Q3 2024 Waters Corp Earnings Call
Speaker Change: In March, and welcome to the Water's Corporation, 3rd quarter, 2024 Financial Results Conference Call.
Speaker Change: All participants will be in a list in only mode until the question and answer session begins. This call is being recorded. If anyone has objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor. Head of the Investor Relations, please go ahead sir.
Caspar Tudor: Thank you Julie. Good morning everyone and welcome to the Waters Corporation third quarter earnings call.
Caspar Tudor: Today I'm joined by Dr. Udit Batra, Audis President and Chief Executive Officer, and Amol Chaubal, Audis Senior Vice President and Chief Financial Officer. Before we begin, I will cover the cautionary language.
Caspar Tudor: In this conference call we will make various forward-looking statements regarding future events or future financial performance at the company.
Caspar Tudor: Real provide guidance regarding possible future results as well as commentary on potential market and business conditions that may impact water's corporation over the fourth quarter of 2024.
Caspar Tudor: 4 years 2024 and 2025. These statements are only our present expectations and actual events will result may differ materially. Please see the risk factors included within our form 10K, our form 10Qs and the cautionary language included in this one is our next release.
Caspar Tudor: During today's call, we will refer to certain non-gap financial measures, reconciliations to the most directly comparable gap measures or attacks to our earnings release, and in the appendix of the slide presentation accompanying today's call, both are available on the investor relations section of our website.
Caspar Tudor: A most stated otherwise, references to quarterly results, increasing or decreasing, are in comparison to the third quarter of fiscal year 2023.
Caspar Tudor: In addition, unless stated otherwise, all year over year revenue growth rates and ranges given on today's call are on a comparable organic constant currency basis.
Caspar Tudor: Finally, we do not intend to update our guidance, predictions or projections, except as part of a regularly scheduled earnings release, or as otherwise required by law. Now, I'll hand it over to Udit to deliver our key remarks.
Caspar Tudor: A more will then present a more detailed overview of our results and guidance after we'll open the lines for questions. Over to you, Udit. Thank you, Caspar, and good morning, everyone.
Udit Batra: At the time, the team delivered very strong results, third, very strong, third, third, quarter results with revenue, margin performance and earnings per share, all significantly ahead of our expectations.
Udit Batra: Sales were well above the high end of our guidance range as each of our three reported regions returned to positive growth.
Udit Batra: Strength was led by our farmer and industrial and markets, both of which saw liquid chromatography returned to positive days ago.
Udit Batra: Together with an important mass-pack, instrument growth turned positive in the quarter, which exceeded our pace of recovery.
Udit Batra: We also built a X-National Momentum as we delivered mid-Single Digital Quarter Over Quarter Revenue Globes, while orders out-page sales for the second quarter in a row.
Udit Batra: In addition to the positive strength and instruments, we saw an acceleration in recurring revenue growth, which grew a healthy high single digits. This was led by 8% growth in our chemistry consumables portfolio.
Udit Batra: Within our PNL, our sustained focus on operational excellence led to better than expected gross margin and operating margin results.
Udit Batra: Coupled with the strong top line performance, we achieved adjusted EBS growth that was over 10% higher than the midpoint of our guide.
Udit Batra: It's also like this in a dynamic market, in dynamic market conditions, they acceptional dedication from all our colleagues.
Udit Batra: I would like to take a moment to commend our team for their commitment to commercial execution, operational management and innovation. This enables us to deliver enhanced performance and accelerate the benefits of pioneering science.
Udit Batra: On the subject of innovation, we do made excellent progress and further strengthened our alignment with higher growth testing areas that will augment our future growth.
Udit Batra: The continued to expand our innovative portfolio with new product launches that solve customer and met needs in both our core markets and in our high growth agencies.
Udit Batra: 2.20% are now to our results. In the third quarter sales group 4% as reported and 4% in constant currency. Our non-gap earnings per share was $2.93 up 3% year over year. On a gap basis, EPS was $2.71.
Udit Batra: In the quarter, market conditions and customer spending trends further improved. We continued our part of strong commercial execution and converted opportunities well.
Udit Batra: We drove strong results as customers were drawn to the innovative new products in a revitalized portfolio. After 7 quarters
Udit Batra: LC decline, instruments grew 1% as farmer and industrial LC growth ton positive.
Udit Batra: Maaspec also performed well in the quarter and grew low single digits led by strength, in industrial and applied applications like PFAS testing. The current revenues grew 7% led by 8% growth in our consumer growth business.
Udit Batra: Breaking Out Our Results by NMarket, we saw a broad improvement in sales growth as each of our NMarket's turn to positive growth. In particular, we observed large, large farmers spending.
Udit Batra: BETA LARGE, Pharma Spending, where our revenue is tied to QAQC applications and capex spending trends.
Udit Batra: Geography, each of our reported regions grew. While China was a slight headwind to sales, we still grew mid-Single digits on a both China and X China basis as further stabilization in China posed less of a headwind to our overall results.
Udit Batra: This is wild, not yet seeing sales contribution from stimulus.
Udit Batra: I would like to share more in-depth commentary on what drove these throng with us. With an LC, orders of Alliance IS, significantly increased, as our new flagship HPLC product grew to a greater percentage of our HPLC volume.
Udit Batra: This occurred not just within replacement but within opportunity style to install base expansion, particularly among those in large form.
Udit Batra: We have continued to expand capabilities on Alliance IS by adding new detectors like the photo diode array or PDA and by introducing the Alliance IS by earlier this year. Alliance IS has already been trialled by most large pharma customers over the past 18 months.
Udit Batra: With the improvement and customer capX spending, we have noticed a notable upshift in the speed of adoption, indicating a promising future for this instrument system.
Udit Batra: In MassPec, the Zvo TQ Absolute Saw is significant ramp up in customer adoption.
Udit Batra: With Units sales growing more than 70% year over year, this system was our best-selling mass spectrometer in the quarter. Impressively, it exceeded the combined sales volume of our other tandem quad mass spectrometers for the very first time.
Udit Batra: The ZIVOTICU absolute rapid success has been a three-fold dynamic. First, strength has been driven by continued rapid growth in PFAS applications. We see PFAS testing as a 300 to 350 million global markets opportunity.
