The operator welcomes participants to the Waters Corporation Third Quarter 2023 Financial Results Conference Call and reminds them that the call is being recorded. Caspar Tudor, Head of Investor Relations, introduces the speakers and provides cautionary language regarding forward-looking statements. He also mentions that the earnings release and slide presentation are available on the company's website. Non-GAAP financial measures will be discussed and reconciliations to GAAP measures can be found in the earnings release and presentation.

The paragraph discusses the quarterly results of a company and provides information about the comparison to the previous quarter, currency terms, and revenue growth rates. The company does not plan to update its guidance predictions unless required by law. The call will include remarks from the company's head, Udit Batra, and a detailed look at the financial results from Amol. The company faced challenges in China and with foreign exchange, but still saw solid performance and growth in other markets. The company also launched new products and made progress with a collaboration. Sales grew less than 1% as reported, but declined by 4% in organic constant currency terms due to lower-than-expected demand in China.

Despite the challenges in the market and adverse effects of the strengthening dollar, the company was able to achieve flat sales and deliver strong earnings per share. Sales in the pharma segment grew in the US and Europe, but were weak in China. The industrial segment also saw declines in China, but showed growth in other regions. The academic and government segment had strong growth in Europe and the Americas, but this was offset by a decline in China. Overall, the company is still performing well in their core business despite the challenging market environment.

In the third quarter, the company's organic constant currency sales grew low-single digits outside of China and 7% on a two and four-year stacked basis. Mass spec has been a key driver of performance, and the company has gained market share with its innovative product portfolio. The company has also shown strong margin performance, with gross margin expanding 240 basis points and adjusted operating margin expanding 380 basis points year-over-year. This is due to strong pricing results, productivity benefits from focus on operational excellence, and proactive cost actions. Despite a challenging market environment, the company remains confident in its long-term growth potential.

The company is expecting strong growth in global prescription drug sales and has implemented measures to improve pricing. The adoption of analytical instruments in process development for large molecule therapeutics is also contributing to growth. The company's product portfolio has been updated with innovative products that address the needs of customers. Recent launches include the Alliance iS, Xevo TQ Absolute, MaxPeak Premier columns, and new bioanalytical characterization instruments. The company also announced a new Bioprocess Walk-Up Solutions product that combines liquid handling, software, and LCMS for easier use in capturing data from bioreactors.

The company has introduced a new light scattering instrument that can measure and analyze nanoparticles used in downstream biologics and material science applications. However, their growth rates in China have declined and are expected to continue to decline in the fourth quarter, resulting in a lower revenue guide. Despite this, the company is actively managing their costs and expects no change in their margin percentage performance. They have updated their full year adjusted EPS guidance to be in the range of $11.65 to $11.75.

Organic constant currency sales for the company declined 4% in the quarter, with the Waters Division and TA also declining 4%. The acquisition of Wyatt added 4% growth, but this was offset by a weaker performance in China and a decline in industrial sales. The impact of foreign exchange was flat, and sales by end market showed a decline in pharma and industrial, but growth in academic and government. Sales in Asia declined 12%, the Americas were flat, and Europe saw growth in pharma and academic and government, but a decline in industrial.

The company saw a decline in instrument sales, but recurring revenues grew. Operational excellence and cost management led to margin expansion. The company's gross margin was 59.1% and adjusted operating margin was 31.5%. The effective operating tax rate was 14.7%. Non-GAAP earnings per fully diluted share increased by 8%. Free cash flow was $123 million, impacted by higher inventory balances. The company has a strong balance sheet and is considering M&A opportunities. Net debt position declined to $2.2 billion.

The company's share buyback program has been temporarily suspended in order to pay off debt from the Wyatt acquisition. The company expects a decline in growth rates in China for the fourth quarter and for the full year, resulting in a 250 basis points headwind. The company has updated its full year 2023 organic constant currency sales growth guidance to a range between negative 2% and negative 1%. Currency translation is expected to have a 1.5% negative impact on sales, but the Wyatt transaction is expected to add 2.5% to revenue growth. Despite these headwinds, the company expects to deliver a gross margin of approximately 59% for the year.

