Q2 2023 Waters Corp Earnings Call
Good morning, welcome to the Waters Corporation second quarter 2023 final 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 if anyone has any objections. Please disconnect at this time.
It's now my pleasure to turn the call over to Mr. Caspar Tudor head of Investor Relations. Please go ahead Sir.
Thank you Ivy good morning, everyone and welcome to the Waters Corporation second quarter earnings call.
I'm joined by Dr. Barbara Walters, President and Chief Executive Officer, and a more travel Walters senior Vice President and Chief Financial Officer.
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 and.
In particular, we will provide guidance regarding possible future results and commentary on potential market and business conditions that impacts waters Corporation over the third 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 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 second quarter of fiscal year, 2022, and organic constant currency terms 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 organic constant currency basis.
Finally, we do not intend to update our predictions or projections, except as part of our regularly scheduled quarterly earnings release was otherwise required by law.
Now I'd like to turn the call over to <unk> to deliver our key remarks for the quarter, then or more will provide a more detailed look at our financial results. After we will open up the phone lines to take questions. Thank.
Thank you Kasper and good morning, everyone.
Before diving into the results I would like to start by saying that I'm very proud of all our teams have executed.
We delivered a solid performance across our end markets, despite a challenging environment and a stronger than expected slowdown in China.
Revitalized portfolio is driving results in areas of high unmet need as our newly launched products continue to gain traction.
And we are well positioned for future growth as we make meaningful progress and make further investments in our high growth Adjacencies.
Turning to our results in the second quarter, we delivered at the high end of our guidance with 3% organic constant currency growth.
Also had a great start for the wire acquisition, which performed ahead of expectations and contributed 2% growth for the quarter.
Overall constant currency growth was 5% and I and our as reported growth was 4%.
Organic constant currency performance was led by strong growth in the industrial segment, which grew low double digits and the academic and government segment, which grew over 20%.
In both of these end market mass spec grew over 40% as a revitalized portfolio sorry.
Continued strong demand.
In the pharma segment, which declined 4%.
Both the U S and Europe grew high single digits, showing initial signs of recovery in pharma spend.
However, this was more than offset by significant worsening in the China pharma market as weakness broadened beyond C. D M O's.
The weakness in China also impacted our instrument growth, which declined 2% in the quarter when excluding China instrument growth was 8% led by mid teens instrument growth in the U S and low double digit growth in Europe .
Meanwhile, our recurring revenue grew high single digits, driven by increased service plan attachment and chemistry E Commerce adoption.
Our non-GAAP earnings, but fully diluted share came in above our expectations at $2 80, driven by operational excellence across pricing and procurement as well as our cost actions on a GAAP basis, our earnings per fully diluted shares were $2 55.
Despite the challenging macro conditions, our commercial execution remains strong.
So far this year, but in instruments mass spec is growing high teens on both a year over year and two year stack basis as our commercial teams have to capitalize on the strength of a renewed product portfolio.
Our Ta instruments Division has also seen strong results despite macro challenges, having grown low double digits year over year and on a two year stack basis.
I'm a car commercial initiatives and strong execution have enabled high single digit growth in regarding to that exactly they're cutting revenue.
They have already achieved our goal of increasing service attachment by a further 100 basis points in 2023, we're now targeting an additional 100 basis points of expansion over the remainder of the year.
The strength of our execution and the quality of our service offering is helping US drive this growth and there is further runway ahead.
<unk> is also a key part of our execution, where we embedded commercial muscle and disciplined in recent years, we have achieved strong results in price over 200 basis points. So far this year.
With our operational excellence, we expect to meaningfully expand our margins this year.
But the first half of 2023, our gross margin is 58, 9%, which is an expansion of 110 basis points versus the first half of 2022.
For the full year, we expect to deliver a gross margin of 59%, which is 100 basis points of expansion versus last year.
Also we expect to deliver an operating margin of 35% this year, which is 30 basis points higher than last year.
Our revitalized portfolio is also driving results in areas of high unmet need.
Would like to share a few specific examples first in the industrial segment, we're seeing strong growth in DFAST testing and we are towards the beginning of a multiyear growth opportunity.
Growth in beef as testing is twice as fast as the 20% estimated market growth rate as we continue to take share with us he bought EQ absolute mass spec.
In the academic and government segment, our high Res mass spec portfolio is seeing strong adoption at a time, but global funding for R&D applications continues to be elevated.
Select cities MRP is unique.
In the high risk mass spec market due to its enhanced resolution at high speeds.
It gives us unique capabilities for metabolomics and imaging applications, where throughput requirements are high.
S. M. S recently, we announced new enhancements for the MLP, which increases imaging resolution by 50% and boost sample throughput even further.
Earlier this year, we launched alliance I S, which we believe is the most significant innovation to hit pharma QA QC in the past decade.
To see strong interest in its launch and several customers have already made plans to replace those Lcs with this new industry leading platform.
