Everyone, I'm Derrick Brown, Senior Life Sciences and [audio distortion] Analyst for Bank of America. Welcome to our Enlightened Healthcare Conference. With us is our first company presenting, Waters. So we have Dr. Udit Batra, President and CEO of the company. Thank you, Udit. Thanks for being here. Thanks for making the trip over from Boston. Just some basic background. I mean, do you want to make any open comments before we sort of begin the inquisition? Firstly, thank you for that. I'm going to start, but Derrick, look, it's wonderful to see you in person. It's great to be here, and thank you for having us. Really been a terrific couple of years where lots has changed. I'm sure we'll get into that. But a lot is constant. We're still in the middle of a pandemic. There's still a macroeconomic challenge that we are confronted with every single day, and we're parsing through it and excited to be at the company and excited to talk about what we're up to. So Udit, you've been speaking of the pandemic, and you became CEO in the middle of it, which I'm sure is a challenging task to begin with, but you've executed quite well. The business has done very well. I mean, obviously, the company had been underperforming your peers prior to your arrival, and it certainly has not been. And since then, I guess, what were some of the major issues and challenges that you initially saw? Just to sort of set the stage for where we're going to go. Let's start with that. I mean, I don't think a lot has changed, and a lot is the same. It's very easy to talk about what we've done to change things, and I'll get into that. But the deep technical focus and deep technical expertise and the customer closeness that Waters always had, and that I experienced as a researcher myself. I was in the lab as a PhD student and in the lab research at the research lab in the U.S. The best reps and the best service engineers were from TA and from Waters. I believe that still remains the case. That was the case when I joined. The basic success factors that made the company successful over several decades were still intact. It was great. What we had lost, and like many companies, what we'd lost is focus on what had made us successful over several years. We had sort of gotten distracted with the shiny object on the left and on the right. And we wanted to become a company that delivered software through SaaS. We wanted to be in bioprocessing. That was a shiny object also. We wanted to be in services, etc. So we had experiments going on in all directions. So we needed to focus back. And second, when you get seduced with all of these things, timelines are lacking a sense of urgency. And the third, and the most important, is accountability. So when you have teams involved in a collaborative culture, it's not really clear who's doing what. And so we now have something called the deletion experiment. If you don't exist, what is going to be different for the company? And I think that has changed the way we operate. And you can see the results as we begin to get into the transformation. But culturally, we just simply built on a very strong base of technical focus and customer closeness that, I can tell you, is very difficult to revive if it's broken. And that's why you saw the transformation happen so fast. We always said to people, "Hey, guys, we're good at replacing instruments. We're good at innovating products and bringing new products with deep unmet needs. We've always done that. Let's keep doing it." That's what we did. So I mean, speaking of focus, I mean, unlike a lot of your life sciences tools peers, your business is highly concentrated. 60%, 70% of LC, 20% mass spec, and then the rest is TA business, roughly speaking. Certainly in LC and MS, we've seen very strong markets for analog instruments for the last couple of years. I mean, particularly for 2022, despite a really strong 2021. So I think there's a lot of concern about when will growth normalize, how sustainable is current demand, have customers pull forward orders. Can you just sort of talk about the current analog instrument landscape? That's a great question. Just again, let's start with the facts. So take a step back. Waters is quite diversified from a portfolio perspective, from a geography perspective, and customer perspective. And from a portfolio perspective, over 55% of our sales is regarding revenues, which is service and customer closeness, which are quite a lot of SKUs and quite a lot of customers. And on the instrument side, which is 45%, 46% of the business, LC is not LC. LC is many different types of LC for small molecules, for large molecules in development, in R&D, in QA/QC. mass spec is many different types of mass spec. You know that better than even I do. High resolution mass spec, tandem quads, now the Bio Accords, which is QA/QC. And TA Instruments have five to six different platforms as well. So it's not a monolith, and our portfolio is quite diversified. Second, from a customer perspective, we're blessed to have exposure to highly resilient and attractive segments. Again, very diversified. Over 60% of the business in pharma. It's one of the highest in the industry. Second, in the industrial and applied segment, over 50%, 60% of that business is still in resilient segments, like food and environmental, increasingly battery testing. So close to 80% of our business is in resilient segments, but very nicely diversified. And geographically, we're one of the most diversified tools companies with almost 20% in China, 40% of the business