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Text: Over the course of the last few months, which have been particularly challenging against the background of a global pandemic, Chris has kept the team focused on execution.
Throughout his tenure, Chris has demonstrated a clear commitment to advancing a new product cycle that has in part helped us establish a strong foundation for growth.
As you know, on July 15th, we announced that Udit will be joining us on September 1st.
Udit is a highly accomplished executive with more than two decades of leadership and operational expertise in our industry.
He has demonstrated a proven track record of delivering tangible financial, and operational results as evidenced by his prior roles at Merck KGaA, headquartered in Darmstadt, Germany.
Importantly, he also has a strong appreciation for our purpose, culture and people.
We are confident he will help Waters build on our foundation and usher in our next chapter of innovation, growth and shareholder value.
I know Udit is eager to get going and we look forward to introducing him when he officially joins us in September.
I hope that you and your loved ones are doing well as the world continues to manage through this truly extraordinary time of the global COVID-19 pandemic.
It's amazing how much is happening on a daily basis, and I wish you peace and fortitude as we all work hard to improve both health and economic conditions for everyone.
During today's call, I will provide an overview of our second quarter operating results as well as some broader commentary on our business in the context of COVID-19 and describe the actions we are taking to emerge from this period stronger than ever.
Sherry will then review our financial results in detail, and update you on our financial actions as it relates to the balance sheet and cost structure.
To briefly review our operating results for the quarter, Q2 sales declined 12%, and adjusted earnings per share declined 2%.
While Q2 was expectedly a bit softer than Q1 in terms of year-over-year growth, our revenue results reflected modestly better market conditions than we had anticipated, an increasing impact of new products as well as strong execution by our global sales, service and operational teams.
During the quarter, we also executed well on our plans to achieve meaningful near-term cost savings to ensure our financial strength and flexibility under a variety of recovery scenarios.
This combination of higher-than-expected revenue and the timing of our near-term cost actions enabled us to exceed our margin and earnings per share expectations.
As we enter the second half of the year, we are focused on our recovery trajectory and normalizing our operating spend and investment in the business.
I am very proud of our team's execution across the business in this dynamic environment.
Looking ahead, while risks and uncertainties in our operating environment remain as a result of the COVID-19 pandemic, we believe that our end markets and geographies will see modestly better conditions in the second half of 2020 than they did in the first half.
I will provide some additional color on this later in my remarks.
As we navigate the COVID-19 global pandemic, we continue to execute against our five point value creation model which emphasizes our unique specialty positioning, organic innovation, operating excellence, disciplined capital deployment, and a sharp focus on people and culture.
That said, I'd like to focus my comments today on our near-term operating priorities relating to the COVID-19 period that I outlined on our last earnings call.
We are making great progress against each of them.
First, our top priority remains the health, safety and well-being of our employees and our customers.
The deliberate actions and cautions we have taken during the pandemic have minimized the infection rate within our employee population, while still enabling the organization to operate efficiently and effectively.
Our multi-phased safe return to workplace process is well under way with teams returning to our major facilities in several stages.
Our second priority is to ensure business continuity.
Our service engineers have consistent access to customer sites globally in order to maintain, service and install instruments, while our sales reps have less consistent access given the varied pace of recovery across our geographies.
Salesforce access has been improving however, as customers continue to ramp up their laboratory operations.
That said, our strategic technology investments over the last several years are paying off, and have enabled us to effectively serve the vast majority of sales, service and scientific activities with a hybrid in-person and digital effort.
We have been successful getting our experts in front of customers through virtual events and we are restoring normal interactions with sales reps and regional specialists where possible.
Operationally, we have confidence in the continuing stability of our supply chain, manufacturing and distribution processes.
Our third priority is maintaining our financial strength, flexibility and liquidity even in our most conservative forward looking scenarios.
Exiting the second quarter, we are on track to achieve our $100 million cost savings plan for the year relative to our prior internal forecast.
We are nearly complete, returning those employees on temporary 90-day furlough to work, we have restored full hours and salaries and we have now reoriented our focus toward investment in the business in the second half to enable our return to growth.
Sherry will provide more details on these measures during her remarks.
Our fourth priority is to accelerate our recovery, by focusing on actions we can control.