Udit Batra: In 2020, the Anavoli, meanwhile, RPF has related revenue has grown by over 40% this year. This is attributed to the competitive strength of this system, which is known for its sensitivity in the market.
Udit Batra: Second, we have also seen stronger option of URTQ absolute in quantitative farmer applications, such as for infurity connotation.
Udit Batra: This includes analysis of genotox, impurities, proteins and peptides. Similar to PFAS applications, its value proposition of leading sensitivity together with its sustainable design is resonating well with our customers.
Udit Batra: It is 45% smaller and uses 50% less nitrogen and electricity than comparable tandem cords. This has opened up new opportunities for us in this segment and enabled us to expand our market position.
Udit Batra: Third, the IVD version of our ZVTQ absolute instrument has been strong growth within clinical applications after we launched it into that space last year. With its ability to analyze trace level analyte at lower detection limits, it has been an instant success.
Udit Batra: It has achieved notable traction across a number of testing areas, but especially in a new technology and for the development of high-value complex tests.
Udit Batra: This is part of a very deliberate push as we expand the competitive position of our mass-pecks, consumables and software within clinical testing workflows.
Speaker Change: In the quarter, Toru Clinical Revenue Group, loadable digits driven and powered by strong sales of the system within the second. Our results were supported by the strength of our innovation in chemistry.
Speaker Change: In the quarter, Max speak Premier columns, which are relevant for large and more complex molecules grew over 40%.
Speaker Change: The benefits of our Max Week Premier Technology are unique to the market and were a key driver of us winning multiple GLP1 related opportunities.
Speaker Change: As we previously mentioned, our columns have been specced into methods for majority of the commercially available GLT1 related injectables on the market today. We are extremely pleased with how well our chemistry portfolio aligns with the expected volume growth of large and small molecules.
Speaker Change: Now, I will talk more about our operational performance. Margins remain resilient as we maintain a successful focus on operational management. Our gross margin expanded 20 basis points to 59.3% and our adjusted operating margin was a solid 30.8%.
Speaker Change: Looking forward we feel very good about our future margin opportunity given our recent success in preserving and expanding our margins during challenging different conditions.
Speaker Change: We remain on track to deliver adjusted operating margin expansion this year. We also expect our 2024 result to be a good base for future long term margin expansion.
Speaker Change: We also have long term margin expansion opportunities from our strategic operational initiatives, which are focus on areas such as productivity enhancement cost management and pricing.
Speaker Change: As you look ahead, what is its well positioned in attractive markets where testing plays a pivotal role in driving long-term growth.
Speaker Change: This volume growth is expected to accelerate in the future, led by first continued growth in GLP one adoption within Pharma and PFAS related testing within a non- Pharma segment.
Speaker Change: Second, new volume growth from an increase in incidence of drug development and novel drug approvals as new molecules progress through the farmer pipeline. And third, future volume growth drivers for generic molecules are becoming more pronounced, particularly due to the aging, global population.
Speaker Change: In addition, a number of key blockbuster drugs will soon be reaching a patterned expiration. So this gives us a tremendous long-term opportunity for installed basic expansion as we sell new testing capacity, associated with these growth vectors in years to come.
Speaker Change: Separately, customer fleets have aged after week, macroeconomic conditions have put temporary constraints on customer cap expanding for downstream instrumentation.
Speaker Change: This deferral of routine instrument replacement within are existing install base has created a catch-up opportunity that lies ahead of us.
Speaker Change: Expected Instrument Growth for 2024 still equates to a low single digit giga versus 2019 levels. This is significantly below the 5% long term average growth rate that we observed on a pre-COVID basis.
Speaker Change: So looking at the facts while no two macro environments are the same, instrument-type down cycles have lasted between 4 to 7 quarters. A catch-up in growth has then subsequently followed as new instrument replacement cycle emerges. As I mentioned earlier,
Speaker Change: Last quarter marked the 7th consecutive quarter of L.C. instrument decline.
Speaker Change: Market Conditions remain dynamic and it is still early days but our third quarter is us, and improving funnel trends especially conversion indicate that we have taken a further step towards recovery.
Speaker Change: With our strong commercial execution category leading portfolio, better pricing levers, and exposure to format UACUC VR in an excellent position to capitalize on these future growth opportunities.
Speaker Change: Turning now to our new product launches in the quarter, the continued steady stream of new product launches in our coal markets, addressing top customer needs.
Speaker Change: This includes a high throughput rapid scan calorimeter that enables precise thermal stability of high concentration biologic formulations.
Speaker Change: We also launched the TA Instruments Compact Discovery Reonator. This expands our geology portfolio with an easy to use product for routine quality control testing within manufacturing manufacturing settings, such as batteries, pharmaceuticals and food.
Speaker Change: It offers similar performance to his comitors used in R&D settings but at a price point that is competitive with those in downstream settings.
Speaker Change: In a high-growth adjacencies, we are actively shaping the waters of the future and increasing our alignment with nascent, higher-growth testing applications where we have a unique right to win. Today, I will share an update on bio-separations.
Speaker Change: Approximately 50% of the drugs in the farmer pipeline are now large molecules, which includes their wide range of novel modalities beyond monoclonal antibodies that each have their own unique challenges.
Speaker Change: Given the high future growth potential and significant on metmeats that exist within separating and purifying these molecules, we have directed organic investment to solve these challenges.
Speaker Change: With the initial progress we've made over the past few years aligning our overall chemistry business to biologics approximately 40% of our farmer chemistry revenue now comes from large molecules.
Speaker Change: As we continue to gear our business towards future growth in novel modalities, we expect this number to rise further. Particularly as we now spend approximately 70% of our chemistry R&D dollars on large molecular-rated applications.
Speaker Change: Last year we launched our first set of in-house developed enzymes for antibodies in areas such as peptide mapping and antibody drug conjugates which have achieved great initial success.
Speaker Change: Last month we expanded our offering further launching our first enzymes and reagents for novel modality related applications.
Speaker Change: Sinclude areas like Selenji and Therapy and Arranay Bay Therapy, such as CRISPR, oligo-nucleotides and Amorani.
Speaker Change: The continued to build key capabilities across each class of next generation therapeutics, with the objective of building a comprehensive portfolio that is monicure agnostic and can support the journey of any modality into high volume settings.