in APAC as a whole including China, 30% in the U.S., 30% in Europe. So nicely diversified across the board. So factually speaking, quite a diverse business. Now, to your question on instrument cycles, again, let's just look at the facts. There's no sense in just looking at 2021 in isolation. If you did, I mean, we looked superb. We grew 16% that year, which is again at the top end of the analytical instruments peers. But on a stacked basis, if you just take out 2019, that growth was 7%. And that, again, is on the top end of the peer group. So if you now take the 7% and extract pricing on it, it's 50 to 75 basis points to normalized basis. Still 6%-6.5% growth volume, which is nice. And this is Waters numbers. And there are some Waters-specific events, meaning commercial transformation, which adds about 100 basis points. And then new products, which also adds something. So that gives you the outperformance versus the market, which is roughly 5-ish% volume percent. Better than what it has been historically, but not double-digit. So that base is reasonable. Then on that basis, first half of 2022 has really been great. There we grew 13% on a constant currency basis. But then you have to extract the pricing from it, which is 200 to 300 basis points. That's still double-digit volume growth. The market is a bit lower. And then again, there are a couple of Waters-specific factors that explain our outperformance. So there is an acceleration, especially in the first half of 2022 versus historical numbers, but it's not a multi-year effect. And there are some specific events that have taken place in the market itself. Take pharma, for instance. Many of our customers focused all their energy in servicing COVID. And during that time, some of their programs in development and launches got delayed. And now those programs have come through. So you're seeing a very nice sort of catch-up. But on a normal basis, it's not a massive pull forward. We don't see a pull forward at all. We check this through independent checks as well. In fact, I had my audit team go and do an independent check with key customers and key geographies. And I said, "Look, first we can explain inside out what the growth is. Let's just do a check and see if anybody's pulling forward orders or holding consumables." People don't hold $500,000 worth of Bio Accords. I mean, that's not something someone wants to do. But are they holding on to consumables? And we didn't find any evidence of that. That said, the fact that orders are outpacing growth also tells you that the demand is very heavy. So we don't see any slowdown in demand. We don't see any pull forward, especially in pharma, especially in the resilient segments that I mentioned. So with that sort of backdrop, and you had your analyst stay in May, when you think about sort of the normalized go-forward rate, you still feel pretty confident in the 6%-8% numbers that you're sort of seeing there. And I guess, once again, tougher comps on 2023. Not trying to get you to tie to 2023, but I would love some color on it. Because I think there's a big concern in the investor base is that all these tools companies are suddenly going to go to low single-digit growth next year or negative growth on business because the numbers are so strong and we're facing recession, blah, blah, blah. I mean, again, let's go back to fundamentals. And I can't speak about all tools companies. I mean, as I said, 80% of our business is in these resilient segments where people don't stop taking medicines during a recession. If anything, food and water testing has become much more stringent. I mean, take PFAS, for example. I mean, I was with two customers in Europe and one in the U.S. over the last week alone just to understand the trends in that area. The regulations in some Scandinavian countries are already implemented. Manufacturers are required to demonstrate that the effluent water streams done on their plants have almost zero PFAS. I mean, that's unprecedented. You need highly sensitive instruments to detect that. And the Xevo TQ Absolute we just launched is the most sensitive mass spec instrument in the market. And customers are just picking it up really rapidly. There are clear unmet needs in the markets that we're serving. New products are serving that need. We don't see any fundamental reasons to believe that the demand is going to slow down. We're not seeing any signals of it either. Now, to your 6%-8% question, the algorithm is pretty simple. There's market growth, and yes, the market is not the 4%-6%, reducing in the past, partly due to pricing, partly due to the volume that I talked about earlier. But whatever it is, we have a clear algorithm that says that our commercial initiatives are adding about 100 basis points, a bit more over the last year and change. Then on top of it, our growth initiatives, including new products, are adding 100 basis points. That goes from 5%-7%, 6%-8%. The midterm of the market is a bit faster. You can add 100 basis points on top of that. So I think that for me is a simple algorithm. The market, commercial, and then the growth. Yeah. I mean, look, I think our work on the market over the years, I mean, things have definitely accelerated, and the companies are better positioned, and I mean, this across the industry is much. I mean, we first picked up coverage of Waters in 2001, if you can believe it, because I'm old, but I mean, it's completely different from where it was. I mean, it was maybe a 3%-4%, maybe 3%-5% if you were lucky back then, and now