Q3 2023 Waters Corp Earnings Call
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Good morning, welcome to the Waters Corporation third 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 if anyone has any objections. Please disconnect. At this time. It is now my pleasure to turn the call.
Over to Mr. Kasper Tudor head of Investor Relations. Please go ahead Sir.
Thank you Ivy and good morning, everyone and welcome to the Waters Corporation third quarter earnings call.
Today Im joined by Dr. <unk>, <unk>, President and Chief Executive Officer, Adam All travel, while the senior Vice President and Chief Financial Officer.
Before we begin I will cover the cautionary language.
I'd first like to point out that our earnings release and the slide presentation supplementing today's call are available on the Investor Relations section of our website at IR Dot waters Dot com.
In this conference call we.
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 that may impact waters Corporation over the fourth quarter of 2023 full year 2023, and 2020 for these statements.
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 or 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.
Lets stated otherwise references to quarterly results, increasing or decreasing are in comparison to the third quarter of fiscal year 2022, and organic constant currency terms. In addition, unless stated otherwise all year over year revenue growth rates and ranges given on today's call are given on comparable organic constant on a.
Comparable organic constant currency basis.
Finally, we do not intend to update our guidance 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 remarks for the quarter. Then the more we will provide a more detailed look our financial results. After we will open up the phone lines to take questions.
Thank you Kasper and good morning, everyone.
I wanted to start today's call by thanking my colleagues for remaining focused.
And our customers on developing new products and supporting each other.
Despite the challenging macro environment <unk> delivered a solid performance and did a great job capitalizing on the available opportunity through strong commercial execution.
As headwinds from China, and FX became greater are indomitable deans rallied to drive productivity gains and margin expansion.
And strong adjusted earnings growth for the quarter.
We launched innovative new products that address the critical unmet needs of our customers and further differentiate our revitalized portfolio and the attractive end markets that we serve we also continued to make strong progress with via <unk>, including the launch of our first new light scattering instrument.
Now to our results.
In the third quarter sales grew less than 1% as reported.
Organic constant currency sales declined by 4%.
Sales outside of China, largely at or above our expectations, However, demanding China felt beyond our expectations, which ultimately led to a sales landing at the lower end of our guide.
With a U S dollar strengthening the currency impact on sales for the quarter was flat.
As our expectations of a 1% tailwind.
<unk> continued its strong start contributing 4% growth for the quarter as expected.
Despite the market challenges and the adverse FX impact or expand we expanded our gross margin percentage by 240 basis points.
And adjusted operating margin percentage by 380 basis points.
This allowed us to deliver non-GAAP earnings, but fully diluted diluted share above our expectations at $2 84.
An 8% increase.
On a GAAP basis, our earnings per fully diluted share was $2 and 2007.
Looking now at our organic constant currency results in more detail in.
In the pharma segment U S pharma grew 6% and Europe grew 5% with a strong continuing performance among our large to medium sized customers. Despite <unk>.
Low funnel velocity in China, we saw continued weakness in pharma throughout the quarter.
Market challenges market challenges in China have now broadened beyond pharma and impacted both our industrial and academic and government end market results in the quarter overall sales in China declined approximately 30% as the demand environment further deteriorated as the quarter progressed.
In the industrial segment, China declined low teens outside of China industrial declined 6% as growth in the quarter was subdued by a tough prior year comparison of over 20%.
While the more cyclical applications in industrial have continued to slow globally. We saw continued strong traction in DFAST and battery testing applications.
In academic and government.
To see strong uptake of new products in Europe, with low double digit growth in the Americas with mid single digit growth.
However, this strength was more than offset by pronounced weakening in China, which declined over 30% now that the shipments related to last year's stimulus program have concluded.
In our core business, while the market environment has become more difficult we continue to deliver strong commercial results.
Looking at our third quarter results outside of China, our organic constant currency sales grew low single digits year over year and as a healthy 7% on a two and four year stacked basis.
On a year to date basis, our organic constant currency growth has been mid single digits year over year, excluding China and flat overall, including China.
A key driver of performance for our business. This year as mass spec, which is an area, where we have gained share with our innovative new product portfolio.
We're also managing our P&L very effectively to focus to a focus on operational excellence that drove strong margin performance in the quarter and year to date.
In the third quarter, our gross margin was 59, 1%.
Year over year expansion of 240 basis points.
Our adjusted operating margin was 31, 5% expanding 380 basis points.
Year to date results also showed substantial margin expansion with our gross margin up 160 basis points to 59% and our adjusted operating margin up 60 basis points to.
To 29, 4%.
Let me talk about above.
About what drove this.
First our commercial teams have continued to achieve strong pricing results at levels that were over 250 basis points for the quarter.
They are beginning to realize the productivity benefits of our focus on operational excellence and Digitization.
I'm excited that next month waters will celebrate the opening of our new global capability Center in Bangalore, India, which will further accelerate our pursuit of Digitization and operational excellence third through our proactive cost actions, we have rapidly aligned resources to our long term growth strategy.