Speaker Change: At Benalow, Cover, Art 2024, Full Year Guidance.
Speaker Change: Market Conditions remain dynamic, customer cap expanding, as continued to improve, especially in format UACUC.
Speaker Change: With a strong funnel, we expect these trends to progress into the fourth quarter and result in 5 to 7% constant currency growth.
Speaker Change: This is why still making 2-0 assumptions around 4th quarter seasonality at equivalent levels to last year and well below typical levels.
Speaker Change: Given our raised outlook for the fourth quarter and better than expected third quarter results, we're raising the re-decreasing our fully agite.
Speaker Change: are updated fully here 2024 organic constant currency sales flow guidance is now negative.9 to negative.3%.
Speaker Change: We are also increasing our full year 2020 for adjusted earnings per share guidance to reflect our improved sales growth expectations and continued strong margin performance.
Speaker Change: The midpoint of our fully 2020-24 adjusted EPS guide is now $11.77 which is flat to slightly positive versus last year.
Speaker Change: And is a 1.4% growth rate improvement compared to our previous guidance. Now, I will pass the call over to Amol to continue covering our financial results in more details and to provide further details on our guidance. Amol.
Amol Chaubal: Thank you Udit and Good Morning everyone. In the third quarter sales of 740 million group 4% has reported and exceeded our guidance range. On a constant currency basis sales increased 4%.
Amol Chaubal: We saw a study improvement in customer spending throughout the quarter. This couple with our continued strong commercial execution, enabled us to deliver Q2 to Q3 sales step up of 32 million or plus 4% versus typically a modest decline.
Amol Chaubal: As we created good momentum.
Amol Chaubal: Ponelectivity Standard and orders out-page sales for the second-quarter-ameral enabling us to build backlock.
Amol Chaubal: In constant currency terms, buy in market, 4% grew 3% industrial grew 7% and academic government was flat.
Amol Chaubal: In Pharma, sales return to positive growth, X China sales grew mid-single digits with 3% instrument growth and 7% recurring revenue growth.
Amol Chaubal: Both small and large molecule applications grew in the corridor as customer cap expanding trends continued to gradually improve.
Amol Chaubal: In industrial sales also returned to growth. Growth was led by food and environmental applications, which grew 5% and chemical analysis which grew low double digits.
Amol Chaubal: We again so strong growth from peak-to-zero related applications.
Amol Chaubal: which have been continued growth tailwind within food and environmental applications.
Amol Chaubal: For RT-A Division sales group 2% led by growth in life sciences and advanced materials and chemical applications.
Amol Chaubal: In academic and government growth was flat reflecting an improvement versus the first half of the year. Now that last year's stuff prior to comparisons are behind us.
Amol Chaubal: My geography, all our three reported regions returned to growth, with mid-single digits sales growth in Asia and Europe and low-single digit growth in America.
Amol Chaubal: Excluding China sales crew 5% led by better than expected growth in both pharma and industrial applications.
Amol Chaubal: In China, sales decline mid-singual digits reflecting continued sequential improvement versus almost 30% decline in Q1 and low-teens decline in Q2.
Amol Chaubal: Alderson the Codor were in line with last year and we expect China sales to return to positive growth in the fourth Codor of this year.
Amol Chaubal: On the subject of China stimulus, we continue to have active dialogue with various customers who stand to benefit from the funding announcements made by the Chinese government earlier this year.
Amol Chaubal: So far, this has led to improved coating and funnel trends in the region. These opportunities are expected to begin converting into orders and sales in 2025.
Amol Chaubal: By products and services instruments grew 1% chemistry grew 8% and service grew 6% There was no change in number of days versus the prior year quarter.
Amol Chaubal: The 4-Codor of this year has 2 additional days compared with last year and 3 additional days compared with the third quarter of this year.
Amol Chaubal: Rekering revenues returned to high single digit growth in the quarter reflecting healthy customer activity levels and strong install base utilization.
Amol Chaubal: Our commercial initiatives continue to support robust recurring revenue growth in areas such as service plan attachment, e-commerce adoption and launch of new biosepiration columns into high-growth large molecule areas.
Amol Chaubal: Now I will comment on a third quarter non-gaps financial performance versus the prior year.
Amol Chaubal: Dispied the headwinds from ethics, inflation, and the return of annual incentive compensation, our team responded to these margin challenges with strength and commitment.
Amol Chaubal: Our focus on operational excellence with pricing, productivity and food and spend management allowed us to deliver a resilient margin performance again.
Amol Chaubal: In the quarter with gross margin expanding 20 basis points to 59.3%.
Amol Chaubal: Excluding FX, Cross margin expanded 50 basis points.
Amol Chaubal: A gested operating margin was 30.8%. Excluding FX, adjusted operating margin was 31.2%.
Amol Chaubal: Our year over year, Malgin Performance was impacted by last year's annual incentive compensation wash pack that benefited last year's Q3 result.
Amol Chaubal: are effective operating tax rate for the quarter was 17.2%. And our average share count was 59.5 million shares.
Amol Chaubal: Our non-gap earnings for fully diluted share was $2.93.
Amol Chaubal: On a gap basis, earnings for fully diluted share was $2.71.
Amol Chaubal: Reconciliation for Gap to non-Gap earnings is attached to this morning's press release and in the weeks of our earnings calls presentation.
Amol Chaubal: Turning now to free cash flow capital deployment and all balance sheet. We define free cash flow as cash from operations, less capital expenditures and exclude special items.
Amol Chaubal: In the third quarter of 2024, free cash flow was 179 million after funding 26 million of capital expenditures.
Amol Chaubal: On a year today, Pricasflow is 556 million or 27% of sales resulting in a free cash flow to adjusted net income conversion ratio of 120%.
Amol Chaubal: We maintain a strong balance sheet, access to liquidity and well structured debt maturity profile. This trend allows us to prioritize investing in growth. We continue to evaluate MNA opportunities that will enhance value creation for our shareholders.
Amol Chaubal: With the strong free cash flow generation in our business model, we have made solid progress in delivering our balance sheet.
Amol Chaubal: In the third quarter we reduce that by approximately 180 million.
Amol Chaubal: At the end of the quarter, a net that position was approximately 1.5 billion, which is a net that to a bit that ratio of about 1.5 times.
