Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Waters Corp (WAT, Financial) exceeded both top-line and bottom-line reported guidance for Q2 2024.
- Year-over-year organic constant currency sales improved by 500 basis points compared to Q1 levels.
- Recurring revenue grew by 5%, demonstrating resilience in the business model.
- Wyatt acquisition delivered a 2% M&A contribution to sales, with synergies realized ahead of schedule.
- Gross margin remained flat at 59.3%, and adjusted operating margin was solid at 29.2%.
Negative Points
- Overall sales declined by 4% as reported and in organic constant currency terms.
- Instrument sales declined by 17%, indicating ongoing challenges in this segment.
- Sales in China declined in the low-teens, although this was better than expected.
- Academic and government sales declined by 16%, reflecting weak growth in this segment.
- The company revised its full-year 2024 sales guidance to assume a more gradual pace of improvement, indicating cautious optimism.
Q & A Highlights
Q: Good morning, Udit, and thanks for taking my question. One maybe high level on your comments about the progression in the quarter, strong finish to June, orders above revenues. Help us square what the guidance change. I don't think the guide change was a surprise. Is this just a conservatism in light of the ramp of the strong June finish order momentum commentary? Or how should we input that in light of the guide change?
A: First thing, good morning, Vijay. And thank you for the question. I think you sort of answered your own question. We just sort of taking first just a step back and a 10,000-foot view. I mean, our approach to guidance, Vijay, has not changed as we progressed through quarter on quarter, right? So we look at three different things. We, of course, look at the facts from the funnel, how the quarter is progressing, how it's ending, then we spend a lot of time looking at history. I mean, there's not that many businesses that have 20 years of data on instruments quarter on quarter, so we look at that. And the third thing we do is we talk to our customers and see what the sentiment is, how the orders are progressing, how the sales are progressing. So just to take you through that, and sorry for the long answer, but it will give you context on our philosophy and the guide. So on the fact, you're totally right. We saw -- we have seen progressive improvement from Q1 to Q2. Sales have declined less in Q2 versus Q1. And as Q2 progressed, I mean, as you will know, June is a big month for us. We saw significant momentum in June. You'll remember, in March, we talked about orders and quality of orders, and we said we'll start to see them convert into sales towards the end of Q2; exactly -- that's exactly what happened. Lot of sales momentum at the end of the quarter in June, and equally, orders growing even faster than sales. So we feel very good about where we see the funnels and what we see with the facts. Now, historically, when you look at Waters's business, we have the benefit of, as I said, 20 years of data. Especially LC, if you just look at the LC business, when it goes through trough, it is usually between four to seven quarters of negative growth. And Q2 was the seventh quarter of negative growth. So we are poised for a recovery, and we're operating at -- if you just look at Q2 on a five-year CAGR basis, it's minus 2%. And we're seeing signs of recovery in LC. So we've factored that into our thinking. And then finally, talking to customers, both of those factual pieces of evidence are verified. I spent a lot of time in the quarter in Europe and in the US with large pharma customers, in particular in China is improving. So as we look at the second half of the year, we're expecting to see improvement quarter on quarter as we go from one quarter to the other. The second half will see growth, as you rightly pointed out. We've just taken our guidance down, especially in the fourth quarter to assume a slightly lower ramp than we would see historically. So just a little bit of caution built into it. I think on a constant currency basis, it's not more than $50 million. So there's a bit of caution built into what we're seeing. And as more data emerges, you'll see us correct that. Sorry for the long answer, but I know -- I'm sure many people have the same question.
Respondent: Udit Batra, President, Chief Executive Officer, Director
Q: Revenues, I think, were cut maybe 3% below the implied Q4 dollar revenues. EPS roughly in line with the street. So what changed is the implied operating margins coming in better? Is there any below-the-line contribution that's driving Q4 EPS?
A: Yeah. Look, I mean, as you've seen us through last year and this year also back in '22 against inflationary pressures, our team is super resilient, and we are able to defend margin, and even during down volume cycles, we're able to expand margin. As we've discussed before, we have a set of productivity initiatives that have a very long runway, and we are able to accelerate some of them. And that reflects in sort of how we've been able to expand margin even last year. If you look at the embedded implied margin profile in our guide, our second-half margin is relatively flat versus last year. So there is not any meaningful step up in the second half versus prior year. The only thing is as we've sort of taken a more cautionary view on the guide, we will see some of the actions that we've put in place already show up in Q4, and that will help us a little bit in Q4. But other than, that second half is relatively flat versus last year.
Respondent: Amol Chaubal, Chief Financial Officer, Senior Vice President
Q: Great, thanks. Thanks for taking the questions, guys. Maybe just on instruments. Q2 was about in line with what your guide expected down 17%. I think you were down mid-teens. Can you just flush out a little bit LC versus MS? And how are we thinking about the updated instrument outlook for the back half of the year? And kind of what's the math to support that?
A: Yeah. So let me start, and Amol can jump in, Dan. So instruments declined about 17% in the quarter. LC was a bit modest than that, mid-teens. Mass spec declined a bit more, and TA was around minus 2%, so minus 17% in the quarter. As I mentioned earlier, we're seeing steady improvement as we went through the quarter and the funnels look extremely strong, especially on the LC front. So for the back half of the year, we're assuming that the instrument growth rate would be flat versus the previous year. So overall, second half is flat. And just to sort of go a bit beyond the numbers, and now as I mentioned earlier, the LC replacement cycle now is in the seventh quarter of its decline. We're starting to see across the globe customers initiating their replacement cycle. So we expect that to -- we expect a little bit of decline or flat growth in Q3 for LC, but in Q4, we expect the replacement cycle start to kick in, which is consistent with what we see with the funnels. So quite an exciting time just given the renewed portfolio across all the instruments as a replacement cycle begins, we feel very good about where we are sitting today.
Respondent: Udit Batra, President, Chief Executive Officer, Director
Q: Great, thanks. And then just China, anything changed with the guide there you were down, I think mid-teens kind of in the quarter around what the guide was. And now, what are you assuming for the full year? And is the commentary
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