While the current market environment is challenging.
The long term fundamentals of our end markets continued to be excellent.
As I mentioned last quarter that our incremental growth vectors to our historical 5% instrument growth that result in a.
Great long term growth profile for our business. This includes global prescription drug sales, which I'd expect it to exceed historical growth rates as well as measures we've put in place to improve pricing, where we expect to sustain a more than 100 basis point improvement versus historical levels. In addition, the growing adoption of analytical instruments.
In process development for large molecule therapeutics is a new growth vector for instruments, such as mass spec and light scattering in our portfolio.
This is only expected to strengthen at end users find value in these instruments for high volume and we're cutting applications such as process development raw materials testing and quality control.
The competitive edge of our revitalized portfolio also positions us well for long term growth.
Product portfolio has been renewed in the last few years with significant innovation that is answering the critical unmet needs of our customers. This includes new launches in LC, such as the alliance I S, which we believe is the most significant innovation to hit pharma QA QC labs in the past decade and mass spec.
The industry, leading sensitivity of zero DQ Absolut has allowed us to gain share in the food and environmental market, but be faster data testing applications.
In chemistry, or Max peak Premier columns have been the most successful launch company's history, serving the more complex needs of large molecule separation and our customers' labs.
During the quarter.
We announced two new product launches for bio analytical characterization, including our first new instrument launch with Wyatt.
We launched a new bioprocess walkup solution that combines our Andrew plus liquid handling robots, one lab software and our <unk> LC Ms system into a more automated setup that is even easier to use.
Together these new products help engineers capture high quality bioprocess and drug product data directly from upstream bioreactors such as those offered by sartorius.
This via a simple simple workflows that automate sample prep CMS analysis and data capture.
This accelerates the upstream development of maps and other biologic drugs, providing more optimal fluid selection that result in more effective tighter than us second.
We launched our first new light scattering instrument within the <unk> portfolio data Star is designed to measure precisely measure and analyze nanoparticles used in downstream biologics and material science applications. It combined three light scattering techniques into a single device cutting measurement time by up to 10 times compared to other <unk>.
While using extremely low sample volume.
I would I would I would now like to cover our updated 2023 guidance.
Growth rates in China have continued to deteriorate as the year has progressed, we expect this to decline further in the fourth quarter sequentially.
Now, we expect China to decline approximately 25% for the year versus our prior expectations of low double digits.
The result is an incremental headwind to our full year organic constant currency growth of approximately 250 basis points versus our previous guidance.
As a result, we now expect our revised full year organic constant currency sales growth to be in the range of negative 2% to negative 1%.
Despite the lower revenue guidance, but continuing to proactively manage our cost structure and drive productivity expansion, resulting in no change to our expected margin percentage performance versus our previous guide.
We expect our full year adjusted operating margin to be 35%, which is 30 basis points of expansion versus 2022.
Full year adjusted EPS guidance is resolved and be in the range of $11 65 to $11 75, and now I will pass the call over to them all to continue covering our third quarter financial results in more detail and give additional commentary on our guidance.
Thank you and good morning, everyone.
In the third quarter sales grew less than 1% as reported.
Organic constant currency sales declined 4%.
Against a mid teens growth comparison last year.
Waters Division and Ta both declined 4%.
We saw good results again from our wire acquisition, which added 4% constant currency growth and performed in line with our expectations. Despite the challenging environment.
The impact of FX was flat in the quarter, which came in below our expectations of a 1% tailwind to reported sales.
Organic constant currency by end market pharma declined, 2% industrial declined 8% and academic and government declined 3%.
Fatima mid single digit positive growth outside of China was more than offset by continued slowdown in China pharma, which declined over 30%.
In industrial business declined high single digits repo tough growth comparison of 22% in the prior year quarter and due to China weakness now spilling over into non polymer segments.
We continue to see strong growth in global beef us testing and battery testing applications.
I couldnt be can Goldman declined 3%.
Outside of China overall, AMG growth was up 8%.
This was led by double digit growth in Europe, and mid single digit growth in the Americas.
In China <unk> declined over 30%.
Demand filled rapidly after we completed shipments under the stimulus program in the first half of the year.
By geography sales in Asia declined 12%.
The Americas was flat and Europe grew 3%.
Sure China broadly declined excluding China Asia grew 3%, which was in line with our expectations, India grew low double digits and Japan grew mid teens.
In Americas pharma grew 6%, which exceeded our expectations as we executed really well, we thought large pharma customers academic and government also grew 6%.
Strength in these two segments was offset by contraction in industrial for the quarter.
In Europe growth exceeded our expectations in pharma, which grew mid single digits and academic and government, which grew 10% while industrial declined mid single digits.
My products and segments.
<unk> declined 13%.
Recurring revenues grew mid single digits overall and high single digit outside of China.
There was no change in number of days what is the prior year's quarter.
Our continued focus on operational excellence pricing productivity and proactive cost a lot.
