The paragraph is the introduction to the Waters Corporation Third Quarter 2024 Financial Results Conference Call. It includes a welcome from the operator and Caspar Tudor, the Head of Investor Relations, who introduces the participants: Dr. Udit Batra, CEO, and Amol Chaubal, CFO. Tudor mentions that the call will include forward-looking statements about future financial performance and market conditions, with relevant cautionary language provided. He notes that non-GAAP financial measures will be discussed, with reconciliations available in the earnings release and slide presentation. Additionally, references to financial results will compare the third quarter of 2024 to the same quarter in 2023, using organic constant currency basis for year-over-year revenue growth rates.

The paragraph discusses the strong third-quarter performance of a company, surpassing expectations in revenue, margin, and earnings per share. All three reported regions returned to growth, particularly in the Pharma & Industrial markets, with positive developments in liquid chromatography and mass spec. The company saw both quarter-over-quarter revenue growth and a rise in recurring revenue, driven by an 8% increase in chemistry consumables. Operational excellence resulted in better-than-expected gross and operating margins, leading to an adjusted EPS growth exceeding forecasts. The success is attributed to the dedication of the team in commercial execution, operational management, and innovation.

The paragraph discusses the company's progress in innovation and growth during the third quarter. It highlights a 4% sales increase and a 3% rise in non-GAAP earnings per share. The launch of new products met customer needs, leading to improved market conditions and spending trends. Specific product segments, including Instruments and Mass Spectrometry, saw positive growth. Recurring revenues increased by 7%, driven by consumables. Sales improved across all end markets, particularly in large pharma spending. Despite a slight headwind from China, regional sales grew mid-single digits. The new HPLC product, Alliance iS, contributed significantly to increased HPLC orders.

The paragraph discusses the expansion and adoption of the Alliance iS and Xevo TQ Absolute systems by large pharmaceutical companies. The Alliance iS has expanded its capabilities with new detectors and the introduction of the Alliance iS Bio, leading to increased customer adoption. The Xevo TQ Absolute has experienced significant growth, particularly in PFAS applications, which is a rapidly growing market. Its success is attributed to its high sensitivity and sustainable design, with strong adoption in quantitative pharmaceutical applications. The system's compact size and resource efficiency have enhanced its appeal and market position.

The paragraph highlights the strong growth and success of the Xevo TQ Absolute instrument in clinical applications, particularly in endocrinology and complex test development. This contributed to a low double-digit growth in total clinical revenue. The innovative MaxPeak Premier Columns also saw significant growth, driven by their unique market benefits, especially in GLP-1-related opportunities. Operationally, the company maintained resilient margins, with gross margin expanding and a strong adjusted operating margin. Looking ahead, they are confident about future margin expansion given recent successes.

The paragraph discusses Waters' strategic initiatives for long-term margin expansion through productivity enhancement, cost management, and pricing strategies. The company is well-positioned for growth in markets where testing is crucial, driven by factors such as increased GLP-1 adoption, PFAS-related testing, and a rise in drug development and approvals. The growing demand for generic drugs, partly due to an aging global population, and the expiration of drug patents present opportunities for expansion. The aging customer fleets, due to deferred spending on equipment during weak economic conditions, create a catch-up opportunity for instrument sales. Despite expected growth in 2024, the projected single-digit CAGR from 2019 is less than the historical average. Historically, instrument down cycles last four to seven quarters, followed by growth as replacement cycles begin. The last quarter noted the seventh consecutive decline in LC instrument sales.

The company is experiencing positive market conditions, with third-quarter results and improving conversion trends indicating recovery progress. Their strong commercial execution, product portfolio, pricing strategies, and pharma QA/QC exposure position them well for growth. They have launched several new products, including a rapid scan calorimeter for biologic formulations and a compact rheometer for manufacturing quality control. They are also focusing on high-growth areas, particularly bioseparations, due to the increasing prevalence of large molecule drugs in the pharma pipeline. Consequently, they have invested in addressing the challenges associated with separating and purifying these molecules, with 40% of their pharma chemistry revenue now derived from large molecules.

The business expects an increase in growth due to a focus on novel modalities, dedicating 70% of R&D spending to large molecule applications. Successful launches have been made in enzymes for antibodies and new products for cell and gene therapy, RNA-based therapeutics, and other novel applications. The company aims to develop a broad, molecule-agnostic portfolio. For 2024, despite market volatility, improved customer spending suggests a 5% to 7% growth, leading to an adjusted earnings per share guidance of $11.77, which marks a 1.4% improvement over prior guidance. The updated sales growth guidance ranges from -0.9% to -0.3%.