Amol Chaubal: We will evaluate our priorities between further debt paid down and the resumption of our share repurchase program throughout the remainder of the year.
Amol Chaubal: Now I would like to share further commentary on a fourth quarter and updated fully-era outlook.
Amol Chaubal: While Market Conditions remain dynamic, customer spending has shown continued signs of recovery and our team has continued to execute well. We expect these trends to progress into the fourth quarter given our positive momentum and as increased vulnerability translates to orders.
Amol Chaubal: Looking to the fourth quarter of 2024, our constant currency sales crores guidance is projected in the range of positive 5% to positive 7%.
Amol Chaubal: This is an improvement in the growth rate expectation versus our previous guidance and calls for mid-single digit instrument growth in the quarter.
Amol Chaubal: At Current Reads.
Amol Chaubal: Currency translation is expected to subtract approximately 1.7%. Therefore, our total 4th quarter reported sales growth guidance is positive 3.3% to positive 5.3%.
Amol Chaubal: This guidance range, fruit and ki, assumes a mid-teen, caught roar, caught an revenue ram. Implowing below typical levels of ramp in the fourth quarter.
Amol Chaubal: It matches last year's Q3 to Q4 mid-teens RAM during which we saw a much weaker than typical budget plus dynamics in Q4.
Amol Chaubal: Based on these revenue expectations, fourth quarter non-gap earnings per fully diluted share are estimated to be in the range of $3.90 to $4.10.
Amol Chaubal: which includes a negative currency impact of approximately 3 percentage points at current
Amol Chaubal: Turning now to our full year guidance.
Amol Chaubal: Diora Batra's unexpected results in the third quarter and raised outlook for the fourth quarter, we are increasing our fully ourselves and EPS guidance.
Amol Chaubal: are updated fully at 20, 24 organic, constant currency sales growth guidance is now between negative 0.9% and negative 0.3%.
Amol Chaubal: At Current Rates, currency translation is expected to subtract.
Amol Chaubal: 1.2%.
Amol Chaubal: Meanwhile, M&A contributions from wire transactions has added 1.3% to our full-year sales from inorganic revenue incurred in the first four and half months of the year.
Amol Chaubal: Therefore, our total fully or 2020 for reported sales growth guidance is in the range of negative 0.8% to negative 0.2%.
Amol Chaubal: Consistent with our previous guidance, glass margin for the full year is expected to be approximately 59.8% which is a 20 basis point expansion versus 20.23.
Amol Chaubal: A adjusted operating margin is expected to be around 31%.
Amol Chaubal: Below the line we expect are fully our net interest expense to be approximately 71 million. A fully tax rate is expected to be 16.5% and our average diluted 20.4 share count is expected to be approximately 59.5 million shares.
Amol Chaubal: Rolling all this together, on a non-gab basis, are updated fully at 20-24 earnings per fully diluted share guidance is projected in the range of $11.67 to $11.87.
Amol Chaubal: At Exmit Point, this updated EPS guidance reflects slide positive growth versus last year, which is 145 basis points, growth rate improvement compared to our previous guide.
Amol Chaubal: It includes an estimated headwind of approximately 3% due to unfavorable foreign exchange.
Speaker Change: Now I would like to turn the call back to who this for our closing comments.
Speaker Change: Udit?
Udit Batra: Thank you, Amol. So to summarize, we are very pleased with the faster than expected return to positive instrument growth. We are also delighted to have observed a notable upshift in new product adoption which has contributed to our growth this quarter.
Udit Batra: [inaudible]
Udit Batra: Now has us at positive adjusted EPS growth versus last year at its midpoint.
Udit Batra: As we expect to build leverage in our TNL, even with the turn of annual incentive compensation among the other headwinds of volume and effects that we've described. The position well for the future with a long term, with a long term outlook that is above a historical average growth rate of 6%.
Udit Batra: This is driven by the associated new testing capacity needed for a compelling set of global volume drivers, as well as other factors such as price contribution.
Udit Batra: At the same time, we stand to benefit from a catch-up in deferred instrument replacement as customer and a catch-up in the e-courses.
Udit Batra: The pace of this catch-up will depend on the speed at which the market continuous improves.
Udit Batra: We are in the early innings in the market to remain dynamic but we are off to a good start. Without teams strong commercial execution highly competitive product portfolio and strong margins to a confident enough future. So with that, I will turn the call back to Caspar.
Caspar Tudor: Thanks for that, that concludes our formal comments. We're now ready to open the first time for questions.
Speaker Change: Thank you. If you would like to ask a question please press star 1. To withdraw your question, press star 2. Once again to ask a question please press star 1. Our first question comes from Tycopyerson with Jeffreef, your line is open.
Speaker Change: Okay, thanks. Congratulations, quarter. Obviously early ining from the replacement cycle Udit as you noted. I guess.
Tycopyerson: A couple questions here, are you able to talk about the percentage of LCs that are going to customers that have arc or is it mostly lab that did not upgrade? So effectively double upgrade here.
Tycopyerson: And then you have the new PDA module, like it's how much is that helping drive, you know, LTC sales. And then as we think about the next couple years, I mean, you mentioned Pat and Exploration, you also potentially have GLPs moving to Orals, like what other drivers should we be thinking about that could potentially help, you know, this replacement cycle as it kicks off?
Speaker Change: Thanks, Thakawans and good morning.
Speaker Change: Look, I mean, very happy with the fact that instruments have returned to growth.
Speaker Change: And if you break it down into LSE and Marspeck, LSE after 7 quarters of decline and this is I think where your question on the replacement cycle is largely focused.
Speaker Change: After 7-4 is a decline has returned to growth.
Speaker Change: This is of course on the back of continued strong growth in India.
Speaker Change: which were the generic segment is doing extremely well, but equally with return to growth in our large format QAQC customers segment where LC grew in the low single digits both.
Speaker Change: in Europe and in the United States.
Speaker Change: and another sort of corroborating evidence for the replacement, the beginning of the replacement cycle. When customers and we spent a ton of time and I personally did in this loss quarter with large trauma customers.
Speaker Change: To understand what we were seeing from a replacement cycle perspective. Look, when the customers start their replacement cycle, they bring cross functionalities together because this is a multi-year process.