things have gotten better. The customers are stronger. The tools companies are stronger, but there is this sort of general fear that the party is going to end, which, as I said, we've been fighting against, but clearly it's reflected in the performance of the stocks. Speaking of customers, currencies have moved pretty dramatically. I know that there had been some history with, particularly with some of your Indian customers not having the budgets as the rupee moved against the dollar, and then are you seeing any sort of delays because of people not having the budgets, or are they finding the money? Not at all. I think globally, the business is very strong. India business has been on a [audio distortion] growth. And in some geographies, where it's still certainly U.S. dollars, you don't see an impact on FX. Really no change from a demand perspective that has been impacted. Got it. As you think about the business, I mean, you mentioned it was diversified among your geographies and certain product types in which you serve. Is there a need to expand into, I don't know, increase your molecular spectroscopy portfolio to better serve some of the customers? I think it's a question as we think about what you need for doing biologics and QA/QC as you sort of think about the higher demands for food safety testing. There are other technologies besides LCMS that are there as like so that's a two-part question. It's like, do you think you need incremental technologies? And then this is going to segue into a bioprocessing question, which I have to ask. No, it's fair enough to be surprised if you didn't. Let's just again start with the facts and let's double-click on pharma for a minute. The pharma market as a whole, commercialized products are 80% still small molecules, and somehow small molecules become a bad word in, or not such a good word in the tools industry. It's a terrific place to be, especially if you're in QA/QC like we are. I mean, 85% of our portfolio is levered towards late-stage development and QA/QC, and in fact, when I joined the company two years ago in September of 2020, one of the first things I was told is, "Waters is small-molecule focused. It's getting commoditized," and especially, and that's why you got your market in China, because they have low-end instruments from some other competitors. Nothing could be further from the truth. We launched the Arc HPLC, and I have nothing to do with the development of that product. It's already in the pipeline. It's just about to be launched. But it met an unmet need in a regulatory frame that didn't have the customers change the data and the methods that they filed, because it had sharper peaks, better carryover, faster experiments, better productivity. And that product just took off in China. And we gained tremendous, tremendous share. Contract manufacturers and large companies in our China business, it's been terrific this year. First half, while sort of others had a slow start in the first half of the year, the first quarter of the year, we came out of the gates very strong. Second quarter, because we had done so well in Q1, we were a little bit slower. But first half of the year, 13%-14% growth. Full year, we think it's going to be 15-ish%. But the small molecule market was also really wanting innovation. And we showed with the launch of Arc HPLC that that market is still robust and you can grow in that market. And then that product was launched in the U.S. and Europe and has done extremely well. Now, to your question on large molecules, so 80% of the molecule market is small molecules, 20% of the commercialized products is large. But the ratio changes in development. 40% of the micro and the large molecules have [audio distortion] modalities. I think all of us know this, and that's why you asked the question. Waters has, over the last two years, gone from this 20/80 ratio in our product base in pharma to a 30/70 ratio. So we've gone from about 20% products that are serving the small molecule market, large molecule market to 30%. And that's been a very deliberate exercise. Now, given that you're a historian and you know where Waters has been, I'll take you through some specifics. And stop me if I get loopy. I love this stuff. I'm an engineer by training, so I don't make any apologies for talking about science. Across the portfolio, start with LC. Let's start with columns. It's easier. With columns, we launched the MaxPeak Premier columns. We coated our columns to reduce the affinity of large molecules which stick to surfaces very easily. And that decreased the experimental times from about 18 hours for some molecules to less than two hours. Products that had to be passivated. Passivation means that you have to run the product before you, it's like running a coffee machine. I mean, I don't know how many of you do this, but usually, if I have to take an espresso, I usually run just water through the machine so that the machine gets hot and my cup gets hot. And then I run it. I see you nodding in the back. You do it as well. And the same thing you have to do with an LC column. You have to make sure all the surfaces are sort of coated. And then when you have to separate the molecule, it's doing what it's supposed to do. That sometimes can take 10, 12, 14, 18 hours. With the MaxPeak Premier column, you can just take it out of the box and run it. Imagine that you don't have to waste time and energy running a blank espresso in the machine, so that is a very significant advancement in the industry, and no wonder this column