Earnings Call Transcript - WAT Q2 2023

Operator, Moderator

Good morning. Welcome to the Waters Corporation Second Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session of today’s call. This conference is being recorded. If anyone has any objections, please disconnect at this time. It is now my pleasure to turn the call over to Caspar Tudor, Head of Investor Relations. Please go ahead, sir.

Caspar Tudor, Head of Investor Relations

Thank you, Ivy. Good morning everyone and welcome to the Waters Corporation second quarter earnings call. Today, I’m joined by Dr. Udit Batra, Waters’ President and Chief Executive Officer; and Amol Chaubal, Waters’ Senior Vice President and Chief Financial Officer. Before we begin, I will cover the cautionary language. In this conference call, we will make various forward-looking statements regarding future events or future financial performance of the company. In particular, we will provide guidance regarding possible future results and commentary on potential market and business conditions that impact Waters Corporation over the third quarter of 2023 and full year 2023. These statements are only our present expectations and actual events or results may differ materially. For more details, please see the risk factors included in our most recent annual report on Form 10-K, our Form 10-Qs, and the cautionary language included in this morning’s earnings release. During today’s call, we will refer to certain non-GAAP financial measures including in our discussions of the results of operations. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and in the appendix of our presentation, which are available on the company’s website. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the second quarter of fiscal year 2022 in organic constant currency terms. In addition, unless stated otherwise, all year-over-year revenue growth rates and ranges given on today’s call are given on a comparable organic constant currency basis. Finally, we do not intend to update our predictions or projections, except as part of a regularly scheduled quarterly earnings release or as otherwise required by law. Now, I’d like to turn the call over to Udit to deliver our key messages for the quarter. Then Amol will provide a more detailed look at our financial results. After, we will open up the phone lines to take questions. Udit?

