Amol Chaubal:

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. We will provide guidance regarding possible future results as well as commentary on potential market and business conditions that may impact Waters Corporation over the third quarter of 2024 and full year 2024. These statements are only our present expectations and actual events or results may differ materially. Please see the risk factors included within our 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. Reconciliations to the most directly comparable GAAP measures are attached to our earnings release and in the appendix of the slide presentation accompanying today's call. Both are available on the Investor Relations section of our website. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the second quarter of fiscal year 2023. In addition, unless stated otherwise, all year-over-year revenue growth rates and ranges given on today's call are on a comparable organic constant currency basis. Finally, we do not intend to update our guidance predictions or projections, except as part of a regularly scheduled earnings release or as otherwise required by law. Now I'll hand over to Udit to deliver our key remarks. Following that, Amol will present a more detailed view of our results and guidance after we'll open up the phone lines for questions. Over to you, Udit.

operator:

Turning now to our results. In the second quarter, sales declined 4% as reported and 4% in organic constant currency. Our non-GAAP earnings per share was $2.63. On a GAAP basis, EPS was $2.40. Excluding China, sales declined in low single digits. Growth was consistent with our expectations across each of our end markets. Customer CapEx spending is showing early signs of improvement. In China, sales declined in the low teens, which was better than expected. Growth rates improved in all end markets compared to the previous quarter, especially in pharma and in industrial. While the stimulus measures announced by the Chinese government this year are still in the early stages of implementation, we are having active conversations with customers who stand to benefit from these initiatives. So far, this has led to improved quoting and funnel trends in the region. These opportunities are expected to begin converting to orders in 2025. Overall, instruments declined 17% and recurring revenue grew 5%. Wyatt delivered a 2% M&A contribution to sales, which was better than expected. It marks a strong close to the first year following the acquisition, where synergies were delivered well ahead of schedule. Wyatt operates in high-growth markets serving large molecule applications, especially across cell, gene and RNA therapies. Altogether, it should deliver 40 basis points of annualized accretion to the total company growth in the near to midterm. Now I will talk about our operational performance. Margins remained resilient as we again successfully counteracted volume, FX, and inflationary headwinds with solid operational management. Our gross margin for the quarter was flat at 59.3%, and our adjusted operating margin was solid at 29.2%. Even with recent progress, our work is far from over. We have runway towards further long-term margin expansion driven by our strategic and operational initiatives. This includes areas such as productivity enhancement where we have various programs that are still in the early stages. At the same time, our focus on pricing continues to yield contribution that is well ahead of historical levels. Looking forward, we feel very good about our future margin opportunity given our recent success in preserving and expanding our margins during challenging business conditions. Beyond 2024 levels, we expect to deliver a more pronounced impact on our long-term margin performance, particularly when more typical volume leverage returns. In the second quarter, we launched a steady stream of new products, solving the unmet needs of our customers. At ASMS in June, we unveiled the Xevo MRD, which is now our highest-performing bench-top mass spectrometer. It builds on the multi-reflecting time-of-flight technology pioneered by the Select Series MRT, which has greater throughput and a more compact form factor. With up to 6x greater resolution and 2x better mass accuracy than competitive systems, the Xevo MRT sets new industry standards for high resolution at blazingly fast speeds. So far, our customers have been impressed by its capabilities. It will serve discovery and other upstream pharma workflows where it will accelerate R&D times for new drugs. This includes areas such as metabolite identification where resolution, accuracy and speed are all critical value drivers. We also launched the latest evolution of our Acquity QDa mass detector, one of our all-time best-selling analytical instruments. The QDa II provides a 20% enhancement in mass range which benefits routine identification and analysis of large molecules. It also has excellent green credentials consuming up to 70% less energy than competing products. This is a benefit of increased importance to our customers. Most importantly, the QDA II runs on Empower, which allows for seamless regulatory submission of compliance-related data for large molecules. As we look ahead, Waters is well positioned in attractive markets with secular growth drivers where testing volume plays a pivotal role in driving long-term growth. Our full ecosystem of instruments, informatics, advanced chemistry and leading service positions us very well to help ensure the safety of medicine, food and water and batteries in electric vehicles. Along with our business model, the regulated and recurring nature of these applications results in excellent profitability and free cash flow generation. In recent years, we've made meaningful progress in aligning Waters with faster-growing large molecule applications. Now over a third of our pharma revenues comes from large molecules and novel modalities. At the same time, future testing volume is expected to grow faster than historical levels with increased prescription volumes, including GLP-1s and areas such as PFAS testing. With our revitalized portfolio, we are in an excellent position to capitalize on these growth opportunities. Over the past several years, we've launched multiple innovative new products that have enhanced our competitive edge and created better pricing levers. Serving our core -- our next-generation LC platform, Alliance iS serves routine QA/QC analysis for both large and small molecule workflows where innovation helps drive -- helps to drive instrument replacement. It also includes our Xevo TQ absolute mass spectrometer, which is seeing rapid growth in areas such as PFAS testing. Within our high-growth adjacencies, we've launched new products into bioanalytical characterization, battery testing and clinical applications, all of which are gaining traction given the critical unmet needs that they solve. Finally, recent deferral of routine instrument replacement has created a catch-up opportunities -- catch-up opportunity that lies ahead of us. Weak macroeconomic conditions have put temporary constraints on customer CapEx spending for downstream instrumentation. Historically, this dynamic has lasted for 4 to 7 quarters and has been followed by a catch up. Looking at the facts, while no two macro environments are the same, Q2 marks the seventh consecutive quarter of LC instrument decline. Expected instrument growth for 2024 equates to a 1% CAGR versus 2019 levels. This is significantly below the 5% long-term average growth rate. Improving funnel trends are a positive leading indicator that we are approaching the early innings of a recovery and initiation of a new replacement cycle. I will now cover our 2024 full year guidance. While customer activity is showing signs of recovery, we're adding caution to our guide. Accordingly, we are revising our full year 2024 sales guidance to assume a more gradual pace of improvement in the second half of the year. As a result, our revised full year organic growth constant currency sales guidance is negative 2% to negative 0.5%. With our commitment to excellent operational performance, we expect to build leverage in our P&L and deliver an adjusted operating margin of around 31%. Therefore, our updated adjusted EPS guidance is in the range of $11.55 to $11.65. Now I will pass the call over to Amol to continue covering our financial results in more detail and to provide further guidance -- further details on our guidance. Amol?

Udit Batra:

Thank you, Amol. So now to summarize, with our strong commercial execution and continued resilient operational performance, our second quarter results demonstrate Waters' ability to deliver solid results in various market conditions. We're positioned well for the future with a long-term outlook that is above our historical growth rate of 6% as global testing volume growth remains on track and customer CapEx spending continues to recover. I am also proud of what our team has continued to accomplish on ESG and sustainability. Last month, we announced that Waters has become the first liquid chromatography column provider to receive the ACT Ecolabel certification from My Green Lab. This designation applies to more than 40 of our LC columns and makes it easier for scientists and procurement professionals to choose more sustainable lab products. So with that, I will now turn the call back over to Caspar.

Vijay Kumar:

One maybe high level on your comments about the progression in the quarter, a strong finish to June, orders above revenues. Help us square what the guidance change, right? I don't think the guide change was a surprise. Is this just a conservatism in light of the strong June finish order momentum commentary? Or how should we inputting of the guide change?

Vijay Kumar:

No, that's helpful. And if I understand you, what you're saying is, look, we're not seeing anything in the quarter. It's positive trends in the right direction. But from a guidance perspective, you're just derisking it. And it's more from the perspective of being conservative versus having seen anything in the quarter. Is that a fair summary?

Vijay Kumar:

Revenues, I think, were cut maybe 3% below street the implied Q4 dollar revenues. -- EPS roughly in line with -- the Street. So what changed is the implied operating margins coming in better? Is there any below-the-line contribution that's driving Q4 EPS?

Operator:

The next question will come from Dan Brennan of TD Cowen.

Udit Batra:

So let me start and Amol can jump in, Dan. So instruments declined about 17% in the quarter, LC was a bit modest than that, mid-teens. -- spec declined a bit more, and TA was around minus 2%, so minus 17% in the quarter. As I mentioned earlier, we're seeing steady improvement as we went through the quarter and the funnels look extremely strong, especially on the LC front. So for the back half of the year, we're assuming that the instrument growth rate would be flat versus the previous year. So overall, second half is flat. And just to sort of go a bit beyond the numbers, and now as I mentioned earlier, the LC replacement cycle now is in the seventh quarter of its decline, we're starting to see across the globe customers initiating their replacement cycle. So we expect that to -- we expect a little bit of decline or flat growth in Q3 for LC, but in Q4, we expect the replacement cycle start to kick in, which is consistent with what we see with the funnels. So quite an exciting time just given the renewed portfolio across all the instruments as a replacement cycle begins, we feel very good about where we are sitting today.

Udit Batra:

Sure. Firstly, I mean, China came in ahead of expectations, right? I mean that's part of the driver for the beat. I mean just to give you a bit of the facts, I mean, Q1, China declined 26%, in Q2, it was around 10% decline. And I mean, in the largest end market pharma, we went again from about a 25%, 26% decline to what a 10% decline in Q2. So steady improvement in China in the second half of the year has a lower base, but we've kept the full year guide at a low double-digit decline for China, just to sort of watch and see more data. So good things happening in China. And again, when you compare LC growth rate, and this is sort of an interesting fact, -- for the first time in a very long time, China's LC decline was less than the rest of the world, right? So China declined in the high single digits, whereas the overall decline for LC was a bit higher than that. Now as you think of the stimulus, nothing has really changed versus previous commentary. We're spending a lot of time with customers, doing 3 things. One, helping them identify the age of instruments. You recall this particular stimulus is targeted towards instrument replacements, the age of their instruments, their visibility for the stimulus and helping them do the paperwork as they start to submit applications for funding. We think this is going to be -- this is going to impact growth only in 2025, maybe a modest impact towards the end of the year, but would not factor that in.

Tycho Peterson:

Maybe just diving in a little bit into the guidance in the back half of the year. So you're guiding to revenues up sequentially from 2Q that's kind of out of line with normal seasonality. So maybe just touch on visibility? And then -- for the fourth quarter, your -- I think in plant operating margins are mid- to high 30s to hit EPS guide. I know you said operating margins are flat in the back half of the year. But what drives that fourth quarter ramp in particular? That seems that in line with normal seasonality?

Tycho Peterson:

Okay. And then the follow-up, academics is only 10% of the mix, I know, but it was down 16%. Can you maybe just talk on how much of that was U.S. versus Europe? And what are you thinking back half of the year as the comps ease there for academic.

Amol Chaubal:

Yes. And I mean you look at it this way, right, like first half of last year, was super well funded between the China stimulus and what was happening in U.S. and Europe. If you look at it on a 2-year stack basis, pretty much every quarter you will see is like 0.1% growth. .

Matt Skyes:

Maybe just first, you guys have leaned into the CDMO channel in China over the past couple of years, and that's been an area of weakness recently due to overcapacity. Could you maybe kind of talk about what you're seeing in the CDMO channel in China? And is it part of sort of some of the inflection that you see maybe towards the back half of this year into next year or is that going to remain fairly subdued for the balance of this year and into '25?

Matt Sykes:

Got it. And then Amol, just on margins, you discussed sort of back half and your expectations. I'm just wondering on a longer-term basis. You made some pretty positive commentary about some margin -- longer-term margin drivers going forward. How should we think about operating margin cadence over the longer term for the business? And where are some of the levers to kind of continue to expand those margins as we move through '25 or maybe on a longer-term framework?

Udit Batra:

Amol has given a comprehensive answer. Just 2 points to summarize the whole thing. One, the teams have great muscle now to expand margins during a down cycle, number one. And number two, the pricing that we see is very resilient, and I'm excited about -- excited about the prospects as we come out of this down cycle given the product portfolio that we have. I mean, it's been totally renewed. We have leading products across the board that customers have had a chance to test during the down cycle. So very excited about what we're about to see.

Rachel Vatnsdal:

I wanted to follow up on begin Brennan's question around China here. It sounds like LC was a little bit better than expected in the quarter, but can you unpack the performance by end market within China there? And then also on the China stimulus dynamic, we've heard from a few of your peers that they've called out an air pocket related to China stimulus as customers are really holding off and submitting orders -- so can you clarify for us, have you seen any pause in orders from customers in the region? And if not, why have you guys kind of been more immune to that scenario?

Rachel Vatnsdal:

Great. And then I did want to follow up on 2025 quickly. So can you walk us through your exit rates at 4Q? You've kind of talked about some of this replacement cycle starting to heat up in the back half. If we learn some of the weaker comps on the China dynamics that you talked about as well, how are you really thinking about that exit rate underpinning 2025? It looks like the Street is currently just shy of a 6% organic growth rate. So just at an early starting point, how comfortable are you with that?

Udit Batra:

I just want to embellish a little bit on what we're seeing at the end of Q2 that starts to give us confidence, right? June is 1 of the largest months of the year for us. And it has surpassed our expectations, right, both in sales and in orders. So there's a lot of momentum that we've built going into Q3. So that gives us confidence in its a lot in the areas that we've just discussed, right? So it's consistent with an improving trend in the industry. Second, as I said, I spent a fair amount of time with customers, both in Europe and the U.S. in this last quarter, especially in large pharma, customers are now used to the additional steps in the procurement process. In fact, one of the largest pharma companies had introduced several steps in the process, which their internal teams were also learning and we were also learning about, and that sort of -- that gave a little bit of pause to how fast the orders were converting to sales. This time around, when we said in March, order quality is high, like clockwork, we've seen them convert into sales towards the end of June. So now the funnel predictability is way better than we've seen, especially in large pharma and the funnel -- the order quality and the funnel strength is pretty good as we sit looking into the back half of the year.

Dan Arias:

Can you maybe just refresh us on the picking around the upgrades within this replacement cycle that we're talking about taking place here? And what I mean by this is, obviously, things are still shaky out there on the CapEx side. So when these LCE customers come back into the market, should we assume that there's maybe less HPLC to UPLC transitioning and what you see during historical periods or do you think these upsell dynamics and the conversion to UPLC could be fairly typical.

Amol Chaubal:

And just to add to that, right, I mean, if you look at our historical instrument growth pattern, the 5% instrument growth has roughly about 50 to 70 basis points of price and 3% of volume, the remaining 1.5 or so really comes from upsell, right? And when we quote our price numbers, their like-for-like SKU and like-for-like geography. So that doesn't include when a customer chooses say, ARC HPLC or Alliance or Alliance iS or ARC UPLC. And in order to achieve that 1.5%, we only need about 7% of these customers to choose an upgrade given the current innovation and the pricing that is out there. And 7%, we feel super comfortable with huge unmet needs that some of our newer launches are directly addressing, which customers are appreciating. .

Puneet Souda:

Udit, for you, if I could ask, the June order growth improvement, the significant momentum you talked about in June, has that continued into July as well? And could you elaborate if this momentum is in mostly in pharma, North America and Europe, it seems like there's some -- still some caution on China that's improving. But just wanted to get some more details there. .

Puneet Souda:

Got it. And then an Asia question for you. Just thinking about China, first of all, and then I want to cover just Japan and India. China, just wanted to understand in terms of retaliatory risks for tariffs. If you could elaborate where is your manufacturing position? How much of the business is China for China in case if there are tariffs and sort of retaliatory tariffs in 2025? And then on Japan, I believe you grew -- sorry, in Japan, you were down 11%. In India, you grew about 11% in the quarter. Could you talk a little bit about what happened in those geographies?

Amol Chaubal:

Yes. I mean, look, Japan unit likely are looking at the reported number, right? And you know where Japanese yen has been over the last year, that's like close to 11% headwind so at constant currency we're more or less flat, and that's also sort of the reason why the currency impact for us is somewhat higher and we had to increase it to 1.5% driven by Japan because we have a reasonable Japan footprint. And our team is doing relatively well coming out of the March year-end. So what you see progressing in Q2 and onwards we see healthy demand, and we see good funnel activity in Japan. .

Operator:

The next question will come from Jack Meehan of Nephron Research.

Amol Chaubal:

Yes. Great question, Jack, as always. Look, I mean, there is going to be some negative mix impact from more instruments when instruments start to come back. But as you look at our guide, that's sort of factored in the gross margin, 20 basis points of expansion that we've outlined for the year. And as we go into next year, if the mix sort of returns back to, call it, say, 2019 levels there will be 10-ish basis points adverse impact, but that's largely covered with the productivity initiatives we have in place so the marginal have got to 20 to 30 basis points still remains intact.

Amol Chaubal:

Yes. So on the first one, right, I mean we continue to pay down debt from the Wyatt acquisition. We are at 1.7 now. So we are at a point where we are actively considering the switch between paying down debt versus buying back shares. I mean, the intention is to gain strategic flexibility as much as possible. So we continue to review options. And on the number of days, I mean, the key thing to note is on Q4 this year, we have 3 more days than Q3 of this year and that partly helps about 1.5% in the ramp from Q3 to Q4. And then other than that, I mean, there are 2 more days in Q4 of this year versus Q4 of last year. Q3 is roughly the same.