Together with lower incentive compensation drove continued margin expansion.
Gross margin for the quarter was approximately 59, 1% an expansion of 240 basis points compared to 56, 7% in the third quarter of 2022.
Adjusted operating margin for the quarter was approximately 31, 5% an expansion of 380 basis points compared to 27, 7% in the third quarter of 2022.
Our effective operating tax rate for the quarter was 14, 7% due to discrete items within the quarter.
The average share count came in at $59 3 million shares, which is about 800000 less than the third quarter of last year.
Our non-GAAP earnings per fully diluted share were $2.84, an increase of 8% despite flat revenue.
On GAAP basis, our earnings per fully diluted share were $2.27.
Reconciliation of our GAAP to non-GAAP earnings is attached to this morning's press release and in the appendix of our earnings call presentation.
Turning now to free cash flow capital deployment, and our balance sheet redefine free cash flow as cash from operations less capital expenditures and excludes special items in.
In the third quarter of 2023 free cash flow was 123 million after funding $38 million of capital expenditures free cash flow was impacted by higher inventory balances.
We maintain a strong balance sheet access to liquidity and a well structured debt maturity profile.
<unk> allows us to prioritize investing in growth, including M&A and returning capital to shareholders. We continue to evaluate M&A opportunities that will meaningfully accelerate value creation.
At the end of third quarter net debt position portable declined $2 2 billion.
Net debt to EBITDA ratio of about two point to.
This represents a decrease of $125 million during the quarter as we delivered the wire acquisition.
As previously disclosed our share buyback program has been temporarily suspended to enable us to pay down the debt incurred as part of the wire acquisition.
We will evaluate resumption of our share repurchase program through the quarter and into the.
First half of next year.
Now I would like to provide our updated thoughts for 2023.
So we didn't outline growth rates in China have continued to deteriorate as the year has progressed.
Addition, recommencing, China has now broadened beyond pharma and into industrial and academic and government end markets.
We expect China growth rates to sequentially decline further in the fourth quarter and now expect China to decline approximately 25% for the full year versus our prior expectations of low double digit decline.
This translates to a full year growth headwind of approximately 250 basis points.
What our previous Skype.
As a result, we are beating our full year 2023 organic constant currency sales growth guidance to the range between negative 2%.
Two 1%.
At current exchange rates, we have been.
U S dollar has strengthened against most major currencies since our last earnings call.
Three translation is now expected to have a one 5%.
The negative impact on our full year sales, which is a 150 basis points headwind, what's the sort of broad guide.
Consistent with our prior expectations, we expect the wide transaction to add approximately two 5% to a full year 2023 revenue growth.
Therefore, our total reported sales growth guidance is now negative 1% to flag.
Diluted core despite incremental headwinds from China and FX.
Our teams have rallied to drive pricing and productivity gains.
We expect this will allow us to deliver a gross margin of approximately 59% for the year.
Which is in line with our previous guidance.
And it's 100 basis points of expansion versus last year.
Together with proactive cost alignment, we expect this will allow us to deliver adjusted operating margin of approximately 35% for the year. After funding investments in high growth Adjacencies, which is also in line with our previous guide and it's 30 basis points of expansion Whats This last year.
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%.
All right.
Bridge diluted 2023 share count is expected to be approximately $59 2 million shares.
Our rolling all this together.
On a non-GAAP basis, our full year 2023 earnings per fully diluted share guidance is projected in the range of $11 65 to.
$11.75.
Which includes a negative currency impact of approximately three five percentage points at.
At current FX rates.
Looking to the fourth quarter of <unk> to 'twenty three we expect further weakness in China and cautious spending from our customers throughout the quarter.
Hence, we expect fourth quarter organic constant currency sales growth in the range of negative 8% to negative 5%.
At today's rates currency translation is expected to subtract approximately one 5%, while we expect wired to add approximately three 5% to our fourth quarter revenue growth.
Therefore, our total fourth quarter reported sales growth guidance is negative 6% to negative 3% fourth quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $3 52 to.
To $3 six producing region.
Which includes a negative impact from currency of approximately five percentage points at current FX rates.
Now I would like to turn it back to wood.
For some summary comments.
Thank you I'm all set.
So to summarize despite a macro environment that is progressively weakened this year. We have continued to deliver a solid performance throughout execution. We're also we're also driving strong outcomes in our margin and margin and earnings performance and are maintaining our full year gross margin and adjusted operating operating <unk>.
Guidance, despite incremental headwinds from volume and FX.
Strengthen our product portfolio, even further through innovation, while container continuing to make strong progress with our acquisition of buy it.
Later this month, we look forward to issuing our 2023 ESG report, which is a transparent way to show our active progress each year on our commitment to leave the world better than we found it.
Some key highlights to expect relate to a continued reduction of emissions increase renewable energy use increase of female representation in management roles as well as the D. C. F D related environment or disclosures, we're initiating in this year's report so with that I'll turn the call back over to Katherine.
Thanks, Susan.
