
130 wise sort of the demand outlook, we plan to proactively manage our costs and intend to keep operating expenses relatively flat in the second half versus the first half and if we are able to do that then allows us to produce the kind of margin expansion.
Yes that we've guided for the second.
Okay.
The next question will come from Dan Brennan of TD Cowen Your line is open.
Great. Thanks, Scott Thanks, guys.
Quick question maybe.
Maybe the first one just on the guide just wondering.
Was there a discussion maybe to cut beyond the three to five just wondering.
You kind of ripping the band aid off here given some of the factors you pointed to but do you feel that guy provides still healthy cushion given all the uncertainties you're flagging it still as you pointed out.
It's still kind of in high single digits.
To your stack, which is above your long term LLP and you do have these factors and you're banking on a recovery in the back half of the year for large pharma.
So to that and thank you for the question look I mean, we spend a lot of time clinically dissecting what happened in Q1 and why it came below our expectations.
With a 3% or so 3% of it.
I'll take us on our sales growth rate and the reasons that I outlined.
<unk>.
Slowdown in Chinese CDN customers start on a budgeting, a tiny CMO customers, who largely serve U S.
And European pharma customers, we think that will persist for the balance of the year. We think the pre commercial biotechs spending will remain muted and I think that's what we've assumed even though we see some <unk>.
Of that improving we've assumed that that remains muted and then thirdly, we expect.
The deferral of purchases of instrument and large pharma customers to come back.
And when you looked at the Super carefully and I personally spoke to some large pharma customers.
We have the budget they have the funding it simply was cautioned to delay the purchases and now with <unk>.
Very strong revitalized portfolio, we feel very good about.
Being able to compete for four orders across the instrument portfolio. So when you put it all and you put it all together you basically see that the instruments are instrument relatively flat.
Our low single digit at most for the full year recurring revenues, which have gone from strength to strength as over 50%, 50% of our business gets into the high single digit category.
Pharma, which has been our strongest grower.
In many for many many years and east also assume in aggregate will be flat to low single digits.
And China again, a strong growth driver will.
And up flat to low single digits. So I think we've been they've been rather cautious about our about our guidance and we've taken all of the factors into account.
And as you said I mean, the full year stack looks looks very good just given the strengthening bid from a commercial perspective, and a strong innovative portfolio that we have put forth in the market and with the close of wire that should add a little bit of more of a little bit more momentum.
Great Thanks for that.
Maybe first off just on the instruments, so flat to low single.
Kind of high single digit stack against what you guys did you guys. Obviously, a tremendous growth. There can you just unpack that a little bit it sounds like mass spec doing terrific.
Could you just give us a flavor for the relative contribution between NASDAQ and LC and if you want to give us any regional I don't know how far down.
You want to go but just give us a sense of what's incorporated into that low single. Thank you.
The instrument sales for this quarter.
Declined roughly 4% right and as you rightly pointed out and this is on the base on the back of a 26% growth in Q1 2022, right. So pretty strong comp now mass spec grew high teens, so strength to strength and on a multiyear basis, its a high teens growth.
<unk> grew double digits.
<unk> declined in Deans.
Your question.
On LTE or deeper question on Nancy and our sales were impacted disproportionately by the decline.
We saw in the budgets biopharma customers and these these are Chinese CDM always having U S and European customers as I mentioned, the pre commercial biotechs and also the delayed orders that I talked about for large pharma, so disproportionately impacting <unk>.
Now just to put this all in a bit of perspective.
<unk> seen an instrument business, we will always see fluctuations and but what is important to remember is that over the long term.
Our instrument business has grown 4% to 5% range with a gross margin of roughly 60%, it's a pretty attractive area to be in.
<unk>.
During this time looked at our instrument growth rates for the last 20 years, starting from 2004, we basically looked at every year and you come up with you come away with just two very simple insights first.
The average growth hovers around 4% to 5%.