is the best launch for Waters. And we've launched columns since 1970. This is the best launch in our history. That technology was then taken into, and that's relevant for large molecules. Then it was taken into the UPLC space with the ACQUITY Premier launch. You talk about the mass spec portfolio. I know that's your favorite for Waters. High-res mass spec. We have a very strong offering with Cyclic. The Cyclic instrument is the only instrument in the market that can distinguish shape of molecules and not just the size. The MRT has been launched. It is an instrument that does experiments that the timsTOF or the Orbitrap can do, but does it much faster at the same level of resolution. It's in early stages. It has to be simplified with software, but the potential exists. You go into the tandem quads space. You have the Xevo TQ, Xevo TQ-XS, and the Xevo TQ Absolute, which we talked about earlier. You have the Xevo G3 QTOF. Sorry for the acronyms. It's a product that's the workhorse for large molecules in development. The advancement here is software. Again, one of the deliberate topics for Waters. What we've done with Empower, having a software that is used in development for small molecules, allowing easier transfer for methods that are used to submit to regulators, into QA/QC, we've done for mass spec. The Waters Connect platform, our newest QTOF, has the same sort of regulatory compliance capabilities that we requested for [audio distortion], so I've gone on long about this, but I just wanted to demonstrate that across the portfolio, it's a very deliberate effort to move us in the direction of large molecules, and you already see the weightage increase from 20% [audio distortion]. Got it. As much as I'd like to talk about technology, I'll get yelled at if I don't ask some mundane questions. So sort of a choppy macro environment we're facing. And can you talk about your cyclical exposure, not your mass spec cyclical, more cyclical exposure, your concerns, how you sort of think about your exposure in a downturn? Yeah. It's a great question. So the first is on the end market side. We've talked about the 80%, 80% of the end markets being in resilient, attractive segments that have sort of believable trends that will traverse through any sort of macroeconomic choppiness. So the microeconomic environment is much more relevant. Second, if you just look at the last downturn back in 2008, 2009, the company grew, contracted roughly 3% in a recession. And that was way better than our whole bunch of years. But the margin expanded. The gross margin expanded. So we're a cash machine. We had $0.25 of every dollar that comes as free cash on an average year. And that algorithm, as long as we have resilient end markets, differentiated products, is still very much intact. And the reason I cite 2008 and 2009 is just the relative dip that took place. And so we didn't see it then. And the company is much more resilient now from an end market perspective, but also from a portfolio perspective. At that point, roughly 45% of our portfolio was instruments. Sorry, 45% was recurring revenue. That's well in excess of 5%-6% now. And when you think of recurring revenue, and this is also something that requires a bit of precision, surely services are recurring, consumables are recurring, and they are recurring every year. Instruments are recurring also five to seven, seven to nine years. They wear out. And just because people are not going to replace them during a capital downturn, perhaps, and some customers might do it, they get replaced the next year. We've just demonstrated that with our replacement cycle. Instruments were not replaced for three to five years. And now we have a three-to-five-year window that we're replacing all the instruments that we hadn't replaced for many years. So it doesn't go away. And I think for long-term investors, that's something you really have to keep in mind. As long as the unmet need is there, our whole business is recurring. It's just a question of time zone. It's also worth pointing out that during the 2008-2009, you also had Wyatt being acquired and Schering being acquired, which historically has disrupted your business and some of the other deals. Then I think there too, you have to distinguish among the players. 85% of our business is now in pharma, late-stage development and QA/QC. We have very low exposure to academia and early-stage research, which is where, so when having spent most of my career in pharma, 2001 is an interesting time because that's when I left the scientific world and came into the business world as well. I used to be in R&D at Merck Sharp & Dohme at the time. When there is an acquisition or an integration, research is sort of compressed. Nobody touches late-stage development. I mean, that's why you're acquiring a company. Definitely no one touches commercialized products and QA/QC. Even during the consolidation phase, Waters is likely to be least impacted among the peer groups given just where we are present. Yeah, and certainly, I think that the commentary, I think there's a lot of concern about biotech finance right now, and I think we think it's more of a red herring on the group and on the CROs just because the fact is stuff doesn't get late-stage. If you're very early-stage, there's clear examples of companies that are having issues with that because they're very early-stage. It's an issue, but for most of the industry, it's not. That's a great point. I mean, again, biotech funding, it's a question that's come up. It's worth