Udit Batra, President and CEO

Thank you, Caspar and good morning everyone. Before diving into the results, I would like to start by saying that I'm very proud of how our teams have executed this quarter. We delivered a solid performance across our end markets despite a challenging environment and a stronger-than-expected slowdown in China. Our revitalized portfolio is driving results in areas of high unmet need as our newly launched products continue to gain traction and we're well-positioned for future growth as we make meaningful progress and make further investment in our high-growth adjacencies. Turning to our results. In the second quarter, we delivered at the high end of our guidance with 3% organic constant currency growth. We also had a great start to the Wyatt acquisition, which performed ahead of expectations and contributed 2% growth for the quarter. Overall, constant currency growth was 5% and our as-reported growth was 4%. Our organic constant currency performance was led by strong growth in the Industrial segment, which grew low double-digits, and the academic and government segment, which grew over 20%. In both of these end markets, mass spectrometry grew over 40% as our revitalized portfolio saw continued strong demand. In the pharma segment, which declined 4%, both the US and Europe grew high single-digits, showing initial signs of recovery in pharma spending. However, this was more than offset by significant worsening in the China pharma market as weakness broadened beyond CDMOs. The weakness in China also impacted our instrument growth, which declined 2% in the quarter. When excluding China, instrument growth was 8%, led by mid-teens instrument growth in the US and low double-digit growth in Europe. Meanwhile, our recurring revenue grew high single-digits, driven by increased service plan attachment and chemical e-commerce adoption. Our non-GAAP earnings per fully diluted share came in above our expectations at $2.80, driven by operational excellence across pricing and procurement as well as our cost actions. On a GAAP basis, our earnings per fully diluted shares were $2.55. Despite the challenging macro conditions, our commercial execution remains strong. So far this year, within instruments, mass spectrometry has grown high-teens on both a year-over-year and two-year stack basis as our commercial teams have capitalized on the strength of our renewed product portfolio. Our TA instruments division has also seen strong results despite macro challenges, having grown low double-digits year-over-year and on a two-year stack basis. Our commercial initiatives and strong execution have enabled high single-digit growth in recurring revenue. We have already achieved our goal of increasing service plan attachment by a further 100 basis points in 2023. We're now targeting an additional 100 basis points of expansion over the remainder of the year. The strength of our execution and the quality of our service offering is helping us drive this growth, and there is further runway ahead. Price is also a key part of our execution where we built commercial muscle and discipline in recent years. We've achieved strong results in price, achieving over 200 basis points so far this year. With our operational excellence, we expect to meaningfully expand our margins this year. For the first half of 2023, our gross margin is 58.9%, which is an expansion of 110 basis points versus the first half of 2022. For the full year, we expect to deliver a gross margin of 59%, which is 100 basis points higher than last year. We also expect to deliver an operating margin of 30.5% this year, which is 30 basis points higher than last year. Our revitalized portfolio is also driving results in areas of high unmet need. I would like to share a few specific examples. First, in the industrial segment, we're seeing strong growth in PFAS testing, and we are towards the beginning of a multiyear growth opportunity. Our growth in PFAS testing is twice as fast as the 20% estimated market growth rate as we continue to take share with our Xevo TQ Absolute mass spectrometer. In the academic and government segment, our high-res mass spectrometry portfolio is seeing strong adoption at a time where global funding for R&D applications continues to be elevated. Select Series MRT is unique in the high-res mass spectrometry market due to its enhanced resolution at high speeds, which gives it unique capabilities for metabolomics and imaging applications where throughput requirements are high. At ASMS recently, we announced new enhancements for the MRT, which increases imaging resolution by 50% and boosts sample throughput even further. Earlier this year, we launched the Alliance iS, which we believe is the most significant innovation to hit pharma QA/QC in the past decade. We've continued to see strong interest in its launch and several customers have already made plans to replace their LCs with this new industry-leading platform. We now have not one but two new industry-leading LCs for QA/QC applications in pharma, Alliance iS and Arc HPLC. Both of these instruments address significant unmet needs in the market, which continue to drive long-term growth in instrument replacement. And in our TA division, new product launches such as powder rheology accessory and the battery cycle microcalorimeter have supported growth in battery testing for electric vehicles. Battery testing is a fast-growing market, and we are well-positioned to support demand for characterization that will lead to safer and better-performing batteries. The strong results we've achieved in growing markets like batteries have allowed us to deliver double-digit growth in TA so far this year despite the challenging environment. We remain well-positioned for future growth and the long-term fundamentals of our business have never been better. While