Second.
There is fluctuation around this mean, we generally gets exaggerated around economic slowdowns like in 2008 to nine 2011, and 12, but volume always returns within one to two quarters. So whenever there is a delay, especially in the case of LTE, which is almost 70% of replacement business.
This fluctuation always subsides and you return to your average of about 45%. So we are pretty positive and we feel very confident about the different businesses coming back, especially now given our terrific commercial execution that you pointed out and a renewed portfolio, especially in <unk>.
A small molecule <unk> segment, where arc HPLC now is augmented by alliance I guess, we should see the instrument growth returning back to normal for lung and sort of for the full year. Then we basically assumed a flat to low single digit instrument growth in aggregate.
And.
Recurring revenues at the high single digit range.
Then the second half of the year, you'll start to see.
See trends that are more like pre Covid times.
I hope that gives you a bit of flavor on what the assumptions are and how do you how we've thought about it.
The next question will come from Matt <unk> of Goldman Sachs. Your line is open.
Hi, good morning, Thanks for taking my questions.
So maybe just to dig a little bit more on the large pharma side, it's quite clear your expectations for the second half recovery and this is.
A delay I'm just wondering just given some of the news we've seen from some of the larger pharma about rationalizing their R&D spend.
Has there been any kind of re prioritizing those R&D budgets, whether it's inflation reduction act.
Hunting them to move into large molecule or anything like that or are you truly see this as sort of a temporary delay.
In terms of ordering.
Matt Great question, and so I personally then decided to speak to several of the large pharma customers both in the U S and in Europe and basically.
We find that the budgets are still very much intact like many companies like us as well.
Being more cautious with capital spend and we are taking longer to approve capital spend and that's what's happened in large pharma as well. So there is no.
No talk of not doing replacements on our triplet and not adding instruments needs that they had planned altogether.
Second what I'll remind you is that our business is more heavily weighted towards the <unk> segment, which is more proportional to.
<unk> manufacturing volumes right and so R&D spend if it comes under pressure does not impact, especially.
<unk> business, which is more weighted towards can see especially on the small molecule side. So really no no real indicators, there that that would that would that would slow down and finally, Matt feel extremely good about our commercial execution that we that has demonstrated and what we've been able to do over the last two to two and half years.
Where we have really.
Ground rather nicely.
All of the instrument replacement initiatives.
Also on the consumable side, which remains extremely strong and consumables I'll remind you is an indicator of pharma activity light if that is growing high single digit. What you find is that there is significant activity is still occurring in the pharmacy with a pharmaceutical customers. So we believe it's just a matter of time that the instrument the instrument orders that were delayed in large pharma.
Although we will come back so we have a lot of corroborating evidence that suggests that this is coming back, but we've been rather cautious.
Even though we see some indicators of it coming back already another cautious to assume that most of the spend will come in the second half of the year.
Thanks, that's very helpful color and then just my follow up would just be on the industrial end market.
Done a really good job in the past I've kind of decompose into sub segments, there and you talked about strength in batteries and P fast, but maybe could you just talk a little bit more about the sub segments, where you're seeing some maybe softness and where youre seeing continued strength.
So I mean, just taking a step back not the industrial segment on waters has dramatically changed over the last 15 years or so right.
Basically it's now constitute heavily of food and environmental and the da businesses has 40% of it is 40% of it is in the more resilient segments like batteries also serving some parts of life science right out of the eight now to just decompose the results for the quarter and grew the industrial business grew roughly.
3%. It was led by D again, which grew 10 almost 10%.
And DFAST testing, which you've talked about several times in our previous discussions which continues to grow really really rapidly and MDA.
Roughly 40% of the business is now in the more resilient segments with batteries really continuing to grow nicely. So doubleclick.
Doubleclick on da I mean, it has the same sort of dynamics that the water division does right. So we've really increased our focus on commercial execution, new products, especially the ones that are relevant for high growth areas for thermal analysis rheology and we've just talked about our new lateral economics kind of inventory.