Now have not one, but two new industry, leading Lcs for QA QC applications in pharma Alliance I S and arc H B O C. Both of these instruments onto onto a significant unmet needs in the market, but to continue to drive long term growth and instrument replacement and in our Ta Division.
New product launches such as border Rioja, rheology accessory and the battery cycloid Microcar limiter have supported growth in battery testing for electric vehicles battery testing is a fast growing market and we are well positioned to support demand for characterization that will lead to safer and better performing batteries. The strong results we've achieved in drilling markets.
Batteries have allowed us to deliver double digit growth in da so far this year, despite the challenging environment.
Remain well positioned for future growth and the long term fundamentals of our business have never been better.
While instruments are always prone to short term fluctuations in spending patterns.
<unk> growth has been highly resilient on a long term basis with average growth of about 5%.
As we look ahead the demand profile for our instruments has only strengthened versus this historical trend.
Total global prescriptions prescription drug sales, which is a key driver of instrument volume growth I would expect it to XD exceed historical growth rates for the foreseeable future.
And our potential is further enhanced by the measures we've put in place to improve pricing, where we expect to sustain a 100 to 200 basis points improvement versus historical levels.
In addition, the growing adoption of analytical instruments and process development and process optimization of large molecule therapeutics is a new growth vector for our business.
Here novel modalities require more advanced characterization techniques like mass spec and light sky things that have not been used in the past.
Believed that this trend will not only continue but we'll also paved the way for adoption of analytical instruments in high volume the cutting applications and large molecule manufacturing.
We expect this to occur as they become embedded within process control QA QC and raw material testing over time.
We remain focused on nurturing this growth opportunity with our continued investment in bio analytical characterization and bio separations.
And bioanalytical characterization, which is a $1 8 billion total addressable market with a 10% to 12% projected annual growth rate, we've been investing both organically and inorganically.
We closed the acquisition of <unk>, which expands our ability to characterize large molecules across various stages of production beyond that.
That's what we can do with LTE.
LC mass spec alone.
We also recently announced an expansion in our collaboration with Sartorius from upstream development into downstream manufacturing so.
So far in upstream process development, we've demonstrated that betting bio caught at line, but the sartorius Amber 15, and $2 50, Bioreactors has enabled bioprocess engineers to accelerate loan selection results from weeks to a matter of hours and our expanded collaboration will integrate our technologies further.
We will develop analytical solutions that are in line and offer real time monitoring of process controls and critical quality attributes in the biotech actor.
By offering Bioprocess engineers access to comprehensive analytical data for downstream batch and continuous manufacturing, we can support improved yields, while reducing waste and lower benefit lowering bio manufacturing costs.
Finally in bio separations, which is a $1 4 billion total addressable market with an 8% to 10% projected annual growth rate.
Recently announced a multi year research collaboration with Princeton University. The goal of this partnership is to advance research and drug discovery and development using novel bio separation techniques that we're developing for large complex bio molecules.
We also just introduced our first release in the new line of size exclusion chromatography columns, which are designed for the separation and analysis on vital vectors in applications such as gene therapy.
Our Nu X bridge Premier Gtx be edge FCC columns reduce the cost of gene therapies by by using three to 10 times less sample than other methods like generating faster results and providing more drug substance information.
They can measure aggregation tighter and low molecular weight impurities at twice the speed of existing columns and 50% greater resolution.
The combination of these columns with wired multi angle light scattering will deepen the level of information that can be acquired from a single experiment.
This will accelerate development times of modalities, such as Dino associated virus or AAV and allow for more optimized manufacturing, which can reduce costs.
Turning now to our updated 2023 guidance the slowdown in the pharma end market in China has progressed beyond CDM OS resulting in broader weakness as a result, we now expect China to decline low double digits this year versus our prior expectation of low digit low single digit growth.
This translates to a full year growth headwind of approximately 200 basis points versus our previous guide.
Our guide does not assume any benefit from a new round of stimulus in the second half of the year.
While our funnel remains healthy.
We also continue to see slower than usual funnel velocity from customers more broadly as.
Assuming that this trend continues through.
The rest of the year, we expect this to translate to a full year growth headwind of approximately 100 basis points to us is a pretty good guide as a result, we now expect our revised full year organic constant currency growth to be in the range of 45 to one 5%.
Despite our lower revenue guide, we are proactively managing our cost and productivity, while continuing to preserve our investments in future growth.
In July we made some very difficult, but necessary decisions to realign the workforce in our core business, which impacted just under 5% of our employees.
These actions allow us to better align our resources with our growth strategy and offset the incremental demand weakness that I just described.
This together with our focus on operational excellence across pricing and procurement is expected to deliver a gross margin of 59%. This year, an increase of 100 basis points versus 2022, we also expect to expand our operating margin approximate to approximately 35%, which is an increase of 30 basis points to us.
When you do.
These actions allow us to mitigate EPS headwind from lower expected revenue, resulting in our updated full year EPS guidance of $12 20 to $12.30 now I will pass the call to them all to continue covering our second quarter financial results and give additional commentary on our guidance I'm old.
