Waters Corporation (WAT) Earnings Call Transcript & Summary

All right. Good afternoon. I'm Doug Schenkel from the Cowen life science and diagnostic tools team. It is our pleasure to welcome Udit Batra, Waters Corp.'s President and Chief Executive Officer, to this, the 41st Annual Cowen & Company Healthcare Conference. Udit thanks for the taking the time. We really appreciate it.

Thank you, Doug. Good to see you.

So as way of background, Udit took the helm as President and CEO of Waters in September of last year. Prior to joining Waters, Udit was CEO of the Life Sciences business, not soley MilliporeSigma, but that was a big part of it at Merck KGaA, German Merck. Additionally, Dr. Batra has an extensive management and academic set of experiences across life science tools and diagnostics. So a very impressive background and strong track record of leadership in our field. Our goal for the next 30 minutes is to talk a little bit about the overall outlook for the company over the next few years, to talk through initiatives that Udit has plans to reposition Waters for improvement growth. And then talk through any dynamics when it comes to capital deployment. So without further ado, let's get into the session. Udit, just to kick off. It's hard to believe, but we're coming up on the 6-month mark for you as CEO. Can you share with us how well the transition has been going? And intertwine in that a little bit about your observations, your experiences interacting with others in the organization and how you're prioritizing areas of focus moving forward.

Thank you. Thank you, Doug. Firstly, let me say, it's -- 6 months have passed very, very quickly, of pandemic. And I must say, one always thinks a lot about moving positions and moving jobs. and that too to pick a time we got smacked in the middle of the pandemic, I think, was a challenge in itself. But Waters, as I had heard about from outside and the colleagues that I know, known from Waters is a warm and welcoming company. I mean, I had an absolutely terrific onboarding with my colleagues on the Board and had a chance to learn a lot, right? I -- basically, the advantage of being virtual is that you can travel globally without having to do much, right? So last night, I was with a KOL in China. And it was pretty simple. We were dressed similarly, and we were able to debate many, many things. And I had that advantage, right? So I was able to dig deep into the facts. We talked to a lot of customers -- a lot of competitors, a lot of folks around the globe. So that said, what are the key learnings, right? So having done such a deep immersion, the key learnings are pretty straightforward. And I think Doug mentioned them also in public forms in the past. I mean Waters has a strong base, strong brand, deep customer relationships, really and experienced organization, especially as well as technology goes and customer relationships go. And that has been there for a long period of time, and that is reflected in our margins, and that's reflected in return on invested capital. As you know, these are at the top of the industry and have been for a little while. But as you also know, we lost a bit of momentum in the last few years. And as we dug deeper, we realized, and this is not just me, I mean, we had about 60 to 70 of us as the top leaders, looking at this data. We said, look, we've lost focus on execution, especially as far as hardware is concerned, and especially as far as sales execution is concerned. We've become a culture of strategic ideas, probably not as focused on the tactical aspects, getting seduced by new and latest trends. And in the tools industry, I don't need to tell you, I mean, there are many, right? I mean, there are many new technologies, and they are very interesting. But if you have the strength in one of the key beacons of tools, you don't lose that and go somewhere else without taking care of it. And the third is, from a strategic perspective, while the industry is consolidating and competitors are picking up technologies in faster-growth segments, we probably were not as fast in doing so, right? And I think those were the 3 sort of diagnosis, and we came up with a plan to execute it. Now I won't go through the exact details. I'm sure we can go into that in your other questions. But early results as far as Q4 is concerned. And I just saw some market share data. And I know this industry is notorious for not having great market share data because everybody seems to claim to gain market share. And I probably was the first one who came in and said, you know Waters actually has not been so strong in the last few years, and we've lost traction. But I can say, looking at that publicly available data and comparing our sales growth to our competitors in the fourth quarter, we are definitely in the top decile, if not the fastest-growing amongst the key areas, right? And this can be attributed to many reasons, and we can go into the details. But a lot of it is the market. The pharma market did well. And as pharma does well, we do well. But we also launched a few initiatives that seem to gain traction. And we were a little bit late coming into the COVID-19, the use of our products for COVID-19 vaccines and treatments, and that started to pick up some traction as well, and those were initiatives we had launched. So that's I guess, a long monologue to tell you that it's been a terrific transition. I'm still -- even though it's been terrific and great learning experience, I still want to go out and meet my colleagues desperately. So waiting for my turn to come for a vaccine and for my colleagues, and I want to go see them.