instruments are always prone to short-term fluctuations in spending patterns, instrument growth has been highly resilient on a long-term basis with average growth of about 5%. As we look ahead, the demand profile for our instruments has only strengthened versus this historical trend. Total global prescription drug sales, which is a key driver of instrument volume growth is expected to exceed historical growth rates for the foreseeable future. And our potential is further enhanced by the measures we have implemented to improve pricing where we expect to sustain 100 to 200 basis points improvement over historical levels. In addition, the growing adoption of analytical instruments in process development and process optimization of large molecule therapeutics is a new growth vector for our business. Here, novel modalities require more advanced characterization techniques like mass spectrometry and light scattering that have not been used in the past. We believe that this trend will not only continue, but will also pave the way for adoption of analytical instruments in high-volume, recurring applications and large molecule manufacturing. We expect this to occur as they become embedded within process control, QA/QC, and raw material testing over time. We remain focused on nurturing this growth opportunity with our continued investment in bioanalytical characterization and bioseparations. In bioanalytical characterization, which is a $1.8 billion total addressable market with a 10% to 12% projected annual growth rate, we've been investing both organically and inorganically. We recently closed the acquisition of Wyatt, which expands our ability to characterize large molecules across various stages of production beyond that of what we can do with LC-UV and LC mass spectrometry alone. We also recently announced an expansion in our collaboration with Sartorius from upstream development into downstream manufacturing. So far, in upstream process development, we've demonstrated that pairing the BioAccord Arc line with the Sartorius Ambr 15 and 250 bioreactors has enabled bioprocess engineers to accelerate clone selection results from weeks to a matter of hours. Now our expanded collaboration will integrate our technologies further. We will develop analytical solutions that are in-line and offer real-time monitoring of process controls and critical quality attributes in the bioreactor. By offering bioprocess engineers access to comprehensive analytical data for downstream batch and continuous manufacturing, we can support improved yields while reducing waste and lowering biomanufacturing costs. Finally, in Bioseparations, which is a $1.4 billion total addressable market with an 8% to 10% projected annual growth rate, we recently announced a multi-year research collaboration with Princeton University. The goal of this partnership is to advance research and drug discovery and development using novel bioseparation techniques that we're developing for large complex biomolecules. We also just introduced our first release in the new line of size exclusion chromatography columns, which are designed for the separation and analysis of viral vectors in applications such as gene therapy. Our new XBridge Premier GTx BEH SEC columns reduce the cost of gene therapies by using 3 to 10 times less sample than other methods, while generating faster results and providing more drug substance information. They can measure aggregation, titer, and low molecular weight impurities at twice the speed of existing columns at 50% greater resolution. The combination of these columns with wired multi-angle light scattering will deepen the level of information that can be acquired from a single experiment. This will accelerate development times of modalities such as adeno-associated viruses or AAV and allow for more optimized manufacturing, which can reduce costs. Turning now to our updated 2023 guidance. The slowdown in the pharma end market in China has progressed beyond CDMOs, resulting in broader weakness. As a result, we now expect China to decline low double digits this year versus our prior expectations of low single-digit growth. This translates to a full-year growth headwind of approximately 200 basis points versus our previous guide. Our guide does not assume any benefit from a new round of stimulus in the second half of the year. While our funnel remains healthy, we also continue to see slower than usual funnel velocity from customers more broadly. Assuming that this trend continues through the rest of the year, we expect this to translate to a full-year growth headwind of approximately 100 basis points versus our previous guide. As a result, we now expect our revised full-year organic constant currency growth to be in the range of 0.5% to 1.5%. Despite our lower revenue guide, we are proactively managing our cost and productivity while continuing to preserve our investments in future growth. In July, we made some very difficult but necessary decisions to realign the workforce in our core business, which impacted just under 5% of our employees. These actions allow us to better align our resources with our growth strategy and offset the incremental demand weakness that I just described. This, together with our focus on operational excellence across pricing and procurement is expected to deliver a gross margin of 59% this year, an increase of 100 basis points versus 2022. We also expect to expand our operating margin, bringing it to approximately 30.5%, which is an increase of 30 basis points versus 2022. These actions allow us to mitigate EPS headwind from lower expected revenue, resulting in our updated full-year EPS guidance of $12.20 to $12.30. Now, I will pass the call to Amol to continue covering our second-quarter financial results and give additional commentary on our guidance. Amol?