Thank you and good morning, everyone in the second quarter sales grew 4% as reported.
Organic constant currency sales grew 3% as Waters' Division grew 2% and Ta grew 11% we had a great start to the wire acquisition, which exceeded our expectations and added 2% constant currency sales growth.
Capex was a 1% headwind in the quarter.
Organic constant currency by end market, Baltimore declined, 4% industrial grew 11% and academic and government over 20%.
In pharma high single digit growth in the U S and Europe was more than offset by a pronounced slowdown in China pharma, which declined over 40%.
In industrial waters Division and Ta both grew low double digits with broad strength across all regions.
Waters prisoners strength was led by food and environmental testing Red. We saw continued strong growth in global beef processing applications, driven biology, zeebo TQ absolute mass spectrometer.
<unk> growth was led by pooling analysis and micro collateral quickly.
We again saw strong demand in secular growth drivers such as batteries and electronics drifting reached more than offset weakness in more cyclical revenues from materials and chemicals.
In academic and government. There was continued strong demand and upstream applications from our refreshed mass spec portfolio supported by elevated funding levels across the globe.
<unk> sales more than doubled in the U S grew approximately 50% in Europe and grew 30% in Asia.
Byproduct strength was led by our high res mass spec portfolio with applications and Madame Lumix and spatial biology, resulting in strong growth for cyclic IMS and select cities are lumpy.
Now by geography sales in Asia declined 5%, the Americas grew 7% and Europe grew 9% in Asia, China declined high teens, excluding China Asia grew 6% with India growing high single digits, and Japan growing mid single digits.
In the Americas Valmont grew 6% led by 7% growth in the U S.
Industrial grew 3% and academic and government grew almost 30%.
In Europe pharma grew 7% industrial grew 6% and academic and government grew over 35%.
In both Americas and Europe . These results reflect two year stacked growth of high single digit sort of ball across each of the end markets.
By products and services instrument declined 2% overall as mass spec growth of almost 20% and double digit growth in Ta instrument system was more than offset by China pharma demand weakness led by L. C.
Recurring revenues grew high single digits chemistry growth was supported by continued strength in Mack speak Premier columns, which grew over 50% in the quarter.
Service growth continues to be supported by strong pull through from recent instrument sales and increasing service plan attachment, which has already increased by another 100 basis points in the first half of the year. There was no change in the number of days versus the prior year quarter.
Gross margin for the quarter was approximately 59, 3% an expansion of 230 basis points compared to 57% in the second quarter of 'twenty to 'twenty two.
Operating margin for the quarter was approximately 29, 6% an expansion of 120 basis points compared to 28, 4% in the second quarter of 2022.
Our margin expansion was driven by strong operational performance.
Pricing gains lower material and freight costs as well as prudent management of spend already.
Eric do operating tax rate for the quarter was 17, 2%.
Average share count came in at 59 million shares, which is about one 5 million less than the second quarter of last year.
Average share count came in at 59 million shares, which is about one 5 million less than the second quarter of last year.
Our non-GAAP , our non-GAAP earnings per fully diluted share was $2.80 on a GAAP basis, our earnings per fully diluted share was $2.55.
A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning and in 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.
The second quarter of 2023 free cash flow was 73 million. After funding 47 million of capital expenditures free cash flow was impacted by higher inventory balances timing of income tax payments and wire transaction expenses.
We maintain a strong balance sheet access to liquidity and a well structured debt maturity profile disciplined allows us the ability to prioritize investing in growth, including M&A and returning capital to shareholders.
Continuing to evaluate M&A opportunities that really meaningfully accelerate value creation in well thought out attractive adjacent markets.
At the end of the quarter at Med debt position was approximately $2 3 billion, which is a net debt to EBITDA ratio of about 2.3. This represents an increase of one 3 billion during the quarter, which is related primarily to the wild acquisition.
As we previously disclosed we have temporarily suspended our share buyback program for the remainder of the year to use our free cash flow to de lever the acquisition.
Now I would like to provide an updated thoughts for 2023.
Oh did outline the slowdown in China pharma has progressed beyond C. D M o's, resulting in broader weakness as a result, we now expect China to decline low double digits this year versus our prior expectation of low single digit growth.
This translates to full year growth headwind of approximately 200 basis points, what's the sort of previous Skype.
Additionally, while our funnel remains strong real absorbing longer capital purchasing approval cycles amongst our customers broadly due to spending caution in the current environment.
We expect these dynamics to continue through the rest of the year and contribute an additional 100 basis points full year growth headwind, what's the sort of previous guidance as a result.
Beating our full year 2023 organic constant currency sales growth guide.
<unk>, 5% to one 5%, which translates to a two year stacked growth of approximately 6% to six 5%.
At current rates currency translation is expected to have a minimal impact on the full year sales.
System with our prior expectations, we expect wide transaction to add approximately two 5% to our full year 2023 revenue growth.
Therefore, our total reported sales growth guidance is now 3% to 4%.