Catherine Schulte:

First, just maybe on Wyatt, it's great to see that coming in ahead of expectations. Are you seeing any different trends in terms of market improvement in that business, just given the exposure to large molecule in cell and gene therapy?

Catherine Schulte:

Great. And then maybe just going back to the guidance update. Can you just elaborate on if there are any specific areas of that conservatism that you added to your assumptions? Was it around China, pharma or is it really broader than that? Any further color would be appreciated.

Udit Batra:

It's a great setup for exceeding expectations as we go through the year and it's just the guidance philosophy we talked about at the beginning of the call that Vijay started with, and it's a great place to sort of end the call. I mean it's basically what we've done all along. We look at a lot of data from customers, from funnels. Second, we spend a lot of time looking at history of LC replacement, in particular, which bodes well. And third, talk to a lot of customers on how they're receiving our new products, how their spending and growing and all three point towards a more positive second half of the year than we've seen. So that's all been factored in Catherine. Thank you for that question. Caspar?

Operator:

Thank you all for your participation on today's conference call. At this time, all parties may disconnect your lines.

Operator:

Good morning. Welcome to the Waters Corporation First Quarter 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded. If anyone has objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Head of Investor Relations. Please go ahead, sir.

Udit Batra:

Thank you, Caspar, and good morning, everyone. We had a strong start to the year with sales coming in at the high end of our expectations backed again by excellent operational performance. I want to begin today's call by thanking my colleagues for their continued focus on innovation and supporting our customers. These results reflect our drive to accelerate the benefits of pioneering science with our innovative portfolio.

Amol Chaubal:

Thank you, Udit, and good morning, everyone. In the first quarter, sales landed at the high end of our guidance range, declining 7% as reported and 9% in organic constant currency. As Udit mentioned, end market dynamics were consistent with our expectations. Ex-China declined mid-single digits as expected, while China declined close to 30%, which was slightly better than expected. In organic constant currency by end market, Pharma declined 6%, industrial declined 7% and academic and government declined 30%.

Udit Batra:

Thank you, Amol. I would like now to give you a brief update on our progress towards leaving the world better than we found it, which is how we think about ESG. We work alongside wonderful people here at Waters, and I'm always proud when others recognize their talent and hard work. Our colleagues were recognized in the quarter for their achievements and contributions to separation science, excellence in manufacturing and for being champions of LGBTQ and women's benefits in the workplace.

Operator:

[Operator Instructions] Our first question comes from Dan Brennan from TD Cowen.

Udit Batra:

Look, China came in better than we expected. But I'll remind you, it's still declining in the high 20s. Now we expect that to continue for at least the first half of the year. Q2 will also see a decline and the second half of the year, we'll start to see a little bit of growth given the weakening comps as the year progresses. Now coming back to Q1, to your question on what changed? I mean you just have to go back to late 2023 when we basically said, look, we think across all end markets, especially pharma, we've seen a bottoming out of the volume.

Operator:

Next, we'll go to the line of Vijay Kumar from Evercore ISI.

Udit Batra:

Vijay, thank you for the 2 questions. So let me just sort of take a step back and provide some context, right? I mean, as you know, Q1 is the toughest quarter for Waters to predict, right? It's our smallest quarter of the year, and this is when customers start to think through the total CapEx spend for the year and also think through the phasing of that CapEx right? So we took advantage of that. And I personally met several customers across Europe and in the United States, across pharma, across A&G, across our industrial segments, across our clinical segments with our teams.

Vijay Kumar:

Fantastic. I'll let others jump in.

Michael Ryskin:

Just following up on some of the end market commentary you talked about China a little about how you expect a low double-digit decline, so a little bit better than prior. You're maintaining the fiscal year. So what's sort of offsetting that? And maybe specifically honing on Americas, it looked like that came a little bit worse in the quarter. Anything changed in your outlook there for the year? And then I've got a quick follow-up.

Udit Batra:

Yes. And then I think you asked about the U.S., in particular, what are we seeing in the U.S. Look, I mean, as I said, I spent a fair amount of time with customers across the globe. And one of those was a large customer in the Midwest, where I spent a whole day with about 12 to 13 folks from the customer across many different departments, across development, manufacturing, QA/QC. And we talked deeply about what they envision for CapEx, which I sort of earlier commented on, and the CapEx is very robust.

Amol Chaubal:

Yes, look, I mean, on Wyatt, we're making fantastic progress, right? All the synergies that we laid out at the beginning of the acquisition, like cross-selling, like attaching our LC seamlessly to the instrument, like attaching our columns with their shipments have all progressed ahead of schedule, including sort of a beta version of bringing light scattering on Empower.

Udit Batra:

And Michael, to build on it, again, from to customer conversations, I had an opportunity spent some time last week with one of our largest academic customers who has a hospital attached to it. And basically, we talked at length about characterization of lipid nanoparticles, which as you will know, are used for delivery of mRNA, both vaccines and therapeutics as we go forward, an area of intense interest across academia and industry. And these folks specialize in characterizing lipid nanoparticles, which can often be aggregated of different -- and have different sizes and shapes. Lights -- they basically use SEC columns from Waters and light scattering equipment to characterize these aggregates. In addition, what I learned is that they're piloting the use of field flow fractionation, which is another instrument that Wyatt makes as a precursor to using SEC malls, right?

Operator:

Our next question comes from Matt Sykes from Goldman Sachs.

Amol Chaubal:

So Matt, thanks for your question. And look, I mean, we executed well to finish at the higher end of our Q1 guide, right? And that sort of keeps us on track for our full year sales guide. And as Udit discussed, our Q2 guide is essentially 10% higher than Q1, which has been sort of our historical trend pre-pandemic. And our second half guide is also very much consistent with how we've historically performed, which is a 45-55 split. So we generally expect the breakdown between Q3 and Q4 to also follow that historical trend for 2024.

Amol Chaubal:

Yes. I mean on a growth basis, it looks a little weird, but that's because of last year, right? The weakness progressively stepped in China and pretty much Q3 and Q4, there was no incremental meaningful bad news out of China, but a lot of that was not reflected in Q1 and Q2. And that's why it sort of it plays out in the growth purely from the baseline effect mostly from China.

Matthew Sykes:

Great. And then just one quick follow-up. Just on the academic end market in the quarter. I know you were facing a really challenging comp. I think you grew academic like 45% constant currency. In Q1 of last year. So was there any incremental weakness in that academic end market? Or was it just purely facing difficult comps?

Rachel Vatnsdal Olson:

So I wanted to dig into the pharma performance in China a little bit. I believe you said that was down 30% this quarter versus rest of world down low single digits. So can you impact that China performance within Pharma for us a little bit Obviously, we've seen the headlines related to BIOSECURE Act. Last year at 1Q, you guys called out your overexposure to CDMOs in the region.

Amol Chaubal:

So look, I mean, great question. As you sort of travel through last year, Q2, Q3, Q4, we saw weakness creep in on different elements of the pharma business in China. But as I said earlier in Q3 and Q4, there was no incremental bad news out of China, and that trend sort of has continued into Q1. And so in a way, what played out, what you see in terms of the decline, is largely baseline related where China, from a pharma point of view has bottomed out and there is no incremental headwind coming into the business.

Operator:

Next, we'll go to the line of Daniel Leonard from UBS.

Amol Chaubal:

Dan, yes, I mean, look, the product mix is helping at this point, especially given lower instrument mix, that's contributing about 30 basis points. But keep in mind, there was also a good 70 to 80 basis points of FX headwind that we offsetted, right? So the remaining delta is favorably coming from price and some of the productivity initiatives in manufacturing.

Patrick Donnelly:

I guess in terms of some of these conversations you're having, I'm wondering what stage do you think we're in? It sounds like again, the conversations with the funnel to your point, maybe improving a little bit, specifically with China, it sounds like maybe you're expecting the actual revs to show up late this year at the earliest. So how do you think about just the progression of these conversations into orders, into revs. And again, is there a potential for a bit of an air pocket as these conversations pick up and the dollars materialize a little later in the year? How do you think about just the progression there?

Patrick Donnelly:

And then Amol, maybe just quickly on the margin side. Can you just talk about the progression as we work our way through the year. I know you guys have some kind of cost initiatives working the way through the year last year. So I'm just trying to think on the cadence there and any moving pieces you want to call out as you work our way through '24 here.

Operator:

Next, we'll go to the line of Doug Schenkel from Wolfe Research.

And then looking at things a different way, I think you would need to go down -- go from being down more than 6% organic in the first half, to being up more than 7% positive in the second half. And for margins, if I'm doing the math right, I think you're essentially implying a targeted second half operating margin of around 33.5%, which is a bigger first half to second half ramp than normal. So with all of that in mind, my questions are really the following:

one, how dependent are you on an instrument recovery and, in fact, a normalization to trend in the fourth quarter to get to these targets?

Udit Batra:

Go ahead -- Let's Amol start, and then I'll jump in.

Udit Batra:

Yes. And then just to sort of, again, embellish just a little bit, Doug, and summarize. First, yes, I mean, the discussions with customers are increasingly positive, but we felt we want to see that land first before we start assuming that it has come, right? So you can imagine, given how difficult it is to predict instrument businesses year-on-year, quarter-on-quarter is even trickier -- a trickier exercise. So yes, the conversations are positive, but we want to see it land and then we'll have -- hopefully, you're right, and then we can have another discussion at the end of Q2 that looks a little bit different.

Operator:

And our final question comes from Catherine Schulte from Baird.

Udit Batra:

So Catherine, thank you for the question. Look, pharma overall even last year grew low single digits for us for the full year. And the full year guide again is low single-digit growth. Q1 was sort of a low single-digit decliner, but the conversations with customers make us even more confident that the full year guide is very much intact for a low single-digit growth in pharma. And as I said before, look, first, the orders look much more firm than they did a year ago across biotech and across pharma.

Caspar Tudor:

Thank you for joining us today and for your continued support and interest in Waters. A replay of this call will be available in the Investor Relations section of our website. This concludes our call, and we look forward to seeing you at future events and conferences.

Operator:

Good morning. Welcome to Waters Corporation Fourth 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 call is being recorded. If anyone has any objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Head of Investor Relations. Please go ahead, sir.

Udit Batra:

Thank you, Caspar. And good morning, everyone. I would like to begin today's call by expressing my gratitude to all my colleagues. 2023 was another transformative year for Waters. Throughout the year, our teams kept an unwavering focus on customers, launched innovative new products, and delivered strong business performance, all during highly eventful times with dynamic market conditions. As 2022 ended, the results of our transformation clearly showed on the top line, having delivered several years of very strong, above-average sales growth. Since then, in 2023, we've demonstrated our ability to manage exceptionally well through a downturn while continuing to make investments for growth. In 2023, we also initiated the next phase of our transformation with the acquisition of Wyatt. This brings with it a new vector for value creation to our shareholders through M&A and we're off to a great start. As an added benefit, it has accelerated our journey into high growth adjacent markets, where we made continued progress with our organic investments over the course of the year. We launched new and innovative products in 2023, including our Alliance iS next generation LC platform. We expanded our Xevo tQ mass spec into clinical applications and developed size exclusion columns for viral vectors that pair with Wyatt MALS instruments. We even had our first light scattering launch as a combined company with ZetaStar. Finally, we were recognized as one of the world's most sustainable companies, achieving a variety of ESG awards. This includes our top five ranking on Barron's Most Sustainable Companies list which scores over 1,000 publicly traded companies based on 230 ESG performance indicators. We're very proud of what we've achieved at Waters in 2023. Today, as I share our fourth quarter and full-year results, I have three key messages. First, we've continued to execute well. Second, our transformation is contributing to our results. And third, we are well positioned for future long-term growth. Turning now to our results. In the fourth quarter, sales declined 4.5% as reported, which was in line with our expectations. Our non-GAAP earnings per fully diluted share landed at the high end of our guidance at $3.62, driven by strong margin performance. On a GAAP basis, EPS was $3.65. For the full year, sales declined 0.5% as reported and 2% in organic constant currency. Even with a constrained CapEx environment, all our regions outside of China grew in 2023 in organic constant currency terms. As expected, Wyatt successfully delivered on on-target M&A contribution of 2.5% to sales. And with a strong EPS result in Q4, non-GAAP earnings per fully diluted share came in at $11.75, which reflects underlying growth of approximately 2% before FX headwinds of 3% and 1% dilution from the Wyatt acquisition. I will now describe our sales results in more detail. The spending environment for instruments remained challenging into year-end. However, Q4 revenue increase increased Versus Q3 levels in all our geographies, even China as we continue to execute well in tough macro conditions. Reported sales were $108 million higher in the fourth quarter than the third quarter. This reflects a 15% ramp that was consistent with our guidance for a muted year-end budget flush. For the full year, our organic constant currency sales grew 3% year-over-year, excluding China. As I mentioned earlier, the Americas, Europe and Asia excluding China all grew in 2023. This took a lot of effort from our sales team who did a fantastic job capitalizing on the available opportunities in the market with our competitive portfolio. As a result, on a full-year stack basis, our ex-China growth remains at a healthy high-single-digits. A key challenge in 2023 was the abrupt turn we saw in China where conditions deteriorated as the year progressed. This was particularly the case in the pharma market where our revenues are most heavily weighted. For the full year, China sales declined more than 20% overall, which was a 5% headwind to our total growth. This brings us now to our margin performance. We believe that the best reflection of good operational execution is effective margin management when things slow down. During 2023, we saw volume and FX headwinds, while inflationary pressure continued. We responded with stronger pricing and added further discipline to our operational objectives. We redoubled our productivity efforts, including the opening of our global capability center in Bangalore, India. And we undertook proactive cost alignment as the slowdown began to emerge. This resilience, focus and commitment allowed us to deliver excellent operational results in our P&L. Our full-year gross margin was 59.6%, which is 160 basis points better than the previous year. Our full-year adjusted operating margin was 30.9%, which is 70 basis points of expansion. Now, let me share our progress with the acquisition of Wyatt Technology. The strong start to lead sharing between Wyatt and Waters allowed us to offset a slowdown in biotech spending, resulting in an on-target M&A contribution of 2.5% to our full year sales. I will now give some detail on how our revitalized portfolio and alignment with higher growth segments are contributing to growth as part of our transformation. Our strong results in 2023 was supported by our innovative portfolio, which helped drive customer spending on new products are gaining good traction in the market, including TQ Absolute, Alliance iS and MaxPeak Premier Columns, as well as several of our high res mass spec instruments such as Cycliq G3 and MRT. From an adoption perspective, this puts us in an excellent position when instrument budgets begin to normalize. Turning now to our adjacencies. We have continued to invest and expand into adjacent high growth markets, where our business model of solving problems in downstream regulated applications can be deployed. For bioseparations and bioanalytical characterizations, we made organic investments, launched new products, and deployed capital to M&A. Large molecule applications are now 35% of our pharma revenues and expected to trend higher, up from around 20%, just a few years ago. For diagnostics, we have invested in our clinical business and added workflows for specialty applications of mass spec. This has transformed related revenue growth from that of low to mid-single-digits to double digits in the past several years. Finally, our focus on batteries is paying dividends where very strong growth has remained throughout the year. Revenues from battery applications are now at over 10 times 2019 revenue levels and our TA business is increasingly aligned with their cyclical faster growing applications. Each of these exciting growth areas is delivering incremental revenue to the company. Now I will share some facts supporting the long term outlook for above average growth and provide our 2024 guidance. Since 2010, Waters has grown on average 6% in organic constant currency terms. For instruments, while the standard deviation is high, long term average growth has been 5%. For recurring revenues, the standard deviation is much lower and the average growth is 7%. As we look ahead, several vectors make us confident that this growth could be even higher. The first is even faster volume growth in segments that we serve, driven by global prescription drug sales and environmental regulations. Second is increased use of analytical instruments for characterizing large molecules and novel modalities. And third, it's about historic pricing where we expect to sustain 100 basis point long term tailwind in incremental growth. Let's take each of these growth vectors in turn. There are at least two key drivers of testing volume acceleration. The first is related to the adoption of GLP-1 drugs, where Waters' instruments and columns are specified into in-process testing and QA/QC testing at the two leading manufacturers. We expect our position to contribute an average additional revenue growth of 30 basis points per year between now and 2030. The second is PFAS testing where we've been gaining share in a rapidly expanding market, in part driven by the sensitivity and compact size of our Xevo tQ Absolute mass spec. We expect PFAS testing to contribute an additional 30 basis points to our revenue growth for the foreseeable future. Finally, Wyatt light scattering is a high growth business, serving attractive large molecule applications. We expect it to contribute 40 basis points of core growth accretion to our business on an annualized basis. It also accelerates our ability to solve customer challenges at formulation development, bioanalytical characterization and QA/QC testing, which has positive repercussions for our Waters business as we increasingly tie our columns, LC and mass spec into these workflows. I will now cover our 2024 full-year guidance. We expect customer spending caution to continue in the first quarter of the year, with slow budget releases for downstream instrumentation. We then expect to see a gradual improvement for the remainder of the year as budgets open up, market conditions improve and as prior-year comparisons become easier. We expect weakness in China to continue, particularly in the first half of the year, which also plays into the growth phasing of our guide. With this initial outlook for 2024, we expect full-year organic constant currency sales growth to be between negative 0.5% to positive 1.5%. We expect continued strong operational performance to build leverage in our P&L with 20 to 30 basis points of further operating margin expansion, while still reinvesting for growth. And we expect adjusted EPS growth of 0% to 3%, in the range of $11.75 to $12.05. Now, I will pass the call over to Amol to continue covering our fourth quarter financial results in more detail and give additional commentary on our guidance for 2024. Amol?