In fluids, our formal comments, we are now ready to open the phone lines for questions.
Thank you we will now begin the question and answer portion of today's conference at this time, if you would like to ask a question. Please press star one to be entered into the queue.
Ask that you limit your questions to one question and one follow up question to allow ample time for questions from each analysts that may wish to participate in this portion of the call again that is star one to ask a question and start to to withdraw your question.
Our first question comes from the.
Jay Kumar from Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking my question.
Maybe.
One on just how the quarter progressed here.
What would the exit rates and what does the Q4 guidance, implying right because I think the sheets looking at sequential numbers right. The sequential step up on a dollar basis <unk> versus Q4, but I think when you look at the growth rates year on year.
I think our instrumentation.
Mid teens.
I think it's just the way we look at year on year versus sequential and I think I think the street's look trying to make the comparison versus your Peterson.
Some companies have guided sequentially on a dollar basis. So maybe just talk about your exit rate in third quarter, and we will just Q4 assuming for instrumentation.
Vijay Thank you and good morning Luke.
I'll give you some summary comments and I'm always talk to you about the ramp from Q3 to Q4, if I understand your question correct. When we look at the exit rates and ramp into Q from Q3 to Q4, we of course look at the performance as we exit Q3. This includes detailed analytics on funnel velocities across the different <unk>.
Customer segments includes what we've seen over the last 15 years as we go from Q2 Q3 to Q4 and look at those that statistically and of course, a lot of conversations with our with our customers and we continue to see strength.
Relatively speaking versus our peer group in pharma, especially outside of China.
And I'll, let him I'll comment a little bit on the on the sequential ramp up.
Hey, good morning.
<unk>.
On the Q3 to Q4, if you look at our last five years, we've averaged roughly 24% from Q3 to Q4.
And where our guidance is roughly 13% to 17% from Q3 to Q4, so clearly.
Fairly muted compared to historic levels also if you look at last 15 years. There have been just a couple of years in those years Richard come in towards the bottom end of our guide.
So that's why you know your drug.
New data from Q3 to Q4 also Q3 baseline, which is a new Saddam reflects sort of the slower approval cycles that have been playing out throughout the year and there's about one extra day in Q4, this year and what system fleet. This year.
And then the last piece is I mean, it's based on the fact that yes. There has been in China at this point, but then when we look at pharma in the U S. In Europe in Japan, and India, especially mid to large pharma and our teams are doing a great job, there and driving decent algorithms.
That's helpful comments Tomorrow and one maybe.
Q4 jump off us.
The minus high single organic.
Is China minus 25 for the year is that done for this year or is that going to spill over into fiscal 'twenty four and water. So next year I feel like when I look at the margins here, obviously leverage will be a question, but I saw that restructuring cost to tick up saying anything on that.
Any implications for 'twenty for either on the comp.
Operating leverage.
So Vijay I'll comment on China and.
Just I mean before we get into any details I mean, we will only comment on 2024.
When we talk about next year, but when we talk about Q4 earnings right and Thats generally been our policy as you know a lot has to evolve from now until the end of the year, especially in our business. So we will not we will not comment on 2024, but on China in particular look.
In the quarter and the quarter the business declined about 30% or in excess of 30% with pharma declining in line with what we had seen at the beginning of the year right with <unk> sort of Flushing out overcapacity and responding by geopolitical tensions we think that's towards the tail end of its development, we saw biotech come under pressure.
We think that's also at the tail end of its pressure just given that high quality molecule itself on being funded also in China and then the third piece was in pharma the Vanda genetic segment, which is roughly 50% of our sales in the pharma segment in China.
And this one here there was an additional additional pressure that that we learnt about which is the anticorruption campaign that the Chinese government issued so.
While our customers are used to value just wanting to value based pricing got this was a new new headwind. So that is still in progress in all five of our two out of three vectors are starting to subside a third one is new over the quarter and this is something that I learned over the last couple of months when I visited I visited China.
And then switching over to other segments the industrial segment we.
We see great growth in batteries in China, but that was not enough to offset the macro sensitive food and environmental segments, which which dropped further in this in this quarter.
And then finally, the academic and government segment as <unk> commented in the prepared remarks, we're seeing the tail end of the benefit from the stimulus from last year.
And that that will sort of come out of the numbers now.
Put it altogether and put it in perspective, we started the year.
With about 19, 20% of what are the sales coming from China.
With our current guide, we expect that to be about close to 13% of our overall sales. So while we remain super optimistic about what we expect in China in the future.
And it has become a much it has become a much smaller proportion of our business and at the beginning of the day than at the beginning of the year.
Next we'll go to the line of Dan Brennan from TD Cowen. Please go ahead.
Hey, guys. Thanks for thanks for the questions here, maybe just on pharma.
China, obviously, you kind of discuss positive trends in the quarter and kind of what you guys are expecting for the fourth quarter, but.
A lot of mixed comments in the quarter. So maybe can you just give us a flavor for.