The company expects to deliver a 30.5% adjusted operating margin for the year, with a 30 basis point expansion compared to last year. They anticipate a net interest expense of $80 million and a tax rate of 15.5%. Their full year earnings per share guidance is projected to be between $11.65 to $11.75, with a negative currency impact of 3.5%. They expect fourth quarter sales growth to be negative 6% to negative 3%, with a negative impact from currency of 5%. Despite a weakening macro environment, the company has performed well due to their proactive cost alignment and investments in high growth areas.

The speaker discusses the company's strong outcomes in margin and earnings performance, as well as their focus on innovation and progress with an acquisition. They also mention their upcoming ESG report and highlight some key areas of improvement, such as emissions reduction and increased female representation. They then open the call for questions and the first question is about the company's exit rates and Q4 guidance.

The speaker gives some summary comments and explains that they look at performance as they exit Q3, including detailed analytics and conversations with customers. They continue to see strength in pharma outside of China. Amol then comments on the sequential ramp up, stating that the guide is muted compared to historical levels due to slower approval cycles and one extra day in Q4 this year. He also mentions that there is pain in China, but the teams are doing well in other regions. When asked about Q4 jump off and the impact of China on fiscal 2024, the speaker clarifies that China is expected to have a negative impact of minus 25 for the year and it is unclear if it will spill over into the next fiscal year.

The speaker, Udit Batra, is discussing the company's performance in China during the quarter. He mentions that the business declined by over 30%, with pharma, CDMOs, and biotech all facing pressure. He also notes that the anti-corruption campaign by the Chinese government is a new headwind. In the Industrial segment, there was growth in batteries, but it was not enough to offset the decline in the macro-sensitive Food and Environmental segments. The company will not comment on 2024 and will only discuss it during the Q4 earnings call.

The Academic and Government segment of Waters Corporation is expected to see a decrease in sales due to the end of stimulus benefits from last year. However, the company remains optimistic about future growth in China, which currently accounts for 12-13% of overall sales. In the pharma sector, the company saw a low single-digit decline in the quarter, with a 30% decline in China. Excluding China, the company saw positive growth in Europe, the Americas, and the rest of APAC, driven by strength in India and Japan.

Despite challenges in the pharma industry, the company's new product portfolio is performing well and gaining traction. The Alliance iS and mass spec have received significant orders, and the company's biologics applications are seeing success. The company expects to continue growing in the pharma sector, despite a decline in Q3 and an anticipated decline in Q4. The team is optimistic about the future and proud of their execution in a challenging macro environment.

In the third quarter, the markets outside of China grew by a little under mid-single digits, and in the fourth quarter, they are expected to continue growing but at a slightly slower pace. Recurring revenue grew by 4% globally, with chemistry at 1% and service at 5%. If China is excluded, recurring revenue grew by 7% with chemistry at a high single digit and service at a mid-single digit. Instruments saw a decline of low teens globally, with LC, mass spec, and TA all seeing drops of around 14% and 12%. Excluding China, LC saw flat growth, indicating that customers are starting to replace their fleets as previously predicted.

LC has had a flat to low-single digit growth, with mass spec declining by 10%. However, they are optimistic about the future of mass spec, as they have seen significant adoption and seeding in accounts. TA also declined, but on a 20% comp. Over the long-term, instruments have grown by 5% and they expect to see higher pricing and increased prescription rates with new molecules and products. In Q4, they expect a 250 basis point increase in price.

Amol Chaubal, CEO of Waters, discusses the company's pricing strategy and how it has been a significant driver of their operating margin expansion. He mentions that last year, the company was able to put good systems and processes in place for pricing, resulting in a 200-250 basis point increase. This has been possible due to the company's differentiated portfolio, which has been well-received by customers. Udit Batra adds that the company's portfolio has been renewed across instruments and has high receptivity from customers. In terms of China, there has been strength in the battery sector, but a weakening in the food and environmental sectors.