Get on the road. Yes. It's super interesting. But one thing you said amongst others that I thought was interesting was talking about Q4. And you did have a very good fourth quarter. I remember talking to you after results were posted. And you were, I think, very careful, probably appropriately so in being happy with the results, acknowledging that some of the initiatives that you had put in place were probably contributing at least a little bit, but also wanting to be careful to do anything resembling a victory lap that early. As we sit here a few weeks later, I'm guessing you're kind of thinking about things the same way. But just to be clear, it does sound like the incremental data you've got since that call would suggest this isn't all the market. It's not all just catch up. There are some things that you put in place that are starting to, in the very early days, having a positive impact.

And I think, Doug, that's very precise of you and very astute of you to pick that up. No, the commentary is not changing. I mean, we feel that we have one data point, and we're not saying that we have a trend, okay? I mean, that's -- I want to be completely clear about that. Now that said, I would be not doing justice to my -- the efforts of my colleagues if I didn't acknowledge that there is a significant amount of effort, be it in the preparation, be it in the execution that has taken place incrementally in the last few months. And yes, we are seeing some early signals that, that is working. There are a few more data points. And I won't talk to you until we have the full data point -- full data set. But yes, the LC initiative is going very well. It continues to go very well. Yes, the turnaround in China is gaining traction, and it continues to gain traction despite having certain comp advantages versus last year. I think you were the one who mentioned that, and we'll take a look at the facts after the quarter is over, and we'll look at those and say, okay, is it -- have we seen some meaningful change, but the activities are different. We're calling on customers in a different way. The value proposition is different. There are new products, where we have put them into a value proposition that the customers can easily understand to say when we're going to go replace an Alliance, we go in with an Arc HPLC, we go in with a PREMIER, and we go in with a financial value proposition, all 3 and say, okay, boss, what do you want to do? Do you want to use the same old Alliance? Or do you have newer molecules that you want to use on the same instrument, no problem, if you want to use it for the same small molecules, but it's going to be unlimited service. So what can we do to help you, right? And the first change management was with our own teams, who are super loyal to the customer and say, we're not going to replace it if it can still be used. And then the next step was to go to the customers. And that is gaining traction. E-commerce is gaining traction. And I mean, we saw and I publicly told you, look, we are seeing double-digit increase in the eyeballs. And I think a day later, one of the person -- one of the people in the analyst community said, no, no, it's not 20%, it's 75% increase in eyeballs. You know what I didn't say, somebody else did. And that data is publicly available. Yes, we are seeing some traction. So there is tangible proof that these initiatives are working. Now don't ask me exactly how much incremental contribution there is, how much tailwind for recovery in pharma there is and how much recovery from other markets there is. We will have a chance to look at that when the results are there.

Let's unpack a little bit of that just to make sure we're being clear on those exciting initiatives. So you just talked about e-commerce initiatives. You mentioned that in the context of -- you're just talking about recent trends. And as you mentioned, traffic to Waters was up double digits. And that can be a range of double-digit things. But no matter what, it's good. What do you think is happening there? I mean, is that a new initiative to push people to e-commerce? And then what are the durable benefits to that as we think about not just the next few weeks or the next few quarters and years?

Yes. So I would break it up into 2 pieces. The first is the immediate benefit of driving people to an existing platform. So when we look at e-commerce, we said, look, we -- about 20% of our portfolio goes through e-commerce. For competitors, it's 50%, and I came from a competitor that has even higher, right? So we said, okay, I mean, we should be able to do better, right? So what do we do? And when people came up with a very sophisticated program and we should modify the platform, we should modify the data analytics piece, we should modify the link to our supply chain. Yes, all of that can be done, probably should be done. But what can we do with the hand that we have? Or is it that bad? It's actually not that bad, right? We have a hand where people -- we have a platform where people can come and search for our products. They do today. But we had not done the basics, right? So the first step was to take the existing platform and drive more traffic through it, get more people in through the door, and there are 2 techniques to do it, right? One is search engine optimization and the second is paid search. So when you go into Google and you search HPLC, our name did not appear on the first page. Now I mean, Waters is not appearing on the first page, right, HPLC or UPLC. And...

Probably searches for cola and Coke not popping up enough, right?

