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    WAT
    Earnings call· Dec 2024(Q4 FY24)

    WATERS CORP /DE/ Q4 FY24 earnings call WAT

    Feb 12, 2025 Source

    Executive summary

    Waters Corporation Q4 FY24 — Strong Finish Driven by Instrument Recovery and New Product Traction

    Waters Corporation concluded FY24 with strong Q4 results, driven by accelerating instrument sales and robust recurring revenue growth. The company is benefiting from a revitalized product portfolio and the early stages of an instrument replacement cycle, particularly in large pharma. Despite ongoing foreign exchange headwinds, Waters is positioned for continued growth in 2025, supported by idiosyncratic drivers like GLP-1 and PFAS testing, and strong execution in key geographies like India.

    Highlights

    6

    • Q4 constant currency revenue growth of 8%, exceeding the high end of guidance.

    • Q4 adjusted EPS growth of 13% (22% excluding FX), reaching $4.10.

    • Pharma sales grew 10% in Q4, led by low double-digit growth in Europe and Asia.

    • Instruments grew 8% in Q4, with LC, Mass Spec, light scattering, and TA systems all growing high single digits or better.

    • PFAS revenue grew over 40% in Q4 and for the full year, outpacing market growth.

    • India sales grew 34% in Q4 and 27% for the full year, contributing over 100 basis points to growth.

    Concerns

    3

    • Foreign exchange headwinds resulted in a 5% decline in full-year non-GAAP EPS and a 4% estimated headwind for FY25 EPS.

    • Q1 FY25 sales guidance of 1% to 4% reported growth, impacted by 2 fewer days and 3% currency translation headwind.

    • China sales declined low double digits for the full year, though returned to low single-digit growth in Q4.

    Guidance & targets

    11
    CategoryTargetConfidence
    Full-year 2025 Constant Currency Sales Growth
    4.5% to 7%
    high materiality
    High
    Full-year 2025 Total Reported Sales Growth
    2.5% to 5%
    high materiality
    High
    Full-year 2025 Non-GAAP EPS
    $12.70 to $13.00
    high materiality
    High
    Full-year 2025 Gross Margin
    59.6%
    medium materiality
    Medium
    Full-year 2025 Adjusted Operating Margin
    31.2%
    medium materiality
    Medium
    Full-year 2025 Net Interest Expense
    approximately $46 million
    low materiality
    High
    Full-year 2025 Tax Rate
    16.5%
    low materiality
    High
    Full-year 2025 Average Diluted Share Count
    approximately 59.3 million
    low materiality
    High
    Q1 2025 Constant Currency Sales Growth
    4% to 7%
    medium materiality
    Medium
    Q1 2025 Total Reported Sales Growth
    1% to 4%
    medium materiality
    Medium
    Q1 2025 Non-GAAP EPS
    $2.17 to $2.25
    high materiality
    Medium

    Segment performance

    8
    SegmentRevenueYoYQoQMargin
    Pharma
    Led by large pharma, contract manufacturing organizations, and generics customers, with revenue tied to high-volume regulated QA/QC applications. Full year growth was 1%.
    Europe growth: low double digitsAsia growth: low double digitsAmericas growth: high single digits
    		—10% (Q4 CC)——
    Industrial
    Growth led by TA division amidst strength in batteries, advanced materials, and chemical testing. Full year growth was flat.
    TA division growth: high single digits
    		—2% (Q4 CC)——
    Academic and Government
    Strong performance driven by broad-based growth in Asia and Europe. Full year declined 7%. Q4 benefited from typical budget flush dynamics.
    Asia growth: 35%Europe growth: 20%
    		—16% (Q4 CC)——
    Europe
    Broad strength across end markets. Full year growth was 2%.
    		—11% (Q4 CC)——
    Asia
    Broad strength across end markets. Full year declined 1%.
    		—9% (Q4 CC)——
    Americas
    Broad strength across end markets. Full year declined 1%.
    		—6% (Q4 CC)——
    China
    Returned to positive growth in Q4. Full year declined low double digits.
    		—low single digits (Q4 CC)——
    Asia ex China
    Strong performance for the full year.
    		—high single digits (FY24 OCC)——

    Operational metrics

    47
    Q4 Sales Ramp (QoQ)
    $132 million18% quarter-over-quarter
    Q4 FY24

    Meaningfully higher than mid-teens ramp assumption in guidance, benefited from budget flush.