We expect gross margin to be approximately 59%.
Here, which is a 100 basis points expansion whats this last year and is higher than our previous guidance.
We expect operating margin to be approximately 35%, which translates to 30 basis points of margin expansion versus last year.
Cost actions in our core business are expected to deliver a broad.
Similarly, $45 million in annualized savings and not expected to contribute $20 million in 2023 predominantly in the fourth quarter, we will progressively deploy part of these savings to the source of our growth strategy and to expand capacity on high growth end market.
Get opportunities.
We expect our full year net interest expense to be approximately $80 million.
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 million given the temporary suspension of our share repurchase program.
Rolling all this together on a non-GAAP basis.
Full year 2023 earnings per fully diluted share guidance is projected in the range of $12 20 to $12 <unk>, which includes a negative currency impact of approximately one percentage point at the current FX rates.
Looking to the third quarter of 'twenty to 'twenty three we expect the current market dynamics to persist in China. We also expect cautious spending from our customers throughout the quarter, Hence, we expect third quarter organic constant currency sales growth of negative 4% to negative 2% reached translate.
Two two year stacked growth of approximately five 5% at midpoint, given the mid teens comp from last year.
At today's rates currency translation is expected to add approximately 1% and we expect <unk> to add approximately 40%.
Third quarter revenue growth. Therefore, our total third quarter reported sales growth guidance is 1% to 3%.
Third quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $2.50 to $2 60.
With a neutral currency impact now.
Now I would like to turn it back to <unk> for.
For some summary comments.
Thank you I'm all evens.
Even through challenging times and the macroeconomic environment, we continue to come together as an organization to ensure we leave this world better than we found it with a vibrant employee circles recently celebrated pride month as well as a fantastic women in engineering.
We also kicked off our third year of water student Academy, a similar program for high school students from underserved communities, who are interested in exploring a career in science.
We're also very proud to be recognized as one of the U S News and World Report's best companies to work for so with that I'll turn the call back over to Gaslog.
That concludes our formal comments and we are now ready to open the phone lines for questions.
Thank you we will now open the lines for questions for those on the phone. If you do have a question. Please press star one on your line and record your name clearly when prompted again Thats star one to ask a question and start to to withdraw. Your question. Our first question comes from Vijay Kumar from Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking my question.
And congrats.
Pretty impressive second quarter print there.
My first one for you a mass spec with what.
Our.
19%.
What's the math what is the mass spec CAGR here.
We plan to make 2019 basis.
Can you just comment on orders and backlog.
Would it be.
Rotation outlook here as you look at the back half.
Super. Thank you. Thank you for your question Vijay and good morning.
Firstly on firstly on mass spec.
Over over the long term so over two years just to answer your question over the two year Dewey. Okay. Good is in the high teens. The four year CAGR is in the high single digits to low double digits. The story with mass spec. Vijay is is twofold. One is of execution and the other one is of the traction of our new products on the new products.
It's roughly two definitely negative two per cent.
This is this is an illustration of two two things one strong execution attraction of innovation in the U S and Europe and of course. Additionally, weakness in China, Let me comment on both.
Starting with the U S and Europe instrument growth rate in the United States was roughly 15%.
Europe was 11% in China of course declined close to 25% for the quarter for overall instruments now if you look at it from a portfolio perspective, we've already discussed my spec mass spectral 20 per cent Ta continued to grow double digit in this quarter and this is basically meeting unmet needs in the back.
Segment and several other segments. In addition to his strong execution you moved to L. C and again, let me double click on this through illustrates my point on execution and a bit of recovery that we're seeing in U S and Europe .
Whereas in China, we saw as he get significantly worse minus 40 ish per cent growth in.
In the U S and in Europe , we started to see growth again, basically for three or 4% growth in both of those geography and you'll recall in the in the first first quarter called we talked about our conversations with several for large format customers and I personally spoken to them and the quality of the orders that we saw from an instrument perspective was terrific.
It was just that the final velocity was lower right. So the final velocity is still lower and that's the assumption for the back half of the year, where we are seeing goes although we saw those orders come through the squatter in fact.
We won several competitive bids.
If they give you an example of the one of the largest G. L. P. One manufacturers. This is the anti obesity drug wherever you won a competitive bid on our you plc's are going to be not just with the originator, but also with all the C. D. I'm also gonna matter of fact of this product and the same thing is true for columns. So instrument growth rate has been.
Again, it's a tale of two sort of stories, where U S and Europe are seeing the nicer to cover the good execution, great traction with new products and a little bit of lack of visibility in China, especially in Farnell and then I think finally in the prepared remarks.
We showed you the long term growth rate of of instruments, roughly five ish per cent gager.
With a 60 ish percent gross margin.
And the lowest in Hey, I mean, I'll take that business any day now if you compare it to historical trends, we see additional vectors for growth pricing is better than than than we've seen in the boss by 100 or 200 basis points. We see prescription growth rates are going up which is the single largest driver for growth of Elsie's N B C. Additional.
