The operator introduces the Waters Corporation Fourth Quarter 2023 Financial Results Conference Call and states that all participants will be in a listen-only mode until the question-and-answer session. The call is being recorded and the company's President and Chief Executive Officer, Dr. Udit Batra, and Senior Vice President and Chief Financial Officer, Amol Chaubal, are present. The cautionary language is covered, and the non-GAAP financial measures will be discussed and reconciled with GAAP measures. The earnings release and slide presentation are available on the company's website.

In the second paragraph of the article, it is stated that any references to quarterly results increasing or decreasing are in comparison to the fourth quarter of fiscal year 2022 in organic constant currency terms. All year-over-year revenue growth rates and ranges are also given on a comparable organic constant currency basis. The company does not intend to update their guidance, predictions, or projections, except as required by law. The speaker expresses gratitude to their colleagues and highlights the company's strong business performance and transformative year in 2023. The acquisition of Wyatt has brought new opportunities for value creation and accelerated their growth in high-growth adjacent markets. The company has also launched new and innovative products, including the Alliance iS LC platform.

In 2023, Waters had a successful year with various achievements, including expanding into clinical applications and receiving recognition for sustainability. In the fourth quarter, sales declined but were in line with expectations and non-GAAP earnings per share were strong. For the full year, sales declined slightly but all regions outside of China saw growth. The spending environment for instruments remained challenging, but Q4 revenue increased compared to Q3.

The company reported a $108 million increase in sales in the fourth quarter compared to the third quarter, with a 3% organic constant currency growth for the full year. The Americas, Europe, and Asia (excluding China) all saw growth, thanks to the efforts of the sales team. However, China saw a decline in sales, particularly in the pharma market, which had a 5% negative impact on overall growth. Despite challenges, the company managed to maintain a healthy high-single-digit growth rate. The company also focused on margin management and saw a 160 basis point improvement in gross margin and a 70 basis point expansion in adjusted operating margin. The company also made progress with the acquisition of Wyatt Technology.

The company's strong start in lead sharing between Wyatt and Waters helped offset a slowdown in biotech spending, resulting in a 2.5% M&A contribution to full year sales. The company's revitalized portfolio and focus on higher growth segments, such as TQ Absolute, Alliance iS, and MaxPeak Premier Columns, have contributed to strong results in 2023. The company has also invested in adjacent high growth markets, such as bioseparations, bioanalytical characterizations, diagnostics, and batteries, which are expected to continue driving above average growth. The company will now provide guidance for 2024.

Since 2010, Waters has experienced consistent organic growth, with an average of 6% in constant currency terms. The growth is expected to continue, driven by factors such as increased use of analytical instruments for large molecules and environmental regulations. Two key drivers of testing volume acceleration are the adoption of GLP-1 drugs and PFAS testing. The Wyatt light scattering business is also expected to contribute to growth by solving customer challenges and tying in with other Waters products. Full-year guidance for 2024 will be covered.

The company expects customer spending caution to continue in the first quarter of the year, with slow budget releases for downstream instrumentation. However, they anticipate a gradual improvement for the remainder of the year as budgets open up, market conditions improve, and prior-year comparisons become easier. They also expect weakness in China to continue in the first half of the year. For 2024, they expect full-year organic constant currency sales growth to be between negative 0.5% to positive 1.5%, with continued strong operational performance and adjusted EPS growth of 0% to 3%. In the fourth quarter, the company delivered sales that were in line with expectations despite market challenges, with a 4.5% decline in reported sales and an 8% decline in organic constant currency sales. The Wyatt acquisition contributed to over 3% growth in reported sales. By end market, pharma declined 11%, industrial declined 4%, and academic and government declined 9%.

In the pharma sector, sales declined due to a weakening in China and a muted budget flush. Industrial sales were flat outside of China, with a decline in China due to weak economic conditions. Academic and government sales performed well outside of China, but declined significantly in China. Overall, sales in Asia declined due to weakness in China, while the Americas and Europe also saw declines due to a muted budget flush. Instruments sales were the most impacted, but recurring revenues showed growth, with one additional day in the quarter. For the full year, pharma and industrial saw low-single-digit growth outside of China, while academic and government grew mid-teens. Sales in Asia declined, with China seeing a significant decline, while the Americas and Europe saw modest growth. Instruments sales declined primarily due to China, with low-single-digit decline outside of China.