Udit Batra :

Thank you, Amol. So, in summary, another transformative year for Waters. We will continue to navigate the current market environment well and deliver earnings growth for our shareholders in 2024. Before I close, I would like to share a few updates on our ESG efforts. We've made strong progress towards our environmental goals with 77% of our electricity now sourced from renewable or low carbon sources. In 2023, we started working with the Science Based Targets initiative to build on this progress and develop further emissions reduction targets. We've also enhanced our climate related disclosure with our TCFD related reporting. Waters was recognized as one of the best companies to work for but by the US News and World Report, and we achieved a perfect score of 100 on the Human Rights Campaign Foundation's Corporate Equality Index. We're also proud that our governance has been recognized. Waters Board of Directors was named the 2024 Public Company Board of the Year by National Association of Corporate Directors, New England chapter. So with that, I'll turn the call back over to Caspar.

Operator:

Our first question comes from Vijay Kumar with Evercore ISI.

Udit Batra:

Look, a couple of high level comments, and then I'll go to the end markets and let Amol comment on the pricing question. The 2024 guidance in general assumes that the trends that we saw in 2023 continue in large part. So, you start off just looking at what happened in 2023. outside of China, all end markets and geographies grew low-single-digits or thereabouts. So all geographies were low-single-digits, and we assumed the same trend for the balance of the year. And all end markets are in the similar sort of zip code. And in China, we assume roughly sort of mid-teens to high-teens decline for 2024. Now when you do the arithmetic, you basically look at the comps. The first half of the year will be slower than the second half, right? The first half of the year has significantly higher comps. When you look at the academic and government stimulus, especially in China, and then the second half of the year, that alleviates, so you'll start to see a bit of a growth. So now to your question on the full year and the assumption for different end markets. For the full year, pharma, we are expecting to grow low-single-digits. And this is again on the back of what we saw in 2023. Industrial was flat in 2023 for the full year, expect to be there or thereabouts, low-single-digit growth. And A&G with a very strong year, roughly 10%, 12% for 2023. We expect it to be a low double-digit decline, basically in China declining quite significantly because of high comps, and the rest of the world, you sort of go back to the long term trends of low single-digit growth. So really, overall, expecting the same execution that we saw in 2023, basically really nice performance in markets outside of China with low single-digit growth in China, mid-teens decline. And by end market, sort of similar trends. Strength continuing in pharma due to our QA/QC focus. Amol, on the pricing.

Udit Batra:

I think just to sort of emphasize that point even more, what gives me sort of a lot of confidence is what we saw on our gross margin and our operating margin. In such an environment, we took proactive cost actions. Operating margin for the full year expanded by 70 basis points and gross margin by 160 basis points. You can talk a good game on pricing, but at the end, it has to show up in the P&L, and that's what we're really proud off.

Amol Chaubal:

We expanded our full year margins by 70 basis points. And on a constant currency basis, that's 120 basis points of expansion because we had a good 50 basis points of FX headwind during the year. The negative leverage from volume was partially offset by mix and AIP. So net-net, it was negative 40 basis points. Pricing added 110 basis points, freight and material savings another 60 basis points, cost actions added another 60 basis points. And then we invested about 70 basis points in nurturing higher growth adjacencies. So that's roughly the breakdown.

Operator:

My next question comes from Matt Sykes with Goldman Sachs.

Udit Batra:

Let me start by first just talking about what we have seen in Q4. You would have seen that, Q4, our sales ramped from Q3 to Q4 by about 15%. And this is typical in a QA/QC driven business. It's muted versus historical trends, which are roughly 24% for Waters. But in a QA/QC driven business, you do see a ramp in replacement towards the end of the year. That trend is very much intact, especially outside of China. I think it's naive to think that replacement cycles have suddenly stopped. This Q4 ramp tells us that replacement cycles are still ongoing. Now the underlying question is, what are driving these replacement cycles and how do you trigger them? In a muted CapEx environment, the conversations we've had with customers on replacements have largely centered around new products, Arc HPLC and Alliance iS, which have both gained a lot of nice receptivity. So, new products allow you to continue to have that conversation. And you see that reflected in our sort of pharma results outside of China and as you compare it to our peer group. Now, to your question on did we see an outsize replacement during the post COVID years? It's very difficult to tell. We think it was more a push back from the depression that you saw during COVID and outsized execution that we saw due to the replacement cycle that we had not had from 2018 to 2020. So pent up demand sort of helped us get really outsized growth. Now, to corroborate that point, if you just look at LC, LC is 70% replacement business. And if you look at how we ended the full year 2023, so LC – and again, one should look at long term trends, on a long term basis, is roughly 1% growth on a four-year CAGR. So LC is growing roughly 1% on a four year CAGR basis, which is well below the long term average of about 4% to 5%. And you add pricing, so it's actually 4-ish-percent sort of below in volume versus the long term trend of 4% to 5% LC growth. So we do expect LC replacement to start imminently. Now don't ask me exactly when that inflection point is. Short term, we have a ton of visibility with a lot of data and a lot of conversations with customers. Long term, we think the trends are going to revert back to the mean or even better, given what we've talked about in our prepared remarks. The inflection point you don't get any extra marks to call it. So in 2024, we've assumed the same trends as 2023 to persist. But, definitely, we believe LC is due to come up in growth rates. So, long answer, but I hope that gives you a lot of context on how we're thinking about it.

Udit Batra:

Early days, Matt. We've assumed roughly $50 million to $75 million for now in the food market. And over time, we expect it to expand. As you well pointed out, that could be a pretty significant market. We want to be a bit cautious here. So the 30 basis points is largely on the back of water testing, and not much from food testing at this point. But that said, the PFAS market is super dynamic. So we've gone from water testing to expansion into food testing, into tissue samples, into soil samples, into sewage, and into industrial companies sort of purchasing mass specs to analyze their effluent stream. So, it's a market that's going to significantly expand. But we're a bit cautious in trying to guess exactly what that size is. What we're focused on is sort of going after each and every opportunity in these segments, and you see that with roughly 40% growth. So stay tuned. As we find out more, you'll progressively see the increased market sizes or better information emerge.

Rachel Vatnsdal:

I just wanted to dig into this 1Q guide a little bit. This was weaker than most of us had anticipated. Appreciate the market is pretty dynamic and you had some really difficult comps in China during 1Q. But are there any other one-timers in terms of why you'd have that level of sequential step down? And was there any pull-forward that may have helped 4Q that led to that softer 1Q guide as well?

Udit Batra:

Rachel, just to sort of build on what Amol has said, we're really no different than what we saw in Q4 overall, right? Q4 was almost 7.5%, 8% down versus previous year. And we're assuming, at the midpoint of the guide, Q1 is roughly 10% down. We expect, as Amol said, the trends from Q4 to persist into Q1. Low-single-digit-ish growth or flat growth in ex China. And in China, roughly 40% decline due to the heavy comps, especially from A&G last year where we had the benefit of the stimulus was coming through. So no real challenge. I'll just sort of say one more thing. In pharma in China, in particular, we're starting to see a bit of stabilization. We're starting to see biotech spending start to reemerge. We're starting to see CDMO spending on recurring revenues. And we're also, in the branded generics segment, which is roughly 50% of our pharma market, where more and more cities and more and more hospitals are starting to open up. So we see that trend, but we are cautious in calling that at this point in Q1. So Q1, basically similar tends to Q4.

Rachel Vatnsdal:

Just my follow-up on this assumed gradual improvement that you guys are embedding throughout the year, can you just dig a little bit more into those assumptions? Which markets and which geographies are you assuming more of an improvement than others? You talked about some of the China in the comping. So, how much do comps really have to do with that improvement that you're expecting throughout the year as well?

Udit Batra:

Similar trends in the first half and second half. Just the arithmetic is that the comps in the first half are higher than the second half.

Doug Schenkel:

Actually, I want to look at China a different way. And I'm just doing some quick math on the fly, which is always dangerous. But one thing as I look back the last few years I've noticed is I think Q1 revenue in China is typically about 70% of Q4 revenue in China, just kind of thinking about the historical sequential pattern, to the extent you can do that, over the last few years, given how different that has been. But if we use that as precedent, it seems like you're essentially embedding that pattern into your guidance this year again. So when I keep that in mind and I look at Q3 and Q4 revenue in China, which were about $100 million each, well, the comps are really tough and the growth is not going to look great in the first half of the year. Are you at some level kind of assuming a normalization of sequential growth over the course of 2024 relative to Q4 on a sequential basis?

Doug Schenkel:

Udit, either for you, or for Amol, I was wondering if you'd be willing to delineate between large and small molecule growth on the chemistry side? I'm just curious how that's been trending. And what's incorporated into guidance that may be cutting things in an unfair way? But if you're willing to indulge us, I think that would be really interesting just to hear how that's been trending and how you're thinking about it for 2024.

Operator:

Our next question comes from Dan Brennan with TD Cowen.

Udit Batra:

Industrial finished 2023 roughly flat. And flat in a year where there was significant macro challenges. And this was largely due to PFAS and battery testing offsetting the other macro sensitive segments in our industrial business. And TA, we've not talked about that business in a while, but the TA business for the full year grew 3% in a year where growth was very difficult to get and that included – that number includes China. Now, as you look into 2024, we assume that the full year will be there or thereabouts, low single-digit growth. Ex-China growing low single-digits really on the back of PFAS, battery and a bit of recovery on food and environmental. And China, really now, given this large comps in 2023 in the negative territory in the low to mid-single-digits. So expecting 2024 to look similar to 2023 overall, especially ex-China. A little bit of – the stronger sort of comps in China make maybe a bit of muted growth. So you should assume that industrial will be sort of flat to low single-digit growth in 2024.

Amol Chaubal:

China, if you look at 2019 or 2022, was roughly 17% to 19% of our revenue. Now, where we finished in 2023, it's about 15% of our revenue. When you look at sort of the different issues compounding the current situation in China, but we generally feel, barring maybe one or two smaller issues, most of these issues are cyclical rather than structural. So, for example, CDMOs struggling with overcapacity, as well as geopolitical challenges or branded generics pulling back spend because of anti-corruption campaigns or industrial business, especially food and environmental, slowing down because of government pulling back reimbursement. We think these issues are largely cyclical. They will all come back. It's just a question when, and it's very hard to predict when that will happen. On the other hand, the biotech funding and the resultant volume they've placed on tier two, tier three CDMOs, that we think is structural. And in the near term, they're not going to be at the levels of 2021, 2022 spending. But at least on that issue, which is structural, the good news is we think we found the bottom on that issue because newer molecules are starting to see funding. But there is going to be sort of $30 million to $40 million correction to our 2022 baseline. The remaining issues we think eventually will come back. And that's the business that is today. And then, as we've said before, what we are super excited about is this whole push for innovative medicines. And there's a whole new vector opening up in China and we think that will create significant value. And we absolutely want to be part of that equation. And we are taking steps, so that we have local presence and participate in that journey more closely.

Operator:

And our next question comes from Catherine Schulte with Baird.

Udit Batra:

Really continuing the trend. So we went from, what, 20 – so, ecommerce from about 20% to 35% already, 35-plus-percent already in ecommerce, and we expect that to grow closer to 40% by the end of 2024. And in service attachment, having already seen roughly 500 basis points of service attach increase from the time we started the initiative three years ago, we're planning for another 100 basis points of service attachment increase in 2024. So continuing on with our commercial initiatives.

Derik De Bruin:

I've got a couple. Could you comment on order trends in Q4? If I missed it, I apologize. Did you see orders pick up sequentially? And how should we think about the tax rate sort of in 2025 as we work through the Pillar Two stuff. And I have one more follow-up?

Amol Chaubal:

Derik, great question on tax. So, if you traced last few years with us, the tax rate has gone up roughly about 150 basis points to 200 basis points. And bulk of that is really coming from the US R&D capitalization. And as a company, we've sort of taken a position that Section 174 changes have an ongoing effect on our P&L. And absent of future legislation, we are not excluding those charges from our non-GAAP P&L, which is different from some of us in the sector. But we think those expenses are part of our non-GAAP P&L, and that's the bulk of the change. The other things that are creeping in there is Singapore going from 0% to 5%. and Ireland adopting Pillar Two, going to 15%. I think 2025, the. big one is, will Singapore adopt and in what form and in what offsets they provide when they do adopt that. So that remains to be seen. We are closely watching that. And as that plays out, we will provide more commentary when that happens.

Udit Batra:

Derik, fantastic question. our goal in bioanalytical characterization is to make it as simple as it is in small molecules. The QA/QC environment for large molecules in cell and gene therapy should become just as simple. And to do that, you need to take some high end technologies, simplify them, move them into downstream applications, so they're simple to use. LC is already there. Mass spec, the BioAccord has made great strides. Light scattering is ahead of mass spec. So it's going to enter QA/QC sooner. And there are a couple of other technologies, like Raman, like cellular analysis, that also belong in the QA/QC and the process analytical testing domain. But all of this hinges on having a simple software that the regulators trust, like in power. So, our single largest initiative with Wyatt after delivering our commercial results is to get Wyatt light scattering software onto Empower. And we will have a beta version of that by the end of the year. And I think that's the primary requirement for QA/QC in large molecules to become like small. So stay tuned, really exciting area. And we're investing in the future while we are navigating the present really, really carefully.

Udit Batra:

Thank you, Caspar. Thank you, Amol. Thank you, everyone, for listening. 2023 has been an unprecedented and challenging year. We've navigated extremely well. As you look at our results outside of China, every end market, every geography grew, which is unusual in this environment amongst our peer group as well. And what is even more pleasing is our focus on cost management. So, really, 70 basis points of margin expansion in the year where the top line went down dramatically is quite an achievement. And we've done that while setting ourselves up very well for the future. We expect the long term growth of our business to be very much intact and accelerate based on what Amol and I described to you. So thank you, again, for your interest and your attention.

Operator:

Good morning. Welcome to the Waters Corporation Third 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 call is being recorded. If anyone has any objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Head of Investor Relations. Please go ahead, sir.

Udit Batra:

Thank you, Caspar, and good morning, everyone. I want to start today’s call by thanking my colleagues for remaining focused on our customers, on developing new products and supporting each other. Despite the challenging macro environment, our teams delivered a solid performance and did a great job capitalizing on the available opportunities through strong commercial execution. As headwinds from China and FX became greater, our indomitable teams rallied to drive productivity gains and margin expansion, resulting in strong adjusted earnings growth for the quarter. We launched innovative new products that address the critical unmet needs of our customers and further differentiate our revitalized portfolio in the attractive end markets that we serve. We also continue to make strong progress with Wyatt, including the launch of our first new light scattering instrument. Turning now to our results. In the third quarter, sales grew less than 1% as reported. Organic constant currency sales declined by 4%. Sales outside of China were largely at or above our expectations. However, demand in China fell beyond our expectations, which ultimately led to our sales landing at the lower end of our guide. With the U.S. dollar strengthening, the currency impact on sales for the quarter was flat versus our expectations of a 1% tailwind. Wyatt continued its strong start, contributing 4% growth to the quarter as expected. Despite the market challenges and the adverse FX impact, our expand – we expanded our gross margin percentage by 240 basis points and adjusted operating margin percentage by 380 basis points. This allowed us to deliver non-GAAP earnings per fully diluted share above our expectations at $2.84, an 8% increase. On a GAAP basis, our earnings per fully diluted share were $2.27. Looking now at our organic constant currency results in more detail. In the Pharma segment, U.S. pharma grew 6% and Europe grew 5% with a strong continuing performance among our large to medium-sized customers despite slow funnel velocity. In China, we saw continued weakness in pharma throughout the quarter. Market challenges in China have now broadened beyond pharma and impacted both our industrial and academic and government end market results in the quarter. Overall sales in China declined approximately 30% as the demand environment further deteriorated as the quarter progressed. In the Industrial segment, China declined low-teens. Outside of China, Industrial declined 6% as growth in the quarter was subdued by a tough prior year comparison of over 20%. While the more cyclical applications in Industrial have continued to slow globally, we saw continued strong traction in PFAS and battery testing applications. In academic and government, we continued to see strong uptake of new products in Europe with low-double digit growth, and in the Americas with mid-single digit growth. However, this strength was more than offset by pronounced weakening in China, which declined over 30% now that the shipments related to last year’s stimulus program have concluded. In our core business, while the market environment has become more difficult, we continue to deliver strong commercial results. When looking at our third quarter results outside of China, our organic constant currency sales grew low-single digits year-over-year and is a healthy 7% on a two and four-year stacked basis. On a year-to-date basis, our organic constant currency growth has been mid-single digits year-over-year, excluding China and flat overall, including China. A key driver of performance for our business this year is mass spec, which is an area where we have gained share with our innovative new product portfolio. We’re also managing our P&L very effectively through focus – through our focus on operational excellence that drove strong margin performance in the quarter and year-to-date. In the third quarter, our gross margin was 59.1% a year-over-year expansion of 240 basis points. Our adjusted operating margin was 31.5%, expanding 380 basis points. Year-to-date, our results also showed substantial margin expansion with our gross margin up 160 basis points to 59% and our adjusted operating margin up 60 basis points to 29.4%. Let me talk about what drove this. First, our commercial teams have continued to achieve strong pricing results at levels that were over 250 basis points for the quarter. Second, we’re beginning to realize the productivity benefits of our focus on operational excellence and digitization. I’m excited that next month Waters will celebrate the opening of our new Global Capability Center in Bangalore, India, which will further accelerate our pursuit of digitization and operational excellence. Third, through our proactive cost actions, we have rapidly aligned resources to our long-term growth strategy. While the current market environment is challenging, the long-term fundamentals of our end markets continue to be excellent. As I mentioned last quarter, there are instrumental growth vectors to our historical 5% instrument growth that result in a great long-term growth profile for our business. This includes global prescription drug sales, which are expected to exceed historical growth rates, as well as measures we have put in place to improve pricing, where we expect to sustain a more than 100 basis point improvement versus historical levels. In addition, the growing adoption of analytical instruments in process development for large molecule therapeutics is a new growth vector for instruments such as mass spec and light scattering in our portfolio. This is only expected to strengthen as end users find value in these instruments for high volume and recurring applications such as process development, raw materials testing and quality control. The competitive edge of our revitalized portfolio also positions us well for long-term growth. Our product portfolio has been renewed in the last few years with significant innovation that is answering the critical unmet needs of our customers. This includes new launches in LC such as the Alliance iS, which we believe is the most significant innovation to hit pharma QA/QC labs in the past decade. In mass spec, the industry leading sensitivity of Xevo TQ Absolute has allowed us to gain share in the food and environmental market for PFAS related testing applications. In chemistry, our MaxPeak Premier columns have been the most successful launch in our company’s history, serving the more complex needs of large molecule separation in our customers’ labs. During the quarter, we announced two new product launches for bioanalytical characterization, including our first new instrument launch with Wyatt. We launched a new Bioprocess Walk-Up Solutions that combines our Andrew+ liquid handling robot, OneLab Software and our BioAccord LCMS system into a more automated setup that is even easier to use. Together, these new products help engineers capture high quality bioprocess and drug product data directly from upstream bioreactors such as those offered by Sartorius. It achieves this via simple workflows that automate sample prep LCMS analysis and data capture. This accelerates the upstream development of MAbs and other biologic drugs, providing more optimal clone selection that results in more effective titles and yields. Second, we launched our first new light scattering instrument within the Wyatt portfolio. DataStar is designed to measure – to precisely measure and analyze nanoparticles used in downstream biologics and material science applications. It combines three light scattering techniques into a single device, cutting measurement time by up to ten times compared to other methods, while using extremely low sample volumes. I would now like to cover our updated 2023 guidance. Growth rates in China have continued to deteriorate as the year has progressed. We expect this to decline further in the fourth quarter sequentially. We now expect China to decline approximately 25% for the year versus our prior expectations of low double digits. The result is an incremental headwind to our full year organic constant currency growth of approximately 250 basis points versus our previous guidance. As a result, we now expect our revised full year organic constant currency sales growth to be in the range of negative 2% to negative 1%. Despite the lower revenue guide, we’re continuing to proactively manage our cost structure and drive productivity expansion, resulting in no change to our expected margin percentage performance versus our previous guide. We expect our full year adjusted operating margin to be 30.5%, which is 30 basis points of expansion versus 2022. Our updated full year adjusted EPS guidance is resultantly in the range of $11.65 to $11.75. Now, I will pass the call over to Amol to continue covering our third quarter financial results in more detail and give additional commentary on our guidance. Amol?

Udit Batra:

Thank you, Amol. So to summarize, despite a macro environment that has progressively weakened this year, we have continued to deliver a solid performance through our execution. We are also driving strong outcomes in our margin and earnings performance and are maintaining our full year gross margin and adjusted operating margin guidance, despite incremental headwinds from volume and FX. We have strengthened our product portfolio even further through innovation while continuing to make strong progress with our acquisition of Wyatt. Later this month, we look forward to issuing our 2023 ESG report, which is a transparent way to show our active progress each year on our commitment to leave the world better than we found it. Some key highlights to expect, relate to our continued reduction of emissions, increased renewable energy use, increase of female representation in management roles, as well as the TCFD related environmental disclosures we are initiating in this year’s report. So with that, I’ll turn the call back over to Caspar.

Operator:

Thank you. We will now begin the question-and-answer portion of today’s conference. [Operator Instructions] Our first question comes from Vijay Kumar from Evercore ISI. Please go ahead.

Udit Batra:

So, Vijay, thank you, and good morning. Look, I’ll give you some summary comments and Amol will talk to you about the ramp from Q3 to Q4 if I understand your question correct. When we look at the exit rates and ramp into from Q3 to Q4, we of course look at the performance as we exit Q3. This includes detailed analytics on funnel velocities across the different customer segments, includes what we’ve seen over the last 15 years as we go from Q3 to Q4, and look at that statistically. And of course, a lot of conversations with our customers and we continue to see strength relatively speaking versus our peer group in pharma, especially outside of China. And I’ll let Amol comment a little bit on the sequential ramp up.

Vijay Kumar:

That’s helpful comments Udit and Amol. And one maybe, if Q4 jump off as the minus high singles organic, is China minus 25 for the year, is that done for this year or is that going to spill over into fiscal 2024? Can Waters grow next year? I feel like when I look at the margins here, obviously, leverage will be a question. But I saw that restructuring cost did tick up, so anything on – any implications for 2024 either on the top and operating leverage?

Operator:

Next, we’ll go to the line of Dan Brennan from TD Cowen. Please go ahead.

Udit Batra:

So Dan, thank you for the question. Look pharma is almost a tale of two stories, right? I mean, overall, we saw the quarter decline low single digits. And in China as expected, roughly 30% or so decline that I just commented on. If we look at ex-China I mean, we’ve printed, I would say amongst our peer group, probably the most positive numbers in growth in China growing mid-single digit. And this is across Europe, across Americas and across the rest of APAC where we saw significant strength in India and Japan. And this is behind two factors. One really our new product portfolio is gaining a lot of traction, despite the slow funnel velocities that we see in mid to large pharma and additional approval levels, despite the fact that biotech came under pressure at the beginning of the year, it’s starting to see – it’s starting to become a little bit less pressured as we exit the year. So in pharma, our new product portfolio has done super well start with LC. The Alliance iS we have had significant orders. And as I mentioned, despite the macro pressures, customers have placed large orders for Alliance iS. And the funnel looks really healthy. Mass spec has been a real star for the year. And in pharma, we have specifically developed biologics applications, and you saw the recent launch of the walk-up solution for BioAccord, which should make process development even faster. The MaxPeak Premier column staying on the theme of biologics is in its third year and still growing in well into the 20% range. So been the strongest launch for us in columns for many, many years. And we recently introduced another column that is targeted towards AAV and cell and gene therapy. So really excited about what we’ve seen in pharma this year, despite a difficult environment and feel like we’re gaining share. And over the long term, pharma is – remains a source of strength. We don’t expect to grow mid-single digits. We expect to grow high single digits and double digits as we look into the future. So I’m super excited about what we are seeing in the pipelines from our customers. I mean, we are very well specked in the GLP-1s and the Alzheimer’s compounds. So really optimistic about the future and proud of the team’s execution and I would say a challenging macro environment. Amol?

Dan Brennan:

Got it. No, thanks for that. And then just maybe on the instrument recurring revenue, just maybe could you just give us a little bit of an overview of kind of what you’re seeing there. Obviously trying to complicate things, but just wondering the steadiness of that recurring revenue. Like, are you seeing any changes there? Just kind of any flavor about how the quarter went and kind of what you’re seeing in the outlook for 4Q? Thanks.

Operator:

Next we’ll go to the line of Matt Sykes from Goldman Sachs. Please go ahead.

Amol Chaubal:

Yes. So, Matt, good morning, and thanks for your question. Look, I mean, ever since we went through the inflationary cycle last year, that gave us opportunity to put good systems and processes around pricing. And if you look at Waters’ history, traditionally we’ve done 50 basis points to 75 basis points. And last year was very different. And our teams have continued to execute on that sort of system and process pathway. So we started the year with about little over 200 basis points and it’s only got stronger as we came into Q3 with little over 250 basis points. And then we expect something similar in Q4, which then for the full year, we will be little over 250 basis points. And that’s sort of driving a third of our operating margin expansion for the quarter.

Matt Sykes:

Great. Thank you for that color. And then just as a follow-up, just zeroing in on China, specifically on the Industrial side, you talked about strength in batteries, but food and I believe environmental weakening in the quarter. Could you maybe talk about the dynamics there? I mean, I think that’s relatively new information relative to what we’ve been hearing and just wanted to understand the dynamics within the Industrial demand inside China and what your sort of expectations are for duration of that we had?

Operator:

Next we’ll go to the line of Derik De Bruin from Bank of America. Please go ahead.

Amol Chaubal:

Yes. So, Derik, thanks for your question. I mean as we had discussed in our last earnings call, right, where we had to make some tough but necessary decisions to reduce our workforce by about 5%. And we did that at the beginning of Q3, and that resulted in approximately $10 million of savings in Q3 that is in our Q3 results. We expect for 2023, roughly $20 million. So another $10 million in Q4. And the annualized impact, which will play out next year would be about $40 million. Again, we may invest some of it to fund some of the high growth adjacencies, but before that annualized, its $40 million. And we incurred about $27 million associated with severance expenses for this restructuring, which is in our GAAP to non-GAAP adjustment. Now, keep in mind, in Q3, the way it sort of played out is we had lower volume on our organic business, so we lost some volume leverage. And so, essentially, the reduction in AIP plus the accretion for Wyatt more or less offsetted the lack of volume leverage from the underlying business. And then the three factors which are pricing, these cost actions that I just talked about, and then the underlying productivity initiatives playing out on freight and procurement and the capability center, they each contributed roughly a third of the 380 basis points.

Derik De Bruin:

Thanks for the clarity. Just wanted a follow-up. I appreciate that Waters has a lot of new products, and those are probably giving you a little bit more incremental growth, but I mean I’m just a little bit surprised of your guidance outside of China. These are not normal market conditions, and I know you’re putting in some conservatism, but I haven’t seen markets like this before and these swings that we’re seeing. So it’s just wondering why you guided as aggressively as you did for the fourth quarter and your competence, because it just feels like you’ve got a little bit of a budget flush that’s in there outside of China and just a little bit more clarity on that. Thank you.

Amol Chaubal:

No, no, I think you covered it.

Operator:

Next we’ll go to Rachel Vatnsdal from JPMorgan. Please go ahead.

Amol Chaubal:

Yes. I mean, look, if you sort of see how the year has played out, we did see funnel velocity slow down across all the trade classes, especially pharma in Q1. And then as we’ve gone through Q2 and Q3, the funnel velocity has sort of stayed where it is at a higher level. So it’s taking more time for people to approve these orders. And we expect that to continue through Q4. What we haven’t seen in pharma, which is good, is we haven’t seen projects getting canceled. And so opportunities are landing, they’re just taking more time to land. And in terms of sort of sales versus orders, I mean, they’re going hand in hand. It’s not that we are meaningfully drawing down backlog in any quarter or the whole. The one place where the trajectory has changed somewhat is in the industrial trade class. And this is all outside of China I’m talking about. And there, while the funnel velocity had progressively slowed in Q1 and Q2, we hadn’t seen any opportunities getting canceled. And what we are seeing in Q3 is and again, don’t confuse this with orders. No customers are canceling orders. But when the opportunity is in the CRM system, from lead gen to conversion, we are seeing elevated levels of projects getting canceled for lack of funding or funding not available in the current year, particularly in testing labs. And that we saw sort of emerge in Q3. And then China, I mean, we’ve sort of covered that before, which is a different story, much more painful. That started in Q1 with tier 1 CDMOs and then sort of progressively went into tier 2, tier 3 CDMOs and biotechs with investor funding and then played out in branded generics with VBP and anticorruption drives, which haven’t bottomed yet and then has spilled over into the industrial and A&G, especially as the stimulus money is done for A&G.

Operator:

Next, we’ll go to Eve Burstein from Bernstein Research. Please go ahead.

Udit Batra:

Thanks for the question, Eve. I’ll start with the Wyatt question. Look, I mean, we’re very pleased with the way the integration is going. I mean, that should be the general takeaway and you can see that in the facts, right, basically a 4% contribution this quarter and 2.5% for the year. So we think we are going to deliver that. And when you look at the drivers, the integration is growing faster than we had initially even imagined. There are exactly the same headwinds. The funnel velocities are longer. It is taking more time for customers to place orders. But number one, given the larger commercial field force that Waters had, we were able to use that to generate a lot more leads for our light scattering instruments from Wyatt, which are highly differentiated in the market. So as we got more leads, we got more conversions and the funnels moving nicely through. Second, we’ve spent a lot of time in making it easier for customers to connect Waters as LCs to multi-angle light scattering instruments from Wyatt, and that’s well ahead of target. And third, we had talked earlier when we talked about the synergy contributions, we had talked about columns from Waters being substituted for other competitors columns and that’s gone extremely well. So every light scattering equipment that is sold now is sold with a Waters SEC column, which are the best-in-class. So integration going very well, but the largest driver, I would say, of short-term results and overcoming the obvious headwinds is the larger number of leads that are Waters account managers have provided the Wyatt specialists. And as you look ahead, I mean, really optimistic about what we are seeing with the collaboration across the two organizations. Our Wyatt colleagues were present at the Innovation Summit recently, which basically invites over 300 or so R&D scientists around the globe for a hybrid session. We had many posters from Wyatt colleagues looking at collaborations across the organization. So I’m extremely pleased with where things are going. And we recently launched the ZetaStar, which combines three light scattering technologies into one. So Wyatt’s going extremely well, and thank you for the opportunity to expound on that. Now, on the high growth adjacencies, the 30.5% operating margin that we are committing to for the full year includes the 70 to 80 basis points that we had said that we would invest, we had started to invest that early in the year. We are seeing very nice outcomes of that, especially in our clinical business where the team has developed many, many assays, simplified workflows for difficult to do experiments with LCMS and making it a much more easier experiment for customers who want to use LCMS in specialty diagnostics areas like for Alzheimer’s testing – like for testing antibodies for Alzheimer’s as just a case in point. So the high growth adjacencies are delivering. Now we will look at the net picture as we look at the full year and how it lands and we will talk about how we’re going to invest and continue to invest in the high growth adjacencies as we give guidance at the beginning of next year.

Catherine Schulte:

Hey, guys, thanks for the questions. Maybe first just to touch on some of your commercial initiatives here, any comments on service attachment rates and e-commerce trends and how those are tracking relative to your expectations?

Catherine Schulte:

Okay, great. And then you had impressive operating margin results in the third quarter. I think to get to your 30.5 for the full year, that implies somewhere between 33% and 34% in the fourth quarter. I know fourth quarter margins are often seasonally high, but should we think of the 31.5 that we saw in the third quarter as a jumping off point for 2024 or just walk through the moving pieces there? Thanks.

Operator:

Thank you. And that is all the time we have for questions.

Operator:

Thank you all for joining. That concludes the Waters Corporation third quarter 2023 financial results conference call. You may disconnect at this time and have a great rest of your day.

Operator:

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.

Udit Batra:

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 spec 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 spend. 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 spec 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 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 of expansion versus 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 spec. In the academic and government segment, our high-res mass spec 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 spec 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 boost sample throughput even further. Earlier this year, we launched 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 answer 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 reology accessory and the battery cycle microcalimeter 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 are expected to exceed historical growth rates for the foreseeable future. And our potential is further enhanced by the measures we have put in place to improve pricing where we expect to sustain 100 to 200 basis points improvement versus 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 spec 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 bio separations. 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 spec 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 bearing 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 reduced 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 column 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 expectation of low digit -- 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 approximate 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?

Udit Batra:

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 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.

Operator:

Thank you. We would now open the lines for questions. [Operator Instructions] Our first question comes from Vijay Kumar from Evercore ISI. Please go ahead.