In the third quarter, the company reported $740 million in sales, a 4% increase both as reported and on a constant currency basis, exceeding their guidance. Customer spending improved, and strong commercial execution helped achieve a $32 million sales increase from Q2 to Q3. Orders outpaced sales for the second quarter in a row, building backlog. By market, Pharma and Industrial saw growth, while Academic and Government were flat. Geographic regions, including Asia, Europe, and the Americas, returned to growth with mid single-digit growth in Asia and Europe, and low single-digit growth in the Americas.

In the third quarter, excluding China, sales grew by 5%, driven by strong growth in pharma and industrial applications. In China, sales declined mid-single digits but showed improvement from earlier declines. Orders matched last year, and positive growth is expected in Q4. Dialogue with customers regarding Chinese government stimulus is ongoing, with benefits anticipated to materialize in 2025. Instruments, chemistry, and services saw respective growth of 1%, 8%, and 6%. The quarter's recurring revenues grew in the high single digits, fueled by strong customer activity and commercial initiatives. Despite facing challenges such as FX, inflation, and incentive compensation, the company maintained a resilient financial performance with a gross margin increase to 59.3%, aided by pricing, productivity, and spending management strategies.

The paragraph discusses the financial performance and strategic priorities of the company in the third quarter of 2024. The adjusted operating margin was 30.8%, increasing to 31.2% when excluding foreign exchange impacts. The effective operating tax rate was 17.2%, with an average share count of 59.5 million shares. Non-GAAP earnings per share were $2.93, while GAAP earnings were $2.71. Free cash flow for the quarter was $179 million, with $26 million spent on capital expenditures, leading to a year-to-date free cash flow of $556 million, equating to 27% of sales. The company reduced its net debt by $180 million, resulting in a net debt-to-EBITDA ratio of 1.5. The company is exploring M&A opportunities and aims to balance debt reduction with potential share repurchases. Further commentary on fourth-quarter and full-year outlook is mentioned.

The company reports positive trends in customer spending and order growth, projecting a 5% to 7% increase in constant currency sales growth for the fourth quarter of 2024. Currency translation is expected to reduce reported sales growth to 3.3% to 5.3%. The anticipated revenue run relies on similar dynamics to the previous year's Q3 to Q4 period, with estimated fourth-quarter non-GAAP earnings per share between $3.90 and $4.10, accounting for a currency impact. Due to better-than-expected third-quarter results, full-year 2024 sales and EPS guidance has been raised. Organic constant currency sales growth is now expected to be between -0.9% and -0.3%, with currency factors reducing growth by 1.2% and M&A activities contributing a 1.3% increase. Total full-year reported sales growth is now anticipated to be between -0.8% and -0.2%.

The company expects a slight positive growth in earnings per share for 2024, with a projected range of $11.67 to $11.87 on a non-GAAP basis, despite a 3% foreign exchange headwind. Gross margin is anticipated to expand to 59.8%, with an adjusted operating margin of around 31%. The net interest expense for the year is expected to be $71 million, with a tax rate of 16.5% and an average diluted share count of 59.5 million. Udit Batra highlights the company's return to positive instrument growth and new product adoption, which have contributed to growth. The company has increased its full-year guidance and expects to maintain positive EPS growth, leveraging its P&L despite headwinds. The long-term growth outlook exceeds the historical average of 6%, driven by global volume growth drivers, price contributions, and recovering customer capital expenditure.

The company is experiencing a positive catch-up phase in the market with strong commercial execution and a competitive product portfolio. Udit mentions that their instruments, particularly LC (liquid chromatography) systems, have returned to growth after seven quarters of decline. This growth is evident in markets like India, especially in the generic segment, as well as in large pharma quality assurance/quality control segments in Europe and the U.S., where LC has seen low single-digit growth. Tycho Peterson from Jefferies inquires about the specifics of the LC replacement cycle and its drivers, including the impact of the new PEA module and factors like patent expirations and the potential move of GLPs to oral forms.