Maybe a little more details on instrument consumable trends and kind of what are specifically, how you're doing you think versus the broader.
Trends and again, maybe im all I know you gave some color on fourth quarter, but just how should we be thinking about pharma in the fourth quarter ex China.
So Dan Thank you for the question look.
Pharma is almost a tale of two stories right I mean overall.
We saw the quarter on quarter decline low single digits.
And China as expected roughly 30% or so of declines that I just commented on if we look at ex China.
We've printed I would say amongst our peer group probably the most positive numbers in growth in China growing mid single growing mid single digit and this is across Europe across our <unk>.
Americas and across the rest of APAC, where we saw significant strength in India and Japan.
And this is behind two factors one.
Really our new product portfolio is gaining a lot of traction despite the slow funnel velocities that we've seen large mid to large pharma and additional approval levels. Despite the fact that biotech came under pressure at the beginning of the year, it's starting to see it starting to become a little bit less pressure as he as we exit the year. So in pharma, our new product portfolio.
He has done super well stocked with LTE. The alliance I guess, we have had significant orders and as I mentioned, despite the macro pressures customers have placed large orders for alliance I S.
And the funnel looks really healthy mass spec has been a real star for the year and in pharma, we have specifically developed biologics applications and you saw the recent launch of the walk up solution for bio card, which should make process development even faster than <unk>.
<unk> Premier column staying on the theme of biologics is in its third year and still growing well into the into the 20% range. So that's been the strongest launch for us in columns for many many years and we recently introduced another column that is targeted towards AAV in cell and gene therapy. So really excited about what we've seen in pharma this year.
Fight a difficult environment and feel like we're gaining share and over the long term.
Pharma is remains a source of strength, we don't expect to grow mid single digits, we expect to grow high single digits and double digits as you look into the future. So I'm Super excited about what we have seen the pipelines from our customers. I mean, we are very well respected in the G. L D ones in the Alzheimer's compounds, so really optimistic about the future and proud of the team's execution and I would say Chad.
LNG macro environment I'm all right.
Sort of touch on your other question, becoming pharma overall declining low single digits for us in Q3.
And then for Q4, what is embedded in the Guy who do sort of a mid single digit decline obviously that includes China.
When you strip trying out for the rest of the markets.
Rest of the market grew a little on the mid single digits in Q3.
And then in Q4, we are expecting them to grow.
But not at the same level in Q3 little bit less than.
One thing can we can see.
Got it thanks for that and then just maybe on the instrument recurring revenue just maybe can you just give us a little bit of an overview of kind of what youre seeing there.
Obviously, China complicate things, but just wondering.
Steadiness in that recurring revenue like are you seeing any changes there just kind of any any flavor about.
How how the quarter went and kind of you know kind of what youre seeing in the outlook for <unk>.
So let's start with recurring and then I comment on instruments. So recurring revenue came in mid single digits this quarter around 4%.
Chemistry, low single digits at 1% of its 5%. This is globally now if you strip China out recurring revenues that again high single digits close to seven and seven plus percent.
In history in the high single digit range service in the mid single digit range, So really healthy growth outside of China, and then China really impacted the chemistry.
Given the less activity that we saw with advantaged genetics customers.
And then if I switch to.
Two instruments look I mean instruments were.
Dropped low teens globally, right and similar drops across LC mass spec NDA, so minus 14 minus 12% something like this across the whole portfolio, but again, if you strip out China, which saw significant declines and here I want to take it each and done right.
L C. As we saw in the last quarter low single digit growth outside of China. This year. This quarter. It was flat right. So really hovering around I would say flattish growth for the last two quarters, just as we have talked about a few quarters ago. When we saw mid teens decline in LC and.
And customers will have to replace their fleets and we're starting to see that happened with some large pharma customers.
So you'll see as he is sort of hovering around flattish to low single digit growth mass spec.
X X China came in at.
At about 10% decline now I would remind you that same time last quarter mass spec.
Almost 40% almost 40% Super excited about what we've seen with the mass spec portfolio and its adoption.
Actually every account that we go and compete with US he bought EQ absolutely win if.
If you go without bio portfolio, now, especially with bio car T with EQ, <unk>, we see significant ceding and and and and and adoption there.
Mass spec is has gone from strength to strength and we see that continuing and again also declined high.
High single digits, but again on a comp of about 20%. So if you again go back to them aspect. If you look at a two year 40, a CAGR I mean, we're well into the high teens with mass spec growth.
Quite excited about what we've seen with instruments and if you just again Goss July for the longer term trends instruments grow roughly 5% have grown about 5% over the long term long term and we are seeing as we look as we go forward about 100 basis points of higher pricing, we see increased prescription description.
Rates with new molecules coming through.
And our new product portfolio driving adoption across our second new segments like be fast. So excited about what we are seeing what we are the execution, we're seeing with instruments across the board.
And what we expect in the future.
Our growth than what we've seen also in the past.
Yes.