That sets a new standard in testing.
Testing batteries in their efficiency and effectiveness just been launched and so we feel very good about where the ta business stand going forward.
Put all of that together for the full year.
Assuming a mid single digit growth.
Industrial in our industrial business led by the strength that we continue to see NDA and be fast testing.
The next question will come from Derek Brown of Bank of America Merrill Lynch.
Your line is open.
Hi, good morning, everyone.
Good morning Derik.
I have a question for you I mean.
Covering waters for a long time, and we've seen some of the spending patterns before me historically farmers have delayed their budget releases in Q1.
And things pick up in <unk>, but about the same token if we're going back to sort of like historical seasonality.
<unk> then there's always a crap shoot in terms of what spending is because you won't have any real visibility until the until September . So I'm, just I'm just sort of.
Why are we not back to some of the sort of seasonality seasonal patterns and then.
Sure.
And everything essentially ended up variety on the fourth quarter and like this I'm just really curious.
Are we.
Was there anything of more different going on here than just return to normal seasonality.
Fantastic question Derek.
And here to us something that relates to the history of what is in general look.
You're totally right. We think the second half of the year, we'll start to approximate what we've seen in the past right. That's why if you just look at the growth rate over the second half of the year, it's between 407% instruments now starting to reverse into the low to mid single digits.
And consumables well above our historical averages reversing at the high single digits I would say it does start to look like historical patterns.
And if you just now look at the specific site as I said.
We basically said look the CMO spending in China.
The pre commercial biotech is not coming back now you can call that Super Conservative.
Are not up to you, but we just said look that's not coming back for the balance of the year. That's what we want to assume for now with pharma. We've said based on the visibility we have with those customers and I personally spoken to several of them as well to just gain confidence we're already starting to see the orders release now it's anyone's guess if it comes in Q2 Q3 and Q4.
But again, we've been cautious and said look it will come in Q3 and Q4 rather than in Q2, So I think thats the dynamics, but it does we've done the second half of the year starts looking awfully like pre Covid times and then when you do the full year Matt.
If you look at waters, I mean, youll see us.
On a stacked two year stack. This is reversing high single digits.
And I've already talked to you about the margins the margins are 30% to 35% that's a pretty good business like a high single digit 35% margin. So we expect to be able to overcome these challenges for the balance of the year and I mean this is the best visibility that.
But we haven't at this point in time given the conditions.
Yes.
Absolutely I mean, just sort of looking at it.
Historically gone through a couple of years with like double digit growth.
In the business and then it mid singles and it comes back double digits and then it goes to it goes to these processes. So.
It seems like the trajectory as we exit 'twenty three would be back to that.
3% to 5% growth in instrumentation business, then would it be augment is on the.
The consumables business right, so 78% in that range right, that's probably the best way to think about next year.
I think I mean, I can't give you.
Over the next year, but just to give you a sort of broad strokes at this point.
We think that our instrument business is super healthy right. So.
Is it three years or is it 5% I cannot judge, but it's a good starting point.
We think our our consumables business has been traversing on the stacked on a double stack, meaning two to four 2% and four year stacked basis on high single digits now.
It seems a bit higher than previous previous growth rates and I know, we've augmented our business with wired, which would add more to the growth rate right. So that's a low double digit grower and expose us to expose more to biologics and you put it all together.
Tremendous our mid single digit recurring revenue as a high single digit you sort of end up at a weighted average which is mid to high single digits.
Thats, what we are saying and remember, we said, 5% to 7% growth in the midterm.
Starting to.
More move towards high growth adjacencies that growth, even expand and been able to maintain our margins because we are rather rather careful about how we invest in the business and it's about a 30 ish percent, 35% margin until you start to see the algorithm come back, but with a bit more victimless trend given.
What we've done on the commercial side.