Udit Batra, responding to a question about the dynamics of industrial demand in China, stated that the segment had underperformed in the quarter, particularly in macro-dependent areas like materials and food. He advised modeling these segments in proportion to the expected economic recovery in China. Outside of China, there was a slight slowdown compared to strong previous quarters. In terms of operating expenses, Amol Chaubal stated that the Q3 to Q4 step down was partly due to incentive compensation and that some of it may return in the future, but did not provide specific numbers.

In the last earnings call, the company announced a 5% reduction in workforce resulting in $10 million of savings in Q3 and an expected $20 million in 2023 with an annualized impact of $40 million. The company incurred $27 million in severance expenses for this restructuring. The reduction in AIP and accretion from Wyatt offset the lack of volume leverage in Q3. The three factors contributing to the 380 basis points margin expansion were pricing, cost actions, and productivity initiatives. The company has a strong focus on cost management and has seen quarter-on-quarter margin expansion, despite volume and FX headwinds.

The speaker expresses gratitude to colleagues for being responsible with costs during a period of low volume. The company's guidance for the fourth quarter takes into account the high quality of orders and the success of new products in the pharma sector. The historical ramp rates for the fourth quarter are also considered, with the current forecast being one of the lowest in the past 15 years. Despite the unprecedented market conditions, the company remains confident in their projections.

The speaker discusses three factors that contribute to the company's projected success in the fourth quarter: strong execution in the pharmaceutical industry, customer conversations, and the wide range of the Q4 guide. They mention that while the conversion of orders to sales is taking longer, the quality of orders remains high and projects are not being canceled. They also provide some statistics on the trend of order rates, book-to-bills, and funnel velocity in different trade classes.

In the industrial trade class, there has been a change in trajectory in terms of opportunities getting canceled due to lack of funding. This trend started in Q1 and has continued into Q3. In China, the situation is much more challenging, with tier 1 CDMOs being impacted first and then spreading to tier 2 and tier 3 CDMOs and biotechs. This has also affected the industrial and A&G sectors due to the end of stimulus funding. However, in pharma and with mass spec and LC, the company is seeing positive trends that are expected to continue into Q4 based on customer feedback and similar performance in Q2.

The integration of Wyatt Technology into Waters has been successful, with a 4% contribution this quarter and 2.5% for the year. Despite longer sales cycles and other headwinds, the larger commercial field force of Waters has helped generate more leads and conversions for Wyatt's light scattering instruments. Efforts to make it easier for customers to connect Waters LCs to Wyatt's instruments have also been successful. Additionally, Waters' columns have been substituted for competitors' columns, contributing to synergy.

The integration of Waters and Wyatt is going well, with the Wyatt specialists receiving a larger number of leads from Waters account managers. There is optimism about the collaboration between the two organizations, with Wyatt colleagues presenting at the Innovation Summit and launching the ZetaStar. The 30.5% operating margin for the year includes investments in high growth adjacencies, which are delivering positive outcomes, particularly in the clinical business. The company will continue to invest in high growth adjacencies and provide guidance for the next year.

Catherine Schulte asked about commercial initiatives, specifically service attachment rates and e-commerce trends. Udit Batra responded that service attachment rates are well ahead of target and will likely increase by 200 basis points by the end of the year. The company has also seen growth in e-commerce, with over 30% of products now going through e-commerce. Amol Chaubal added that the company has had impressive operating margins in the third quarter and expects to reach 30.5% for the full year, with potential for even higher margins in the fourth quarter. He also noted that the company has performed well in the face of adversity, such as inflationary pressure and a strong dollar.

Despite challenges such as demand fluctuations and a strong U.S. dollar, the company was able to maintain or improve margins through pricing, productivity, and cost alignment. The company will provide more details and guidance for 2024 at the Q4 earnings call. A replay of the call will be available on the company's website. The call has now concluded.

This summary was generated with AI and may contain some inaccuracies.