Waters Corporation — 2024 Q1

Look, China came in better than we expected. But I'll remind you, it's still declining in the high 20s. Now we expect that to continue for at least the first half of the year. Q2 will also see a decline and the second half of the year, we'll start to see a little bit of growth given the weakening comps as the year progresses. Now coming back to Q1, to your question on what changed? I mean you just have to go back to late 2023 when we basically said, look, we think across all end markets, especially pharma, we've seen a bottoming out of the volume.

Udit, maybe on that comment around China. I think you mentioned improved funnel activity in the quarter as the quarter progressed. Is that funnel activity -- is that being sort of driven by this China? Or is that a global biopharma? Any color on what you mean by the funnel activity, and I think for the back half guidance, which assumes I think, close to high singles growth. What visibility do we have in growth normalizing in the back half?

Vijay, thank you for the 2 questions. So let me just sort of take a step back and provide some context, right? I mean, as you know, Q1 is the toughest quarter for Waters to predict, right? It's our smallest quarter of the year, and this is when customers start to think through the total CapEx spend for the year and also think through the phasing of that CapEx right? So we took advantage of that. And I personally met several customers across Europe and in the United States, across pharma, across A&G, across our industrial segments, across our clinical segments with our teams.

Fantastic. I'll let others jump in.

Just following up on some of the end market commentary you talked about China a little about how you expect a low double-digit decline, so a little bit better than prior. You're maintaining the fiscal year. So what's sort of offsetting that? And maybe specifically honing on Americas, it looked like that came a little bit worse in the quarter. Anything changed in your outlook there for the year? And then I've got a quick follow-up.

Yes. No. I mean, Mike, at this point, we are just derisking the remainder of the guide, right? We had better expectations of China, based on how we are executing in that market, and we're keeping our full year guide flat.

Yes. And then I think you asked about the U.S., in particular, what are we seeing in the U.S. Look, I mean, as I said, I spent a fair amount of time with customers across the globe. And one of those was a large customer in the Midwest, where I spent a whole day with about 12 to 13 folks from the customer across many different departments, across development, manufacturing, QA/QC. And we talked deeply about what they envision for CapEx, which I sort of earlier commented on, and the CapEx is very robust.

Okay. If I could squeeze in a quick follow-up. On Wyatt, you had some commentary on how the quarter progressed? And if you could elaborate on that a little bit. And it looks like you tweaked down the M&A contribution for the year. I think it was $1.3 million prior. Now it's $1.1 billion. Is that instrument mix in Wyatt? Is that phased and phasing through the year? Just sort of how is that acquisition trending?

Yes, look, I mean, on Wyatt, we're making fantastic progress, right? All the synergies that we laid out at the beginning of the acquisition, like cross-selling, like attaching our LC seamlessly to the instrument, like attaching our columns with their shipments have all progressed ahead of schedule, including sort of a beta version of bringing light scattering on Empower.

And Michael, to build on it, again, from to customer conversations, I had an opportunity spent some time last week with one of our largest academic customers who has a hospital attached to it. And basically, we talked at length about characterization of lipid nanoparticles, which as you will know, are used for delivery of mRNA, both vaccines and therapeutics as we go forward, an area of intense interest across academia and industry. And these folks specialize in characterizing lipid nanoparticles, which can often be aggregated of different -- and have different sizes and shapes. Lights -- they basically use SEC columns from Waters and light scattering equipment to characterize these aggregates. In addition, what I learned is that they're piloting the use of field flow fractionation, which is another instrument that Wyatt makes as a precursor to using SEC malls, right?

So Matt, thanks for your question. And look, I mean, we executed well to finish at the higher end of our Q1 guide, right? And that sort of keeps us on track for our full year sales guide. And as Udit discussed, our Q2 guide is essentially 10% higher than Q1, which has been sort of our historical trend pre-pandemic. And our second half guide is also very much consistent with how we've historically performed, which is a 45-55 split. So we generally expect the breakdown between Q3 and Q4 to also follow that historical trend for 2024.