Amol Chaubal, CFO

Thank you, Udit, and good morning, everyone. In the second quarter, sales grew 4% as reported. Organic constant currency sales grew 3% as Waters division grew 2% and TA grew 11%. We had a great start to the Wyatt acquisition, which exceeded our expectations and added 2% constant currency sales growth. FX was a 1% headwind in the quarter. In organic constant currency by end market, Pharma declined 4%, industrial grew 11%, and academic and government grew over 20%. In pharma, high single-digit growth in the U.S. and Europe was more than offset by a pronounced slowdown in China pharma, which declined over 40%. In industrial, Waters Division and TA both grew low double digits with broad strength across all regions. In our Water business, strength was led by food and environmental testing where we saw continued strong growth in global PFAS testing applications driven by our Xevo TQ Absolute mass spectrometer. In TA, growth was led by thermal analysis and microcalorimetry. We again saw strong demand in secular growth drivers such as batteries and electronics testing, which more than offset weakness in more cyclical revenues from materials and chemicals. In academic and government, there was continued strong demand in upstream applications from our refreshed mass spectrometry portfolio supported by elevated funding levels across the globe. Mass spectrometry sales more than doubled in the U.S., grew approximately 50% in Europe, and grew 30% in Asia. By product, strength was led by our high-res mass spectrometry portfolio with applications in metabolomics and spatial biology, resulting in strong growth for cyclic IMS and Select Series MRT. Now by geography, sales in Asia declined 5%, the Americas grew 7%, and Europe grew 9%. In Asia, China declined high-teens. Excluding China, Asia grew 6%, with India growing high single digits and Japan growing mid single digits. In the Americas, pharma grew 6%, led by 7% growth in the U.S., industrial grew 3%, and academic and government grew almost 30%. In Europe, pharma grew 7%, industrial grew 6%, and academic and government grew over 35%. In both Americas and Europe, these results reflect two-year stacked growth of high single digits or above across each of the end markets. By products and services, instrument sales declined 2% overall as mass spectrometry growth of almost 20% and double-digit growth in TA Instrument Systems was more than offset by China pharma demand weakness led by LC. Recurring revenues grew high single digits. Chemistry growth was supported by continued strength in MaxPeak Premier columns, which grew over 50% in the quarter. Service growth continues to be supported by strong pull-through from recent instrument sales and increasing service plan attachment, which has already increased by another 100 basis points in the first half of the year. There was no change in the number of days compared to the prior-year quarter. Gross margin for the quarter was approximately 59.3%, an expansion of 230 basis points compared to 57% in the second quarter of 2022. Operating margin for the quarter was approximately 29.6%, an expansion of 120 basis points compared to 28.4% in the second quarter of 2022. Our margin expansion was driven by strong operational performance with pricing gains, lower material and freight costs, as well as prudent management of spend. Our effective operating tax rate for the quarter was 17.2%. Average share count came in at 59 million shares, which is about 1.5 million less than the second quarter of last year. On non-GAAP basis, our non-GAAP earnings per fully diluted share were $2.80. On a GAAP basis, our earnings per fully diluted share were $2.55. A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning and in the appendix of our earnings call presentation. Turning to free cash flow, capital deployment, and our balance sheet. We define free cash flow as cash from operations, less capital expenditures and excludes special items. In the second quarter of 2023, free cash flow was $73 million after funding $47 million of capital expenditures. Free cash flow is impacted by higher inventory balances, timing of income tax payments, and wire transaction expenses. We maintain a strong balance sheet, access to liquidity, and a well-structured debt maturity profile. This strength allows us the ability to prioritize investing in growth, including M&A and returning capital to shareholders. We continue to evaluate M&A opportunities that will meaningfully accelerate value creation in well thought-out, attractive adjacent markets. At the end of the quarter, our net debt position was approximately $2.3 billion, which is a net debt-to-EBITDA ratio of about 2.3. This represents an increase of $1.3 billion during the quarter, which is related primarily to the Wyatt acquisition. As we previously disclosed, we have temporarily suspended our share buyback program for the remainder of the year to use our free cash flow to delever the acquisition. Now I would like to provide our updated thoughts for 2023. As Udit outlined, the slowdown in China pharma has progressed beyond CDMOs, resulting in broader weakness. As a result, we now expect China to decline low double digits this year versus our prior expectation of low single-digit growth. This translates to a full-year growth headwind of approximately 200 basis points versus our previous guide. Additionally, while our funnel remains strong, we are observing longer capital purchasing approval cycles amongst our customers broadly due to spending caution in the current environment. We expect these dynamics to continue through the rest of the year and contribute an additional 100 basis points full-year growth headwind versus our previous guide. As a result, we are updating our full-year 2023 organic constant currency sales growth guide to 0.5% to 1.5%, which translates to a two-year stack growth of approximately 6% to 6.5%. At current rates, currency translation is expected to have a minimal impact on full-year sales. Consistent with our prior expectations, we expect wire transactions to add approximately 2.5% to our full-year 2023 revenue growth. Therefore, our total reported sales growth guidance is now 3% to 4%. We expect gross margin to be approximately 59% for the year, which is 100 basis points expansion versus last year and is higher than our previous guide. We expect operating margin to be approximately 30.5%, which translates to 30 basis points of margin expansion versus last year. Cost actions in our core business are expected to deliver approximately $45 million in annualized savings and are expected to contribute $20 million in 2023, predominantly in the fourth quarter. We will progressively redeploy part of these savings to resource our growth strategy and to expand capacity on high-growth end market opportunities. We expect our full-year net interest expense to be approximately $80 million. The full-year tax rate is expected to remain at approximately 15.5%. Our average diluted 2023 share count is expected to be approximately 59 million, given the temporary suspension of our share repurchase program. Rolling all this together, on a non-GAAP basis, our full-year 2023 earnings per fully diluted share guidance is projected in the range of $12.20 to $12.30, which includes a negative currency impact of approximately 1 percentage point at the current FX rates. Looking to the third quarter of 2023, we expect the current market dynamics to persist in China. We also expect cautious spending from our customers throughout the quarter. Hence, we expect third quarter organic constant currency sales growth of negative 4% to negative 2%, which translates to two-year stacked growth of approximately 5.5% at midpoint, given the mid-teens comp from last year. At today's rates, currency translation is expected to add approximately 1%, and we expect Wyatt to add 4% to our third-quarter revenue growth. Therefore, our total third-quarter reported sales growth guidance is 1% to 3%. Third quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $2.50 to $2.60 with a neutral currency impact. Now, I would like to turn it back to Udit for some summary comments.