Exactly right. Exactly right. And so we were -- I mean, of course, you can imagine the discussion that took place. And now we are at the top in most of those searches. And that's not just paid search, but that's also search engine optimization to have the right keywords and keeping up with the search algorithms, right? So that was the first -- very first step, and that's why you saw a huge bump from a certain lower point to a higher point, bringing more people in. Now how much of that translates into sales is a different matter, right, there is a whole funnel, how many people you bring in, how they experience your products, what the pricing is, et cetera, et cetera. And that part we have to work on. So the first bucket is getting more people in, and we have seen significant impact of that initiative. The second piece, which we have started to now look at is to now create a data platform, an integrated data platform for all sorts of data that we have in the company, right, and put it into a data lake and make it accessible for our e-commerce platform, the supply chain data. So you can get data on when your column is going to be delivered, when your vial is going to be delivered. And this is what many of the companies do. Be able to pay by mobile, be able to transact through credit cards, have a better checkout. And that will take a bit of time. I mean, is it 12 months? Is it 18 months? Is it 24 months, but that will happen in parallel, right? So again, not to quantify exactly the impact, but I'm giving you leading indicators that should indicate that there is contribution from that work as well.

So presumably, if I were to categorize that, I mean, there's some low-hanging fruit like fixing paid search. There's some kind of not quite so low-hanging fruit, but some clear initiatives that you can pursue that will reduce friction to placing an order. And then probably inherent in this is the ability to gain more information about what your customers need, which will better power your sales people to actually be able to do better in terms of performance.

Brilliant. Brilliant. And the third piece is the holy grail, right? Can you actually look at customer behavior and use it to predict what they're going to do or what they haven't done. So for instance, if somebody is ordering a column every 2 weeks and they stop ordering, there should be an automatic reminder. And that comes from linking the e-commerce data to the sales data.

When we talked about the different categories of things, where you thought things would get better and then hopefully I'm not mischaracterizing it, but it was sales approach, and I think kind of intertwined with that is e-commerce, which we just talked about. It sounds like just making some initial tweaks in sales and e-commerce are amongst the things that you think probably helped you almost immediately. Is that fair?

I think it's more in -- when we talk sales, I want to unpack that, that just a little bit. On e-commerce, we just described it. On sales, it's not that we had to change the incentive system or the structure. I mean, there were 2 or 3 things that we had to do. One, we basically had to give our sales reps, clear target information and clear value proposition. So for instance, to replace an LC, now they would walk in and say, okay, you want to replace an LC, here's a new product that you can use, and here's the value proposition, right? And the value proposition could also be a financing approach as well, right? So that's new. They have new targets and they have new value proposition. So that's a pretty significant change from what we used to do in the past. That's the first piece. And for some specific products, changing the approach, going from a generalist sales approach to a specialist sales approach. And BioAccord is a case in point, where for a complex instrument in a -- or a simple instrument -- simple-to-use instrument, but complex technology, in a space that is notoriously conservative, you want specialists to talk to specialists. You want to be able to take methods from the customer, bring them to your own lab in a non-threatening environment and debate and discuss technology, and that's how it gets embedded. It does not get embedded as an upgrade to your LC, right? So that's what we realized. And we basically have implemented that, and that's starting to show some traction as well. Those are the 2 different things on the sales front.

Yes. And maybe kind of building off of, I think it's the first one. I mean you've spoken about the LC replacement cycle initiative, and you noted that, that started to improve in terms of trends in the fourth quarter. I think you've talked about 10% to 15% of around 8,000 or so instruments that could be replaced and about 60% of customers have already been contacted pursuant to driving this. Is that the type of thing where better information in the hands of sales force gets you up the curve actually allows you to execute on this opportunity a lot better than you did in the past?

Absolutely, without a doubt. And creating it and making it so that it's a reproducible approach, right? So the first step is brute force. We basically said, give us all the Excel sheets. Here are the analysts. We're going to look through these 80,000 instruments. We're going to look at the ZIP codes, we're going to look at the customers, we're going to clean the data, and we're going to come back to you and tell you, dear rep, how many customers you have who have dated instruments, go get them, right? But this has -- this can't be done with brute force every time, right? You can't have 15 analysts sitting down and doing this in a room all the time. So we are putting all this data into a data lake and making it searchable. And it sounds rather crazy in this day and age. But yes, that's what we have to do. And we're using the opportunity to put a whole bunch of different data into that. Yes, so a better targeting approach allows you lower friction in the replacement.

So I mean that's a big opportunity. Those 80,000. There's -- we talked about e-commerce. We've talked about a little bit of incentive structure, but almost just getting the right tools in the place under your force. Those are things you can do operationally. I know they're not easy. They take time, but they're critical, and they would seemingly have durable benefits over time. The other part -- one of the other things you highlighted was hardware. I mean, do you think you have the product portfolio you need to fully play offense right now? Or is that another thing where maybe R&D prioritization needs to change a little bit, which if that's the case, it's exciting, but you can't roll out a new product overnight.