Speaker Change: [inaudible]
Speaker Change: and we have seen more and more of those meetings. Now to your question on art, what is this alliance? I mean there is.
Speaker Change: An increasing proportion of our LC fleet that is RKH PLC and now increasing the alliance I.S. which over the last 18 months
Speaker Change: has been trialed by each and every large farm our customers. So we feel extremely good with the feedback.
Speaker Change: And over the last few months we've added the PDA, we've added the Alliance BIOS system and we have several other ideas to continue to improve its performance. So Alliance IS is indeed playing a part in the discussions.
Speaker Change: RKHPLC remains a strong strong contributor to the replacement discussions as well. We won't break it down any further than that at this point.
Speaker Change: And do your question on patent expiration? I mean, and I suspect that's referring to India. Look, India has been awesome for us for the last three to four years. Gone from 5% of our sales to 8%.
Speaker Change: Laudje Dribon by our strong presence in the genetics segment, I mean India supplies roughly 40% of the genetics globally.
Speaker Change: And going forward, we expect at least 200 billion over the next three or four years of patent expert. So I mean, next four to five years of around 200 billion of revenues going off patent from originators in the next three to four years.
Speaker Change: And more than half of that is small molecule. So we have very well positioned in that segment as well. Just to add to that type of code as you correctly pointed out, I mean, art is at a meaningful price premium to like a sea alliance, and that has been a very successful product and very accredited from...
Speaker Change: Being better priced and with the value proposition of Alliance I.S. It's able to justify even a higher price premium to ARC because the unmet needs that it is solving is resonating with the customer. So that sort of creates that double effect.
Speaker Change: Under replacement cycle.
Speaker Change: And very early days for PDA, so the PDA version really hasn't produced.
Speaker Change: A Christian because we're just launching it. So we will see more of that in Q-4. In a nutshell, the replacement cycle definitely signals for the replacement cycle. Beginning, some impact already in the quarter and our broader market leading LC portfolio is absolutely playing a role in those discussions.
Speaker Change: And I guess as we think about next year, are you willing to make any comments? Pull them in early, you know, the streets are five and a half to centred in. You know, obviously there's a nice tailwind.
Speaker Change: I was thinking that that would be one of the most, one of the questions later in the call by the perspectives, one of the first ones.
Speaker Change: You know that we won't make any comments on 20, 25 at this stage. I mean there's a lot that will play out in the next few months.
Speaker Change: But so not to disappoint you, let me just sort of tell you how we are thinking about the puts and takes right so you can start with our cutting revenue and if you look at especially the last two years
Speaker Change: It's like a Swiss clock, right? I mean, while recurring revenues in different segments, especially in former research have gone up and down,
Speaker Change: In QAQC and late stage for us, this is going predictably well, so you can assume a long-term historic average, and that's 55% of our business. You start there. Then you look at the puts and takes on the instrument side, right? And so let's first talk about what...
Speaker Change: This rather definite right so the generic volumes we just talked about will continue to grow. Now don't ask me exactly the percentage of growth but it's pretty dynamic.
Speaker Change: Second PFAS testing is a creative to our overall growth and we have a market leading instrument that is helping us win more orders than we lose them.
Speaker Change: And GRP ones, you already mentioned that we have pole position in that with the two largest producers and as it gets geneticized and Indian producers come in we think we are very well positioned. So those are things that you can assume.
Speaker Change: are positive. There are two variables that we really need to sort of watch and understand better. The first is how fast is the replacement cycle going to pick up and I've given you enough clues in your first question that it's already happening and the discussions are happening.
Speaker Change: And the second is the stimulus in China, right? And there we feel that we have incredibly well positioned.
Speaker Change: Given the expansion of distribution, given the expansion of our localized portfolio, we feel incredibly well positioned to capitalize at this stimulus comes in.
Speaker Change: I think those are the only two variables that you need to watch over the next video for months and there's plenty to happen in the next few months and we'll talk when we get the cue for. This one thing to add is basically, you want in big segment environment where we are seeing.
Speaker Change: A Grasive Competitive pricing pressures, we are still delivering on our commitment of 100 basis points plus versus the historical levels and the proof is in our cross margin.
Speaker Change: I'm going to be a good friend of mine.
Speaker Change: Okay, and then just one last quick one on Capitol Allocation. Amol, you would talk about preference for M&A versus by-back you mentioned both in your comments.
Speaker Change: Athikoh, again something that we won't get into a ton of detail on other than what we've said. We'll executing on what we told you probably three, four years ago when the transformation started. We said we were going to learn how to play better with the hand we have. This is commercial execution.
Speaker Change: and Margin Preservation that you saw all the way through in 2023. Then we said we're going to launch new products that are going to be first in class and test in class and they're delivering the promised data lines I.S. The Vertic you have salute or our chemistry columns.
Speaker Change: and third research we are going to start executing on M&A, which is aligned with R.
Speaker Change: Well stated and clearly stated strategic ambitions and that's where Wyatt fit in.
Speaker Change: Location Perspectives, that's the sequence we will spend more energy on organic growth. We have ton of opportunities there.
Speaker Change: If a deal makes sense like it did with Viart and it's a line with our strategy and it's a naturally very disciplined we will do it.
Speaker Change: And of course, we'll continue to return value to our shareholders. So bye, back.
Speaker Change: But to a balanced capital allocation strategy.
Speaker Change: Thank you. Our next question comes from Brandon Koo-Yard, with Wells Fargo, your line is open.
Brandon Koo-Yard: Thanks for the morning. You took down guidance last quarter, taking it back up now. You just talk about which in the market actually beat your expectations. It does feel like the LC replacement cycle may be coming back faster.
Brandon Koo-Yard: Now then what your base case you might have been to three months of those, is that fair assessment and talk about just what you're reaching, might be driving that.
Speaker Change: Good morning and thank you for your question. Look, I mean everything.
Speaker Change: Across the board game ahead of expectations. Right? So I think you can see that in the print as well. And as we go into Q4 and are sort of guidance philosophy, look, you need to look at it from two different perspectives. One.
Speaker Change: All the positive drivers we expect that we have seen improve over the year.
Speaker Change: will continue into Q4. So, through the sequentially the growth has gone up and Q3 was 4%.