The paragraph discusses the replacement cycle for pharmaceutical equipment and how customers are increasingly starting these cycles by involving cross-functional teams due to the significant investment required. The company has engaged extensively with large pharma customers to understand their perspectives. There is an increasing adoption of their ARC HPLC and Alliance iS systems within these customers, with positive feedback. The company is also expanding its product offerings with additional features like the PDA and Alliance Bio System. Additionally, the paragraph mentions India as an emerging market, contributing significantly to sales due to its strong generics segment. The discussion touches on the anticipated expiration of patents, which is expected to drive growth, particularly in small molecule generics, positioning the company well in the market.

The paragraph discusses the dynamics of product pricing and market positioning for ARC and Alliance iS products, highlighting their success and premium pricing due to customer needs being effectively addressed. Early-stage PDA product launch hasn't yet shown significant financial impact but is expected to contribute more in the future. Udit Batra mentions that the replacement cycle signals its beginning and that their broader LC portfolio plays a vital role in discussions. Batra refrains from making predictions for 2025 but emphasizes the stability of recurring revenue, particularly in pharma research and QA/QC segments, which constitute 55% of their business. There's an expectation of continued growth in generics volume.

The paragraph discusses the company's optimistic outlook on growth, driven by strong PFAS testing capabilities and a leading position in GLP-1 with major producers. They highlight the need to monitor the pace of the replacement cycle and China's stimulus impact, where they feel well-positioned. Despite competitive pricing pressures, they maintain their pricing commitments, as reflected in their gross margin. Lastly, the company's capital allocation strategy involves a preference for mergers and acquisitions over stock buybacks, aligning with their transformation goals set years ago.

The paragraph discusses a company's strategic focus on commercial execution, launching new products, and engaging in mergers and acquisitions (M&A). They prioritize organic growth but remain open to acquisitions that align with their strategy, exemplified by their acquisition of Wyatt. The company maintains a balanced capital allocation strategy, which includes shareholder value returns through buybacks. During a Q&A session, Brandon Couillard from Wells Fargo questions the CEO, Udit Batra, about guidance changes and market performance. Batra explains that their performance exceeded expectations across all sectors and regions, indicating an accelerating liquid chromatography (LC) replacement cycle contributing to growth. They remain optimistic as they approach Q4, anticipating continued positive trends.

The paragraph discusses the company's positive outlook on the generics market, which has led them to raise their revenue guidance for Q4 by 6%. The company has decided to maintain the same revenue ramp from Q3 to Q4 as last year, despite improving trends across various segments like pharma and industrial. Brandon Couillard asks about the mixed data from China, and Udit Batra, after visiting China and meeting with customers and officials, states that their performance in China aligned with expectations.

The company's orders are consistent with the previous year, although sales are down by 5% due to a shipment delay. Despite challenging market conditions over the past two years, the company has adapted by resizing its organization and expanding its distribution channels. They have localized their product portfolio to better capitalize on anticipated fiscal stimulus, which they feel well-positioned to leverage. A recent order from a government-run customs agency, though modest in value, indicates the stimulus is beginning to translate into sales. Overall, the company anticipates improving conditions and is optimistic about benefiting from upcoming economic stimulus measures, particularly in China.

The paragraph discusses a Q&A session where Puneet Souda from Leerink Partners asks Udit Batra about the varying growth trends in instrumentation among industry peers, highlighting growth in LC (liquid chromatography) and MS (mass spectrometry) and an LC replacement cycle, unlike some peers reporting declines. Udit responds by emphasizing the stability of Waters' recurring revenues, likening them to a "Swiss clock" due to their consistent mid- to high single-digit growth driven by innovation and increased attachment rates. He expresses confidence in the sustainability of this growth, even predicting improvement in service revenues as the replacement cycle approaches. For instrumentation growth, Udit mentions generics in India as a key volume driver.

The company is expanding its presence in India, Eastern Europe, and parts of the U.S., and benefiting from a growing replacement cycle in the market. They have a strong position in quality assurance and quality control (QA/QC) testing for pharmaceuticals, particularly in marketed drugs, which sets them apart from competitors. While there is less activity upstream in pharma research due to funding delays, opportunities exist in biotech and contract development and manufacturing organizations (CDMOs), especially with innovative modalities like ADCs and oligonucleotides. The company has also focused on revitalizing its product portfolio, resulting in advanced products like the Alliance iS in HPLC testing and the Xevo TQ Absolute for PFAS testing.