It's again a great question. Let's unpack it a little bit along different platforms. So the base LC Alliance, right, this is roughly half of our fleet. There, we have the Arc HPLC that came in, and that's a better instrument in terms of engineering performance and allows Alliance customers to go to an Alliance-based software, right? So you don't have to switch, you don't have any new drivers. It's the activation barrier to switch from a Waters instrument to a Waters instrument is much easier. And it's better from an engineering perspective. And then there is a pipeline behind it, right? So we have a set of products that are going to come out. I'm not going to give you the exact details, but they're going to come out in the next year or so, starting the next year or so, that will start to redefine the LC experience. Then there is the next piece, which is UHPLC, which was the old Arc PREMIER, so the old acuity Arc line. And then finally, there's a UPLC line, which is terrific in its own right, and that has gone through a lot of rejuvenation. We are undoubtedly the market leader there, also used for larger molecules. So I feel we know -- we knew what the gaps were. We've made some strong progress in Arc HPLC, and we have -- we are going to do more to plenish the hardware on the workhorse. Secondly, it's not just about the hardware itself, it's actually about the surfaces. I mean that's the beauty of playing in LC with Waters. We know exactly what the customers are thinking. And so we created a surface that is inert to many of the larger molecules and many of the novel modalities that are being used. This is the PREMIER line, and that's just been launched. So I feel reasonably good about playing offense in HPLC and in the LC domain, right? And yes, we have a bit of work to do on some pieces, but it's not rocket science. On the mass spec side, the team has completely replenished the portfolio. On the high res side and on the tandem quad side, and these are 2 different markets. Tandem quad think less accuracy and more workhorse. This is -- if you want accuracy to 1 decimal point and high res is discovery. This is where Orbitrap and TOF are playing and this is where our Cyclic is playing, and this is kind of the high res area. On both of those areas, hardware is competitive, no question about it. And if anything, even better than any of the competition. On the software side, we've not made enough progress in the past few years. And I think this is something that we are focused on. There is a plan that I've seen, and then there's I won't give you again exact time lines. But before the end of the year, we expect to have some meaningful progress on the tandem quad side and then subsequently on the high res side on the software. So let it flow out and we'll talk in retrospect rather than prospectively. But again, I feel good in defending my turf. I don't feel good yet in fighting it out offensively. On LC, we're ready to go, right? On mass spec, we can -- we have done enough to retain our share and not lose much more. But have we done enough from a software perspective to beat people left and right, I think depends on the domain, right? So on the tandem quads for traditional Chinese medicine, for instance, we are very good, in fact, exceptional. On environmental use, we're exceptional. On high res mass spec, instruments good, but software needs a bit of work, right? So that gives you sort of a playing field. On consumables, I mean we'll go head-to-head with anyone. No problem, right? It's not -- when I read it outside in, it seemed like, oh, I mean, Waters has a huge problem. It's not the case. I think factually speaking, it's like anything else. In some places, we are stronger; in some places, we have a little bit of work to do.

Yes. That's helpful. And I'm glad you said that point and made that point at the end because from the outside, like anything in life, you're trying to kind of probably oversimplify and make, unfortunately, for bad overarching conclusions and observations. I mean from the outside, I think we all knew, not everything was broken, and there were things that were going well, but it did seem like Waters is probably doing better, maintaining existing accounts and then categorically wasn't doing as well in greenfield opportunities. The -- I mean, just tell me if you disagree, as you've got inside the firm, do you kind of agree if you were to simplify that, that may have been the case historically. But with the assets you have in place and with the tweaks that we're talking about in the near term and the bigger changes you're talking about over the next year or 2, you should shortly and increasingly be in a position to compete better in those greenfield opportunities.