In particular, we are taking direct action to a, maximize the impact of our strong new product cycle, b, target our R&D efforts on near-term product introductions, c, service our installed base either remotely or in person as customer labs allow, and d, focus our sales efforts on customer labs that are open to operation.
In Q2, we saw an increased contribution from our recently launched mass spec products while launching an important new LC instrument.
More on this in a few minutes.
Finally, we are continuing to contribute our expertise and capabilities in the global fight against COVID-19.
Our customers have responded enthusiastically to our offers of deep scientific and technical expertise across a range of COVID-19 therapy and vaccine candidates under development.
In particular, our unique system solutions have been very useful in critical workflows including peptide mapping, glycans analysis and oligonucleotide analysis.
While the short-term revenue impact is minimal, these efforts have been deeply appreciated and have greatly advanced relationships across our customer base while also advancing the fight against COVID-19.
Now, I would like to make a few comments on our outlook.
As we outlined last quarter, our planning scenarios are based on a categorization of each geography into one of three phases of the COVID-19 pandemic: Containment, Recovery, and Return to growth.
We currently believe that all of our major geographies have now transitioned to the recovery phase.
As a result, and as I mentioned before, we believe the second half will be modestly better than the first half.
However, we don't anticipate that quarterly revenue growth will turn positive until 2021.
From an end market perspective, our largest market, pharmaceutical is leading the recovery.
Encouragingly, our top global pharma accounts grew in the second quarter and year-to-date.
In addition, CXOs and large molecule pharma customers are recovering nicely, while generic and specialty pharmaceutical customers are still operating with more constrained capital budgets.
Looking ahead, though we expect most pharma customers to return to normalized operations this fall, risks and uncertainties certainly remain, particularly in Q4 around meaningful year-end budget releases that we typically see.
Our industrial markets are recovering more slowly with customers generally operating under tighter capital budgeting restrictions than in pharma.
Notably, because these customers provide less recurring revenue than our pharma customers returning to normal operations doesn't immediately result in a corresponding return of spending in the form of capital equipment.
Within the industrial category material, science labs are operating at higher activity levels than food and environmental labs and we expect them to return to normal levels more quickly.
Lastly, academic and governmental markets are lagging corporate customers, and are expected to be the slowest to recover.
Many academic labs remain closed or only partially open, while governmental business has been significantly impacted by delayed tender activity.
Turning now to our geographies, all major regions have transitioned from containment to recovery phase with each seeing steadily increasing customer activity throughout the quarter.
A number of countries including China, other countries in Asia and parts of Europe are moving through the recovery phase more rapidly.
On the other hand, the United States, India and remaining parts of Europe are progressing more cautiously through these various stages of easing restriction.
In aggregate, as we look to the second half of the year, we are expecting improved demand across the business, in particular for instruments as we expect a gradual easing of capital spending with constraints in all of our end markets.
Looking specifically at China, the pharma market is leading the recovery with solid growth in large molecule pharma and CXOs.
Generic pharma remains under pressure as customers remain cautious on capital spending in the context of both the GPO program implementation and the COVID-19 pandemic.
That said, China's pharma recurring revenues grew in the quarter across both large and small molecule which we expect to continue bolstering our confidence that we will see increasing instrument demand over time.
China's food and environmental markets were down in the second quarter, reflecting the continued funding pressure that is impacting government labs, partially offset by growth within independent labs.
Elsewhere in Asia, recovery is a mixed picture with strength in certain geographies such as Korea and slower recoveries in other regions such as Japan and India.
Turning to the US, we are seeing a dynamic and somewhat uncertain environment with various states experiencing increasing COVID-19 cases over the past several weeks.
And therefore, are seeing rollbacks of previously implemented reopening plans.
The pharma market is leading the recovery, driven by large molecule customers.
Capital spending is slowly, but steadily improving, and we are seeing strong customer support for our new products.
Elsewhere in the Americas, Latin America remains very soft.
Lastly in Europe, recoveries in the countries of Southern Europe and Northern Europe are lagging those in Eastern Europe and Central Europe.
Pharmaceutical markets are recovering more quickly than other markets with QA/QC reporting growth in the second quarter.
Our recent European performance has been stronger compared to the Americas, because many European countries have been more effective managing COVID-19 containment efforts and European customers are adopting some of our new mass spec technology at a faster rate than other geographies as we typically see.