Next we'll go to the line of Matt. Thanks from Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for taking my questions, maybe just first on pricing just given the margin gains you saw this quarter and your comment about 250 basis points of price. We've heard from peers that sort of pricing is starting to trend back towards normalized levels.
Probably less of a tailwind could you just maybe comment on what your expectations for price or in Q4, and then as we go into 'twenty four how much of a tailwind do you believe pricing will continue to be for you.
So Matt good morning, and thanks for your question look I mean ever since we went through the inflationary cycle last year.
Gave us opportunity to put good systems and processes around pricing.
You look at water Street traditionally we've done 50 to 75 basis points.
And last year was very different.
And our teams have continued to execute on that sort of system and process.
Mark Twain.
So we started the year with about little over 200 basis points and it's only got stronger as we can.
Came into Q3 with little over 250 basis points.
And then we expect some similar in Q4.
Then for the full year.
50 basis points, and that's sort of driving toward.
Our operating margin expansion.
For the quarter.
I think just to conclude on this matte lip.
Pricing is dependent upon us I'm also had good execution good systems, good processes, but it's equally dependent on a differentiated portfolio.
We've renewed our full portfolio across instruments, and it's got very high receptivity from customers. So customers are responding to good innovation across instruments, but also on the column side, where the stick rates are tremendous right I mean with the Max week premiere with new columns introduced for EV applications. I mean, we are highly differentiated.
The peer group, so we do expect pricing pricing to stick.
He is going to be high levels.
Great. Thank you for that color and then just as a follow up just zeroing in on China, specifically on the industrial side, you talked about strength in batteries, but for.
Food and I believe environmental weakened in the quarter could.
Could you maybe talk about the dynamics there I mean, I think that's relatively new information relative to what we've been hearing and just wanted to understand the dynamics within the industrial demand inside China, and what your sort of expectations are for a duration of that weakness.
So good good good one Matt look I mean industrial came in below our expectations for the quarter.
In China and that drove the weakness across our across the globe.
And Youre right are divided into two parts I mean, there is a resilient segments like be fast testing as well as batteries, especially in China, where we're seeing very good uptake.
The challenge is the more macro dependent segments like materials like food, which I'll also funded by the government were impacted by the slow slowdown of the economy and as you look ahead I would simply model those in proportion to the economic recovery that we would expect in China and that's that's how we're looking at it now I will turn.
China of course.
You didn't ask this but outside of China again, we saw a bit of a slowdown.
Against very very strong comps right on a long term basis outside of China, We're seeing mid to high single digit growth in industrial I mean, you should expect a mid single digit growth for the long term and are in it.
In industrial but in China for sure there was additional weakness largely related to them to the macro sensitive segments like materials and food.
And alike.
Next we'll go to the line of Derik de Bruin from Bank of America. Please go ahead.
Hi, good morning, and thank you for taking my questions. So.
First one is looking at the Q3 to Q4 step down in operating expense expenses, how much of that was incentive comp. It can come back how much of that is going to be sustained.
As we look into 2024 can you just sort of give us some thoughts on just how we should think about the operating expenses as we move in to.
<unk> Q4 and to next year.
Yeah. So Eric Thanks for your question I mean, as we had discussed in our last earnings call right.
We had to make some tough but necessary decisions.
To reduce our workforce by about 5%.
And we do that at the beginning of Q3.
That resulted in approximately $10 million of savings in Q3 that is in a complete his arms.
We expect our 'twenty to 'twenty three 'twenty.
$20 million on other 10 million in Q4 and the annualized impact.
Next year, it would be about 40 million.
And then you know we may invest some of the funding some of the high growth adjacencies, but before that annualized it's $40 million and incurred about $27 million associated.
Severance expenses of one of these restructuring, which as you know on a GAAP and non-GAAP adjustment now keep in mind in Q3, the way sort of playing out as we had lower volume on our organic business. So we lost some volume leverage and so essentially the reduction in VIP.
The accretion from wire more or less offset the lack of volume leverage from the underlying business and then the three factors which on pricing.
These cost reductions that I, just talked about and then the underlying productivity initiatives playing on freight from Goldman.
And the capability center.
Each contributed roughly on par.
Basis points.
And Doug just to conclude sort of qualitatively I mean.
This is in the DNA of waters right. I mean, we are one of the highest margin companies in the in the peer group and back when I joined three years ago people said you plan to expand your margins are maxed out I mean quarter on quarter. We continue to continue to focus on as a mall mentioned really careful cost management pricing and difficult actions when we need.
Take them and the exit of for the full year is around 35, which is 30 basis points of margin expansion. Despite the fact that volume went against what we had assumed and FX was also a headwind like so I mean im extremely extremely grateful to all my colleagues for putting in putting their heads down and.
Being super responsible with costs when the volume doesn't come in we had to respond rather rapidly right. So I wanted to make that point.
Thanks for the clarity.
Just wanted to follow up.
I appreciate that waters has a lot of new products and those are probably giving you a little bit more incremental growth but.
