The operator introduces the Waters Corporation First Quarter 2024 Financial Results Conference Call and hands over to Caspar Tudor, Head of Investor Relations. He is joined by Dr. Udit Batra, President and CEO, and Amol Chaubal, CFO. The earnings release and slide presentation are available on the company's website. Forward-looking statements and non-GAAP financial measures will be discussed, with a reminder to refer to the risk factors and cautionary language included in the earnings release. Reconciliations of non-GAAP measures are available on the company's website.

The company's quarterly results increased in comparison to the first quarter of fiscal year 2023 in organic constant currency terms. The company also reported strong operational performance and a focus on innovation. Sales were at the high end of expectations, and the company added new products to its portfolio. Sales declined 7% as reported and 9% in organic constant currency.

Despite a decline in sales in China, our non-GAAP earnings per share exceeded our guidance and our gross and operating margins expanded due to effective margin management. Our strong operational performance is reflected in our free cash flow and we have made significant progress in deleveraging from the Wyatt acquisition. We operate in attractive markets where testing volume is a key factor in our success.

The company expects an increase in prescription consumption in the future, leading to strong long-term growth. They have a competitive advantage in downstream applications and have aligned with high-growth opportunities. The company launched several new products, including the Alliance iS Bio, a liquid chromatography platform for biologics applications, and GTxResolve Premier columns for assessing aggregate content in larger biologic particles. They also launched a new product, Waters Oasis, to simplify the detection of PFAS. These launches support the development of new modalities and the company's critical instrument technology and software.

The company has launched a new solution for PFAS testing, which is a rapidly growing market. The solution has high sensitivity and can detect PFAS at very low levels. The company is also expecting new regulations governing PFAS across the globe. In addition, they have launched a new accessory for battery testing. The company's 2024 full year guidance remains unchanged and they expect growth rates to improve as the year progresses.

In the first quarter, sales met expectations, declining 7% as reported and 9% in organic constant currency. Pharma sales outside of China declined slightly, while China declined close to 30%. Industrial sales were driven by growth in food and environmental applications, but this was offset by weakness in core industrial applications. Academic and government sales were weak due to lumpy spending patterns. Sales declined in all regions, with Asia declining the most at 16%.

In the first quarter of 2024, the company saw a decline in by products and services, with recurring revenues affected by low activity levels in China. However, their focus on operational excellence allowed them to achieve a gross margin expansion and an adjusted operating margin of 27%. Their effective operating tax rate was 14.3% and their non-GAAP earnings per fully diluted share were $2.21. Free cash flow was $234 million and the company maintains a strong balance sheet and access to liquidity. They are also evaluating M&A opportunities to drive growth.

The company's net debt position decreased to $1.7 billion at the end of the quarter, with a net debt-to-EBITDA ratio of 1.8x. The share buyback program has been suspended to pay down debt from the Wyatt acquisition. The company expects sales growth to improve in 2024 and maintains its full year guidance. The Wyatt acquisition is expected to contribute to sales growth. The company also expects to see gross margin and operating margin expansion, with a net interest expense of $80 million and a tax rate of 16.3%. The average diluted share count for 2024 is estimated to be 59.7 million.

The company's non-GAAP earnings per share guidance for 2024 remains unchanged, with a projected growth of 0% to 3%. Cautious customer spending and weakness in the Chinese market are expected to continue in the second quarter, resulting in a decline in sales. The company's focus on ESG initiatives is highlighted, along with recognition for its employees' talent and hard work.

In the first quarter, our colleagues were recognized for their achievements in separation science, manufacturing excellence, and promoting LGBTQ and women's benefits. We congratulate Dr. Philip Wyatt for receiving the Pittcon Heritage Award and Waters for being recognized as one of the 100 most sustainable companies by Barron's and S&P Global. We were also honored with the 2024 public company Board of the Year Award and are committed to reducing our greenhouse gas emissions. Overall, we are pleased with our performance and remain on track to achieve our 2024 objectives. Our long-term growth prospects are strong and we have a solid financial profile and capital allocation strategy to create value for our shareholders.

In this paragraph, Caspar Tudor thanks Udit for his comments and opens the phone lines for questions. The first question is from Dan Brennan about China's performance in the first quarter. Udit explains that China's decline was better than expected but still high at around 20%. He also mentions that the decline is expected to continue in the second quarter but may see growth in the second half of the year. Udit attributes the better performance to the replacement of LCs in their Branded Generics segment, which they had previously discussed as a potential growth opportunity. He also notes that the 5-year stack growth for LC instruments in China is down by about 8-9%, providing a baseline for potential growth in the replacement cycle.

The new stimulus package has caused some changes in Waters' guidance for the year, with a likely low double-digit decline instead of a high teens decline. China is expected to perform better than anticipated, and the stimulus may improve sentiment and lead to a replacement cycle in the latter half of the year. In the first quarter, there was improved funnel activity, but it is unclear if this is driven by China or global biopharma. Q1 is the most difficult quarter for Waters to predict, as customers plan their total CapEx spend for the year.

The company took advantage of the pandemic to meet with customers and found that the quality of orders has improved, new products are gaining traction, and there will be a delay in seeing the benefits of orders. This has led to increased confidence in their full year guidance and they have used historical data to determine the phasing of revenue.

The speaker discusses the company's increased confidence in their full year guidance due to a strengthening funnel and positive conversations with customers globally. They mention a potential decline in China, but are maintaining their flat full year guide. The speaker also mentions a recent meeting with a customer in the Midwest where they discussed robust CapEx plans and positive reception of new products. The U.S. market is still healthy, with a back half weighted spending phasing.