Aside from these current market dynamics, we remain sharply focused on our primary growth strategy of organic innovation.
We believe we are well positioned to leverage our robust and growing new product pipeline as demand normalizes and we expect continuing increases in contribution from new products.
Looking at the Waters product line, there is increasing evidence of traction of new products throughout the quarter particularly BioAccord and Cyclic IMS. In addition, we launched six new instruments year-to-date and have received very positive initial feedback.
These new product launches were highlighted by the Arc HPLC, a rugged, reliable and modern HPLC system that is a significant advancement, and enhances our strong technology leadership position in the core, liquid chromatography market.
In our TA Instruments product line, the three new products launched last quarter at PittCon have received strong customer interest.
Material science markets have been challenged, but these products are poised to support future growth and market share gains.
In summary, the sales in our second quarter continued to be impacted by the COVID-19 pandemic.
Our revenue results reflected modestly better market conditions than we had anticipated, and increasing impact from our new products as well as strong execution by our global sales, service and operations teams.
We also took decisive actions to manage our cost to ensure the largest portion of our 2020 savings plan in the second quarter, which as expected was a more challenging environment than the first quarter.
This combination of better than expected top line performance with the benefits of our cost containment efforts enabled us to exceed our margin and earnings per share expectations.
Although risks remain with the uncertain trajectory of the global COVID-19 pandemic, we expect market conditions to improve modestly in the second half versus the first half of the year, and therefore have accelerated our growth investments to take advantage of opportunities as demand recovers.
With that, I'd like to pass the call over to Sherry Buck for a deeper review of our second quarter financials.
In the second quarter, we recorded net sales of $520 million, a decrease of approximately 12% in constant currency.
Currency translation decreased sales growth by approximately 1% resulting in a sales decline of 13% as reported.
In the quarter, sales into our pharmaceutical market declined 10%, sales into our industrial market declined 13% while academic and governmental markets declined 21%.
Looking at our product line growth, our recurring revenue, which represents the combination of precision chemistry products and service revenue declined 3% in the quarter while instrument sales declined 23%.
As we noted last quarter, there was no year-over-year difference in the number of calendar days during the second or third quarters, but there are two additional calendar days in the fourth quarter of 2020 compared to 2019.
Chemistry revenues were down 4% in the quarter, driven mostly by weakness in academic and governmental.
On the service side of our business, revenues were down 2% as mid single digit growth in service contract revenues were offset by a decline in on-demand service revenues and spare parts.
Breaking second quarter product sales down further, sales related to Waters branded products and services declined 12%, while sales of TA-branded products and services declined 20%.
Combined, LC and LCMS instrument platform sales declined 24% and TA's instrumentation system sales declined 20%.
Looking at our growth rates in the second quarter geographically, and on a constant currency basis, sales in Asia declined 12% with China down 20%.
Sales in Americas declined 15%, including a 14% decline in the US and European sales were down 9%.
Before I comment on our second quarter non-GAAP financial performance versus the prior year, I would like to update you on the progress of our cost actions in response to the COVID-19 pandemic that we shared with you during our last quarterly earnings call.
We are on track to achieve cost savings of approximately $100 million for the year relative to our prior pre-COVID internal plan.
We achieved about 60% of our planned annual savings in the first half of the year, which was better than expected, as we focused on aligning our operations and investments with our growth challenge in the second quarter.
This result flow through our P&L and is the primary driver for favorable performance in gross and operating margins versus the second quarter of 2019.
Looking ahead, while we plan to maintain strong operating discipline through the end of the year, a significant portion of our cost actions were enacted for a 90-day period and are nearly complete.
Employees are returning from temporary 90-day furloughs, and we have restored reduced work hours and salaries to normal levels.
As a result, the second half of the year will not reflect the same level of savings reported during the second quarter, as we reorient our focus toward growth investment in the business in the second half.
We anticipate the remaining 40% of our cost savings to be achieved in the second half of the year.
This plan reflects our core assumption that the business moves to the recovery phase and business conditions improve in the second half.
We're monitoring our business conditions and we will adjust our plans as appropriate based on the pace of the recovery.
Returning to our second quarter's non-GAAP financial performance, gross margin for the quarter was 59% compared to 58.4% in the second quarter of 2019, primarily as a result of our cost savings actions.