Udit Batra:

Thank you for your question Vijay and good morning. Firstly, on mass spec. Over the long-term, so over two years -- just to answer your question, over the two-year CAGR is in the high teens, 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 of 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've heard the market grows roughly 20%. We're growing double that rate. In that particular market, our mass spec instruments are seeing terrific, 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 -- some of the mass spec heavy 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. And to your question now on overall instruments, look, take a step back and when you look at the overall instrument performance for this quarter, it's roughly two -- roughly negative 2%. Now this is an illustration of two things

Amol Chaubal:

Yes. So, a couple of things there, Vijay, right. I mean the step up on the growth is purely related to the baselining. So, if you look at it on a two-year or a four-year stacked basis, Q3 and Q4 guide is pretty consistent. So, on a four-year stack basis, both Q3 and Q4 are growing 6%. Two, if you sort of look at the ramp-up in dollar million sales. I mean we typically do 24% of our full year revenue in Q3 and about 30% in Q4. And so the guide is sort of consistent with that, with sort of tad caution on Q3. And so that's sort of consistent with the past. And it also sort of accounts for the fact that whatever we see in Q3 in terms of China slowdown and cautious spending with pharma will continue into Q4. And then as you look into Q4 EPS, you see a steep ramp versus last year of about 15% growth, but again, there are various factors that are contributing to it. I mean as Udit outlined, we've taken cost actions and a predominant portion of those cost action savings will show up in Q4. That, coupled with productivity gains that our teams have managed across pricing, across materials and freight, across other areas of procurement, those two things together, we get about 5% of that growth coming from the cost actions, another 3% to 4% of that growth coming out of productivity. So, that's the big portion of the 15% increase that you see in the EPS in Q4. The rest is there is 3% FX benefit. Wyatt is normal dilutive in Q4, so there is a net neutral impact there. And then there is the lower share count, about 1.5% underlying sales growth.

Luke Sergott:

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 if you guys have any further deterioration in any of the markets baked in?

Amol Chaubal:

Yes. And I mean if you sort of go through the individual components, right, China, as we said, is a low double-digit growth for the full year. It's slightly more elevated in the second half versus the first half in our guide assumptions. Rest of the world in the first half grew mid-single digits. The assumption for the second half is low single-digits. LC sort of grew mid-teens decline in the first half, and that's sort of also our second half assumption versus mass spec and TA. Just given the situation, and we've reduced it to sort of low to mid-single-digit growth for the second half of the year. So as you see, I mean, we've sort of risk-adjusted a big portion of our second half of the year given what's playing out in the market.

Udit Batra:

Luke, that's a good question. And I don't think you'll hear us saying a lot different than what you've heard from many of our peers, right? In the long-term, China is a terrific growth market, we all know, right? And you've seen that through the history. But we saw in the second quarter a mid-teens decline in China. CDMOs got worse and people are just cautious, super cautious in spending in our pharma customers, across the traditional Chinese medicine customers, you see that permeating across the board. And it's not clear when that opens up. So we've assumed that for the full year, China is going to decline low to mid-double digits. Now when you look at -- and we've also not assumed that another stimulus is coming to grow the ANG market, and we've seen pretty dynamic growth for the first half of the year, that was driven by the stimulus that came late last year, and we've assumed that there's no stimulus coming for the balance of the year until we have clear visibility. So you've seen we've been very careful and cautious, but there's not a heck of a lot of visibility. What I'd like to remind you, though, from a Waters-specific case from 2016 to 2020, whenever Waters grew and whenever Waters growth rate fell, it was all correlated to China. This is very different now. We see that the US and Europe 2020, 2021 and now also 2022 and 2023, we seen US and Europe grow and contribute to growth really, really well in addition to China. So we feel that the business is very nicely diversified, and we see that we have growth in other geographies. And I'll conclude by saying China remains a dynamic market. Our teams have visited four to five times. The global teams have visited four to five times since the last time we spoke. And on the ground, you see incredible, incredible collaboration with our customers. You see, especially in the batteries market, China is well advanced of US and Europe, and we think the adoption for our TA products is going to grow much faster in China. If you go to the specialty diagnostics arena, China again, has been a front runner in adoption of mass spec in the clinical space, and we are working with several collaborators there to introduce our high-end mass specs in that workflow. And it's a matter of time that China will recover. We feel we are very well positioned to capitalize on it when it does. But in the short-term, you will not hear us say anything different about the visibility for the balance of the year than what you've already heard.

Dan Brennan:

Great. Thanks. Solid quarter. So, question would be on the guidance, I think. I think the question we'll probably get is after solid Q2 kind of is the guide derisked enough and it kind of makes it more difficult to parse out the super lead China and obviously, Europe and US doing better than I think we expected. So, can you just speak to a little bit again? I know you've given some color already and the comps make it difficult to kind of get a trend line here. But like how should we think about the extent of maybe a cushion that's kind of assumed in the back half of the year or just kind of the confidence in the back half of your guide?

Dan Brennan:

Great. Thank you. And then maybe a I think US and EU pharma results here look really solid. I guess it's a little different in the early start of Q2 earnings season from peers that have kind of been talking now for the more. Just again, the business mix to currently make it difficult if you like direct read process. But do you think you guys are gaining share as related to maybe different business making comps? And then kind of what's assumed at the back half of the year for the US and European pharma? Thanks.

Udit Batra:

Yes. And Dan, your line was breaking up a little bit. If I understand the question, you wanted a bit more color on pharma. And I guess you could ask, hey, you're seeing good trends in pharma or at least some recovery in both US and Europe. And recall that we talked about this in Q1, where we said we had conversations with large pharma players, and it was not a question of what, it was just a question of when they would place orders and some of those orders came through in Q2 and some fairly significant orders, right? I mentioned GLP-1 agonist. We are the UPLC of choice for a very large pharma manufacturer. In fact, both of them who are making GLP-1s columns replaced -- in our competitors' column, which is a rare, rare thing that happens in the industry because the customer said they wanted full end-to-end visibility on the supply chain. We are the only player in the industry who manufactures our own particles, our own columns, full end-to-end, and that gives us significant strength, right? So we saw share gain in pharma. We saw new products gaining traction in the bioprocessing arena. And you would have seen that we've just launched a column that is specifically targeted towards separating Adeno-Associated Virus. These are viral vectors used for set of gene therapy. And it brings me great pleasure to say that these are columns that are attached to our mouse [ph] instruments. So we are really executing well in pharma, wherever we have ability to access our customers and customers are purchasing. And new products are gaining traction. So for the second half of the year, we've just said, look, let's not just use one data point to extrapolate. We're looking for more data points, even in US and Europe, and we will gain even more confidence. But from where I sit today, I see excellent execution, excellent new product traction both in US and in Europe. And in China, like I said before, our visibility is just as much as others. And when China recovers, we'll execute like we're executing in U.S. and in Europe.

Derik De Bruin:

Hi, good morning. Thank you for taking my call. Just out of curiosity, how much backlog work down left over stimulus spending did you see in Q2? And just sort of like what were orders coming through and what was sort of like -- was anything worked down as you have any backlog that got pushed?

Derik De Bruin:

Got it. On the academic market, just out of curiosity, are you doing -- are you seeing any pull forward in spending? I mean, obviously, there's some worries about budgets and things. Are you seeing any sort of pull forward your customers they look?

Operator:

Next, we'll go to the line of Matt Sykes of Goldman Sachs. Please go ahead.

Udit Batra:

Matt, thank you for the question. You know that we closed the deal in this quarter. And really three drivers and we've talked about them in our previous discussions, and they're all contributing, right? The first one is column attachment to malls instruments, and this has gone as planned. Our columns are being shipped with the instruments as we speak. Second, in the column space itself, we've launched columns that are custom-made for solving problems for our customers, and in this case, our most recent X Bridge GTX column that we just launched and this is -- basically this was announced yesterday, but it's starting to ship now. There -- it speeds up measurements by over 50%, reduces sample size by 30% to a 100%. And that basically saves our customers a lot of samples. So, those -- that's already happening. Second, we have talked about lead generation. There are significant hundreds of leads that are -- that have been generated in -- especially in the US and in Europe, where there's a lot of access to our customers. And as emerging biotech and precommercial biotech starts to especially in the US, we're seeing the lead generation pick up quite dramatically and some of those leads have already been converted into sales. So, that's a contribution. And the third piece that you see, which our customers are extremely excited about is the software bridge. We've basically made a lot of progress in building a software bridge of our instruments to -- our LC instruments to our light scattering instruments or Wyatt light scattering instruments. So, progress on all of those fronts that we talked about, our teams are super excited, seeing quite a good traction from our customers, especially as we start to see recovery in pre-commercial biotech and we see this also in the Cambridge Mass area.

Amol Chaubal:

Yes. So look, I mean, on both the sides, our commercial teams as well as operations teams have done a great job through Q2. The commercial teams have delivered fantastic outcomes on price, which is flowing to our gross margin. And then on the operation side, we've sort of laser-focused on managing raw material costs, managing freight costs, optimizing freight lanes, consolidating freight vendors. And we've also focused on value engineering where possible to sort of work through specifications and reduce the cost of the product. And all that is playing out through our gross margin line, which expanded 230 basis points. And we think this outperformance will carry forward in the second half, which is why full year gross margin is 100 basis points up versus a year ago. We started on this journey of operational excellence two years ago, and it's starting to bear fruit. And we are really proud of what our teams have achieved in this space.

Josh Waldman:

Good morning. Thanks for taking my question. Two for you. I guess, first, Udit, a follow-up on pharma. I mean it sounds like you're seeing signs of life from pharma outside of China, but it also sounds like you're seeing slower than normal funnel build from pharma broadly. I guess I wondered if you could unpack that a bit? And then, I wondered if you could provide context on what the guide assumes in regards to a budget flush, would you expect a typical seasonal ramp in the fourth quarter from pharma in the West. Is that -- I mean, is that the a driver, I guess, to the assumption for a pretty significant step-up in organic in the fourth quarter?

Amol Chaubal:

Yes. So I mean, Josh, if you look at our Q2 results and then look at Q3 and Q4 on a four-year stacked basis, they're all 6%. So what it essentially assumes is the dynamics that we saw in Q2, which was a demand slowdown in China and capital approval cycles becoming longer, we expect that to continue through Q3 and Q4. And hence, Q4 will sort of perform at the levels of Q2 on a stacked basis versus four years ago. Even on a two-year stack basis, the assumption there is our Q2 was roughly 6.5%, steps down to 5.5% in Q3 and further steps down to 5% in Q4.

Josh Waldman:

Got it. And then I guess, as you think about the current environment and where you position the near and medium term guide back at the Analyst Day, I mean, do you think Waters is still positioned to grow 100 bps plus above the market? And maybe more important, what do you think is the right way to think about market growth in the medium term in an environment where pharma is a bit more -- pharma a bit more cautious?

Operator:

And that was the last question we have time for.

Operator:

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

Operator:

Good morning. Welcome to the Waters Corporation First 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. Sir, please go ahead.

Udit Batra:

Thank you, Caspar, and good morning, everyone. For this morning, I'll start by giving you color on our first quarter results, as well as our updated guidance. Then I will cover some of our recent product launches, including Alliance iS, and I will also provide an update on Wyatt. Our first quarter results were below our expectations with revenue growth of 3% on a constant currency basis, versus our expected 4% to 6% growth. This was largely driven by weaker-than-expected demand for instruments in biotech and pharma, which I will cover in a moment. As you know, we had an extraordinary Q1 last year with 16% constant currency growth. Even though our first quarter this year was slower than expected, it still represents a very healthy two-year stack growth of approximately 9.4%. We also saw good overall strength in our recurring revenues, which continued to grow in the high single digits, as well as mass spec and DA, both of which grew double digits. Our end markets remain resilient, and our leadership team continues to drive strong commercial execution. We have further strengthened our revitalized portfolio with a steady stream of innovative new products. Finally, we've added M&A to our growth strategy with our pending acquisition of Wyatt. And we continue to invest organically in our high growth adjacencies, which are also on track and are gaining momentum. Reviewing our first quarter results in more detail; our performance was impacted by a combination of three factors. First, China was weaker than anticipated as pharma customers scaled back purchases. Second, while we have limited exposure to pre-commercial biotech, we have seen a pronounced scale back in demand from these customers as they have significantly reduced spending to conserve capital. And third, several of our large to medium-sized pharma customers delayed timing of instrument orders due to macroeconomic caution. Each of these dynamics occurred late in the quarter and led to instruments declining 3% after they grew over 25% in the first quarter of last year. By end market, the impact was to our pharma business, which declined 4% overall. This was offset by strength in the academic and government segment, which grew 45%, and industrial, which grew 3%, while our recurring revenues remained strong across service and chemistry. As a result of this lower-than-expected volume, our non-GAAP earnings per fully diluted shares also came below our expectations at $2.49 for the first quarter. On a GAAP basis, our earnings per fully diluted share was $2.38. As we look ahead, we are assuming that spending among pharma customers in China will remain scaled back for the balance of the year and while our exposure to pre-commercial biotech is low, we also believe that the slowdown in this space is likely to persist for the remainder of the year. As a result, we're lowering our 2023 guide due to these two factors. We now expect our fully organic constant currency growth to be in the range of 3% to 5%. We believe that large-to-medium pharma-sized budgets remain in place. We expect spending among these customers to catch up and be stronger in the second half of the year after delayed spending in the first half. Despite our revised revenue guide, our full year EPS guidance, and free cash flow generation expectations remain unchanged. We intend to proactively manage our spend and working capital, and Amol will cover this in more detail. Even with short-term market challenges, our sources for growth remain intact. Our end markets are robust, with almost 80% of our business exposed to durable growth areas. This includes demand for QA/QC testing of commercialized medicines, increased scrutiny of PFAs in food and water, and the testing of batteries used in applications such as electric vehicles. Our team has developed a strong commercial discipline that is supported by best-in-class innovative new products that address evolving customer unmet needs. We're also seeing high single-digit growth in our recurring revenues, which are over 50% of our annual sales. Chemistry growth is supported by strong end-market activity, growth in biologic applications with our MAX peak premier columns, and our e-commerce initiative. For service, we're seeing strong pull-through from our instrument sales, and increased service plan attachment is supporting the growth. We expect service plan attachment for our instruments to increase by another 100 basis points this year, building on the 350 basis point expansions in 2019. Our revitalized portfolio has been further strengthened with a recent launch of Alliance iS, which is our next-generation intelligent HPLC system. We believe it is the most significant innovation to hit pharma QA/QC in the past decade, and it provides a major leap forward in lab productivity. Not only is the instrument easy to use with its large touchscreen interface, but can eliminate common user errors by up to 40%. It does this by guiding users between steps with a highly intuitive interface. It intelligently conducts a number of real-time system checks before a sample is run. This helps ensure that the instrument is configured correctly for the method that is being tested. Before now, errors such as incorrect solvent or the wrong column being used are usually discovered after the sample has been run, which results in wasted time and a wasted sample. Given the strength of the Alliance brand and the significant new features that this instrument offers, we had a strong reception at its launch. Since quality testing is such a critical component of pharmaceutical manufacturing, customer interest has been strong, including from Janssen Pharmaceuticals, who noted that Alliance iS feels like the future is here and has already made plans to replace a large number of its LCs with this instrument. We now have not one, but two new industry-leading platforms for QA/QC applications in pharma, Arc HPLC and its biocompatible equivalent Arc Premier, and now higher-end Alliance iS, which sits at the top of the range. Last month, we also launched our Xevo TQ Absolute mass spec into clinical applications. Not only is this the most sensitive triple-quad on the market for PFAs detection, where it has seen strong traction in food and environmental testing, but now, within clinical, it is up to five times more sensitive than other competing instruments in the segment. This sensitivity enables clinical labs to detect and measure trace-level analytes at lower detection levels than was previously possible. It also enables clinical labs to expand their test menu to include multiplex panels. Meanwhile, our TA Instruments business launched a new microcalorimeter for battery testing essential for electric vehicle, energy storage and electronics applications. This provides customers with a significant upgrade as it accelerates validation of battery safety, quality and performance testing by up to 75%, which while collecting up to six times more data than other calorimeters. Lastly, we also recently launched a new system monitoring software product on Waters Connect, the first us and unique to the industry. Developed in consultation with QA/QC scientists, it enables real-time monitoring of all chromatography instruments controlled by our Empower software. It helps increase productivity of QA/QC labs by allowing customers to analyze their instrument fleets at anytime from anywhere to monitor uptime, usage levels and real-time system availability. Each of these new products have been developed in close collaboration with our customers to address their most pressing unmet needs. They further support the strength of our revitalized portfolio. Earlier this year, we announced our intent to acquire Wyatt Technology, the recognized leader in light scattering. With more than 80% of its revenues tied to large molecule applications, Wyatt expands Waters' portfolio and increases our exposure to faster growth areas within biologics. It also increases our ability to build a business in bioanalytical characterization, which is a $1.8 billion total addressable market with a 10% to 12% projected annual growth rate. We remain on track to close in the second quarter of this year. We also expect the transition to deliver immediate growth and adjusted operating margin accretion. Now I will pass the call over to Amol to continue covering our first quarter financial results and give additional commentary on our guidance. Amol?

Udit Batra:

Thank you, Amul. So to summarize, despite a slower than expected start to the year, our end markets are resilient and we expect to see increased strength in the second half of the year. While we have revised our revenue guide, we're maintaining our full year EPS guide due to our robust financial model and the acceleration of our growth strategy remains on track, with continued progress on all of our high growth adjacencies, and with our pending acquisition of Wyatt Technology. I would like to take this opportunity to thank our colleagues around the world who've continued to demonstrate the indomitable spirit of Waters with their focus on strong commercial execution and revitalized innovation. We also look forward to welcoming our future Wyatt colleagues. Finally, I'm proud to share that Waters continues to be globally recognized for its strong ESG profile, placing at number five on the Barron's 100 Most Sustainable Companies list for 2023. This is the second year that we've been placed in the top 10 after receiving more than 20 awards in 2022, recognizing the company for excellence in product innovation, leadership strength, and commitment to social and environmental responsibility. We look forward to continuing to demonstrate our commitment to leave the world better than we found it. So with that, I'll turn the call back to Caspar.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator instructions] And our first question today will come from Luke Sergott of Barclays. Awesome. Your line is open, sir.