Additional users, especially in large pharma environmental and food testing. So I hope that gives you a picture of a far masback as well as an instrument instrument growth rate and why we are positive about that business.
That's extremely helpful.
Mhm, one for you when I look at the third quarter guidance versus Apple was born in Florida, There's a pretty big sequential step up in the queue for both on organic and even more impressive on the P. S line, maybe just talk about the fourth quarter.
Options here.
No what's driving <unk>.
No. It's a couple of things to regenerate I mean, the step up on the growth is purely related to be sliming, which will look at it on a two year of 40 or stock the basis.
Two three Q for the card is pretty consistent so on a 40 year stock basis, both Q3 and Q4 not growing 6%.
Two if you sort of look at the ramp up in dollar million sales.
Typically do 24% of our full year revenue in Q3 and about 30% in queue for until the guidance sort of consistent with that with the sort of Todd caution on two three and so that sort of consistent with the past and it also sort of account for the fact that what I what are we seeing.
Three in terms of China's slowdown and cautious spending when Fatima will continue into Q4, and then as you look into 240 G. P. S.
You'll see your stupid are poor since last June of love, 15% growth, but again there are various factors that are contributing to it as well.
Outline we've taken crossed auctions and predominant portion of those cost auction savings will show up in queue for a doctor.
That coupled with productivity gains that our teams are managed across pricing across materials and fray across other areas of procurement those two things together, we get about 5% of that growth coming from the cost auctions, another 3% to 4% of that growth coming out of productivity. So that's the big portion of the 15% increase.
That you've seen the EPS in queue for the recipe is there is 3% fixed benefit why aren't as normal dilute do in queue for so that has made new crawling back there and then there is the lowest share complain about 1.5% underlying sales growth.
Next we'll go to the line of Luke So I got some Barclays. Please go ahead.
Awesome. Thanks I.
Yes can we just dig in here from.
The drivers as a guide for the full year.
For the remaining back have and if you guys have any deteriorate further deterioration in any of the market's baked in.
So I'll I'll start and then I'll, let almost comment Luke. Thank you for the thank you for the question I mean, just starting with the with the second quarter of Us and how that plays out for the balance the balance of the year.
I mean in the in the second quarter U you saw so roughly 3% three per cent growth.
And it's sort of different in the U S Europe , and China right in the U S and Europe , we see roughly seven ish per cent growth in China V C. A.
He continued continued decline as close to mid teens and as you know look at the balance of the year. We are starting to see they're starting to see a bit of a recovery Bulletin U S in Europe , and and I'm I commented earlier to Jay's question also on what we saw on instruments.
But but where we sit right now.
We've seen China has deteriorated further and then there's a bit of lack of visibility what we saw with CD animals has not bloviate it into the rest of the pharma industry. So we've decreased our our guide overall by 300 basis points 200 basis points of that is additional China slowdown and we while the orders are very.
Strong why the execution is extremely strong in in across the globe new products are gaining traction.
We think the final velocity has been slower towards the end of end of Q2, and we have to use that projection for the balance of the year. So we've taken down the guide an additional 100 basis points. So that's a 300 basis points drop versus what we told you in queue. One on the top line I'm old Yeah, and I mean.
If you sort of go through the individual components right, China as we said.
No double digit growth for the full yogurts slightly more elevated in the second half what is this the first half guided assumptions.
The rest of the world.
In the first half grew mid single digits.
<unk> for the second half as low single digits.
Elsie sort of grew meetings decline in the first half and that's sort of also our second half assumption. What's this mass spec NPA just given the situation and.
Reduced to sort of low to mid single digit growth for the second half of the year. So as you see I mean, we've sort of risk adjusted.
A big portion of our second half of the year, given what's playing out in the market.
Alright, and then.
You know you guys have been operating in China for Awhile, you have a lot of history. There can you just give us a sense of.
You know how quickly the various and markets can bounce back.
<unk> seen in the past and what you're hearing from the boots on the street over there.
A little bit that's a good question and I don't think you'll hear a thing a lot different than what you heard from any of our of our peers.
In the long term, China is a terrific growth market, we all know right and and you've seen that through the history.
What we saw in the second quarter, a mid teens decline in China C. D. M O clock worse and people are just cautious super cautious in spending.
Our farmer customers.
Across the traditional Chinese medicine customers useful you see that permeating across the board and it's not clear when that when that opens up. So he was zoomed look for the for the China has gone on God I'm Gonna decline low low to mid double digits now when you look at and we've also not a zoom.
That another stimulus is coming the grill to go the Angie market I'm guessing pretty dynamic growth for the first off of the year that was driven by the stimulus that came late last year and we've assumed that there is no stimulus coming for the balance of the year until halfway invisibility. So you've seen we've been very careful than a cautious but there's not a heck of a lot of visibility what I'd like to remind you though.
From a what a specific case from 2016 to 20 whenever waters grew and whenever I what does what does it.
Felt it was all correlated with China.
This is very different now we see that the U S and Europe .