Udit Batra, President and CEO

Thank you, Amol. Even through challenging times in the macroeconomic environment, we continue to come together as an organization to ensure we leave this world better than we found it. With our vibrant employee circles, we recently celebrated Pride Month as well as our Fantastic Women in Engineering. We also kicked off our third year of Water Student Academy, a summer program for high school students from underserved communities who are interested in exploring a career in science. We're also very proud to be recognized as one of US News & World Report Best Companies to Work For. So, with that, I'll turn the call back over to Caspar.

Caspar Tudor, Head of Investor Relations

Thanks Udit. That concludes our formal comments, and we are now ready to open the phone line to questions.

Operator, Moderator

Thank you. We will now open the lines for questions. Our first question comes from Vijay Kumar from Evercore ISI. Please go ahead.

Vijay Kumar, Analyst

Hey guys. Thanks for taking my question and congrats on a pretty impressive second quarter print here. Udit, my first one for you, mass spec was the star at 19%. What is the mass spec CAGR here on a pre-pandemic 2019 basis? Could you just comment on orders and backlog? Would it be presumable for instrumentation looking at the back half?

Udit Batra, President and CEO

Thank you for your question Vijay and good morning. Firstly, on mass spec. Over the long-term, the two-year CAGR is in the high teens, and the four-year CAGR is in the high single digits to double digits. The story with mass spec, Vijay, is twofold. One is of execution and the other one is the traction of our new products. On the new products, we launched the Xevo TQ Absolute, which meets significant unmet needs in the PFAS area where we're growing double the rate of the market. I think we heard the market grows roughly 20%. We're growing double that rate. In that particular market, our mass spec instruments are seeing terrific traction in the high-risk space where there's additional funding that academic institutions have. And as you move to the biologics area and bioprocessing, our LCMS tools like the BioAccord and the enhanced workflows that we've developed are gaining traction. So, if you compare our 20% print in this quarter or year-to-date or even versus last year on stacked, it compares very favorably to some of the peers who have already reported their results. So, we feel very good that we're gaining share in this market. And mass spec goes from strength to strength. To your question on overall instruments, it's roughly negative 2%. Now this illustrates two things: strong execution and traction of innovation in the US and Europe, and of course, additional weakness in China. Let me comment on both. Starting with US and Europe, the instrument growth rate in the United States was roughly 15%. Europe was 11%, while China declined close to 25% for the quarter for overall instruments. If you look at it from a portfolio perspective, we've already discussed mass spec. Mass spec grew at 20%. TA continued to grow double-digit in this quarter, which is meeting unmet needs in the battery segment and several other segments in addition to strong execution. You transition to LC, where in the US and Europe we started to see growth again, about 3% to 4% growth in both of those geographies. In the first quarter call, we mentioned our conversations with several large pharma customers, and I have personally spoken to them. The quality of the orders we saw from an instrument perspective was terrific. It was just that the funnel velocity was lower, right? The funnel velocity is still lower, and that's the assumption for the back half of the year. But we are seeing those orders come through this quarter. We even won several competitive bids, giving an example of one of the largest GLP-1 manufacturers; we've won a competitive bid and our UPLCs are going into their operations. The same applies for columns. Instrument growth has been a tale of two stories where the US and Europe are seeing a nice recovery and great traction of new products, while a bit of lack of visibility in China remains. Finally, in prepared remarks, we've shown the long-term growth rate of instruments is roughly 5% CAGR with a gross margin of around 60% and low SG&A; I’ll take that business any day. When you compare this to historical trends, we see additional vectors for growth. Pricing is better than we've seen in the past by 100 to 200 basis points. We see prescription growth rates rising, which is the largest driver for growth of LCs, and we see additional users, especially in large pharma, environmental and food testing. I hope that gives you a comprehensive picture of our mass spec as well as our instrument growth and why we are positive about that business.