Udit Batra:

Sure. Thanks, Luke, and good morning. Look, it's a great start to the year with about 45% growth, and this is largely due to the elevated global funding that we're seeing across the globe and the strong demand for our high res mass spec portfolio. This growth was, of course, led by China, which grew over 80% versus previous year. And of course, we saw the same thing happening not to that same extent in magnitude but in the U.S., in India and in Europe, all had a nice growth well into the double-digit territory. So Academic and Government, as you know, is a segment that's rather lumpy. So I would rather not extrapolate Q1 to the rest of the year. So we assume that we will see the second half that will become more normalized and the full year will be more in the low double-digit to teens range given such a strong start to the year.

Udit Batra:

So look, just to sort of take a step back. The full year guide -- for the full year guide, we have assumed 3% to 5% in constant currency, right? And on a 2-year stacked basis, this is still high single digits. We like to -- we think like the first quarter, the spending at Chinese CDMO customers and the pre-commercial biotech customers remains constrained for the balance of the year. And to remind you, on the China side, we've grown the CDMO presence over the last 2 years. We've actually tripled that business, right? So it's gone dramatically up. So we think -- like the first quarter, the spending in the Chinese CDMO customers and the pre-commercial biotech customers will remain sort of muted. On the other hand, we're assuming that the large pharma customers who delayed orders for instruments will come in the second half of the year. And here, over the last 2 weeks, I've personally spoken to several large customers, both in the U.S. and Europe to understand the situation. And the funding remains very much intact, and the POs were simply delayed. So we're expecting those to come largely in the second half of the year. So then the 3% to 5% guide would then imply that for the full year, China will grow in the low single digits versus our previous assumption of high single digits. Pharma will also remain in the low single-digit category with combined pressure from China CDMO and pre-commercial biotech, and instruments for the year will grow flat to low single digits and recurring revenues in the high single digits, right? So I hope that gives you a flavor for the drivers of the full year guidance and how we stepped it down. Amol, do you want to comment on the quantitative aspects.

Operator:

The next question will come from Vijay Kumar of Evercore ISI. Your line is open.

Udit Batra:

So let me -- so Vijay, thank you for the question. First, on the biotech exposure. Our biotech customers, broadly speaking, constitute between 10% to 15% of our pharma business. and with more heavier weighting in the U.S. and China where the biotech industry is even more developed. Pre-commercial biotech, which is where we saw the slowdown is a subset of this and is roughly half of it, right? So if you do the math, that's roughly 5% to 7% of our pharma business, right, and largely focused on the U.S. and in China. So during Q1, pre-commercial biotech companies, of course, got extremely cautious and virtually halted their instrument purchases, especially later in March. We're starting to see some relaxation but we've assumed that this situation will persist for the balance of the year. And over the long -- over the long term, I don't need to remind you, the biotech industry plays an extremely important role in the innovation that we see across health care, and they remain our very, very strong customers. Now to your question on Wyatt, roughly 80% of the Wyatt business is focused on biologics applications. Wyatt has historically been very strong in academic and government and for biologics applications, we're characterizing large molecules like cell and gene therapy and cell and gene therapy and proteins and monoclonal antibodies. We expect this business for the balance of the year once the close happens to remain in the low double digit -- low double-digit category. And as Amol said, this would add roughly 25% of our incremental revenue for Waters for the rest of the year. So we expect this to continue to remain extremely strong for the balance of the year.

Amol Chaubal:

So there are a couple of things, which, that play into the second half of the year, right? One is the volume in the second half is typically higher than the first half, and that produces some degree of volume leverage and our gross margin profile in the second half is slightly better than that in the first half. Two, we also benefit from exchange rate in the second half. Remember, in the first half, is still a headwind in the second half FX is a tailwind. And three, given the revised sort of the demand outlook, we plan to proactively manage our costs and intend to keep our operating expenses relatively flat in the second half versus the first half. And if you are able to do that, then it allows us to produce the kind of margin expansion and EPS that we've guided for the second half.

Dan Brennan:

Maybe the first 1 just on the guide. Just wondering, was there a discussion maybe to cut beyond the 3 to 5, just wondering your kind of ripping the mandate of here given some of the factors you pointed to. But do you feel that guide provides still healthy cushion given all the uncertainties you are flagging. It's still, as you pointed out, Udit, it's still kind of in high single-digit to your stack, which is above your long-term LRP, and you do have these factors and you're banking on a recovery in the back half of the year for large pharma.

Dan Brennan:

Great. And maybe just a follow-up, just on instruments, so flat to low single that's kind of a high single-digit stack against what you guys did. You've obviously had tremendous growth there. Can you just unpack that a little bit? It sounds like mass spec doing terrific. Could you just give us a flavor for the relative contribution between mass spec and LC and if you want to give us any regional, I don't know how far down the whole you want to go. But just give us a sense of what's incorporated into that low single.

Operator:

The next question will come from Matt Sykes of Goldman Sachs.

Udit Batra:

So Matt, great question, right? And so I personally then decided to speak to several of the large pharma customers, both in the U.S. and in Europe. And basically, we find that the budgets are still very much intact, like many companies like us as well. We are being more cautious with capital spend, and we are taking longer to approve capital spend, and that's what's happened in large pharma as well. So there is no talk of not doing replacements or not adding instrument fleets that they had planned altogether. Second, what I'll remind you is that our business is more heavily weighted towards the QA/QC segment, which is more proportional to manufacturing volumes, right? And so R&D spend if it comes under pressure, does not impact, especially our LC business, which more weighted towards Q3 and especially on the small molecule side. So really no real indicator there that, that would slow down. And finally, Matt, feel extremely good about our commercial execution that we -- that has demonstrated what we've been able to do over the last 2 to 2.5 years. Where we have really grown rather nicely with all the instrument replacement initiatives also on the consumables side, which remains extremely strong, and consumables, I'll remind you, is an indicator of pharma activity, right? If that is growing high single digit, what you find is there is significant activity still occurring in the -- with the pharmaceutical customers. So we believe it's just a matter of time that the instrument orders that were delayed in large pharma will come back. So we have a lot of cooperating evidence that suggests that this is coming back. But we've been rather cautious, even though we see some indicators of it coming back already, we've been rather cautious to assume that most of the spend will come in the second half of the year.

Udit Batra:

So I mean just taking a step back, Matt, the industrial segment of Waters has dramatically changed over the last 15 years or so, right? I mean, basically, it's now constituted heavily of food and environmental and the TA business has 40% of it is in the more resilient segments like batteries also serving some parts of life science, right, out of the TA. Now to just decompose the results for the quarter. I mean, it grew -- the industrial business grew roughly 3%. It was led by TA again, which grew 10%, almost 10% and PFAS testing, which we've talked about several times in our previous which continues to grow really, really rapidly. And in TA, roughly 40% of the business is now in the more resilient segments with batteries really continuing to grow nicely. So when I double click on TA, I mean it has the same sort of dynamics that the Waters division does, right? So we've really our focus on commercial execution, new products, especially ones relevant for high-growth areas for thermal analysis and geology, and we just talked about our new battery calorie meter that sets a new standard in testing batteries and their efficiency and effectiveness. It's just been launched, right? So we feel very good about where the TA business stands going forward. So if I just put all of that together for the full year, we're assuming a mid-single-digit growth in our industrial business, led by the strength that we continue to see in TA and PFAS testing.

Derik De Bruin:

I have a question for you. I mean, I've been covering Waters for a long time. And we've seen some of the spending patterns before. I mean historically, pharmas have delayed their budget releases in Q1 and things pick up in 2Q. But by the same token, if we're going back to sort of like historical seasonality, 3Q then is always a crapshoot in terms of what spending is because you won't have any real visibility until September. So I'm just sort of why are we not back to some of these sort of seasonal patterns? And then you're -- and everything essentially end up riding on the fourth quarter and like this. I'm just sort of curious, are we -- is there anything more different going on here than just return to normal seasonality?

Derik De Bruin:

Yes. And I mean, absolutely, I mean just sort of looking at it, you've historically gone through a couple of years of like double-digit growth in the business and then it goes to mid-single, then it comes back double digits and then it goes through -- it goes to these processes. So, it seems like the trajectory as we exit '23 would be back to that 3% to 5% growth in the instrumentation business than whatever the Augment is on the consumables business, right? So 7% to 8% in that range, right? That's probably the best way we think about next year.

Operator:

The next question will come from Josh Waldman of Cleveland Research.

Udit Batra:

So maybe I'll start with the very end and then work towards the front on the pharma customers. Look, Josh, we've done a very clinical analysis on the drivers of what's happened in Q1, right? And we've been super transparent about where they've come from, right, the Chinese CDMOs, the emerging -- the pre-commercial biotech. And those 2, we don't expect to see coming back for the balance of the year, even if there are indications that, that starts to relax towards the latter part of the year. On the pharma spend, we have a significant amount of cooperating evidence that from the field, from my personal conversations, from looking at the data, especially in what we're seeing on commercial perspective. And I'll remind you that we are still very much a QA/QC focused company. So come the commercial volumes continue to rise as they are in pharma, new products keep coming through, we expect to see that spend continue in the way that it has. So we feel reasonably comfortable that the spending will come back for the balance of the year. Again, how it's distributed in Q2, Q3, Q4, it's not straightforward, but we are assuming that it's in the second half of the year. And that brings us to the full year full year guide, which is the 3% to 5% or a 2-year stack growth rate of high single digits. So I hope that gives you color on how we are thinking about the full year and where we see strength and where we have sort of analyzed it and said, look, we are not bringing this back into the equation.

Amol Chaubal:

I mean at this point, Josh, price is raising a little about 200 basis points based on the dynamics we are seeing in the market. Our teams are doing an excellent job holding on to that. And that's what we are thinking for the rest of the year.

Operator:

The next question will come from Rachel Vatnsdal of JPMorgan.

Udit Batra:

Sure. Rachel, thanks for your question. Look, instrument sales declined about 4% for this quarter, right, and on the back of the 26% in Q1 2022. Mass spec, as I mentioned earlier, grew high teens and DA grew double digits, while LC is the 1 that declined in teens. And to your question, on how these were and where this came from. I mean it's the same drivers that I mentioned earlier, they were impacted disproportionately by the decline in the Chinese CDMO customers who are serving U.S. and European pharma companies, pre-commercial biotech and some delayed orders in large pharma. As we think about the full year, we feel quite confident that the deferred business is going to come back given what I mentioned to the -- in response to the previous questions and also the fact that we have an excellent commercial organization and a new portfolio that basically allow us to place these instruments. For the full year, we are assuming a flat to low single-digit growth in instruments and of course, high single digits for consumables. And you'll start to see, to Derik's question earlier, the second half of the year look awfully like pre-COVID times. I hope that gives you clarity.

Udit Batra:

So Rachel, thanks for that question. Look, I mean, about 40% to 50% of the pharma pipeline is now biologics. A good portion of that is cell and gene therapy molecules, which are curative, not just treatments. These are fantastic drugs. And we're doing all we can to help our customers take these to the market. Unfortunately, the characterization techniques for these have not moved at the pace that they should have historically. Now we have the tools like LCMS, like LCU, like light scattering that -- and like our MaxPeak Premier Columns that will allow our customers to characterize these molecules much better to move them faster to the pipeline and reduce costs. dramatically. So we see that demand really, really picking up, right? So when we did the analysis, we said, look, this is about a $1.8 billion market that is growing well into the double digits. Now with the addition of yet, we now have a world-class portfolio with the simplest LCMS instrument in Biocad that has very good adoption for raw material testing for in-process characterization of cell lines and now rapidly moving into QA/QC. And I've given some examples of that also in the past. Second, LC/UV remains a characterization technique that many of our customers use to release biologics. And thirdly, now with Wyatt multi-angle light scattering that we now intend to attach to our SEC malls -- our SEC columns as well as our LCs. We think this has very, very good prospects going forward. And when you talk about wired, it has historically grown in the 20% range. And our assumption is -- as we look at the balance of the year and the rest and after the deal is closed, we -- our assumption is still that it's a low double-digit grower with a 40% margin for the foreseeable future. So we feel very good about this area and biologics in general and the business that we're building in bioanalytical characterization.

Unidentified Analyst:

So I guess, first on pre-commercial biotech. Can you talk a little bit about how that trended throughout the quarter? Did the weakness mostly stem later on in the quarter in February and March? Or was it kind of even throughout? And then I have 1 follow-up.

Operator:

And that was our final question for today. I'll turn it back over to the speakers for closing remarks.

Operator:

Thank you all for your participation on today's conference call. At this time, all parties may disconnect.

Operator:

Good morning and welcome to the Waters Corporation Fourth Quarter 2022 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 Mr. Caspar Tudor, Head of Investor Relations. Please go ahead, sir.

Udit Batra:

Thank you, Caspar, and good morning, everyone. Before diving in, I would like to extend our thoughts and our prayers to the thousands of those who are affected in Turkey and Syria by the earthquakes. Today marks a major milestone in accelerating value creation for our customers and shareholders as we progress to the next step in the execution of our strategy. This morning, we made the exciting announcement that Wyatt Technology, the recognized leader in light scattering will be joining forces with Waters, bringing with it a fast growing, attractive business with key capabilities to accelerate our 1.8 billion double-digit growth opportunity in Bioprocess Characterization. More than 40 years ago, Wyatt was the first commercialized light scattering instruments incorporating lasers as their light source. Ever since they've defined and redefined state-of-the-art light scattering instrumentation, software, and services. Along the way, we've also added several related technologies including dynamic light scattering, viscometry, refractometry, and field-flow fractionation. Together, the innovative products are used to determine the properties of novel therapeutics such as cell and gene therapy, vaccines, and proteins, as well as synthetic polymers and nanoparticles. Wyatt was the top asset and priority we identified for bioanalytical characterization, making the acquisition a significant step forward in this high growth adjacency. I would like to take this opportunity to invite Geof and Cliff to say a few words about this exciting combination. Geof?

Cliff Wyatt:

Sure. Thank you, Geoff. I would like to echo your comments and also [my father's] [ph] Dr. Wyatt’s sentiment that we could not have been more excited, but could not be more excited about this combination. Waters will broaden Wyatt global reach scale and will accelerate deployment of light scattering technologies in downstream and QA/QC spaces, integrating this technology onto Waters' well-established empowered platform. Waters is such a natural and logical fit for us in this next exciting chapter of Wyatt’s history.

Geof Wyatt:

Thanks again, Udit. Well, Wyatt is a remarkable company and we owe much of its success in high growth applications to our amazing team. Our flagship technology is multi-angle light scattering MALS, which is used by leading biopharma, biotech, and academic institutions to measure fundamental properties of complex biologics, including cell and gene therapies, mRNA vaccines, biopolymers, biosimilars, and therapeutic protein. We're based here in Santa Barbara, California and have 225 outstanding employees of whom roughly 25% have Ph.D.’s. Over the past 40 years, we've built Wyatt into the recognized leader in light scattering detection, defining the segment very much like Waters did for liquid chromatography and mass spectrometry. Our sales have grown around 20% on a three-year CAGR to approximately $110 million in 2022. We're also a highly profitable business with an adjusted operating margin of approximately 40%. More than 80% of our revenues are in large molecule applications. Our biopharma customers are eager to use light scattering for QA/QC applications and have been keen for us to combine our software with Empower. So, you can only imagine how excited we are with this combination, which will add additional choices and capabilities for our existing customers and let us delight even more. Back to you, Udit.

