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    Waters Corp (WAT)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$324.85Last close (Feb 5, 2024)
    Post-Earnings Price$322.00Open (Feb 6, 2024)
    Price Change
    $-2.85(-0.88%)

    What went well

    • Waters Corporation achieved operating margin expansion of 70 basis points in 2023 despite constrained revenues, demonstrating strong operational execution through pricing strategies, cost actions, and productivity efforts.
    • Successful commercial initiatives have increased e-commerce penetration from 20% to over 35%, with expectations to reach 40% by the end of 2024; service attachment rates have also improved by 500 basis points over three years, supporting growth in recurring revenues.
    • Integration of the Wyatt acquisition is progressing well, with plans to integrate Wyatt's light scattering software onto Waters' Empower platform by the end of the year, accelerating growth in bioanalytical characterization for large molecule applications.

    What went wrong

    • Waters Corporation expects continued significant decline in China sales, projecting a 40% year-over-year decline in Q1 2024 and a mid to high-teens decline for the full year, due to ongoing market weakness and high prior year comparisons. , ,
    • The company's guidance for Q1 2024 indicates an organic constant currency sales decline of 9% to 11%, which is weaker than expected, partly due to muted customer spending and slower budget releases, suggesting potential challenges in achieving sales growth. ,
    • Waters faces potential increases in its effective tax rate due to changes like U.S. R&D capitalization and global tax reforms (Pillar 2), which could pressure future earnings and are not fully offset by current strategic tax positions.

    Q&A Summary

    1. China Sales Impact
      Q: How is China's performance affecting your guidance?
      A: Udit Batra explained that the 2024 guidance assumes the trends from 2023 continue, with China expected to decline mid-teens to high-teens due to ongoing challenges and high comps from last year's stimulus. Outside China, all end markets and geographies are expected to grow low single digits. The first half of the year will be slower due to higher comps, but growth is expected to improve in the second half as comps alleviate.

    2. Q1 Guidance Assumptions
      Q: Why is the Q1 guidance weaker than expected?
      A: Amol Chaubal noted that one-timers in China, such as last year's stimulus, create tough comps, leading to a significant decline in China sales in Q1. In the rest of the world, customers are expected to be cautious in releasing budgets, causing a slow start. Overall, similar trends from Q4 are expected to persist into Q1.

    3. Operating Margin Expansion
      Q: What's driving operating margin expansion despite flat revenues?
      A: Operating margins expanded by 70 basis points for the full year, or 120 basis points on a constant currency basis, despite negative leverage from volume. Pricing added 110 basis points, freight and material savings added 60 basis points, and cost actions added another 60 basis points, partially offset by investments of 70 basis points.

    4. Replacement Cycle Impact
      Q: Is the replacement cycle affecting instrument sales?
      A: Udit Batra acknowledged that replacement cycles haven't stopped, evidenced by a 15% sequential sales ramp from Q3 to Q4. New products like ARC HPLC and Alliance iS are driving replacements. LC revenue is traversing below long-term averages, growing 1% on a four-year CAGR versus a historical 4–5%. They expect LC growth to revert back to the mean or better.

    5. PFAS Market Expansion
      Q: How significant is the PFAS opportunity in food testing?
      A: Udit Batra stated that it's early days, with an assumed market of $50–75 million for food testing. The 30 basis points annual contribution from PFAS is largely from water testing. The PFAS market is dynamic and expected to expand into various segments over time.

    6. Large Molecule Growth Focus
      Q: How is large molecule business impacting growth?
      A: Udit Batra noted that revenues from biologics increased from less than 20% in 2020 to over 35% now. The growth is due to both the Wyatt acquisition and organic acceleration. Approximately 70–80% of R&D spend is now on large molecule and biologics applications, with products like MaxPeak Premier Columns growing over 30%.

    7. Industrial Segment Outlook
      Q: What's the outlook for the industrial segment amid macro challenges?
      A: Industrial finished 2023 roughly flat, with PFAS and battery testing offsetting other macro-sensitive segments. TA segment grew by 3%, including China. For 2024, low single-digit growth is expected ex-China, while China may see low to mid-single-digit declines due to high comps.

    8. E-commerce and Service Attachments
      Q: What are your targets for e-commerce and service attachment rates?
      A: E-commerce has grown from about 20% to over 35%, aiming for 40% by the end of 2024. Service attachment rates have increased by 500 basis points over three years, with plans for an additional 100 basis points increase in 2024.

    9. Tax Rate Outlook
      Q: How will global tax changes affect your tax rate?
      A: The tax rate has increased by 150 to 200 basis points over the past few years, mainly due to U.S. R&D capitalization under Section 174 changes, which are included in the non-GAAP P&L. Potential adoption of Pillar 2 by Singapore and Ireland may impact future tax rates, and the company is monitoring these developments.

    10. Capital Deployment Plans
      Q: Any insights on capital deployment and technology investments?
      A: Udit Batra emphasized the goal of simplifying bioanalytical characterization, similar to small molecules. The focus is on integrating high-end technologies into downstream applications. A key initiative is integrating Wyatt's light scattering software onto Empower, with a beta version expected by year-end.

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