I mean, I'm, just a little bit surprised that'd be your guidance outside of China.
This is these are not normal market conditions.
And I know you put against some conservatism, but I haven't seen markets like this before and these swings that we've seen so just was wondering why you guided as aggressively as you did for the fourth quarter.
And your confidence because it just feels like you've got a little bit of a budget flush its in there outside of China, and just a little bit more clarity on that thank you.
I think Derek this is what I'm all started with like the first is the baseline from and all the input that goes into into into into Q4 right. So we look at how the funnel velocities are I mean, if I just stay with pharma for a minute and the quality of the orders.
It's very high right customers, who placed orders are actually buying they're just they've just bought over there.
They are just the order to sales conversion is just a bit longer than it's been in the past right.
The new products.
The new products have a lot to do with it customers are responding to innovation, especially in pharma side and you saw mid single digit growth. This quarter. So that goes into our calculations second.
We looked at historical ramp rate and when you look at historical laundry at the lower end of our guide, which is 13% ramp from Q3 to Q4.
It was one of the lowest in the last 15 years right and I appreciate it and.
Both of US have been in this industry for a long time and these are unprecedented times, but this is sort of the lowest one of the lowest ramps that we've seen in many many many many years.
And then the third is customer conversations right. So theyre talking to customers that are spending a lot of time with them and it's it's clear that we are seeing I would say asynchronous good execution in pharma.
That gives us the confidence to sort of say, okay Q4 is going to be like we have like we have projected and you know we.
We have that's why we have and largely because of the uncertainty ranged the Q4 guide wider than we have in the past right. So I. Appreciate your question and I appreciate the historical context.
A lot of the factors into account and guiding wider than we have in the past and as I said look new products great execution.
With the hand that we have.
I think we're doing extremely extremely well, especially outside the U S. I'm all anything else to add on the guide you on what I think.
Thank you Derek.
Next we'll go to Rachel VAT itself from J P. Morgan. Please go ahead.
Hi, good morning, and thanks for taking the question.
Firstly I just wanted to follow up on that answer to derek's question around some of the order rates you mentioned that the quality of orders have been high but it's just that conversion to sales is taking a little bit longer can you give us any stats from order rates book to bills.
That's pharma ex pharma and then looking at total overall versus ex China, as well and kind of how that's trending into park Hill.
No I mean look if you sort of see how the year has played out.
C.
Parnell velocities slowdown across all of them trade classes.
Especially pharma in Q1.
And then as we've gone through Q2 and Q3, the funnel velocity has sort of stayed where it is at a higher level. So it's taking more time for people to approve these partners.
And we expect that to continue through Q4.
What we haven't seen in foreign languages. Good use we haven't seen projects getting canceled and so opportunities at Atlanta, they're just taking more time right.
And in terms of sort of.
Salesforce, there's orders I mean, they are going hand in hand.
We are a meaningful you're drawing down backlog at any quarter or so of the one place where.
So.
Trajectory has changed somewhat.
Industrial grade Clos and this is all outside of China Im talking about and there you know while the fundamental osophy hurts progressively slowed in Q1 and Q2, we haven't seen any opportunities getting canceled.
What we are seeing in Q3 us and again don't confuse this with all of those not no no customers about canceling orders, but when the opportunities in the CRM system.
From lead Gen two conversion.
Seeing elevated levels of <unk>.
Projects getting canceled for a lack of funding or.
Funding not available in the economy, particularly in testing labs and that we saw sort of emerge in Q3.
And then China, we've sort of covered but before.
The firms will be much more painful.
It started in Q1 would be on <unk>.
Then sort of aggressively rounding computer computer three cdos in biotech. So we can mix of funding and then being blended genetics with BBB and.
And we got option lives.
We haven't bottomed yet and then has beautiful went into the industrial and AG, especially as the stimulus monies.
And then Richard just one last comment on Q3.
And the ramp to Q4, I mean, the trends Youre seeing in Q3, what gives us confidence, especially in pharma and with mass spec with LC that they'll persist as we saw exactly the same thing in Q2, and we I think we probably had the same discussion why are we seeing better performance in pharma than the peer group why are we seeing as he sort of flatten out.
It's the same reasoning and we're seeing the same customer feedback so I think its reasonable to project that into into Q4.
Next we'll go to East Bernstein from Bernstein Research. Please go ahead.
Hi, there good morning, Thanks for taking my question.
Two questions.
Both of those high grade growth adjacency related so for why it.
He is not too much pressure as your core instrument and it makes sense that there wouldn't have been as much pull forward there.
L. C. For example, but are you still seeing lengthening sales cycle.
<unk>.
Demand weakness for why apology.
And then for the other high growth Adjacencies, you mentioned, a couple of times about reinvesting.
Funding investments.
<unk> adjusted operating margin can you talk about how the pressures in the industry pressures to your top line.
Has.
Potentially links and some of that.
Timelines that youre looking at to go after this high growth Adjacencies.