True.
2020, 2021, and now also a 22 and 23, we've seen U S in Europe .
Grow and contract with the growth really very well in addition to China. So we we feel that the business is very nicely diversified and we see that we have growth in other geographies and I'll conclude by saying China remains a dynamic market. Our teams are visited all to five times the global teens I visited four to five times since the last time, we spoke and on the.
Ground, you see incredible incredible collaboration with our customers, you'll see especially in the in the batteries market China's well advanced with U S. In Europe and we thank the adoption for a da products is going to go much faster in China Ah. If you go to the especially diagnostics Arena, China again has been a frontrunner in order.
And a small speck in the clinical space and we are working with several collaborate is there to introduce our higher as much.
Or high end Mark specs in that work flow and it's a matter of time that China will recover we feel we are very well positioned to capitalize on it when it does but in the short term you will not hear us say anything different about the visibility for the balance of the other than what you've already heard.
Next we'll go to the line of Dan Brennan from T. D. Cowan. Please go ahead.
Great. Thanks, <unk> <unk>. So question would be on the guidance I think I think the question will probably get in.
After two to kind of busy Guy D written up and it kind of makes it more difficult parts out a super Big Kinda, and obviously Europe and you asking that Americans be expected.
So can you just speak to a little bit again, I need, giving some color already and it comes to make a difficult you kind of get a timeline here, but like how should we think about you know the extent of maybe a cushion that's kind of assumed in the back half a D or just kind of confidence in the back half of your guide.
Yeah, so gun.
I mean, we we looked at how things have progressed through Q2, and if you look at.
The region's he went outside China, we have meaningfully reduce.
An outlook for those regions as I said before those regions grooming single digits oxide, China now estimating low single digits.
Instruments decline low single digits.
Zooming photo the second half of it will decline mid single digits as normal lives as one of my spray can be a you wanted to be cutting revenues, we've sort of step them down from mid to high single digits to mid single digits for the second half and we sort of assume gangi an industrial normally.
Lives in the second half of the year.
Now based on those assumptions were you think it's reasonable given how things I'm bleeding out.
I think the one wildcard still remains how sort of China plays out in.
In Q3, and Q floor, because we know China Goldstone Fox Sports. It also comes back fast rehab, one presumed any second half China's stimulus member so that comes with being outside.
But otherwise we feel comfortable went on a guy who these people could be in for the second half.
Great. Thank you and then maybe a foreigner.
<unk> and your phone <unk> work really hard.
We started to to earnings appears there could have been talking down or more.
[noise] again bigger snakes, the current can make it difficult to do like directly to process.
You guys are you sure that's related to be different business makes the cops and then kind of workers that can't figure <unk>. Thanks.
So I mean look at things in U S and you're on a stoop and exceedingly great job and <unk> to do or when the rates went up.
You know they they positively surprised us with great outcomes.
With the level of growth that'd be managed right.
As we look into the second half for those teams right now we've sort of April .
Ireland's down to low single digit growth in those regions, but the way our teams are executing in these markets gives us great confidence that they will be able to.
Do a great job in these markets as things start to come back in and then there was Ah.
The line was breaking up a little bit if I understand the question you wanted a bit more color on on farm on and I guess, you could ask hey, you're seeing good friends in farm out at least some recovery in both U S and Europe and recall that we talked about this and do one where he said we had conversations with large farm up there and it was not a question of.
What it was just a question of when they would place orders and some of those orders came through and cute too and some fairly significant daughter's site I mentioned G. L. D. One agonists we are the the the U B L. T of choice for a very large pharma manufacturer in fact, both of them were making G. L D ones columns Ah replaced.
Ah Ah Ah competitors columns, which is a rare rare thing that happens in the industry because of the customers said they wanted full and Duane visibility on the supply chain and the only plan in the industry, who manufacturers' that'll one particle tolan columns for them too and and that gives us significant strength right. So we saw share gain and farm out we saw new products gaining.
Section in the Bible, and the Bible processing Ah Arena Ah.
And he would have seen that we've just launched it.
A column that is specifically targeted towards separating separating Ah Ah Dinah associated Vitus. These are vital let us use for 17 therapy and it brings me great pleasure to say that visa columns that are attached to our malls instrument. So where we are really executing well in pharma wherever they would ever be.
Have whenever we have our ability to access our customers and customers a bunch I think and new products are gaining traction so for the second half of the year. We've just said look.
Let's not just use one data point to extrapolate we're looking for more data points, but even in the U S and Europe , and we will get it get getting even more confidence, but before that I sit today I see excellent execution Ah excellent new product attraction, both in U S. A and in Europe and in China, like I said before or was.
[noise] abilities, just as much as as others and then China colors.
He would like we're executing in the U S and in Europe .
Next we'll go to the lineup character Brown from Bank of America. Please go ahead.
Hi, Good morning, Thank you for taking my call.
Hey.
Just out of curiosity how much.
Backlog work down.