Recurring revenues grew 6% overall and high-single-digits outside of China, driven by strong demand for MaxPeak Premier Columns and adoption of ecommerce. Service growth was also strong, with a 200 basis point increase in plan attachment. Despite challenges such as lower sales volumes, FX, and inflation, the company delivered a fourth quarter gross margin expansion of 170 basis points and an adjusted operating margin expansion of 120 basis points. For the full year, gross margin expanded by 160 basis points and adjusted operating margin expanded by 70 basis points. The effective operating tax rate for the quarter was 17.1% and the average share count decreased by 300,000. Non-GAAP earnings per fully diluted share were $3.62 for the quarter and $11.75 for the full year. Foreign exchange headwinds and dilution from the Wyatt acquisition lowered EPS growth by 3% and 1% respectively. On a GAAP basis, EPS was $10.84.

The company provided a reconciliation of their GAAP to non-GAAP earnings and discussed their free cash flow, capital deployment, and balance sheet. They reported a strong balance sheet and access to liquidity, allowing them to prioritize investing in growth and returning capital to shareholders. Their net debt position decreased and their share buyback program has been temporarily suspended to pay down debt. They anticipate a gradual recovery in sales growth throughout 2024.

The company is maintaining a cautious outlook for the year due to market uncertainty, with projected organic sales growth of -0.5% to 1.5%. M&A activity is expected to contribute to overall sales growth, but currency translation may have a negative impact. The company expects to maintain strong margins and deliver a gross margin of 59.8% and operating margin of over 31%. Net interest expense is expected to be around $80 million and the tax rate is expected to remain consistent with the previous year. The company expects earnings per share to grow by 0% to 3% for the full year, with a potential 2% headwind from foreign exchange. In the first quarter, slower customer budget release timing and market weakness in China may affect results compared to the previous year, which benefited from A&G stimulus in China.

The company expects a 40% decline in their China business in the first quarter, resulting in negative organic constant currency sales growth. Currency translation is expected to have a negative impact, while Wyatt is expected to contribute positively. Non-GAAP earnings per share for the quarter are estimated to be between $2.05 and $2.15. The company has made progress in their ESG efforts and has received recognition for their environmental, human rights, and governance practices. The call is then turned back to the CEO for closing comments.

The company is now taking questions from analysts, with the first question coming from Vijay Kumar. He asks about the annual guidance and what assumptions are being made for end markets such as pharma, government and academia, and industrial. The company expects growth in all geographies outside of China, with low-single-digit growth in all end markets. In China, they expect a decline in the mid to high-teens for 2024, with the first half of the year being slower due to higher comps and academic and government stimulus. For the full year, pharma is expected to grow low-single-digits, industrial to be flat, and A&G to have strong growth similar to 2023.

The company expects a low double-digit decline in overall revenue, with significant declines in China due to high comps. The rest of the world is expected to see low single-digit growth, similar to the performance in 2023. The pharma market is expected to remain strong due to QA/QC focus. The company has exceeded its pricing expectations, with a 300 basis point increase in 2023 and a projected 200 basis point increase in 2024. The company's gross and operating margins have also improved, despite flat organic revenue, due to proactive cost actions. FX may have an impact on gross margins.

In the paragraph, Amol Chaubal and Udit Batra discuss the factors driving the company's margins, including FX assumptions, pricing, and cost actions. They also mention the impact of the replacement cycle on the company's sales, with Udit Batra stating that the trend is still intact and ongoing, especially outside of China. He also mentions that it is important to understand what drives these replacement cycles and how to trigger them.

The company has seen positive reception for their new products, which has helped with conversations around replacements. They believe the growth in the post-COVID years was due to pent up demand, and expect LC replacement to start soon. They anticipate long-term growth to revert back to the mean or even better. The company has a lot of visibility and data to support their expectations. LC is expected to see an inflection point in growth rates. The company also briefly mentions PFAS.