And again, let's decouple a few things, right? So if the greenfield is within pharma, right, yes, come any day, we're ready to fight, no problem. Another pharma company that we haven't played in, I mean, we'll go head-to-head with anyone, and I put my odds on Waters. I've been very public about us not being as strong on contract organizations and especially contract research organizations and contract testing organizations in food in China, right? In contract manufacturing organization with biologics, in fact, what we learned, and we were not as strong, but what we learned as we dug deeper into it is that they play to our strengths, meaning they're not really asking for better financial terms. They're not asking for us one-stop shop. They're really asking for technical capabilities to help them do method transfer. And this again plays to our strengths. And we didn't even know, right? So when you talk about greenfield, there are shades of gray, right? So if it's purely pharma, greenfield, yes, any new account we're ready to go. If it's contract organizations, there are some where we have had to do a lot of work to contact those organizations, especially in China. And that's market expansion opportunity if you look at it positively. And if you want to be a bit negative, you'd say, why didn't you do it before, right? And then on the contract manufacturing organizations, it's a little bit middle -- in the middle -- on the pharma side or biologics. The Catlins of the world or some of the bigger ones. I mean, basically, what we're learning is they want us to come in and help them do method transfer, right? And so that's -- and I know several of those people from my past history, organization. And they've said, look what we'll do, you know what, I don't want better discounts from you. I don't want any of that. Just send me some people who know what they're doing to do this method transfers because I'm getting these methods transfers from large pharma companies, therefore these complex molecules that we've never seen before, right? And so I think that's playing to our strengths. So it's again shades of gray. I think in general, you're right that we were not as precise in delineating where we were strong and where we were not strong. I think that's a very clear point. And I think now we know where we are strong, where we have market expansion and where as we do market expansion, what plays to our strength and what doesn't. So again, shades of gray. But I think, in general, if you -- I would not blame you if you came to the conclusion and said, oh, these guys are not good at greenfield. I would just open the discussion and say, well, yes, it depends on which greenfield you're talking about.

No, that's helpful. And it's good to get your assessment and your diagnosis of what's working and where you can get better. I know we only have about 5 minutes left, and we've talked about your assessment of the business. We've talked about the opportunities and the needs to get better in hardware, in sales approach, in e-commerce and software. One of the things we haven't talked about that you mentioned earlier on is inorganic opportunities in M&A, an area where Waters has a history of doing tuck-ins, but maybe hasn't been as active as some others over the last few years. As you think about capital allocation over the next 3 to 5 years, how do you balance, maybe wanting to be more active on the M&A front with also wanting to make sure you don't take on too much as you implement your vision for the core?

Yes. I think, Doug, it's a bit of both or a bit of 3 sort of levers. One is organic and capital allocation towards organic initiatives, be it more e-commerce, be it more sales deployment across contract organizations, be it more investment in infrastructure in different places. So the organic piece is clear as day, and we know what we want to do, where the gaps are, and we're after it already, right? And I think the good news is as the sales momentum picks up, I think this is one of the questions I think you had asked, will you -- should we be thinking about dilution? Absolutely not. If you are growing the top line in such a great business, where the gross margins are good and there's good cost containment and cost consciousness. I mean you have a lot of ability to reinvest. And if we had additional need I would be the first one to come in and signal. I mean this quarter, you can expect us to -- on these 2 quarters, you can expect us to invest, and we'll sure pay that later. Not afraid to do that. But there, I feel very good. Second is partnerships, right, in an industry where multiples are so high, purchasing is not the only option, right? So again, the contacts from the past, I mean, we see opportunities in working with bioprocessing players where we can take LCMS into the bioprocessing suite. And that's something that plays to both trends. I mean, we are the world's expert in LCMS, and there are others who do bioprocessing well. We see opportunities in creating an informatics umbrella. And I don't mean this as everything should go through Waters, but we are in the best position to do it with over 500,000 users on Empower. We have the single most ubiquitous instrument in a QA/QC lab, can we do that? And your -- to your question on inorganic, absolutely. I mean, that's on the table. That is no preconceived notion. It has to make sense strategically. It has to make sense financially and the timing has to be right. And you can understand that it will be sequenced. So we want to get our organic strength back. We want to get the team in place, and we want to make sure that those 2 things are in place. And yes, we are ready to fight. So... And then the next question is what areas. Again, we start from the core out, right? You start from the core, there are clear opportunities in the core, where can we augment better separation techniques, where can we come up with a more -- bigger consumables portfolio? Let's assume that we build an e-commerce platform, how can we enhance our consumables portfolio, where can we take LCMS into the diagnostic space, right? So you can see there are logical movements. And you will not see us bidding for sartorius. Let's be clear. But that's I think you can see what it is, yes.

Yes, yes. All right. We'll cross that one-off the list, but that is awful, one way or the other. All right. That was really the -- I really enjoyed that. Thank you for taking the time. Unfortunately, we're out of it for now. We're at 30 minutes, but this is really great, and we look forward to keeping the discussion going and hearing more about your progress over the coming quarters.

Thanks, Doug. Always good to catch up.