And how he has been adding.
Adding adding strength on the consumables.
<unk> E Commerce service attachment rates, which are higher than ever.
And then.
New product the new product portfolio, which is completely rightly. So we think it'll be it'll be in.
There or thereabouts, but probably a little bit better given commercial commercial commercial success, given innovation and the fact that we have <unk>, which is a faster growing business in the segment.
The next question will come from Josh Waldman of Cleveland Research. Your line is open.
Hey, guys. Thanks for taking my questions a couple for you.
Just another follow up on your comments on large format. I think you said you have orders or quotes in hand.
At this point I guess.
Curious if you could comment on the magnitude of these orders.
And then maybe what customers are telling you with respect to year over year growth in their budget.
And then I guess referenced in reference to the full year guide.
If the opportunities do convert but it sounds like youre starting to see you.
Do you think there is upside to the guide and then on the flip side is if they don't do you think you have to trim the guide going through the year.
So maybe I'll start with the very end and then work towards the front on the pharma customers.
Josh we've done a very clinical analysis on the drivers of what's happened in Q1, right and we've been super transparent about where they've come where they've come from the Chinese <unk> the emerging pre commercial biotech.
And those those two we don't expect to see coming back for the balance of the year. Even if there are indications that that starts to relax towards the latter part of the year on the pharma spend we have a significant amount of corroborating evidence that.
From the field from my personal conversations from looking at the data, especially in what we're seeing on a commercial from a commercial perspective, and I'll remind you that.
We are still very much a QA QC focused company.
So commercial is a conventional volumes continue to continue to rise as they are in far more new products coming through.
We expect to see that spend spend continue in a way that it has so we've been reasonably comfortable that.
That spending will come back for the balance of the year again, how it's distributed in Q2 Q3 Q4.
Not straightforward, but we are assuming that it is in the second half of the year and that brings us to the full year full year guide, which which is which is 3% to 5% or a two year stack growth rate of high single digits. So I hope that gives you color on how we are thinking about the full year, the full year and where we see.
Strengths in various sort of analyzed and incentives.
Bringing this back into the equation.
Got it.
Or a mall wondering if you could comment on how price is tracking year to date versus your expectations. I think you'd previously said 200 basis points. This year or is that still the right way to think about it or does the softer demand environment here in the near term pressure on that.
I mean at this point George price.
Are you seeing little above 200 basis points.
Just on the dynamics, we are seeing in the market.
Our teams are doing an excellent job holding on to that.
So what we are thinking for the rest of the year.
And Josh to build on the price comment.
We expect that the strength that we've built in execution of implementing pricing changes.
We'll stay with US second our portfolio, which is really reinvigorated across the board right. So we've talked enough about the mass spec business and the Boston does Evo TQ absolute the GTI kicked off which now helps customers transfer their methods much better from development into QA QC or to the bio <unk>.
<unk>.
We've talked about the impact of our Mac speak Premier columns.
Innovation across the board and now more recently with LC with the Alliance I guess.
And also in da for battery applications, we see innovation across the board in this customers do want these products. They meet very significant unmet needs and they are willing to pay a premium.
To access these products so the commercial strength that we've built over the last two years plus revitalized portfolio makes us.
And that we can continue robust on price.
And a very significantly.
The next question will come from Rachel Latin style of J P. Morgan Your line is open.
Great. Thanks for taking my question.
So when youre in instruments declined 3% during the quarter, but you made a comment on the dynamics really started late on in the quarter. So can you walk us through what was the exit rate for instruments.
Orders look during April may timeframe, and then as a follow up you mentioned that instruments are expected to be flat or low single digits for the year. So what's embedded in that guidance range.
Rachel Thanks for your question the instrument sales declined about 4% for this quarter right and on the back of the 26% in Q1 2022.
<unk> as I mentioned earlier grew high teens.
<unk> grew double digits, while as seen.
