Q1 2024 Earnings Summary
- Waters Corporation's new products are gaining significant traction with customers, particularly in the pharmaceutical sector, indicating strong potential for future growth. , ,
- The company is seeing improved funnel activity and increased confidence in their full-year guidance, suggesting that order volumes and revenues are expected to ramp up in the second half of the year. , ,
- Despite facing headwinds, Waters Corporation is demonstrating strong operational performance, delivering margin expansion and maintaining robust financial health, which positions the company well for future growth. ,
- The company's full-year guidance relies heavily on a significant second-half recovery, needing to go from down more than 6% organic in the first half to up more than 7% in the second half, which may be challenging given current market conditions.
- Margin expansion is expected to be limited in the second half due to cost actions already in the baseline and bonuses accrual, potentially impacting overall profitability.
- Despite some improvement, sales in China declined close to 30% in the first quarter, and future recovery is uncertain, posing a risk to expected growth.
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China Sales and Guidance
Q: How did China revenue perform this quarter?
A: China revenue declined by high 20s percent, better than the expected 40% decline. Waters expects China to continue declining in the first half but anticipates slight growth in the second half due to weakening comparables. Their full-year guidance for China has improved to a low double-digit decline from a previous expectation of a high-teens decline. -
Full-Year Guidance Confidence
Q: Are you confident in achieving the full-year guidance?
A: Despite challenges, Waters has increased confidence in their full-year guidance. They observed a stronger order funnel, with orders firming up across pharma and biotech, especially in Europe and the U.S.. Historical trends support their assumptions, with the first half typically comprising 45% of revenues and the second half 55%. -
Instrument Sales and Replacement Cycle
Q: What is the outlook for instrument sales and the replacement cycle?
A: Instrument sales are expected to improve as customers begin replacing aging liquid chromatography (LC) instruments, especially in the Branded Generics segment in China . Waters noted signs of the replacement cycle initiating due to customers' need to update their aging LC fleet . This is anticipated to positively impact revenues in the latter part of the year . -
Margin Outlook
Q: How will margins progress throughout the year?
A: Waters expects to deliver an adjusted operating margin expansion of 20 to 30 basis points for the full year. Most of this expansion will occur in the first half, with minimal margin expansion in the second half due to proactive cost actions already in the baseline and accruing for bonuses. -
Wyatt Acquisition Impact
Q: How is the Wyatt acquisition performing?
A: The Wyatt acquisition is progressing ahead of schedule, with synergies developing faster than anticipated. Waters adjusted their M&A contribution from Wyatt to 1.1% from 1.3% due to slight timing shifts in instrument shipments during the small first quarter. Customer feedback is positive, and Waters is excited about integrating Wyatt's technologies. -
Pharma Market Outlook
Q: What is the health of the pharma market outside China?
A: Pharma revenue outside China declined in the low single digits in Q1 but is expected to grow low single digits for the full year. Customer conversations indicate firm orders and strong traction of Waters' new products addressing challenges in large molecule analysis. Waters remains confident in their full-year pharma growth projections. -
China Stimulus Impact
Q: What is the expected impact of China's stimulus on revenues?
A: Waters is engaged with customers planning for China's new three-year stimulus, which is three times larger than previous ones and explicitly calls for instrument replacement . While they anticipate a positive psychological impact on capital expenditure, Waters has not incorporated the stimulus into their guidance and expects minimal impact this year, with more significant effects in early next year . -
Role of New Products and Funnel Activity
Q: How are new products and funnel activity influencing growth?
A: Waters' new products are gaining traction and are well-received by customers across pharma, biotech, and other segments . The quality of the order funnel is higher than a year ago, indicating stronger demand. However, benefits from this activity are expected to materialize in late Q2 and more significantly in the second half due to typical budget phasing. -
Investor Concern over Guidance
Q: Is your guidance too optimistic given market conditions?
A: Waters acknowledges the challenges but remains confident in their guidance based on historical trends and current customer activity. They have considered potential risks, including the uncertainty in China, and believe their assumptions are prudent. While discussions with customers are positive, they prefer to see actual results before adjusting guidance further. -
Academic End Market Performance
Q: Was there weakness in the academic end market?
A: The decline in the academic segment was due to difficult year-over-year comparisons, as Q1 last year saw exceptional growth of 45%. The academic market is Waters' smallest segment, and long-term trends show low single-digit growth. Excluding China, there's no significant concern in this segment.