Speaker Change: Including the LC replacement, we see better signals for that, we see the genetics, market, going pretty well, we see PFAS testing and I'm just gone through that in the previous question as well. So we see all of those trends continuing.
Speaker Change: and hence we've raised the midpoint of our guidance for Q4 from revenue perspective so it's now 6%. So that...
Speaker Change: has the trends are given as confidence today as the guidance. And so on the other side, the second aspect, and Amol mentioned this in the prepared remarks, as well, on the other side, it's...
Speaker Change: 1 data point, 1 the scene or before we get more bullish. So if you look at the top end of the guidance what we've done is we've tried to keep the ramp from Q3 to Q4.
Speaker Change: The same as last year, right? So, we just elaborate a little bit over the last few years from Q3 or the step up in revenue from Q3 for usually is about 20%
Speaker Change: Dasha, we saw one of the most bid grants that we've seen.
Speaker Change: the scene of a history.
Speaker Change: and we failed the student, if that as the other book end of the guide. So, wild brands are improving across the world, farmer, dust tube, it's any of any of the polio segments.
Speaker Change: The film is put on that this point, so I put it on the book and then keep the RAM same as last year.
Speaker Change: I'm going to talk on this on China, you have pretty mixed data points, I would say so far from other peers. This quarter is the signal to noise ratio from your point of view getting any better. How do you think stimulus is what are activity, quoting, is tracking relative to your expectations right now?
Speaker Change: So that's a great question. I had a chance to visit China in September and I have the same questions that you do.
Speaker Change: And had a chance to visit a lot of customers see some government officials across the country, not just in one city and across many customers segments, right? So it was a pretty helpful visit.
Speaker Change: In all, I mean if you just look at the numbers for a minute, China came in line with our expectations. Auders are in line with what we saw in the same time last year.
Speaker Change: Sales went down by 5% versus the same time last year and that's last year due to shift one shipment moving in the TA business from Q3 to Q4. So that impacted that impact the sales but orders are in line with the last year as we expected.
Speaker Change: Now that said as the market conditions and this is something I learned from our team.
Speaker Change: At the market conditions have worsened over the last two years, I mean, our team basically first, of course, right-size the organization to respond to the conditions but then.
Speaker Change: We took a deliberate effort to expand our distribution to many more customers' segments that we've been historically present in. Second, we localize our full portfolio, so as in when the stimulus comes we feel.
Speaker Change: Very well placed to capitalise on it. Now talking about the stimulus in particular, I mean you know that the first one was on instrument replacement and the government is now thinking through releasing another one on on physical stimulus. So pretty broad based.
Speaker Change: In Curagement for the Economy, we feel very well positioned to take advantage of it and in the last quarter I talked about one of the first discussions we had that looked like it could be consummated in order. This was discussions with customs agencies that are government run, that has indeed come through. So that order has actually come through.
Speaker Change: The sales don't ask me if it's converted in Q4 or early next year, probably there are thereabouts, it's not in our guidance and don't get to excited it's low single digit millions, but it is the first signal that the stimulus is now converting into sales.
Speaker Change: And as I said, we feel incredibly well-positioned to take advantage of it. So, in a nutshell, China came in.
Speaker Change: As expected, improving conditions from the first half of the year into Q3. And as we look ahead, we feel incredibly well positioned to take advantage of the stimulus. And it's not just signals, it's actually turning into reality. I hope that helps.
Speaker Change: Thank you. Our next question comes from Puneet Sada with The Ring Partners. Your line is open.
Puneet Sada: Yeah, hi Udit. Thanks for taking my questions and congrats on the strong print here.
Puneet Sada: The first question, you know, we're seeing varying numbers of instrumentation growth in the PIRs. I mean, you have instrumentation recovering in ELSI.
Puneet Sada: where some of the peers are still saying that single-digit decline. So, can you take a step back and elaborate a bit about the QAQC position that Waters has?
Puneet Sada: when it comes to instrumentation growth. What do you think is misunderstood here? And on the consumable side, the 8% chemistry in columns number, that was impressive.
Puneet Sada: Could you maybe provide us, you know, your thoughts on the sustainability of that and what gives you confidence why that recurring revenue should continue to sustain in 2025 despite the comps?
Speaker Change: Let's start with the simpler question, Puneet. Good morning. Recurring revenues for us are like the Swiss clock.
Speaker Change: Okay, you go back in 2024 and you compare are they cutting revenues to anybody in the peer group?
Speaker Change: and you'll find that they're very stable, right? Mid to high single digits. And so there's not much to say there other than the fact that this is gonna continue.
Speaker Change: and we are fueling it with new innovation. Attachment rates and service are increasing. So, if anything, this starts to grow even more.
Speaker Change: And as we are at the cusp of the replacement cycle, you will see service revenues improve. So there's nothing more to say there other than just look at the history and the facts and it's pretty clear.
Speaker Change: On the instrument side, this is how I would think about it and I'll try to sort of break it down from a customer segment as well because your question had that piece.
Speaker Change: First, from a volume perspective, look, there are two obvious drivers, right? The first is genetics in India, right? And we have a strong position there, and that continues to grow. And it's not just in India. It's also in Eastern Europe and parts of the U.S. that we continue to benefit disproportionately from our presence there.
Speaker Change: Second is the initiation of the replacement cycle and here I'll just take a slight detour and talk about pharma in particular and that might explain some of the differentiated results here right and basically for us
Speaker Change: We are, our instrument results, our consumable results are more proportional to the volume of testing in compliant conditions, be it pharma or be it non-pharma. In pharma, our stronger presence in QA, QC.
Speaker Change: makes us slightly different than what you're seeing with the rest of the peer group, right? So that segment has been pretty resilient and now the replacement cycle benefits us there. If you now contrast that with upstream, in pharma research we are not seeing the same level of dynamism, right? So upstream where customers have been impacted by IRA.
Speaker Change: The funding is still not yet going.
Speaker Change: You can make the same argument for biotech.
Speaker Change: We are again very well positioned as we look at novel modalities in particular for our recurring revenues and increasingly for our instruments with ADCs and oligonucleotides. So from a volume perspective in instruments, we are very well positioned.