Left overs stimulus spending did you see in queue to just sort of like what we're orders coming through and and what was sort of like it wasn't anything worked outage heavy backlog we got pushed.
So Derek thanks for the question.
The so very modest drawdown in backlog of orders were largely in line with sales for the quarter and we see the same thing happening for the for the you. That's the same was option. So again, an indicator that says like like to the previous question indicated that says that look trends are improving.
Especially in the U S and in Europe for.
For a large farmer customers and other customers, but yes in this.
In this quarter basically very modest single digit low single digit million draw. It on a backlog and the same was option for the balance of the year.
Got it uhm on.
On the academic market.
Just out of curiosity are you doing.
You know are you are you seeing any pull forward and spending I mean, obviously, there's some worries about budget and things are you, saying that a throat pour forward from your customers.
Look.
As a former academic myself I can tell you.
We spend when we get the money and.
And then you'll get money like like at the academic things are getting now my old professors Ah My old colleagues.
And as soon as they get it right. So they pull forward or is it is it is a catch up you cannot tell a it's a very it's a very volatile market that goes up dramatically. It goes down dramatically and coordinate with only one thing stimulus and you'll see stimulus coming across the globe.
And what we've what we've seen is is dynamic growth in the U S and Europe and again R mass spec portfolio the high Rez Masback portfolio R. U B L T's columns.
Columns have done extremely extremely well in this market around the globe and we won competitive bids across the board. So I feel very good about our portfolio in that market, although it's a water tight market. It correlates very heavily with funding I don't think it is catch up on foot forward. It is just opportunistic when it comes professors have money.
<unk>, and thereby and I've done that myself as a previous academic.
Next we'll go to the line of Matt Sikes from Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for taking my questions, maybe just the first one on why it just so obviously outperforming you're sort of initial expectations, maybe talk about some of the drivers that you're seeing this.
It's contributing to that an outperformance and you had mentioned when you are.
Talked about the synergies of why that you would start shipping waters columns with Wyatt and I think previously they were non waters calm shipping is that part of the dynamic or is it just too early is it more about further penetrating the markets and driving sort of organic growth with the instruments.
Thank you for the question you know that the debate we closed the deal in this quarter and really three drivers and we've talked about them in our in our brief.
Diaz.
Previous discussions and they're all they're all contributing like the first one is column.
Column attachment to two malls instruments and and this is gone as planned columns I being shipped with the instruments as we speak second in the column space itself. We've launched columns that are custom made for solving problems Ah for for our customers and in this case to our most recent experts.
D T X column that we just launched and this is basically this was announced yesterday, but it's starting to ship now there are <unk>.
Speeds up measurements by over 50 per cent reduces sample size by 32, 32 100 per cent.
And that that.
That basically saves our customers a lot of a lot of samples of those that's already happening second.
We have talked about regeneration Ah there was significant hundreds of leads that are that have been generated and especially in the U S and in Europe , where.
There's a lot of access to our customers and as emerging biotech and Precommercial biotech starts to recover especially in the U S. We are seeing the lead generation to pick up quite dramatically and there was some of those needs have already been converted into savings. So that's a contribution and the third piece that you'll see which our customers are extremely excited about is the software bridge basically made a lot.
Progress in building a software glitch of our instruments to R. As he instruments to our life scratching instruments or why it's like scratching instruments. So progress on all all of those funds that we had talked about teams are super excited seeing seeing quite a quite a good reaction from our customers, especially as they start to see recovery and become.
She'll biotech and we see this also in Cambridge mass area.
Great. Thanks for the color of that and then I'll just on gross margins Uhm, you've mentioned a couple of dynamics that are helping drive that gross margin expansion I'm. Just curious obviously prices as a driver but on the cost side you'd mentioned sort.
Sort of lower input costs on freight and materials.
Are you are you sort of seeing some kind of leverage as the inflation comes down to input costs come down as you are still increasing price and do you expect that dynamic to continue through the balance of this year.
Gosh look I mean.
On both the fights on commercial teams as well as operations teams have done a great job through cute too.
The commercials teams aren't really work fantastic outcomes on price, which is flowing through on grass monitoring and then on the production side, we've sort of laser focused on managing raw material costs, managing freight costs optimizing freight lanes.
Holiday thing freight windows.
And we've also focused on value engineering English possible to to sort of work through specifications and reduce the cost of the product and all that is playing out to la Crosse margin line, which expanded to 130 basis points and we thank you don't this outperformance.
County forward in the second half, which was my full year gross margin is 100 basis points of what is this a year ago. We started on this journey of operational excellence two years ago, and it's starting to bear fruit and we're really proud of what I've been sort of achieved in this space.
Next we'll go to the lineup Joshua Mauldin from Cleveland Research. Please go ahead.
Good morning, Thanks for taking my questions to for Ya I guess first you to follow up on farm I mean, it sounds like you're seeing signs of life from farm outside of China, but it also sounds like you're seeing slower than normal final bill from pharma broadly I guess wondered if you could unpack out of bed and then.