less than 5% of the early-stage biotech or less than 5% of our revenue base. Now, that doesn't mean that these companies are irrelevant. I mean, we do work with them to develop methods, but it's such a small portion of our business, and they buy an LC or they're working with a CRO with LC. They don't have big capital needs, so they're not part of our cycle. Can we talk a little bit? I mean, you touched on it briefly, but can we talk a little bit about how margins progress from here? And then you mentioned your strong free cash flow. Obviously, there's always the question of capital returns and share buybacks, dividends, and there's a tax rate question embedded in there. So once again, let's stick with all the boring stuff and talk margins and. I was going to invite my CFO to come up and talk to you about tax rates. He gives a good lesson on tax rates, but on taxes, just to address that question, no change. We'll give you any more detail on calculations we're doing based on what would come and what couldn't come. We've done a whole bunch of scenario planning, but maintaining is a good discussion. Now, on margins, I think what one has to keep in mind is just the algorithm, so again, just taking a step back and looking at Waters and P&L as an overall company, we grow 5%. We usually have about 50 basis points of that margin, so those margins should expand by about 50 basis points. Given that we have one of the highest margins in the industry, people come and say, "but you have no productivity left. And if you invest more in R&D, you guys will dilute the margins." That was one of the first questions I think you would also ask us. I think you've demonstrated over the last couple of years, we can maintain the P&L and in fact expand margins while growing the top line and investing in the base, and that's because we still have ways to go on productivity. The interesting thing about Waters is we were so technically focused and so sort of dispersed that we didn't implement many of the productivity initiatives that large companies have done in the past, and we're a large company itself, so we never built a capability center like many companies have in India or in some other locations. So we're doing that. We hadn't sort of consolidated procurement. We haven't implemented some of the operational initiatives that you hear from many of our peers. We've implemented and started to implement those. And if you take that into account, take new products into account, there's another 50 basis points of margin there. So that's about 100 basis points on an organic basis, on a constant currency basis. We believe over the next couple of years, we want to invest 70 to 80 basis points in R&D. So that's why you don't see any dilution coming from that. We're investing heavily in our pipeline. And we still have 20 to 30 basis points that we can implement. Now, this year, with the FX headwinds, if you take the FX headwinds into account, and this is quite important, it's a factual data, we've committed to 20-30 basis points even this year. There's 160 basis points of FX headwind. If you remove that, there's about, sorry, there's 130 basis points of FX headwind. If you remove that, there's 160 basis points of margin expansion. If you just look at the numbers this year. So that means once FX goes away, the jump-off point for Waters is very high, and you just have to peel the onion. I've taken you through the math, and I think it's worthwhile just taking a look at it, analyzing it, and what you find is the company is in a very, very good place, and the FX headwinds will turn. We've got sort of counterweight this strong forever, relatively speaking. When it turns, Waters is coming out at a very, very good jump-off point, and you see this in the EPS as well. For the full year, when you look at our numbers, the top line is [audio distortion]%. That's what we said, but the EPS on a constant currency basis is high teens. So it's a very healthy business at a very good time where a whole bunch of things are working, and we're able to offset pretty significant headwinds from FX. On the capital deployment, I mean, you talked about maybe looking at things and things that were sort of still within the core competency of Waters in the diagnostic space. Can you talk about share buybacks given that some of the laws are changing there? There's always the dividend question that comes up. Look, I mean, growth for capital allocation. Growth is the path, and organic growth is by far [audio distortion]. We believe that we have tons of opportunities to reinvest in the business. It's not just in the LC, in the mass spec, in the consumable space, in the informatics space, but it's also in the adjacencies we've outlined, the near adjacencies in reagents and [audio distortion] in advancing mass spec into diagnostics, batteries. Those are very attractive areas, but as you mentioned, we're a cash machine, and there's still stuff left over. In the past, we've done share buybacks, and we've agreed, and the board has completely aligned that we have extremely good growth areas. It's a question of what can accelerate our growth in these adjacencies, and we're open to M&A. We have ideas. I won't give you many specifics. I can see with a smile on your face you're about to ask that question. No, given that we cover 48 companies, I was going to make some suggestions. You're looking for some ideas. But look, I mean, the tools industry is a terrific, terrific place to be. Waters happens to be in one of the best places with a very sort of