The paragraph discusses the positive reception of the Xevo MRT, a mass spectrometer designed for metabolomic testing, emphasizing its high resolution and speed. It mentions the company's confidence in improving pricing by at least 100 basis points due to their differentiated portfolio and operational execution. Amol Chaubal highlights that while 45% of their portfolio consists of instruments, their recurring revenue, which makes up 55% of the portfolio, consistently grows between 6% and 8%, offering stability compared to others in the market. Puneet Souda inquires about the company's position in the GLP peptide market, particularly in terms of volume growth and emerging molecules, with a focus on expectations for 2025.

In the paragraph, Udit Batra discusses Waters Corporation's strong market position in the growth of GLP-1s, highlighting their primary vendor status in columns for large injectable manufacturers Novo Nordisk and Eli Lilly. Waters holds a significant share in at-line testing systems and is well-positioned in both the oral and generic GLP-1 segments. Batra expresses confidence in continuing volume growth through 2025. Vijay Kumar from Evercore ISI then asks whether Waters is gaining market share or benefitting from a broader market recovery, seeking insight into the company's competitive positioning.

The paragraph discusses the challenges in accurately assessing market share within the industry due to different portfolios and segments among competitors. The speaker emphasizes that their company is performing well, often winning more than losing in various segments. They attribute this success to effective commercial execution and a strong portfolio in areas like quantitative mass spectrometry and metabolomic testing. However, the speaker highlights the difficulty of pinpointing exact market share gains without precise information from competitors and comments on the confusion between share of wallet and market share. Additionally, Amol Chaubal notes the absence of comprehensive data like IMS, making it challenging to measure growth accurately, though the company is experiencing outsized growth, especially in India.

The company outperformed the market, with a $25 million quarterly beat and an annual guidance raise. Vijay Kumar inquired about Q4 revenue guidance, noting extra days in the quarter. Amol Chaubal explained that the guidance was conservative, aligned with last year's 15% ramp, but slightly increased to 16% due to additional days. The EPS guidance was raised, despite timing of spending adjustments aimed at market recovery. Udit Batra added that spending isn’t being cut, emphasizing growth in generics in India, Eastern Europe, the Alliance iS, and PFAS, ensuring resources for future growth. No revenue was pulled forward from Q4.

In the provided paragraph, the conversation revolves around the company's performance in China, particularly concerning orders and sales of instruments. Orders are growing faster than sales, resulting in a backlog. The company experienced a 5% decline in China sales for the quarter, with instruments down by high single digits. However, growth is expected to return in the fourth quarter, with low to mid-single-digit growth in sales in China, albeit with a similar decline for instruments. The discussion also touches on the anticipated monetary stimulus in China but highlights the uncertainty due to the varied rollout phases across different provinces, making it challenging to predict its impact for 2025.

The paragraph discusses the anticipated positive impact of stimulus measures in China on a sector, emphasizing the importance of localized distribution and engagement with customers. Although the timing of the impact on sales is uncertain, initial orders suggest progress. Additionally, the fiscal stimulus is expected to boost economic confidence, influencing the sector. The conversation also touches on the business potential of PFAS and GLP-1, with PFAS expected to contribute 30 to 40 basis points of growth, particularly as its applications expand to areas like food and consumer products.

The paragraph discusses the expectations and analysis around growth prospects for GLP-1 and Instrument sectors. It mentions that GLP-1 could represent a significant portion of prescription volumes and capital expenditures over the next decade, but the company is maintaining prudence in projections. Udit Batra points out the robust investment activity in biotech hubs like Copenhagen and Indianapolis. Matt Sykes from Goldman Sachs inquires about the potential recovery and growth in the Instruments sector and whether it might surpass its historical 5% growth average, noting the presence of a catch-up opportunity and possible pent-up demand. Udit Batra responds that while the magnitude of growth is significant, predicting the exact recovery rate is challenging, with possibilities ranging from 0.5% to 11% quarter-over-quarter growth.

The paragraph discusses improvements in funnel conversion rates, highlighting that predictions have become more accurate and robust as the quarters progress. It notes increasing cross-functional discussions with customers, particularly in large pharma, which indicates significant capital expenditure discussions for non-GLP-1 customers. The conversation also touches on medium- to long-term growth expectations in China, suggesting that despite being a mid-single-digit growth market, having an advantaged portfolio and better execution could lead to outperforming this growth rate. Further details are expected to emerge with the full-year numbers.

The call will be available for replay on the company's Investor Relations website. The call has concluded, and the company looks forward to future events. Participants can now disconnect.

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