Is the one that declined in Deans and your question on how these were and where this came from I mean, it's the same drivers that I mentioned earlier, they were impacted disproportionately by the decline in.
In the Chinese CMO customers of our southern U S and European pharma companies and commercial biotech and some delayed orders and large pharma.
And as you as we think about the full year.
Quite confident that the deferred business is going to come back given what I mentioned.
In response to the previous questions and also the fact that we have an excellent commercial organization and a new portfolio that basically allows us to.
Allows us to place these instruments for the full year for the full year, we are assuming a flat to low single digit growth in instruments.
And of course <unk>.
Single digits.
For consumables and you'll start to see genetics question earlier.
Second half of the year look.
Awfully light vehicle bid vehicles at times I hope that gives you clarity.
Yeah, and then just a follow up here on.
Biological and analytical characterization can you just talk about what the adoption of that portfolio with bio CT and then also how why its adoption rate has trended in recent months and you talked about the opportunity here for bio analytical characterization is that adoption rates.
Greece over time, but just given that characterization is that required for bio processing right. Now is there a risk that that's been an area, where pharma really starts to rationalize spending in that that could pressure new customer wins and then ultimately what Kentucky is for growth rates in Bayou corne in white this yet.
So Rachel Thanks for that question look I mean.
About 40%, 50% of the pharma pipeline is now biologics a good portion of that is cell and gene therapy molecules, which are cumulative not just not just treatment. These are fantastic drugs and we're doing all we can to help our customers take these to the market.
Unfortunately, the characterization techniques for these have not moved at the pace that they should have historically now we have the tools like as CMS like Edison, you mean like light scattering.
And like our Maxine Premier columns that will allow our customers to characterize these molecules is much better with them faster to the to the pipeline and reduced costs dramatically. So we see that demand.
Really really picking up right. So when we did when we did the analysis. We said look this is about a $1 8 billion market that is growing well into the double digits now with the addition of wired. We now have a world class portfolio with the simplest LC Ms instruments and bio cohort that has very good adoption.
Material testing for in process characterization of cell lines.
Ill rapidly moving into into QA, QC and I've given some examples of that also in the past.
Second as <unk> remains a characterization technique that many of our customers and us to release biologics and thirdly, now with with wired multi analyte scattering that we now intend to attach to our SEC malls.
The ICC columns.
As well as our.
We think this is very very good prospects going forward and when you talk about wired.
Florida has historically grown in the 20% range and our assumption is.
As we look at the balance of the year and the rest.
After the deal is closed we our assumption is still that it's a low single low double digit low double digit grower with a 14% margin for the foreseeable future. So we feel very good about this area.
In biologics in general and bio and the business that we're building and bioanalytical characterization.
The next question comes from Patrick Donnelly of Citi. Your line is open.
Good morning, Lindsay on for Patrick Thanks for taking my questions I guess first on pre commercial biotech can you talk a little bit about how that trended throughout the quarter or was the weakness mostly stem later on in the quarter, but during March or was it kind of.
Even throughout and then one follow up thanks sure.
Look I mean this this really came.
In the month of March right, I mean, a pre commercial biotech as I said before is roughly 5% to 7% of our overall pharma business and largely focused in the U S and in China now to double click on the U S. These companies are mostly in the Cambridge.
And San Diego, San Francisco Bay area right.
And we saw really theyre spending almost halt in March given the financial crisis that many of the companies who are going through some of that has started to relief, but we saw that.
That segment really slow down quite dramatically in the month of March and then that has.
And thats and that has persisted.
Persisted into.
Assuming that that is persisting into Q2, especially for that particular segment.
And that was our final question for today I'll turn it back over to the speakers for closing remarks.
Thank you very much for your participation and questions today and on behalf of the entire management team at quarters I would like to thank you for your continued support and interest in the company. Thank you and have a wonderful day.
Thank you all for your participation on today's conference call at this time all parties may disconnect.