    Q4 Adjusted EPS FX Headwind
    $0.23greater than anticipated
    Q4 FY24

    Despite this headwind, non-GAAP EPS was $4.10, at the high end of guidance.

    India Sales Growth
    27%YoY growth
    FY24

    Constant currency growth.

    India Sales Growth
    34%YoY growth
    Q4 FY24

    Constant currency growth.

    India Sales as % of Total
    >8%
    FY24

    Meaningful contributor to Waters' total sales.

    Genericization Opportunity
    $240 billion - $250 billion
    Next 5-7 years

    India supplies roughly 50% of the global generics market.

    PFAS Market Size
    $400 millionprior $300M-$350M
    Annual

    Market size continues to increase as more applications come in.

    PFAS Market Growth
    20%
    Annually

    Waters' PFAS revenue grew over 40%, approximately twice the market growth.

    PFAS Revenue Growth
    >40%YoY growth
    Q4 FY24 and FY24

    Outpacing market growth, driven by Xevo TQ Absolute, compliant informatics, and chemistry workflows.

    Clinical Revenue Growth
    low teensYoY growth
    Q4 FY24

    Driven in part by strong sales of the IVD version of the Xevo TQ Absolute.

    Alliance iS Sales Growth
    >100%quarter-over-quarter
    Q4 FY24

    Paved the way for smarter, more capable liquid chromatography separation.

    Alliance iS % of HPLC Revenue
    20%
    Q4 FY24

    Adoption continued to scale throughout the year.

    Xevo TQ Absolute Unit Sales Growth
    40%year-over-year
    Q4 FY24

    Remained best-selling mass spectrometer, with market-leading sensitivity and sustainable design.

    Xevo TQ Absolute % of Tandem Quad Revenue
    50%
    Q4 FY24

    Tandem quads are suitable for high-volume, quantitative measurements in compliant settings.

    Max Premier Columns Sales Growth
    >30%
    Q4 FY24

    Aimed at separating larger, more complex molecules like biologics and novel modalities.

    Max Premier Columns Sales Growth
    >40%
    FY24

    Aimed at separating larger, more complex molecules like biologics and novel modalities.

    Large Molecule Applications % of Pharma Chemistry Revenue
    ~40%
    FY24

    Growing due to success of new column launches.

    Service Plan Attachment Rate
    >50%
    Q4 FY24

    For the first time, over 50% of active installed base has a service plan. STI recognized service team for highest satisfaction scores.

    GLP-1 Testing Growth Accretion
    30
    Annual

    Expected annual average growth accretion from GLP-1 testing.

    PFAS Testing Growth Accretion
    30
    Annual

    Expected annual average growth accretion from PFAS testing, assumed for FY25 guidance (was 60 bps in FY24).

    India Growth Accretion
    70 to 100
    Annual

    Expected annual average growth accretion from India (was over 100 bps in FY24).

    Adjusted Operating Margin
    35.5%expanded 60 bps
    Q4 FY24

    After absorbing 220 basis points of FX impact.

    Adjusted Operating Margin
    31%expanded
    FY24

    After absorbing 130 basis points of adverse FX impact and normalization of annual incentive compensation.

    Instrument Growth (5-year CAGR vs 2019)
    2%vs 2019
    5-year CAGR

    Comes after weak macroeconomic conditions put temporary constraints on customer CapEx spending.

    Instrument Growth (historical long-term average)
    5%
    Long-term

    Historically, instrument growth during uptrends has been 2% to 3% higher than this average.

    Gross Margin
    60.1%
    Q4 FY24

    Excluding FX, gross margin expanded 60 basis points.

    Gross Margin
    59.4%
    FY24

    Excluding FX, gross margin expanded 80 basis points.

    Non-GAAP EPS FX Decline
    ~5%decline
    FY24

    Due to foreign exchange headwinds, full year non-GAAP EPS grew 1% to $11.86.

    Effective Adjusted Operating Tax Rate
    16.9%
    Q4 FY24

    For the quarter.

    Effective Adjusted Operating Tax Rate
    16.4%
    FY24

    For the full year.