Amol Chaubal:

Thank you, Udit, and good morning, everyone. It's been great to work with Geoff, Cliff, and the entire team at Wyatt Technology. Like Udit, I'm very thankful to the Wyatt family for considering us as the rightful stewards of their mission and legacy and for providing us this opportunity to create value for our customers and for our shareholders. Now, to the transaction highlights. This 1.36 billion investment will result in immediate accretion of our revenue growth and our adjusted operating margin percentage. The synergies that Udit just described, along with Wyatt’s highly attractive financials, are expected to result in accretive non-GAAP EPS impact as early as first quarter of 2024. Altogether, as Udit mentioned, this combination is expected to deliver a high-single-digit plus return on invested capital by year five. We will fund this investment through cash on our balance sheet and existing debt capacity that is available on our revolver. On day one, our net debt-to-EBITDA ratio will be around 2.3. We will temporarily suspend our share buyback program for the remainder of 2023 and will utilize our free cash flow to pay down the debt through the rest of the year. We expect our net debt-to-EBITDA ratio to land at around 1.7 by year-end 2023. The transaction is expected to close in the second quarter of this year subject to regulatory approval and customary closing conditions. Now, to our fourth quarter financial results. We delivered an excellent close to a very strong year for Waters with constant currency growth of 9%. Waters division grew 8%, and TA grew 15%. By end market, pharma grew 6%, Industrial grew 14%, and academic and government grew 8%, which Udit already covered. By geography, sales in Asia grew 7%, Americas grew 8%, and Europe grew 11%. In Asia, growth in region overall was strong. Japan grew 25% and India grew 15%. China declined low single digits for the quarter, as a sharp increase in COVID infections at year-end resulted in delayed spending due to customer site closures. We expect these headwinds from the post-zero COVID reopening to continue into the first quarter of 2023 before catching up throughout the remainder of the year. In other regions, the U.S. grew 8% and Europe grew 11% with broad strength across end-markets. By products and services, instruments grew 10%, led by mass spec, which grew over 30%. Recurring revenues grew 7% with chemistry up 8%, and service up 7%. Finally, TA grew 15% with double-digit growth across our major geographies. Growth was led by sales in electronics, and battery applications, as well as strong growth in advanced materials and chemical testing. Looking now at our full-year results. By end market, pharma grew 10%, industrial grew 15%, and academic and government grew 13%. In pharma, growth was led by large molecule applications, which grew mid-teens, while small molecule grew high-single-digits. By geography, sales in Asia grew 12%. Americas grew 14%, and Europe grew 10%. By products and services, instruments grew 16% for the full-year with liquid chromatography, mass spec, and TA system sales all up double-digits. In our recurring revenues, chemistry grew 9% supported by our strong launch of MAX peak premier columns in large molecule applications and further expansion in digital commerce adoption. Service grew 8% with continued expansion in attachment rates, which increased 150 basis points in 2022 and have increased 350 basis points since 2019. Now, I would like to comment on our fourth quarter and full-year non-GAAP financial performance versus the prior year. Gross margin for the quarter was 59.4%, up 140 basis points versus prior year, driven by sales volume and pricing, partially offset by inflationary costs. For the full-year, gross margin came in as expected at 58%. Operating margin for the quarter was 33.7%, growth of 110 basis points versus prior year, driven by gross margin dynamics. For the full-year, operating margin was approximately 30.2%, which was flat with last year. On an underlying basis, we expanded our operating margins by approximately 100 basis points versus our guide of 20 basis points to 30 basis points at the beginning of the year. This is net of our investments in higher growth adjacencies and despite the higher instrument mix in our revenue. On an as reported basis, our expansion was offset by 80 basis points of FX headwinds and 20 basis points of additional compensation to help our colleagues with the temporary impacts of inflation. In the quarter, our effective operating tax rate was 17.6% and for the full-year it was 15.6%. For the full-year as anticipated, our effective tax rate increased by 180 basis points, primarily due to change regarding the capitalization of R&D costs. Average share count came in at 59.6 million shares, which is about 1.8 million less than the fourth quarter of last year. Our non-GAAP earnings per fully diluted share for the fourth quarter increased 5% to $3.84, compared with $3.67 last year. Foreign exchange headwinds lowered our non-GAAP EPS growth by 8%. On a GAAP basis, our earnings for fully diluted share was $3.81. For the full-year, our non-GAAP earnings per fully diluted share increased 7% to $12.02, versus $11.20 in the prior year. The foreign exchange headwind lowered our non-GAAP EPS growth by 9%. On a GAAP basis, full-year earnings per share was $11.73. 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 fourth quarter of 2022, free cash flow was 145 million after funding 62 million of capital expenditures. Excluded from this free cash flow was $8 million related to the investment in our Taunton precision chemistry operations. In the quarter, we continued to build inventory to secure supply and build safety stock, given strong instrument demand. For the full-year, free cash flow was 506 million after funding 176 million of capital expenditures and includes approximately 100 million of additional inventory versus the prior year-end. Excluded from the free cash flow, was 32 million related to the investment in our Taunton precision chemistry operations and a 38 million tax reform payment. We maintain a strong balance sheet, access to liquidity, and a well-structured debt maturity profile. This trend allows us the ability to prioritize investing in growth, including M&A, which will meaningfully accelerate value creation in well thought out attractive adjacent markets. In Q4, we repurchased approximately 475,000 shares of our common stock for 149 million. At the end of the quarter, our net debt position was approximately 1.1 billion with a net debt-to-EBITDA ratio of about 1.1. Now, as we look towards the year ahead, I would like to provide you with our thoughts for 2023. We have seen strong performance throughout 20 22, driven by robust end market demand, excellent commercial execution across our geographies, and new product introductions driving growth. As we enter 2023, we expect our sales momentum to remain solid in our durable end markets and that our refreshed portfolio and growth initiatives will continue to enhance our performance. These dynamic support of full-year 20 23 guidance of organic constant currency sales growth of 5% to 6.5%, excluding Wyatt. At current rates, negative currency translation is expected to subtract approximately 1 percentage point resulting in full-year reported organic sales growth guidance of 4% to 5.5%. We expect the Wyatt transaction to close in the second quarter of 2023, and depending on the timing, we expect it to add approximately 2% to 3% to our full-year 2023 revenue growth. Therefore, our total reported sales growth guidance is 6% to 8.5% versus 2022, including Wyatt. For the full-year 2023, organic gross margin is expected to be approximately 58% and organic operating margin is expected to be approximately 30%. Before FX, this includes 20 basis points to 30 basis points of net margin expansion after 70 basis points to 80 basis points of investment in high growth adjacencies. FX is expected to be a headwind of 50 basis points, particularly in the first half of the year. The addition of Wyatt in Q2 is expected to be accretive to our full-year 2023 adjusted operating margin by 20 basis points to 30 basis points. Excluding the transaction, we expect our full-year net interest expense to be approximately 42 million. The transaction is expected to add 27 million to 43 million of additional interest expense, depending on the timing of the close. The full-year tax rate is expected to remain at approximately 15.5%. Since we will be temporarily suspending our share repurchase program for the remainder of the year and using free cash flow to pay down debt, our average diluted 2023 share count is expected to be approximately 59.5 million. Rolling all this together, on a non-GAAP basis, our full-year 2023 earnings for fully diluted share guidance, excluding the transaction is projected in the range of $12.70 to $12.90. This represents 6% to 7% growth versus last year and includes a negative currency impact of approximately 3 percentage points at current FX rates. The Wyatt transaction is expected to be accretive to EPS, as early as in the first quarter of 2024. And this is even net of our share buyback suspension for the remainder of 2023. Overall, we expect it to deliver a high single digit plus adjusted return on invested capital, net of tax by year five. Due to interest expense incurred on higher debt balance, and the suspension of share repurchase program this year, the transaction is expected to result in a 2023 EPS headwind of approximately $0.15. Hence, including Wyatt, non-GAAP full-year 2023 earnings per fully diluted share is projected in the range of $12.55 to $12.75. Looking to the first quarter of 2023, we expect constant currency sales growth to be 4% to 6%, which is 10% to 11% on a two-year stacked growth. At today's rates, currency translation is expected to subtract approximately 4 percentage points resulting in first quarter reported sales growth guidance of flat to 2%. First quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $2.55 to $2.65 with a negative currency impact of approximately 6 percentage points. Now, I would like to turn it back to Udit for some summary comments. Udit?

Caspar Tudor :

Thank you, Udit. That concludes our formal comments and we are now ready to open the phone lines for questions.

Luke Sergott:

Hi guys. Thanks for the question here. So, I guess, before we get into Wyatt, can you kind of give us a sense on continued instrument strength you guys hear it a lot? Your visibility here, how the backlog built, mass back up over 30%, that's from the strength in the business building here the last six months. Any kind of color here we can get going forward on that – on the new instrument launches there in the revitalization?

Luke Sergott:

All right. Great. Just a quick follow-up on that. Can you clarify if orders grew faster than sales? And then I'd love to dig in on Wyatt where – so where that fits into the overall characterization portfolio? So, you have the BioAccord on the raw materials on the upstream, where would Wyatt's light scattering technologies, kind of fit into the overall instrument portfolio and the bioprocessing workflow?

Operator:

The next question is coming from Vijay Kumar of Evercore. Your line is open.

Udit Batra:

So, I'll comment a bit on China first and what we expect there, and I'll pass it on to Amol to take it up from there. Look, Q4 in China, I mean, has been especially tough with 50% to 75% of our colleagues, at any point in time, being infected due to the reopening. And despite that, if you take from November last year, we had a shipment delay from third quarter to fourth quarter. And if you take that into account, China grew roughly 4%-ish, despite that headwind. We expect our colleagues to, of course, enjoy the Chinese New Year, reconnect with their families after several years and we see the same with the customers. So, step-by-step, I think China will open up. We expect better growth in the second half of the year than the first half. But Vijay, as you can imagine, it's anyone's guess how fast this comes back. We currently assume a high single-digit-ish, sort of growth for the full-year with the second half of the year being stronger than the first half. Amol, do you want to talk about the guide in FX?

Udit Batra:

And just, Vijay, your question on pricing, it was roughly 300 basis points. For this year, we expect 200 basis points as an assumption for 2023. And you can imagine that's largely because the inflation is still not gone. Second, our new products definitely should command a higher margin as we go forward. And then, finally, the teams have built a muscle through these very, very difficult times on passing on pricing wherever it seems [reasonable] [ph].

Udit Batra:

Now going into the year, we feel very good about where our margin profile is.

Udit Batra:

It's a lot of questions. I'll try to take them one after the other. 80% of the applications for Wyatt are in large molecule applications. As you know, we screen, and we were pretty clear on the Investor Day, we screen a lot of targets. And I can tell you without reservation, in bioanalytical, biophysical characterization, this is the Number 1 asset that we had in our minds. So, when we spoke with Geof and we spoke with Cliff, and we started our discussions, this was not something that's unknown to us. We've known company really well, really well for a significant period of time. And what Waters does on the chemical characterization, on the composition of characterization, Wyatt does for using light scattering for physical characterization. So with 80% of their revenues coming from large molecules, the growth is roughly 20%-ish on a three-year CAGR. Margins are accretive to our margins. And as I said before, this is not something that we see in the industry as much. 110 million in sales already. It will be accretive to our revenue growth and margin growth to our revenue and margins on day one. And to the 70 million, it comes across four dimensions. First, Wyatt is heavily concentrated in the United States, and to some extent, in Europe with less than 20% of their sales coming from APAC. And as you know, with Waters, geographically quite diversified, with APAC constituting 40% of our sales. We think there's a significant opportunity to expand and serve many more customers in fast-growing areas across the globe. Second, we want to provide customers with many more choices. If you look at light scattering instruments, especially MALS, it is sold with SEC columns, and Waters has leading SEC columns industry. The LC is used as a separator before you insert products, insert molecules into light scattering for characterization, not dissimilar to mass spec. We think the attachment rates could be significantly higher as we do the software integration across the two companies. Number 3, it starts us on the journey of building a bioanalytical platform with a suite of products that all eventually have one compliance software that can be used across to submit data to regulators. And then, finally, there is an immediate opportunity to serve our customers a really big pain point of taking MALS into QA/QC, and who better than Waters to usher that journey through. So, that's why we think, by year five, there's a potential for [70-plus million] [ph] in synergies and even higher if the bioanalytical platform starts getting established sooner than we do Empower integration faster. So that, I think, gives you a color across the synergies, Vijay.

Matt Sykes:

Hi, good morning. Thanks for taking my questions. Congrats on the acquisition and the quarter. Maybe just, if you could help us put a, kind of a finer point on services and chemistry growth in 2023. Udit, I heard your comment about think about it, sort of at the high-end of your guide, but just given the instrument growth that you've seen in 2022 and previous to that, how should we be thinking about services and chemistry growth in 2023?

Matt Sykes:

Great. And then just one quick follow-up on Europe. Obviously, very strong growth there in Q4 and for the full-year. Obviously, a mild winter there, so things seem to be better than expected. Could you just talk about what you're assuming for Europe this year and kind of thoughts in terms of the end market demand within Europe for 2023?

Operator:

The next question is coming from Dan Brennan of Cowen. Your line is open.

Udit Batra:

So look, Dan, firstly, thank you for your question. You can imagine that we're just getting into the integration, and there is, of course, a little bit of prudence built in, and we want to make sure that we start off on the right foot. As the integration goes, we don't expect the business to slow down, but that's – the low double-digit guide has that in the assumptions. And in terms of biologics, I mean, a bulk of the applications are in large pharma, in discovery and development and in QA/QC and online and at-line testing. So, I mean, I think that's where you see most of the applications and increasingly now more weighted towards cell and gene therapy applications where the small particles need to be characterized really well before they are injected into people. So, I hope that gives you more color. And we don't intend to break down the full biologics piece, but you can imagine it's mostly late stage and [PAD testing] [ph] and QA/QC, Amol?

Udit Batra:

And then just one last thing. I've used light scattering myself in my Ph.D., I didn't want to let the call finish without stating this. And I was reviewing my Ph.D. thesis before this call. And you know what, of course, it's great. And for the life [indiscernible], I don’t understand all the equations that I was using to analyze it. So, we're super excited even at a personal level to get access to the technology.

Udit Batra:

Dan, same thing, right? I mean we don't expect mass spec to fall off a cliff. I mean the applications are tremendous. The 5%-ish, I mean, the math is pretty simple, right? I mean, 3% to 4% long-term growth, 100 basis points of pricing in addition to the past and about 100 basis points of commercial execution and innovation in that number. And you can imagine, I mean, look, coming off such really, really strong growth over the last two years, we think the growth will start to normalize. Now that said, there's also a bit of prudence with China built in, right. I mean China is one of our fastest-growing markets. And I think, at this point in time, we feel comfortable saying, look, it's a high single-digit market by the end of the year. If the recovery goes faster, of course, there's upside and if they is more traction for new products, there is upside, right. So, I think it's a great place to start the year, and we'll keep you posted as more facts emerge.

Derik De Bruin:

Hi, good morning. And thank you for taking my question. Can we talk a little bit about the pharma business, please? The 6% growth in the quarter, a little bit lower than we were looking for. Can you unpack that, talk about what was the potential impact from China? What are you seeing in demand at CROs and CDMOs, I mean that's been a driver? Have they pulled back on capital spending at all? And just, sort of your major peer in LC has talked about some of the slowing of the replacement cycle in LC and pharma in the second half of the year. Just sort of wondering what you're going to bake in for that? So, just a little bit more color on your pharma business, please. Thank you.

Amol Chaubal:

No, I think you covered it well.

Rachel Vatnsdal:

Great. Thanks for taking the questions. [Indiscernible] on the quarter and the deal. So, first up, I just, kind of on the follow-up on some of these China comments. You talked about China returning to high single-digit growth for the year in 2023, but I really wanted to dig into the expectations embedded into that 1Q guide for China. So, you noted that China declined low-single-digits in 4Q, and that you expect that to continue into 1Q. So, can you just give us some color on, do you expect further sequential declines in China? And then how much of a headwind do you think China will be to that 4% to 6% growth that you've guided to for 1Q?

Udit Batra:

Yes. In terms of end markets – Rachel, this Udit, in terms of end markets, in terms of what we see as visibility, there is no signal that the fundamental demand for our products in China is slowing down. There is no sub signal. So, we feel very good about China and it's a good place to start at the beginning of the year to assume a high single-digit-ish growth. And as I mentioned, if the recovery is faster, of course, you expect faster growth.

Josh Waldman:

Hi guys, thanks for taking my question. Udit, I appreciate you were reviewing your Ph.D. thesis before the call, really covering all your bases. Just two questions for you, I think, Udit. Wondered if you could give us an update on where you think Waters is in the LC replacement opportunity? Maybe comment on what portion of the LC sold in 2022 were in the Acuity or Arc platform versus legacy alliance? And what you think that could look like in 2023? Just I guess curious your thoughts on like if we do see a slowing in the LC replacement cycle, kind of broadly, do you think Waters' push to rotate customers into the [new RLC] [ph] platforms could elongate that refresh?

Operator:

The next question is coming from Jack Meehan of Nephron Research. Your line is open.

Amol Chaubal:

Yes. So, let me quickly cover the second one. The load double-digit growth that we're talking about, that's the stand-alone business, the 70 million synergies that we are talking about are sort of incremental to that. And on the first question, there's roughly about 75% of the revenue is instruments, roughly a quarter today is what we traditionally call recurring revenue. But as you know with Waters, we think instruments are also recurring. And again, there is a great opportunity on that, not just on the light scattering platform, but also the HPLC and the SEC columns that go with it.

Operator:

The next question is coming from Patrick Donnelly of Citi. Your line is open.

Udit Batra:

Sure. So thanks for the question, Patrick. Industrial for the year just on the fact, I mean, grew 15%. And we saw nice high teens in the U.S., mid-teens in Europe, China, high single digit to low teens despite the lockdowns. And industrial across the board, right, so applications in food testing with the Xevo TQ Absolute, with PFAs testing was excellent. The PA business with battery testing, especially with the introduction of our new [indiscernible], we see incredible opportunity there to increase penetration of our existing instruments, and that's been going extremely well. And electronics, electronic chemicals testing has also been doing extremely well in the TA business, which has been in the high teens in the Industrial segment. So industrial, across all regions, across the food and environmental segments, as well as materials segment has been doing extremely well. So, I hope that gives you color on how we explained the results so far. Going forward, with the new products, there is a lot more runway for Xevo TQ Absolute and PFAs applications. We intend, of course, to take that instrument into the pharma space. We think there's incredible opportunity. For TA, we are seeing really, really good traction of our products in the battery testing value chain, all the way from raw materials to process development, not unlike bioprocessing, to now establishing online, at-line testing with our instruments for several of our customers. So, also going forward, a really healthy outlook. And I think the only prudence that we, sort of built-in is with what we expect in China, like China is a pretty strong grower in that segment as well, and we want to make sure that we get more data before we start reaching out more.