Moving down the second quarter P&L, operating expenses decreased by approximately 13% on a constant currency basis, and foreign currency translation decreased operating expense growth by approximately 1% on a reported basis.
In the quarter, our effective operating tax rate was 15.4% compared to 15.7% in the prior year.
Net interest expense was $9 million, an increase of about $3 million as anticipated.
Our average share count came in at 62.2 million shares, a share count reduction of approximately 11% or about 7 million shares lower than in the second quarter of last year as a result of shares repurchased through the end of the first quarter of 2020, subsequent to which we paused the share repurchase program.
Our non-GAAP earnings per fully diluted share for the second quarter decreased to $2.10 in comparison to $2.14 last year.
On a GAAP basis, our earnings per fully diluted share decreased to $1.98 compared to $2.08 last year.
Turning to free cash flow, capital deployment and our balance sheet, I'd like to summarize our second quarter results and activities.
We define free cash flow as cash from operations, less capital expenditures and excluding special items.
We made good progress in the quarter on our capital expenditure and working capital improvement plans shared during the last quarterly earnings call, and we also remain on track for the full year.
In the second quarter of 2020, our free cash flow came in at $175 million after funding $46 million of capital expenditures.
Excluded from free cash flow was $23 million related to the investment in our Taunton precision chemistry operation.
In the second quarter, this resulted in $0.34 of each dollar of sales converted into free cash flow, and $0.30 year to date.
Our strong free cash flow was primarily a result of cost savings actions implemented in the second quarter.
Turning to working capital, accounts receivable days sales outstanding came in at 87 days this quarter, up 8 days compared to the second quarter of last year and inventories decreased by $8 million in comparison to the prior year quarter, reflecting revised production schedules.
Waters maintains a strong balance sheet, access to liquidity and a well structured debt maturity profile.
We ended the quarter with cash and short-term investments of $356 million and debt of $1.7 billion on our balance sheet at the end of the quarter.
This resulted in a net debt position of $1.3 billion, and a net debt to EBITDA ratio of about 1.8 times at the end of the second quarter.
We also have $1 billion available on our bank revolver for a total available liquidity of $1.4 billion at the end of the second quarter.
In terms of returning capital to shareholders, while our future capital structure target of approximately 2.5 times net debt to EBITDA remains unchanged, our near-term focus is maintaining financial flexibility and preserving liquidity.
As a result, our share repurchase program remains on hold, and so we see a more stable and predictable business environment.
We expect the actions we've taken will continue to provide us with adequate flexibility under a variety of potential recovery scenarios.
Given the uncertainty surrounding the magnitude and duration of the COVID-19 pandemic, and its impacts on our customers, we're not providing full year guidance.
However, there are a few data points that will be helpful for modeling purposes.
Due to the timing of our cost actions, as discussed earlier, we expect full-year operating expense growth in the range of negative 1% to positive 1% year-over-year in constant currency.
For the full year at current rates, currency translation is expected to decrease sales growth by about one percentage point and to negatively impact earnings per share by about 3 percentage points.
For the full year, net interest expense is expected to be in the range of $40 million to $42 million primarily due to lower interest rates.
In summary, while the second quarter was challenging as we expected, we were very pleased with our results, which were driven by a modestly better market conditions than we anticipated, increasing impact from new products and the strong execution by our team.
We are looking forward to the back half of the year, and we are optimistic that the Company is well positioned to return to growth in 2021.
Before we take questions, I would like to add a few brief comments on our upcoming CEO transition.
It has been the honor and privilege of my career to serve as the CEO of Waters Corporation.
I have loved every single day working with such inspiring customers and an incredibly talented and committed group of colleagues.
Together, we have significantly advanced Waters over the course of the last five years, including, we have transformed our organic innovation engine and established an unprecedented new product pipeline and supplemented our technology portfolio through external investments and tuck-in acquisitions.
We have implemented a new capital deployment framework with increasing emphasis on growth investments while also returning capital to shareholders.
And we have significantly advanced the Company's talent organizational capability and technology infrastructure.
I will pass the reins to Udit Batra on September 1st knowing that Waters is moving forward from a strong foundation.

user
compname reports q2 earnings per share of $1.98.
q2 non-gaap earnings per share $2.10.
q2 gaap earnings per share $1.98.
q2 sales $520 million versus refinitiv ibes estimate of $496.9 million.

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