Speaker Change: second
Speaker Change: We've talked a lot about our best-in-class new products. I mean, we took on a deliberate effort three to four years ago to revitalize our portfolio, and now you can see the results. Alliance IS sets the standard in HPLC testing, augmenting our MaxPeak Premier supported Acuity Premier for UPLC. Go to MassSpec.
Speaker Change: The Vivo TQ Absolute sets the standard for PFAS testing.
Speaker Change: for sensitivity and we've just introduced the Zivo MRT and that is receiving very good feedback from customers for metabolomic testing where you don't have to give up speed if you want high resolution and you get it all on a benchtop mass spec. And finally on pricing
Speaker Change: I wanted to give you a comprehensive answer because you touched on end markets as well, but feel very good about where we are on our instrument portfolio.
Speaker Change: Absolutely correct insight on the recurring revenues, right? No two recurring revenue portfolios are equal.
Speaker Change: of our portfolio is instruments, but people overlook the fact that the remaining 55% which is recurring, when you contrast it with other recurring portfolios in the markets, in this down-economy, the other recurring portfolios have been flat or even negative growth.
Speaker Change: and people typically overlook this fact right and when you put that together it sort of gives you so much more stability in the equation.
Speaker Change: Got it. That's super helpful. Thanks for covering that.
Speaker Change: Just to follow up on the GLP peptides, obviously one of the largest categories in terms of volume, and Udit, you've talked about volume being an important driver. Can you just help us understand sort of ...
Speaker Change: Can you elaborate what your position within those are and just given the volume growth that you can potentially expect in this market and how to think about this in 2025. I know it's about 2025 but just wondering how to think about GLP-1s in 2025 context. Thank you. Puneet, you're going to be super popular with your peers because you're asking all the questions but that said, look, it's a relevant question. GLP-1s are a creative to our growth.
Speaker Change: And when you look at our position in columns, we are the primary vendor spectrum for both the two large injectable manufacturers for chemistry.
Speaker Change: Instruments are distributed between us and another vendor, but usually it's 60-40 us or slightly more than that, depending upon which one.
Speaker Change: And third, there are at-line testing HPLC and UPLC instruments, where we have the lion's share, and these are called patrol systems.
Speaker Change: and Pauline Waters, you'll be very well familiar with it. They are adopted in each and every manufacturing site and each and every line of both Novo Nordisk and Eli Lilly.
Speaker Change: Now to your question on orals, we feel very good about where we are. It's early days in terms of talking about exactly what's specked and what's not. But we are very well positioned, not just with these two, but with many others who are working on it.
Speaker Change: Third piece is around GLP-1s in the genetic segment. As I mentioned earlier, we have a good position with the genetics manufacturers in India and in Eastern Europe. And as they start to bring the older GLP-1s and start to geneticize them, we again feel very good about our position there.
Speaker Change: 2025, I won't say more, especially on the specifics of what will happen with GLP-1, but there is no reason to believe that the trend doesn't follow the overall volume growth that we've seen so far.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Vijay Kumar with Evacor ISI. Your line is open.
Vijay Kumar: Hi Udit, good morning to you and congrats on a nice print share. Maybe one on the comparative dynamics here. Do you believe Waters is gaining market share or is this a broader sort of end market, you know, recovery? How would you characterize your comparative position?
Udit Batra: Thanks for the question and I mean having been in the industry over a decade I mean this is question on market share is always puzzling. Using two things and we discussed market share, share of wallet, market share. Given that most of our peers have different
Udit Batra: portfolios in different segments, it's very difficult.
Udit Batra: I have direct comment other than your own information which is longitudinal. So you have information for many years and I can tell you we are winning more than we're losing across different sectors and just to sort of shed some more light why that's happening.
Udit Batra: Second, we have a market-leading portfolio. We have Podium position, LC. We have Podium position, Quantitative Mass Spec, which are the segments that are very hard.
Udit Batra: But if you pin me down and say, what exactly is the market share point-by-point gain, I would need...
Udit Batra: very trustworthy information from each of our competitors to add and subtract and I'm surprised that people are able to make such comments with so much confidence.
Udit Batra: I think we're confusing to choose share of wallet and market share.
Udit Batra: outsized versus market and for us there are three vectors where we clearly see that IFAS we are growing twice the market, India rich, we are doing twice the market.
Udit Batra: are so much more better than the market, the clinical, the psychologists, they're really not going to fall. And the NGOs aren't going to expect it.
Udit Batra: That's all I've got.
Speaker Change: Understood. Amol, one for you on this guidance here. You beat the quarter by $25 million. Annual was raised roughly by $25.
Speaker Change: You know, when you look at the sequential revenue map, well, I understand it's consistent with last year. I think you have extra days in Q4.
Speaker Change: So maybe just talk about the guidance assumptions here in Q4.
Speaker Change: Is that conservatism or...
Speaker Change: and any pull forward of revenues from Q4 and Q3. Thank you.
Speaker Change: which is far lower than typical. What we have guided is 15.5 percent.
Speaker Change: We have two extra days in the ramp this year versus last year, and that adds 2% more recurring revenue or 1% overall, right? So call it 16%. So maybe it's a tad
Speaker Change: conservative and prudent at this stage.
Speaker Change: in the equation. So that's on the sales side.
Speaker Change: On the EPS side...
Speaker Change: Our full year rate is slightly lower than RQ3BEAT
Speaker Change: And that's to do with the fact with timing of spend, right? I mean, you know, we had pullback spend.
Speaker Change: because September is a big month and we wanted to make sure it checks out to our assumptions, which it did.
Speaker Change: Now, the Fourier EPS guide is slightly positive versus last year.
Speaker Change: Look, I mean, we are seeing dynamic growth in genetics in India, in Eastern Europe. We're seeing very good growth with the Alliance IS as the adoption improves.
Speaker Change: We're seeing great growth in PFAS. We're not pulling back spending and so as teams come in we're really making sure that they have the resources to grow in the future.
Speaker Change: And on the question on pull forward, no pull forward. You just need to look at the orders and sales. Orders grew again faster than sales and backlog has been building. So no pull forward at all.
Speaker Change: Thank you. Our next question comes from Dan Brennan with TD Accounting. Your line is open.
Speaker Change: Great, thank you. Thanks for the questions. Congrats on the quarter. Maybe just on just to start on China
Speaker Change: So, in the quarter, what, China instruments may be down around 10% is our math, and just wondering...