Vijay Kumar, Analyst

That's extremely helpful, Udit. Amol, one for you. When I look at the third-quarter guidance versus fourth-quarter implied, there's a pretty big sequential step up in Q4, both on the organic and even more impressive on the EPS line. Maybe just talk about the fourth-quarter implied assumptions here. What's driving the sequential strength?

Amol Chaubal, CFO

Yes. So, a couple of things there, Vijay. The step up in the growth is purely related to the baselining. Looking at the two-year or four-year stacked basis, Q3 and Q4 guidance is pretty consistent. In Q3 and Q4, both are growing at 6%. If you look at the typical ramp-up in dollar million sales, we typically do 24% of our full-year revenue in Q3 and about 30% in Q4. And the guide is consistent with that, accounting for the cautious approach in Q3. It also accounts for the fact that whatever we see in Q3 from China’s slowdown and cautious spending in the pharma sector will continue into Q4. Looking at Q4 EPS, there's about a 15% growth stepping up versus last year, but there are various factors contributing to that. As Udit outlined, we've taken cost actions, and a predominant portion of those cost action savings will show up in Q4. Coupled with productivity gains our teams have managed across pricing, procurement, and other areas, those two dynamics bring us about 5% of that growth in Q4 EPS, along with a 3% to 4% from productivity gains. Additionally, there's a 3% FX benefit, Wyatt will be neutral in Q4, so there's a net neutral impact, and there's a lower share count contributing about 1.5% underlying sales growth.

Luke Sergott, Analyst

Awesome. Thanks. I guess, can we just dig in here from the drivers of the guide for the full year and for the remaining back half? And have you baked in any further deterioration in any of the markets?

Udit Batra, President and CEO

So, I will start, and then I'll let Amol comment, Luke. Thank you for the question. Starting with the second quarter first and how that plays out for the balance of the year. In the second quarter, you saw roughly 3% growth, which differs in the US, Europe, and China. In the US and Europe, we see roughly 7% growth while in China we see continued decline of close to mid-teens. Looking ahead, we are starting to see a bit of a recovery in both the US and Europe. In Q2, we reported solid execution, especially on instruments. However, we think that China has deteriorated further and there is a bit of lack of visibility. The issue with CDMOs has now spread to the rest of the pharma industry. So, we have decreased our guidance overall by 300 basis points, with 200 basis points of that being due to the additional slowdown in China. While the orders are very robust, and despite strong execution globally and new products gaining traction, we think the funnel velocity has slowed toward the end of Q2, and we’ve accounted for this projection for the balance of the year. So, we’ve amended our guidance down by an additional 100 basis points.

Amol Chaubal, CFO

Yes. If you go through the individual components, right, China, as we said, is anticipating a low double-digit decline for the full year. The outlook in the second half forecasts a bit more normalization versus the first half. The rest of the world in the first half grew mid-single digits, assuming a low-single-digit growth for the second half. LC is predicted to yield mid-teens decline in the first half, and that remains applicable for mass spec and TA. Given the situation, we've revised it down to low to mid-single-digit growth for the second half of the year. We've risk-adjusted a significant portion of our second half based on current market conditions.