The speaker mentions that sales outside of China are in the mid- to high single digits, with no major issues to report. They have had two exceptional years in ex-China sales, and while there may be a slight lull currently, they are confident in their plans for the full year. The speaker also discusses progress with the Wyatt acquisition, noting that all synergies are ahead of schedule and they are happy with the progress. They also mention that the M&A contribution for the year has been tweaked down slightly due to the small size of Q1 and some delays, but they are excited about bringing light scattering into QA/QC. The speaker had recently spoken with a large academic customer who also has a hospital attached to it.

The speaker discusses the characterization of lipid nanoparticles and their use in delivering mRNA vaccines and therapeutics. They mention the use of SEC columns and light scattering equipment from Waters, as well as piloting the use of field flow fractionation. This technology could become a mainstay for separating aggregates in experiments. The same approach may also be applied to AAVs and other particles used in biologics. The speaker is excited about the potential of this technology and believes it will continue to contribute to growth and margins in the mid- to long-term. In regards to the company's lower-than-expected guide for Q2, they mention potential growth in Q3 and Q4, with a possibility of pushing more growth into Q4. They also note that they executed well to finish at the higher end of their Q1 guide.

The company is confident in meeting their full year sales guide, with Q2 expected to be 10% higher than Q1 and the second half consistent with historical trends. The difficulty in predicting the business is acknowledged, but the company has confidence in their historical statistics and customer discussions. The growth in the academic end market was strong in Q1 due to a challenging comparison to the previous year.

The speaker explains that the academic end market is facing difficult comps, but overall, Waters has shown a low single-digit CAGR in the past five years. In China, the academic segment is down by low to mid-single digits. The next speaker discusses the performance of the pharma market in China, which was down 30% compared to the rest of the world's low single-digit decline. They mention the impact of the BIOSECURE Act and CDMOs, and request further details on the performance of Tier 1 versus Tier 2 and 3 CDMOs. The response states that there was weakness in the pharma business in China in the past year, but no significant negative developments in Q3 and Q4.

Amol and Udit discuss the decline in the Chinese pharmaceutical market, attributing it to a baseline correction rather than any significant headwinds. They also mention that there is no growth in activity in CDMOs, branded generics, or biotechs in China. However, they note that customers are taking proactive measures to secure their supply chain, which has led to an increase in demand for their services. They also mention that the BIOSECURE Act has not had a significant impact on their business.

The CEO of the company stated that they are ready to help customers who are looking to transfer from one vendor to another. They are also working on proposals for customers in China who may benefit from the government's stimulus plan. The stimulus is expected to be broad and cover various customer segments, but it is unclear when it will translate into orders and revenue. The CEO does not expect much of the stimulus to go towards high-tier A&G customers.

The company is currently having good conversations with customers, particularly in academia, industry, and pharma, regarding their products. However, they do not expect to see the impact of these conversations until later this year or early next year. The company is also experiencing a favorable product mix and offsetting FX headwinds, contributing to gross margin expansion. These conversations may potentially lead to orders and revenue later in the year, but there may be a delay before this materializes.

Udit Batra addresses a question about the growth of Waters' instruments, stating that they have grown on average 5% over the last 15 years, with some years above or below this average. He also mentions that in the last 3.5 years, there has been a microcosm of this trend, with 2 years of 20%+ growth followed by a decline. Batra believes it is difficult to predict quarterly instrument growth, but the 5-year average is more instructive, especially for LC instruments, which are due for a replacement cycle soon. He mentions having conversations with customers who are interested in replacing their aging fleet of instruments for new launches.

The speaker mentions that things are going in the right direction, but it's important to not get too excited about high growth and decline. They remind listeners that the overall business has a 45-55 average for the year and a 10% increase in the second quarter. They also discuss conversations about QA/QC and replacement cycles starting in China and other countries. On the topic of margins, the speaker mentions that proactive cost actions have been taken and there may not be significant margin expansion in the second half due to bonuses, but they still expect a 20-30 basis point expansion for the year. Doug Schenkel thanks the speaker for their commentary on the quality of the funnel and for providing context on seasonal patterns.

The speaker is questioning the conservative guidance given by the company for the year-over-year comparisons and how they progress over the course of the year. They are struggling to understand how the company will achieve their targets in spite of the helpful commentary provided. They ask about the dependence on instrument recovery and normalization in the fourth quarter, and whether the company considered cutting guidance. The company responds by saying they have been prudent in their guidance and have some visibility in CRM for Q3 and Q4.

The sales cycle is around 6-9 months and there is increased activity in early stages of the pipeline. The historical pattern is in line with previous years and there is no noise outside of China. The decline in China is expected to result in a modest increase in the second half of the year. Cost work done last year will result in modest margin expansion in the second half. Stimulus in China is not included in the guide, but the government's actions are encouraging. Customer discussions are positive, but the company is waiting to see results before making assumptions. Predicting instrument businesses is difficult.

The speaker discusses the positive conversations they have had with customers in the first quarter and their hope for a different discussion at the end of the second quarter. They also mention the impact of China on their overall numbers and predict low single-digit growth for the year in various customer segments. Specifically, in the pharma market, they expect low single-digit growth, with orders becoming more firm and their products gaining traction in solving problems for large molecules.

The speaker discusses the strong performance of their products in light scattering and mass spectrometry analysis. They also mention that the first quarter of the year met expectations for their pharmaceutical division and they anticipate low single-digit growth for the full year. The call concludes with thanks to participants and an invitation to visit the company's website for a replay of the call.

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