Thanks, Nick Thanks for the questions I'll start with a Y O y.
Very good question look I mean, we're very pleased with the way the integration is going I mean that should be the the the general takeaway and you can see that in the fact like basically a four 4% contribution this quarter and two and a half per cent for the year.
We are we are going to deliver we think we're going to deliver that.
And when you when you look at the drivers the integration is going faster than we had initially even imagined that are exactly the same headwinds the funnel velocities are longer.
Is taking more time for customers to place orders, but number one given the larger commercial field force that waters had a we were able to use that to generate a lot more leads for our light scattering instruments from Wyatt, which are highly differentiated in the market. So as we got more leads we got more conversions and the funnel is moving nicely.
Second we have spent a lot of time and making it easier for customers to connect what does is that it seems too.
Multi analyte scattering instruments from wired and that's well ahead of target and third we.
We had talked earlier when we talked about the synergy contributions. We you talked about columns from what is being substituted for other other competitors' columns and that's gone extremely well. So every light scattering equipment that is sold now it's all with the waters FCC column, which are the best in class integration going very well, but the largest.
Dry what I would say of short term results and overcoming the obvious headwinds.
Is the larger number of leads that are watched as account managers have provided the wired.
Specialists and as you as you look ahead, I mean really optimistic about what we're seeing with the collaboration across the two organizations are wired colleagues, who are present at the innovation summit recently, which basically in white over 300, or so R&D scientists around the globe for hybrid session.
Many bills started from from Wired colleagues looking at collaborations across the organization. So I'm I'm extremely pleased with where things are going and we recently launched a data started which combined three light scratching technologies into one so why it's going extremely well and thank you for the opportunity to expound on that now on the high growth Adjacencies.
35% operating margin that we are.
Committing to for the full year includes the 70 to 80 basis points. If you had said that we would invest we had started to invest that early in the year.
Seeing very nice outcomes of that especially in our clinical.
In our clinical business, where the team has developed many many assay simplified workflows for default.
Difficult to do experiments with LC, Ms and making it making it a much more easier experiment.
For customers, who want to use as CMS and specialty diagnostics areas like for ASI mono testing like protesting antibodies for Alzheimer's.
Just a case in point so the high growth Adjacencies are delivering now we will look at the next picture as we look at the full year and how it lands.
And we will talk about how we're going to invest and continue to invest in high growth Adjacencies as the as we give guidance at.
At the beginning of a beginning of next year.
Next we'll go to the line of Catherine Schulte from Baird. Please go ahead.
Alright, thanks for the question.
First just to touch on some of your commercial initiatives here any comments on service attachment rate and e-commerce trends and how those are tracking relative to your expectations.
So service attachment rates.
Okay Awesome. Thank you for the question service attachment rates are well ahead of target, you'll remember that we committed to a 100 basis points of increase in attachment rates were well ahead of that so we will likely exit the year with 200 basis points of increase until there's attachment rates and you would see that in the growth that is that is being seen especially outside of Oh.
Especially outside of China for service, which is basically high single digit growth for them or for them for.
But year to date and the balance of the year. So service is going quite well on e-commerce as well, we've gone from about 20% 25% of all.
Brought us going to ecommerce to well in excess of 30% goes up to 35% now.
The team is highly focused on that I mean as you can imagine.
Given the slowdown in the overall market our chemistry portfolio is still done pretty well and the chemistry portfolio is benefiting from additional additional products going through E. Commerce. So chemistry is going to be growing high single digits and benefiting from the additional an additional focus on e-commerce.
Okay, Great and then you had impressive operating margin results in the third quarter to get <unk> 35 for the full year that implies somewhere between 33 and 34% in the fourth quarter.
Fourth quarter margins are often seasonally high but should we think of the 31 five that we saw in the third quarter as a jumping off point for 24, just walk through the moving pieces there.
Yeah, I mean look.
If you look at how we've performed in adversity like last year.
It's tremendous inflationary pressure in dollar, becoming stronger and stronger right and despite all of that our teams rallied to find pricing gains and productivity gains and sort of like the margin.
Equal or better than the prior to go and then this year again sort of.
Gone through demand challenges and then also further strengthening of U S dollar and despite that.
We found ways to defend margin through pricing and productivity.
Through cost alignment.
So we really feel good about how our teams have responded in these situations.
Now as you look at 'twenty 'twenty four will get all client right. It's really largely because we wanted to see how the next two months play out they are a big part of our year.
So just rolling up our bottoms up it will be and we want to sort of the view that before we sort of talk.
Talk about 'twenty 'twenty four so like we always do our Q4 earnings call, we will provide more details and guidance for 2024.
Thank you and that is all the time, we have for questions.
Thank you for joining us today and for your continued support and interest in waters.
Play of this call will be available in the Investor Relations section of our website. This concludes our call and we look forward to seeing you at future events and conferences.
Thank you all for joining that concludes the wires Corporation third quarter 2023 financial results Conference call. You may disconnect at this time and have a great rest of your day.