Speaker Change: Did you say what you're implied or kind of what your guide is for China in the fourth quarter and for instruments and you know Udit you talked about the stimulus.
Speaker Change: like any way to size what that might be for 25 and we come up with 70 billion dollars The monetary stimulus being allocated broadly to instruments and kind of science and tech Is that the number and any sense of what percent you know, the sector could capture that?
Speaker Change: China for the quarter was minus 5%. Instruments were down sort of high single digits.
Speaker Change: for Q4. And again, a lot of it, as Udit mentioned, has to do with the fact that orders were in line with.
Speaker Change: last year. You know, it was just timing of some of the TA-related shipments. As we get into Q4, we are expecting growth to return to China. So it will be sort of low single-digit to mid-single-digit growth in China, and instruments will be somewhere around low to mid-single-digit decline.
Speaker Change: But again, as we said, we have had no major incremental negative news from China since Q3 of last year.
Speaker Change: and because we had finished shipping last stimulus in Q2 of last year.
Speaker Change: part of its journey in terms of getting all the paperwork and approvals together. So still very early days in sort of timing the stimulus as it will happen next year.
Speaker Change: I mean, it's inevitable. It's going to be great.
Speaker Change: for the sector but hard to put time on. And then just to embellish this on the China piece, we were in China...
Speaker Change: September as I mentioned earlier
Speaker Change: I mean, the general sense is yes.
Speaker Change: Similas is coming. We have many conversations with each individual customer who is looking to qualify. We expanded our distribution as a result to make sure we were in every place where there was a discussion going on. This one will be very dispersed. It's not one that will be concentrated in two or three big academic institutions, so we prepared ourselves. We've localized the portfolio. As I mentioned, we already saw the first
Speaker Change: or first set of orders consummate and as I said I don't know if it lands this year in sales or early next year slow single-digit millions but it's a good signal that it's happening.
Speaker Change: Very difficult to talk about timing at this stage. I mean, let the next three months pass, we'll find out a lot more.
Speaker Change: until that time. And I think you talked about the 70 billion but there's an equally important fiscal stimulus that will create confidence in the overall economy and that will influence the sector as well. So don't forget that piece of it as well.
Speaker Change: And then maybe just as a follow-up, just I know you've touched on PFAS and GOP1 several times throughout. Would you be, I know you've talked about the long-term opportunity in terms of contribution to your growth rate. Would you be willing to size how big those businesses are today and kind of how much they're contributing today to your growth?
Speaker Change: Yeah, I mean what we've said is both those businesses will contribute about 30 to 40 basis points of a creative growth and that's based on
Speaker Change: purely the environmental side of PFAS. What we are seeing on PFAS is it's now spilling into things such as food and consumer products.
Speaker Change: and that would be incremental upside to that 30 to 40 basis points of accretive growth on PFAS.
Speaker Change: On GLP-1, that assumption is based on what percentage of prescription volumes GLP-1 will be, say around 20, 30, based on analyst reports.
Speaker Change: If you look at it in an alternative way, which is what percentage of capex GLP-1 would be over the next decade, you get to a much larger number, but at this stage we want to stay prudent. Yeah, and I mean, I think the other way to look at this is you take a visit to Copenhagen, highly recommend it, or go around Indianapolis, and the number of cranes per square foot
Speaker Change: is higher than Cambridge Mass where the biotech and Cambridge Mass at its height as well when the biotech boom was going. So it's pretty serious activity dams.
Speaker Change: Thank you. Our last question comes from Matt Sykes with Goldman Sachs. Your line is open.
Matt Sykes: Hi, good morning, thanks for taking my questions. Congrats on the quarter. Maybe just going back to instruments, and Udit, a comment you made about a catch-up opportunity.
Matt Sykes: How do you see the slope of recovery as we kind of move into next year? And do you have expectations that it could outgrow that 5% historical average? I think, you know, it's interesting to see the...
Matt Sykes: replacement cycle kicking in for you and I think there's still a lot of questions about how gradual that recovery will be and your comments around catch-up opportunities suggest there might be some pent-up demand. So maybe you could just kind of contextualize how you see this potential recovery taking place.
Speaker Change: So I think, thanks Matt, I mean, I think the magnitude is pretty clear, right? I mean, you can just look at historical numbers, do the CAGRs that we've been doing for so much time, and you can see the magnitude is pretty significant, especially for LC catch-up opportunity. In terms of the slope, I mean, just being fact-based, that can go anywhere from 0.5% to 11% growth.
Speaker Change: one quarter to the other for the recovery. So it's very difficult to predict based on facts.
Speaker Change: Now, you can then rely on two other features. One is the funnels that we have. And there, I can tell you, since March, June, and now September, the last month of every quarter tells you a lot about funnel conversion.
Speaker Change: It has been improving.
Speaker Change: Right? So we've been seeing people say they're going to do something, they do it.
Speaker Change: And they say they're going to do large stuff, they do large stuff. They're going to do small stuff, they do small stuff. So it's the funnel conversion rates have been getting much more, much more robust as we've gone through. So the predictions become...
Speaker Change: with our customers where IT will also show up and procurement will show up, finance will show up. So those are the start of a multi-year replacement discussion where the CapEx is pretty significant for our large pharma customers.
Speaker Change: And I'm talking here about also non-GLP-1 customers. So I think that's as much as I can say right now. And as I said, more will reveal itself in the next few months, and we'll share it at the full year numbers.
Speaker Change: Very helpful. And then just when you look at sort of medium-term views on China, just given where the GDP growth has gone from where it's been historically, how are you thinking about sort of medium to long-term growth in China given your portfolio and your exposure there?
Speaker Change: Lots of people way smarter than us have been speculating on this. I think the general sense at this point is it's a mid-single-digit grower.
Speaker Change: because it's a developed economy, but if you have an advantaged portfolio, in some cases where we do, and you have better execution, you can outgrow that number. So I think that's as much as we can say about that at this stage. And again, more will reveal itself, Matt, as time goes on.
Speaker Change: Thank you. Bye-bye.
Speaker Change: Thank you for joining us today and for your support and interest in waters. A replay 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.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Thank you for your participation. Participants, you may disconnect at this time.