I think, Matt, thanks for the question. And again, I'll remind you, we had the same discussion when we looked at Q3 versus Q4 of 2023, and there was a lot of discussion on the ramp. And I think we, again, landed at the higher end of what we were predicting. So a difficult business overall to predict if you have high average selling price instruments. But I think we have so much statistics from the history of Waters, gives us a lot of confidence and couple that with discussions that we've had with customers that we think the full year guide is fully intact. And quarter-on-quarter, there's a lot more time to talk about it as we see how Q2 evolves on the ramp between Q3 and Q4. But history should be a decent guide if you're really looking at that sort of modeling between quarters.

Yes. I mean on a growth basis, it looks a little weird, but that's because of last year, right? The weakness progressively stepped in China and pretty much Q3 and Q4, there was no incremental meaningful bad news out of China, but a lot of that was not reflected in Q1 and Q2. And that's why it sort of it plays out in the growth purely from the baseline effect mostly from China.

I think what Amol saying is it's arithmetic and customer conversations give us confidence that we have a pretty good set of visibility.

Yes, I think you nailed it, it's really difficult comps. I mean it is our smallest segment, in particular, anyway. So you see an exaggerated drop if you just look at year-on-year. And again, if you look at sort of the long-term trend and which is sort of the best way to look at Waters in any case, even in A&G what you find is the 5-year comp is at the low single digit, 5-year CAGR is at the low single-digit range. And ex-China, as I keep saying, there's really no drama ex-China, you're at almost 2% to 3% growth versus what we saw 5 years ago on a CAGR basis.

So I wanted to dig into the pharma performance in China a little bit. I believe you said that was down 30% this quarter versus rest of world down low single digits. So can you impact that China performance within Pharma for us a little bit Obviously, we've seen the headlines related to BIOSECURE Act. Last year at 1Q, you guys called out your overexposure to CDMOs in the region.

So look, I mean, great question. As you sort of travel through last year, Q2, Q3, Q4, we saw weakness creep in on different elements of the pharma business in China. But as I said earlier in Q3 and Q4, there was no incremental bad news out of China, and that trend sort of has continued into Q1. And so in a way, what played out, what you see in terms of the decline, is largely baseline related where China, from a pharma point of view has bottomed out and there is no incremental headwind coming into the business.

And Rachel, just to embellish on this, and that's a very good sort of insightful question, just to embellish on what Amol said, on the minus 30% for Q1, it came minus 28%, Q1, it came above our expectations, largely because we started to see customers who have aging LC fleets in branded generics start to move, right? So we started to see that signal, which is a positive sign. And as I commented earlier, as the stimulus starts to roll in towards the latter part of the year, that should have a positive impact on the psychology for spending CapEx.

Great. And then my follow-up. I want to push on that China stimulus dynamic a little bit more in terms of some of your peers that are working on proposals for customers at this point, so can you talk about the conversations you're having on your end with customers and if you're working on proposals as well. And specifically, what types of instruments and then which industries do you really expect to benefit from within China stimulus?

Everything and anything about the stimulus, Rachel. Look, the timing, I don't have much more to add than what I said earlier. I think latter half of the year. We are indeed working with several customers on their plans for the stimulus as they hear more across the country. And it is a broad stimulus. I mean this time around, it's a 3-year stimulus, it's 3x in size. It's quite broad across virtually every customer segment, not just limited to A&G. And frankly speaking, I don't know what people -- if they got extra money in academic -- academia, what they would do with it because they've sort of been chockful.

One question on your gross margin expansion in the quarter. How much did better-than-expected product mix contribute to that? You mentioned that liquid chromatography did a bit better than planned and mass spec was a bit worse. So I'm curious how much of the contribution that was.

Dan, yes, I mean, look, the product mix is helping at this point, especially given lower instrument mix, that's contributing about 30 basis points. But keep in mind, there was also a good 70 to 80 basis points of FX headwind that we offsetted, right? So the remaining delta is favorably coming from price and some of the productivity initiatives in manufacturing.