recurring revenue base, late-stage in development, QA/QC, with a simple business model that has been perfected over many years. It gives us high margins and gives us the ability to sort of peer at the rest of the space and say, "What do we want to pick off to accelerate our growth that is consistent with our business model?" And our business model is very simple at the end. If you abstract it down, we take complex instruments that start off looking like a Frankenstein, and we simplify it into little elegant boxes without losing the sophistication. We are deeply embedded in QA/QC. So the informatics solutions we develop really assure the regulators and our customers that the sanctity of the analysis is maintained. So nobody can press the delete button without everyone knowing that you've done it. And the chemistry is sort of customized to the molecules that we're trying to test. And our service engineers and our service teams are rated the highest in the industry year in, year out. And that's no mystery because these folks have developed the instruments, and they have very often worked on the instruments as customers. So they go and help our customers do the experiments in these regulated settings. It's a very simple business model. And we want to apply it in spaces like bioprocess stack, in bioanalytical testing and bioseparations. We want to do the same thing in battery testing as regulations applies. And there are many opportunities to accelerate. So we have pieces of the puzzle. If you just take bioseparations for a second, we have the capability of functionalizing surfaces in small particles for small molecule separation. We want to do the same thing for large molecules. So it's a very logical extension, but that's as much as I'll say about what we have in mind. Right. I mean, it's interesting. The industry is so resilient. And yet, when I talk with many investors, as I said, I think a lot of people can relate to what Pfizer does or what United does or CVS does. When we look at life sciences tools companies, I mean, nobody knew what PCR was prior to the COVID pandemic, right, and so I do think the fact that these tend to be a little bit more niche-y for most people. I mean, you and I are geeks because we spent years in the lab and doing things, so we have a certain approach for this, but I think the industry is a lot more resilient than anyone appreciates. I think we're coming towards the end here. Is there any specific questions from the audience? I think I want to pick up on the thread unless there's a question that somebody wants to ask where you ended your last statement on the underappreciation of what the tools industry does for people who are not experts. I think it's also consistent with how we're trying to describe what we do internally and to make sure everyone's inspired. We don't talk about platforms, and scientists don't get excited about, "Hey, I'm going to become a big service manufacturer. I'm going to become a big LC manufacturer or a mass spec manufacturer." Nobody gets excited about that. We get excited about solving problems. I mean, who would want to be in a company that is looking to detect diseases in the very early stages of an infant's life? Within the first six months of an infant's life, there are biomarkers that you can measure largely using techniques that are assets because mass spec. Those biomarkers are predictors of diseases that emerge later. Which parent would not want to know? I have two kids. I would want to know in the first six months of the life of the child on what I can do to help them grow up healthy and so on. The same thing in cell and gene therapy. Analytical methods are one of the single largest tools that will reduce the cost of bioprocessing for cell and gene therapy. Because if you have better analytical techniques, you don't have to have so much QA in modifying and tracing cells. That is exciting. You want to go home and tell your mom and your kids that, "Hey, I'm working on techniques that are going to take this therapy that's available to 300 kids." That's amazing. And that's how we talk about science in the company. And I'm certain that hopefully within my career, we're able to talk to the general audience about the value we bring to the industry. I think it's unfortunate that we talk about just the breadth of the portfolio and serving the customer's needs. I mean, yeah, that's all cool. But at the end, we will serve the customer's needs. Otherwise, we will not be in business. That's sort of expected. But it's much more inspiring to talk about solving an unmet need in a specific area. Battery testing is another one. I mean, if we're all going to drive electric vehicles, or many of us are going to drive electric vehicles, we want to be sure that these batteries are not going to explode or catch fire. How do you do it? You basically look for homogeneities in composition in these little cells that form batteries. And you can do that in a lab. And when you're driving an electric vehicle, you can talk to your kids or your family and say, "Hey, I'm working at a company that tests these things to make sure that when we're driving, this thing doesn't catch fire." Isn't that cool? I think we just have to change the narrative a little bit and not just either be too geeky as you and I are or be too commercial. And I think the happy medium is being directly focused on the needs. I think that's a fabulous way to end. Thank you, Udit. Thanks, everybody, for listening. Have a great conference, everyone. Thank you. Thank you.