The speaker discusses the expansion of the market into food testing and the potential size of this market. They mention that they are being cautious in their assumptions and have estimated $50-75 million for the food market. The majority of the 30 basis points annual contribution from PFAS is expected to come from water testing, but the market is dynamic and expanding into other areas. The speaker also addresses the lower-than-expected 1Q guide and attributes it to difficult comps and one-time events in China, such as the stimulus in A&G.

The company is seeing a level of weakness in China that was not reflected in last year's first quarter. They expect customers to be slow in their spending, based on the muted budget flush in Q4. This trend is reflected in their guidance for Q1, which is expected to be down by 10%. The company expects similar trends to persist in Q1 as in Q4, with low-single-digit growth or flat growth in ex China and a 40% decline in China due to heavy comps. However, they are starting to see stabilization in the pharma market in China, particularly in biotech spending and recurring revenues. The company is cautious in calling this trend in Q1, which is their smallest quarter. They are assuming gradual improvement throughout the year, with some markets and geographies expected to see more improvement than others.

The speaker discusses the company's performance in China and expectations for the year. They note that the company has grown low single-digits excluding China, and expects this trend to continue for the full year. They anticipate a decline in Q1 due to a strong baseline, but expect things to normalize in the second half. The speaker mentions that comps will be higher in the first half compared to the second half, and a similar trend is expected for the next five years. The next question from an analyst focuses on the company's performance in China and the historical pattern of Q1 revenue being about 70% of Q4 revenue in China. The speaker confirms that this pattern is embedded in their guidance for the year.

The speaker discusses the company's revenue in China for Q3 and Q4, which were around $100 million each. They explain that the comps were tough and growth may not look great in the first half of the year. The company uses a mathematical approach to determine their guidance and also has conversations with customers. They anticipate a normalization of sequential growth over the course of 2024, but if there is improvement, there may be upside. The speaker also mentions that they are seeing trends in Q1 that look better in China's largest end market, pharma, and that customers are cautious in Q1.

The speaker asks about the growth of large and small molecule applications in the company's chemistry sector and how it has been trending. The other speaker responds by stating that revenues from biologics have increased from less than 20% to over 35% in the past year, with a mix of growth coming from both chemistry and instruments. They also mention specific products and applications that have contributed to this growth. The next question is about the company's confidence in the continued growth of the industrials category, particularly in PFAS and battery testing, and why there shouldn't be a slowdown in the rest of the world.

Udit Batra, CEO of the company, discusses the performance of the industrial and TA businesses in 2023 and their outlook for 2024. Industrial finished the year flat due to macro challenges, but PFAS and battery testing offset this. TA business grew 3% and is expected to have low single-digit growth in 2024, with China's growth being muted due to large comps in 2023. The net contribution of China to revenue was 17-19% in previous years, but it is now 15%. The issues in China are seen as cyclical rather than structural.

The company believes that the current challenges faced by CDMOs, such as overcapacity and geopolitical issues, are cyclical and will eventually come back. However, the decrease in biotech funding is a structural issue that has reached its bottom. The company is excited about the push for innovative medicines in China and is taking steps to participate in this market. Overall, LC is expected to be mid-single-digits on a long-term basis, but declined in 2023 due to a decrease in China.

The speaker expects similar trends in the first half of the year in LC as in the second half, with a bit of relief and growth in the latter half. Biotechs and CDMOs are starting to spend again, and hospitals are opening up, leading to a mix of replacement cycles and recovery in pharma. The company plans to continue its commercial initiatives, aiming for a 40% ecommerce rate and a 100 basis point increase in service attachment by 2024. The speaker also mentions order trends in Q4 and the potential impact of Pillar Two on the tax rate in 2025.

Udit Batra discusses the Q4 orders and sales, which are in line with each other. Amol Chaubal explains the increase in tax rate, mainly due to US R&D capitalization. The company is closely monitoring the changes in Singapore and Ireland's tax policies. With the recent acquisition of Wyatt, the company's leverage is down and they may restart their buyback program. The company's goal is to simplify the QA/QC environment for large molecules in cell and gene therapy.

The speaker discusses the company's successful navigation of difficult times and their focus on cost management, resulting in margin expansion despite a decrease in revenue. They also anticipate future growth based on advancements in technology and software.

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