    Average Share Count
    59.6 million
    Q4 FY24 and FY24

    For the quarter and for the full year.

    Capital Expenditures
    $52 million
    Q4 FY24

    Includes the purchase of a $13 million manufacturing facility in Colorado.

    Free Cash Flow as % of Sales
    25%
    FY24

    Resulting in a free cash flow to adjusted net income conversion ratio of 105%.

    Debt Reduction
    approximately $200 million
    Q4 FY24

    Resulting in approximately $900 million of debt repayments made in 2024.

    Debt Repayments
    approximately $900 million
    FY24

    Made in 2024.

    Net Debt Position
    approximately $1.3 billion
    End of Q4 FY24

    Approaching pre-Wyatt acquisition levels.

    Net Debt-to-EBITDA Ratio
    about 1.3x
    End of Q4 FY24

    Strong balance sheet and access to liquidity.

    Target Max Leverage Ratio
    2.5x
    Long-term

    Comfortable going up to this level for M&A, as company can delever quickly.

    FY25 Sales FX Impact
    negative 2%
    FY25

    Expected currency translation impact on full year sales.

    Q1 2025 Sales FX Impact
    negative 3%
    Q1 2025

    Expected currency translation impact on first quarter sales.

    Q1 2025 Days Impact
    2 fewer daysvs Q1 2024
    Q1 2025

    Impacts sales growth guidance for the quarter.

    Q4 2024 Days Impact
    2 additional daysvs Q4 2023
    Q4 2024

    Benefited Q4 sales growth.

    Pricing Contribution to Growth
    closer to 200
    FY24 and FY25

    Consistent contribution expected for both years.

    NIH Funding Exposure
    <1%
    Current

    Very little direct exposure to NIH funding, reducing impact from potential cuts.

    A&G Growth Assumption
    low single-digit
    FY25

    Prudent assumption for 2025, not expecting the dynamism seen in Q4.

    China Stimulus Contribution
    mid-to-high single-digit million
    FY25

    Modest contribution assumed for the year.

    Installed Base Service Coverage (warranty + service plan)
    ~60%
    Q4 FY24

    Includes first year instruments under warranty. Target is to get back to 55% for service contracts alone.

    Industry KPIs

    8
    MetricValueDetails
    FCF conversion ROIC105%%
    Revenue EPS guidanceSales: 4.5% to 7% CC growth; EPS: $12.70 to $13.00%
    China revenue exposurelow single digits (Q4), low double digits (FY24)%
    Pricing price realizationcloser to 200bps
    Diagnostics testing demandlow teens%
    Segment organic revenue growthEurope: 11% (Q4), 2% (FY24); Asia: 9% (Q4), declined 1% (FY24); Americas: 6% (Q4), declined 1% (FY24)%
    Instruments vs consumables services mixInstruments: 8% growth (Q4), declined 7% (FY24); Recurring Revenue: 9% growth (Q4), 6% growth (FY24)%
    Organic core revenue growth by end marketPharma: 10% (Q4), 1% (FY24); Industrial: 2% (Q4), flat (FY24); Academic and Government: 16% (Q4), declined 7% (FY24)%

    Risks & headwinds

    4
    Foreign Exchange HeadwindsQ4 2024, FY 2024, FY 2025, Q1 2025

    5% decline in FY24 non-GAAP EPS; 4% estimated headwind for FY25 non-GAAP EPS; 2% negative impact on FY25 sales; 3% negative impact on Q1 2025 sales; $0.23 greater than anticipated FX headwind on Q4 EPS.

    Mitigation: Operational excellence, pricing, productivity, cost management, robust operational performance.

    Macroeconomic Conditions / Customer CapEx ConstraintsRecent years (2023-2024)

    Weak macroeconomic conditions put temporary constraints on customer CapEx spending in recent years.

    Mitigation: Innovation in revitalized portfolio, focus on high-volume life science applications, instrument replacement cycle beginning.

    Biotech/Biotech Research Market Recovery LagOngoing

    Not recovered to healthy state.

    China Pharma Market Recovery LagOngoing

    Not recovered to a level it needs to.