Luke Sergott, Analyst

All right. You guys have been operating in China for a while. You have a lot of history there. Can you give us a sense of how quickly the various end markets can bounce back? What have you seen in the past? What are you hearing from on-the-ground contacts?

Udit Batra, President and CEO

Luke, that's a good question. As you may expect, you won't hear us say much different than our peers. Long-term, China is a terrific growth market, and we all know that. We've seen that through its history. In the second quarter, we observed a mid-teens decline in China. CDMOs got worse, and customers are cautious in spending in our pharma sector, including traditional Chinese medicine consumers. At this time, it’s uncertain when the situation will improve. Therefore, we have assumed for the full year that China will decline low to mid-double digits. The fact is that we have not incorporated any second stimulus into our numbers for the remainder of the year until we have clear visibility. That said, we've been cautious and mindful, and there's not a lot of visibility at the moment. A notable distinction from past years is that although Waters has seen its growth correlated with China in the past, we are now experiencing solid growth with US and Europe contributing positively to our results. So, we feel that our business is very well-diversified, and we anticipate growth in other regions. I should note that our teams have visited multiple times over the past months, and we are fostering excellent collaborations with our customers, especially in the battery market, where China remains far ahead of the US and Europe. There remains significant potential in the specialty diagnostics arena where China is leading the charge, quantifying mass spec in clinical workflows. The market remains dynamic, and when it recovers, we expect to execute effectively as we have done in US and Europe.

Dan Brennan, Analyst

Great. Thanks. Solid quarter. My question concerns guidance, specifically, the recent performance raises the question about whether the guidance is adequately de-risked considering solid Q2 results but the atypical China headwinds. Could you provide your real-time perspective on the guidance for the remainder of the year?

Amol Chaubal, CFO

Sure, Dan. We evaluated how the situation has progressed through Q2. Our outlook, even outside China, has been meaningfully reduced. For instance, total sales outside China grew mid-single-digits, and we now estimate low single-digits for the second half. Instruments notably declined low single-digits, and we're projecting a mid-single-digit decline as the growth normalizes for mass spectrometry and TA. Recurring revenues have also been revised down from mid to high single-digits to mid-single-digits for the second half. We have factored in normalization for the rest of the industry in the second half. Therefore, we believe our guidance represents a reasonable scale based on the information we have. What remains elusive is how exactly China will perform in Q3 and Q4, as it can fall rapidly but can also rebound quickly. Yes. Our team in the US and Europe observed exceedingly robust performances in Q2. Their win rates surpassed expectations, achieving high levels of growth. Looking towards the second half, we have adjusted guidance down to low single-digit growth for those regions. However, the performance from our teams gives us confidence that they will continue to excel as market recovery occurs.

Udit Batra, President and CEO

Yes, Dan, regarding pharma, you raised significant points. We're noticing positive trends in pharma and early signs of recovery in both US and Europe, however, due to previous cautious spending patterns, we’d prefer to survey more data points before drawing concrete conclusions about this enhancement. Our initial observation indicates strong order quality, especially in pharma, and this sustains our confidence as we proceed into the second half. And finally, to establish a comprehensive understanding, we view Waters well-positioned in addressing significant unmet needs in pharma and the environmental segment. Strength lie heavily on our robust execution in the industry’s challenging landscape. As we progress, our focus on innovation enables us to achieve exceptional results, particularly in the high unmet need segments.

Operator, Moderator

And that was the last question we have time for.

Udit Batra, President and CEO

Thank you. Thank you all for your questions and your participation today. On behalf of our entire Waters team, I'd like to thank you for your support and your interest in Waters. Thank you, and have a wonderful day.

Operator, Moderator

Thank you all for participating in today's conference. You may disconnect your line and enjoy the rest of your day.