Wondering if you could provide contacts on what the guide assumes in regards to a budget flush would you expect the typical seasonal ramp in the fourth quarter from farm in the west is that.
The.
A driver I guess to the assumption poor pretty significant step up an organic.
And the fourth quarter.
We had questions Josh and thanks for the opportunity to comment on farm a smaller.
Look as we discussed in Q1, we are.
B C very high quality funneled, we see customers, who are really using our products to solve significant significant challenges I mean, the alliance I S had.
<unk> has gained a lot of traction on the small Malik insight on the last one to go side, we are seeing the bioaccord being used increasingly in bioprocessing applications are columns are doing very well already cutting revenues over all have been high single digit for a very long time and finalize the only exception to that you'll see all those trends playing out in both the U S. A.
And in Europe that said, we have been cautious and we've said look we wanted to see more than one data point before we assume that the fun of velocities are increasing back to normal as they are they are slowly across across all market segments. We are seeing some green shoots in in farm on for sure we're seeing green shoots in biotech.
Precommercial biotech biotech when God both in U S. A.
And in China altogether in the U S. We are starting to see that recover other nicely, but I would like to wait for at least one more data point before I call. It.
Call It a complete recovery, even in Europe and in the U S. A leader being a bit cautious with how we are seeing the final velocity, it's improved but I'm not saying at this point that it's it's gone back to normal but the quality of the discussion is the quality of the needs is is really really excellent across.
Regarding revenues, meaning service columns as well as instruments and it's not just the mass spec story as he is also doing pretty well.
Starting to do well in some of our final customers as I mentioned with the GOP one agonist whenever you want a competitive bid.
<unk> as well as all columns and let them work or comment on the diabetes.
So I mean, Josh if you look at our <unk> and then look at Q3 and Q4ward on 40 or snack the basics that all six per cent. So what did essentially assumes who's the dynamics that we saw in <unk>, which was a demand slowdown in China and got personal approval cycles, becoming law.
Longer.
We expect that to continue to Q3 and Q4 enhanced Q forward will sort of.
At the levels of Q2 on a snack basis versus 40 years ago. You went on to your snack basis, though assumption. There is R. Q2 was roughly six and half steps down to five and half in Q3, and further steps down to 5% in Q4.
So when you when you compare to previous years based on stacked and three years four years tacked growth rates Q3, or Q for it doesn't look any different than.
Then then one another and I think the question of budget flush and we both I'm older than I have been on the receiving end of this enemy within farmer.
The way it usually works as is as you go through a few for you see the CFO coming in and saying Hey, now I think I have is the ability to make you four Q for landing go ahead and spend and that's the dynamic that people observed through and through all all across South Korea, even if it's a lower base.
Expect that to modesty modestly persists, but when you look at our competitors versus stacked three or the four years that go today. So you don't see an acceleration assumptions.
Got it and then I guess.
Think about the current environment, and where you position the near a medium term guy back at the analysts say.
Waters is still position to grow 100 bps plus above the market and maybe more important you. What do you think is the right way to think about market growth in the medium term in an environment, where farm is a bit more.
As part of a bit more cautious.
A crystal ball Huh look and I look at my Crystal ball, I see tremendous unmet needs and pharma I see tremendous unmet needs in the environmental segment with be fast testing.
Battery testing in the industrial segment and and pharma in particular I feel what does a super Super well position I mean, let me give you a couple of examples right. I mean, we had the opportunity to comment on months' back there. There's a direct competitor when he was just combat us to appear group they've known 20 per cent again this quarter right and you compare.
US to the ones, who are already devoted with with with my spec portfolios.
There, but but lower than this so we think are gaining share with our new products. You would think about our columns I I believe we have the best chemistry theme in the industry that is really darn decisively towards solving problems for large molecules and we've just introduced to call them, that's going to separate aly and reduce sample size.
In that in that area and dramatically right across the board or innovation is targeted towards larger unmet needs and we are gaining traction without strong focus on on execution. So I think overall, we feel very good about how waters is positioned we feel we're already.
Out executing a head to head many of our competitors in spaces there'd be altogether, and I expect that to be no different as the recovery accelerates, we're starting to see.
Early signs of recovery in in the U S and Europe and again as I said before I'm not ready to call. It yet until I have more than one data point and that's how I know recovered they feel very well positioned so yes, what we said on the analyst a still towards our God is very strong with strong new products with like Alliance I S. Ah Adjacencies that we picked.
We are already gaining traction across the board and more on that as we go forward and we have more proof points and the other adjacencies as well, but feel extremely good about what we said and and finally have a comment on the margin.
Seen what we've done in queue do and also the fact that we expect margin expansion both on the operating margin 30 basis points and on the operating margin for the full year. Despite the challenging environment I think that should give you some confidence on the execution that reorder that'd be O C.
And that was the last question, we have time for it.
Thank you. Thank you all for your questions and and your participation today and on behalf of our entire what does what does seem I'd like to thank you for your support and your interest in waters. Thank you and have a wonderful day.
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