    What to watch in Q1 FY25

    5

    Instrument Growth Rate

    Q1 FY25 and throughout FY25
    CurrentHigh single digits (Q4 FY24)
    TargetContinued acceleration towards 2-3% outperformance vs. 5% long-term average

    Why it matters

    Indicates the strength and duration of the instrument replacement cycle, a key driver for Waters' growth.

    Typically when we come out of a trough in instrument replacement, we usually see a 2% to 3% outperformance versus the long-term average, which is 5%, right? So going back to the CAGRs, the long-term average is 5%. Usually, when you come out into the replacement cycle, you start seeing a 2% to 3% outperformance. All signs are pointing in that direction.

    Q&A highlights

    5

    Inquired about the nature of the Q4 budget flush, the progress and widespread adoption of the instrument replacement cycle, the expected mix of Alliance iS, and the company's capital allocation strategy between M&A and share repurchases given low leverage.

    Management described Q4 budget flush as typical for pre-pandemic years. The instrument replacement cycle is beginning in earnest, especially in large pharma, driven by new products like Alliance iS (20% of HPLC sales in Q4) and Xevo TQ Absolute (50% of tandem quad revenue). On capital allocation, they prioritize M&A that aligns with value creation goals, are comfortable with leverage up to 2.5x, and will evaluate share repurchases in 2025.

    “2024 was really almost a typical year. We saw a high teens ramp from Q3 to Q4, and that was helped by the sales momentum that we saw at the end of the year. So rather a typical budget flush, if you want to call it that.”

    asked by Tycho Peterson · answered by Udit Batra

    2 min read5 chapters

    Detailed Narrative

    01

    Instrument Replacement Cycle and Market Recovery

    Management highlighted that the analytical instruments market is beginning its recovery, with instrument growth historically 2% to 3% higher than the long-term average of 5% during uptrends. Waters' instrument growth is currently at 2% on a 5-year CAGR basis versus 2019, indicating a significant catch-up📎 opportunity from deferred instrument replacement. The company expects the average growth rate of instruments to trend higher than the historical 5% in the longer term due to higher volume trends, new application areas like large molecules, and better pricing dynamics.

    02

    New Product Portfolio Traction

    New product launches are gaining significant traction. The Alliance iS LC system more than doubled sales quarter-over-quarter in Q4 and constituted 20% of HPLC revenue. The Xevo TQ Absolute mass spectrometer remained the best-selling mass spectrometer, with unit sales growing 40% year-over-year and constituting 50% of tandem quad revenue, driving strong results in PFAS and clinical applications. Newer column launches for larger, more complex molecules (Max Premier columns) grew over 30% in Q4 and over 40% for the year, increasing exposure to large molecule applications to approximately 40% of pharma chemistry revenue.

    03

    Idiosyncratic Growth Drivers

    Waters is benefiting from unique high-volume testing opportunities. PFAS testing revenue grew over 40% in Q4 and for the full year, significantly outpacing the $400 million global market growing at 20% annually. Clinical revenue grew low teens in Q4, driven by the IVD version of Xevo TQ Absolute. GLP-1 testing and the generics market in India are also significant contributors, with GLP-1 and PFAS expected to add 30 basis points each annually to growth, and India 70 to 100 basis points.

    04

    Operational Excellence and Margin Expansion

    Despite numerous margin challenges including FX headwinds🌐 (220 bps impact in Q4, 130 bps for full year) and normalization of incentive compensation, Waters achieved a 60 basis point increase in adjusted operating margin to 35.5% in Q4 and full-year adjusted operating margin expansion to 31%. The company plans to continue this margin expansion journey in 2025 through productivity initiatives, targeting 20 basis points of net year-over-year expansion for both gross and adjusted operating margins.

    05

    Capital Allocation and Balance Sheet Strength

    Waters generated $188 million in free cash flow in Q4 and $744 million for the full year (25% of sales, 105% FCF to adjusted net income conversion). The company reduced debt by $200 million in Q4, totaling $900 million in debt repayments for 2024. Net debt is approximately $1.3 billion, with a net debt-to-EBITDA ratio of about 1.3x, approaching pre-Wyatt acquisition levels. Management continues to evaluate M&A opportunities and will evaluate the resumption of its share repurchase program in 2025.

    AI-generated summary of the company’s earnings call. Not investment advice.