I guess in terms of some of these conversations you're having, I'm wondering what stage do you think we're in? It sounds like again, the conversations with the funnel to your point, maybe improving a little bit, specifically with China, it sounds like maybe you're expecting the actual revs to show up late this year at the earliest. So how do you think about just the progression of these conversations into orders, into revs. And again, is there a potential for a bit of an air pocket as these conversations pick up and the dollars materialize a little later in the year? How do you think about just the progression there?

It's a great question. Look, Patrick, let's just take a full step back on Waters, right? As you know and many on the call know, we've grown instruments roughly 5%. And I know your question is targeted towards instruments. Instruments have grown on average 5% over the last 15 years, right? And those statistics are sort of easily available given that we've not done a lot of M&A. You can look at our longitudinal history on instruments, right? So about 5% on average, but no year is actually 5% on the dot, right? There are 5 that are well below 5 that are well above and 5 close to the average, right?

And then Amol, maybe just quickly on the margin side. Can you just talk about the progression as we work our way through the year. I know you guys have some kind of cost initiatives working the way through the year last year. So I'm just trying to think on the cadence there and any moving pieces you want to call out as you work our way through '24 here.

Yes. Look, I mean, already in Q1, we put good numbers on board and continued our good financial performance. As you get into second half of the year, keep in mind, the proactive cost actions that we took are already in the baseline, and there will be some headwind as we accrue for bonuses. So you may not see meaningful margin expansion in the second half, net of those 2 effects, but we would have mostly covered our ground for the 20 to 30 basis points of margin expansion mostly in the first half. So we will still end up delivering an adjusted operating margin expansion of 20 to 30 basis points.

Udit, thank you for the commentary on the quality of the funnel and also providing context, looking back 15 years at seasonal patterns, that's helpful. That said, recognizing those points and even being mindful of the year-over-year comparisons and how they progress over the course of the year. Your guidance, it doesn't seem conservative to me to be direct, at least as I look at the model. I'm struggling a little bit to kind of see how you get there in spite of all the helpful commentary you provided. To explain where I'm coming from, starting on revenue, the 45, 55 H1, H2 revenue split. It's a long-term norm, but it certainly isn't the recent norm.

one, how dependent are you on an instrument recovery and, in fact, a normalization to trend in the fourth quarter to get to these targets?

Go ahead -- Let's Amol start, and then I'll jump in.

Yes. Look, I mean, where we stand at this point, one may say, look, your Q2 guidance is conservative given there was some delay in budget releases in Q1. And we've been prudent there just to stay with our historical norm, right? Q3, Q4, we have some visibility in CRM. But the sales cycle, as you know, is 6, 9 months, so you don't have all the visibility, but it's still in line with the historical pattern, and we are seeing increased activity at early stages in our pipeline, which we think will convert into orders as the year progresses, right?

Yes. And then just to sort of, again, embellish just a little bit, Doug, and summarize. First, yes, I mean, the discussions with customers are increasingly positive, but we felt we want to see that land first before we start assuming that it has come, right? So you can imagine, given how difficult it is to predict instrument businesses year-on-year, quarter-on-quarter is even trickier -- a trickier exercise. So yes, the conversations are positive, but we want to see it land and then we'll have -- hopefully, you're right, and then we can have another discussion at the end of Q2 that looks a little bit different.

Maybe just on pharma. I think you said down low single digits ex-China. And you talked about budgets opening up throughout the quarter. So can you just talk through the health of that end market outside of China exiting the quarter and your expectations for the second quarter for that end market?

So Catherine, thank you for the question. Look, pharma overall even last year grew low single digits for us for the full year. And the full year guide again is low single-digit growth. Q1 was sort of a low single-digit decliner, but the conversations with customers make us even more confident that the full year guide is very much intact for a low single-digit growth in pharma. And as I said before, look, first, the orders look much more firm than they did a year ago across biotech and across pharma.

Thank you for joining us today and for your continued 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.