Puneet Souda :

Yes. Hi, Udit and Geoff, congrats on this acquisition. It's great to see a light scattering outlook going into QA/QC. So, maybe my first question there is, when we look at the downstream QA/QC and late stages, when you look at the [five-year 70 million] [ph] synergies, is that sort of the time line you're thinking about moving light scattering into a number of these applications? And, Udit, could you maybe elaborate what is needed to integrate MALS into Empower? And what's the, sort of the outlook for Empower potentially becoming, sort of the backbone for biomolecules with BioAccord and light scattering? And last one, if I could squeeze in, any thoughts on the China loan stimulus benefit for 2023? Thank you.

Amol Chaubal:

And just to clarify that, on the 70 million that we talk about, there is very little – or we are assuming that is the time where it's super early days on Empower. Most of that is coming really from geographical expansion and SEC column and HPLC attachment.

Amol Chaubal:

And then the last piece on China, Puneet, I mean it's early days. We're still evaluating. Hard to put a number at this stage on that.

Operator:

This will conclude today's conference. All parties may disconnect at this time.

Operator:

Good morning and welcome to the Waters Corporation Third Quarter 2022 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 call is being recorded. If anyone has 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.

Udit Batra:

Thank you, Caspar, and good morning, everyone. We continue to deliver excellent results in the third quarter with very strong growth across our product portfolio, our end markets and geographies. This was led by instrument growth of more than 20%. Similar to previous quarters, orders again outpaced sales. A result like this takes an exceptional effort and dedication from all our colleagues. We are very proud of what our teams continue to consistently deliver. Today, we have three key messages to share, which reflect the ongoing strength and exciting drivers of our business

Udit Batra:

Thank you, Amol. In summary, we're very pleased with our performance. Demand has continued to be robust across our resilient end markets and geographies. This together with our strong commercial execution and refreshed portfolio is allowing us to consistently deliver excellent results. Once again, we're raising our full-year sales guidance from a prior range of 9.5% to 10.%, now to 11.5% to 12%. In closing, I would like to point out that our 2022 ESG report will be released next week. At Waters, we're proud to have been widely recognized as an ESG leader. We believe that we all have a part to play in leading the world better than we found it from decreasing our environmental footprint to becoming more representative of the society we live in. This year we've made further progress towards our goals, delivering approximately 60% of our electricity from renewable or low carbon sources. We launched the Water Student Academy and are partnering with three historically black colleges and universities to provide STEM education and career opportunities. We also conducted broad stakeholder engagement in our comprehensive materiality assessment. We are proud that our new state-of-the-art chemical manufacturing facility in Taunton, Massachusetts was recognized by the U.S. Green Building Council as the only lead certified facility of its kind in the state and among the small number in the United States. While there is always more work to be done in ESG, I'm proud of the progress we've made. So with that, I'll turn the call back over to Caspar.

Operator:

We are now ready to begin our formal question-and-answer session. [Operator Instructions] And the first question is coming from Vijay Kumar of Evercore ISI. Your line is open.

Udit Batra:

Sure. So Vijay, firstly, thank you. Look, from a demand perspective, I mean, we are operating in very resilient end markets, right? I mean, starting with pharma, which is 60% of our business. And I'll remind you that we are more levered to late stage development and QA/QC. Pharma continues to grow and even if there is a downturn, people don't stop consuming medicines, right? So I think that we believe is a very strong place to be. Second is our industrial business, which over the years has transformed and is heavily focused on our food and environmental and increasingly the TA business on battery testing and the need for safe food, clean water, especially with PFAs testing, as well as battery testing is our salient drivers. So roughly 80% of our business is levered towards, I would say, resilient end markets. Now in those rather resilient growing end markets, I think there are water specific drivers that I'd like to point out that gave us confidence in continued outperformance, right? So if you just simply start with our commercial initiatives, right? I mean, we see those continuing to add value over the next couple of years, be it instrument replacement, be it e-commerce, which is well over 30% now from a 20% starting point for our consumables revenue. But we think we're going to end up north of 55% over the next few years. CDMO footprint has increased quite nicely over the -- on a stacked basis over the last two to three years that, that portion of the business has grown double the rate of the overall business, almost 20%. So we think our commercial initiatives have run way number one in these strong markets. Second, as I pointed out in my prepared remarks, innovation is really contributing well to our growth. And that is a driver that will continue to contribute, right? I mean, starting with pharma, we of course talk about our Arc HPLC, but then what gives me even more confidence is our increased focus on biologics, right? And that is one of the most salient drivers of growth for pharma. Over 30% of our pharma business now is levered towards large molecules with now the launch of MaxPeak premier columns, now increasingly focused on the MassSpec business. I remember when I joined, folks told me what is going to do about the MassSpec business, then two years later, I mean, you see strong, strong outperformance in our MassSpec business. I mean, instruments grew this quarter 21%, MassSpec almost touched 40% with Xevo TQ Absolute really solving problems for our customers in detecting increasingly low quantities of PFAs. So the MassSpec portfolio is contributing very nicely to the growth of the business. I can go on the innovation side, but I feel very good about where we stand from an innovation standpoint. And then finally, the third specific driver for Waters is our adjacencies. I pointed out the increased traction we have for BioAccord, not just in QA/QC, but upstream in clone selection in selection of and detection of raw materials for bioprocessing and there's a lot of traction for simplified LCMS in -- from our customers. And finally, despite the, sort of, turbulent environment, be it rolling shutdowns, due to COVID in China or the geopolitical challenges in Europe, we've been able to navigate through these extremely well. So that gives me confidence that from a macro perspective in these resilient end markets, I mean, what does this commercial execution, really now supported by strong innovation and increased traction in our adjacencies gives me a lot of confidence that in the future, we'll see even more robust performance. And really, I mean, I'll end here. Look, faster instrument growth and don't ask me when this slows down, it looks really good. Orders were again higher than sales. This looks really good, but it bodes well for what we see in the future for our consumables business, especially service which we've been focusing on a lot. So I hope that gives you clarity on why we have so much confidence and we raised the full-year guidance, as well on constant currency growth.

Amol Chaubal:

Yes. So, Vijay, look, I mean, on the gross margin line that are sort of four vectors that are playing out, right? There is FX, there is a higher instrument mix, there is new product launches, and then there is the pricing inflation dynamics that I just discussed. And each of these vectors are going to be accretive in driving gross margin expansion in the times to come. I mean, on the FX side, we really feel excited about the fact that despite this headwind, the business has rallied to find ways to offset the impact of exchange rate. And when the exchange rates normalize, you will see a much more pronounced impact on the margin, because of the resilience that has already played out in our 2022 numbers. On the instrument mix, I mean, it's a great problem to have. While this instrument growth is creating somewhat of a headwind on the margin today, it is going to drive accretive recurring gross margin growth from chemistry and service in the future. We've seen also great growth from our new products and it sort of underscores that innovation matters in this space. But as you can understand, anytime when you launch new products, they haven't gone through the typical value engineering cycle that they go at Waters like we've gone through with Alliance. And we will see that play out on the gross margin of these newer products in the coming years. And then the last piece is the pricing inflation dynamics, right? And there, the pricing gains are systemic, we've built muscle in terms of systems and processes to drive pricing gains more than what we have historically driven, which was 50 basis points to 75 basis points. And on the other hand, a lot of inflation is spot buys. And as the electronic component market, sort of, normalizes, some of this spot buy pressure will go away again providing tailwind to the gross margin. So overall, I mean, we are still on track where we say, look, I mean, we will have about 100 basis points of margin expansion in the underlying business between volume leverage, mix and productivity gains. And we will reinvest 70 basis points to 80 basis points of those gains in nurturing our higher growth adjacencies in the near-term.

Dan Brennan:

Great. Thanks for Udit, thanks for taking the questions. Maybe just as a jumping off point as we kind of look ahead, you just kind of addressed a little bit of the margin drivers. I know at the Investor Day you talked about ’23, still feel good about mid single-digit plus. I'm just wondering, doesn't sound like anything has really changed, but just wondering is that still the right zip code as we sit here today, which would imply a three-year stack acceleration from what you're doing? And then kind of related to the prior question given the FX headwind that you're talking about for next year, three to four points, it would imply kind of modest top line growth. So in a modest top line growth environment, kind of, what's the ability to expand margin in ’23 if that's fair?

Amol Chaubal:

Yes. And then covering on the margin, right? So I think at this stage, we feel really good about where each of our initiatives are? I mean, our volume leverage is working with a strong instrument growth this year, we think that will have an accretive mix impact on the recurring revenue, bringing better gross margin profile next year. We do see, sort of, the level of spot buys slowing down and we have gained a lot of confidence and comfort in the systems and processes that we've implemented for pricing. So all of that will enable us to stay on the track that we outlined at our Investor Day, which is still roughly 100 basis points of underlying margin expansion with a 70 basis points to 80 basis points of reinvestment in higher growth adjacencies.

Udit Batra:

It’s a fantastic question, near and dear to my heart. Look, I have made it a point to go to many of the conferences that, that many of the technical conferences like the AAPS, this is the American Association of Pharmaceutical Scientist, where I went recently the Bioprocess International, the AACR just to talk to customers directly and not just drink our own Cool Aid. And I can tell you our MassSpec portfolio is solving fairly significant unmet needs across the portfolio. Now we've talked about LC in the past, Arc HPLC and ACQUITY Premier, what they do for especially ACQUITY Premier and MaxPeak Premier columns? What they do for biologics testing? On the MassSpec side, you can go across the portfolio. High res portfolio, our cyclic IMS, is the only instrument that is able to analyze molecules by shape and size, which is quite an important attribute to have as you're looking at larger molecules and that's direct feedback from our -- from some of our top customers. And Cyclic has been doing very well recently. The MRT, which we launched recently, the multi reflecting ToF is in its early innings. We've also got the license for Charge Detection MassSpec. And we feel very good about our IRS portfolio as a consequence. Second, the application of tandem quartz, this is sort of the workhorse instruments in the industry, right? I mean, I already talked about Xevo TQ Absolute and the Waters Connect Black -- Waters Connect software that we developed for our Xevo TQXS, which is the food -- which is level towards the food testing environment. This is a very deliberate effort, Dan, right? I mean, the challenges in environmental testing with increasing the sensitive, increasing amount of sensitivity required for PFAs testing is something that's known to all of us and it's an unmet need across all geographies and we are just seeing the start of that on build up. So we expect that to grow very nicely over the next couple of years. Second, on the food testing side, our customers came to us and said, look, we want to be able to do our testing faster and quantitative faster and the Waters Connect platform, especially with MASK-1, with the MASK-1 application speeds up the process by 50% again, a very deliberate focus on unmet needs for our customers. And then finally, we've talked about BioAccord, which was initially launched in the QA/QC environment. Of course, it has traction as I mentioned in my prepared remarks, with several large pharmaceutical companies, but not just in QA/QC, now for clone selection with our collaboration with Sartorius, Wwe've already placed several instruments and there's a very large number of seeds out there and we think the seed conversion is going to be pretty high in this case for a clone selection, and we have seen increasingly customers use it to test raw materials against something I pointed out in my prepared remarks. And again, the pipeline of pharmaceuticals is roughly 40% towards large molecules. And the use of a simplified LCMS method with create great workflows is something that we expect to contribute to for many, many years to come. So across the portfolio and I'm really focused on elaborating on MassSpec now, we've talked about LC in the past. We feel extremely, extremely good about what it's doing in the pharma space for towards biologics, but also how it's helping us revive the growth in food and environmental and the academic segments. Thank you for the question, I could go on forever, I mean, being an engineer, I can get into a lot more details, but I think this is -- I'll stop here and I hope that gives you some flavor of why we're so confident about what we're doing.

Matt Sykes:

Hi, good morning. Thanks for taking my questions and congrats on the quarter. Udit maybe the first question just on China, it seems that for you and others that China lockdowns have been less impactful this time around than previously. Could you maybe talk about what has changed there? Is it just where the lockdowns are occurring? Or if you change the way that you're managing that business over there to adjust to that type of environment? So should we expect maybe less volatility in China going forward?

Amol Chaubal:

And good to add to that, Matt, right? For Q3, China benefited with a lower baseline, because of the $12 million shipment delay last year, so that's about 10 percentage points of growth. But at the same time, they did have a headwind from some of the newer lockdowns, so one has to keep that in mind. And as Udit outlined, you know, for us, the team is executing really well and working towards a mid-teens growth profile for the year.

Amol Chaubal:

Yes. So I mean, what we've done is we've looked at sort of our product profile and we've gone through bill of materials for pretty much every product and gone through secondary and tertiary supply chains and identified hotspots where a certain component that travels through the supply chain is sort of in shortage. And there, we've gone deep to build relationships with the primary supplier and have secured quantities that will last us for longer than usual times, right? And where possible we have built alternative supplies especially for electronic components and where possible we will also build geographical diversification. So you're sort of not stuck in a lockdown in China or in a place where you have a sole source. Now that has put some pressure on inventory, because we've sort of accumulated this inventory in preparation for the demand that we are seeing on the instrument side and in preparation for potential supply disruptions that may be caused by COVID or other sort of macroeconomic events. But at this point, we feel really good where supply chain stands, right, progressively a lot of the yellows have been resolved and things are sort of between green and yellow on most of the items.

Luke Sergott:

Hey, guys. Thanks for the question or questions, can you dig in here what you're seeing on the CDMO side, there's been a lot of mixed signals coming from peers and also CDMOs themselves. Can you just give us a sense of how you guys are seeing that market shake out and what your -- how you're factoring that in as you start planning for next year?

Luke Sergott:

Okay, great. And then you talked about service a little bit. And as you guys continue to drive a lot of strong instrument growth, can you update us on how much you've expanded your installed base? And then talk about the service attach rates? And what's driving part of your strong service growth? Is it more about just placing new boxes? Or is it also driving that incremental service revenue per instrument?

Amol Chaubal:

Yes. Luke, I mean, it's a great question. And the way we look at it is, let's say, when you grow instruments by 21% your installed base doesn't grow by 21%, right? Because the installed base on an average is, let's say, seven years, and so you get a 3% bump if all these instruments were new placements. But close to 70% or 80% of them are replacements. So they are sort of not adding to the installed base, the new ones are. But also on the ones that you replace, you expect higher utilization at least on chemistry. So all of these become available to what you can drive your recurring revenue on. And as we've pointed out on service, we've been very successful 200 basis points last year and this year, we said we would do 100 basis points and we already did 100 basis points in the first half of the year. And again, there one has to think not all of it is incremental revenue, because these customers are already buying spare parts from us outside of the plants. So the incremental revenue is sort of a fraction of what the attachment rate would bring. But overall, with this great instrument growth, we feel really excited how much recurring revenue we can drive both on chemistry, as well as on service in the years to come.

Operator:

The next question is coming from Rachel Vatnsdal of JPMorgan. Your line is open.

Udit Batra:

Rachel, on the orders to sales ratio, right? So our orders have again grown more than the sales this particular quarter. So orders were higher than sales. Again we have not seen, I would say, any sort of significant change in order patterns so far this year. I mean, it's a very robust pipeline, we're very -- and again, I'll remind you, I mean, we're not dealing with volatile end markets. Close to 80% of our end markets are highly, highly resilient. Second, our products are very innovative, right? I mean, we are now meeting unmet needs for our customers, right? So we don't expect customers to stop ordering the Xevo TQ Absolute, because they need it and it's the most sensitive instrument in the space for testing PFAs. We don't expect customers to stop ordering Xevo TQ XS with Waters Connect, because it's 50% faster than any competitive instrument in terms of analysis. We don't expect them to stop ordering ACQUITY Premier or Arc HPLC given the benefits that they get. So innovative products in resilient demand segments don't seem to be impacted by what you are pointing out. So we are not seeing any of that. And I think it could be a water specific thing. I mean, as I mentioned earlier, the demand overall is good, but we also think we are doing some specific things, which are deliberately improving our traction with our customers, especially from an innovation standpoint.

Udit Batra:

Sure, Rachel. I mean, M&A is something we're thinking about quite regularly, right? I mean, but I’ll just remind you sort of our overall capital allocation priorities, right? I mean growth is the imperative, we're seeing tremendous organic growth and that remains the number one priority. I mean, we'll invest in CapEx and OpEx as Amol mentioned earlier about 80 basis points even in this environment to support our growth ambitions. We feel extremely good about that. Second, to support the growth, we're looking at M&A opportunities and the pipeline is very robust, not just in the adjacencies, but also in the coal. In some areas they are richer than others, of course, you can imagine I can't comment more specifically on it. And if we don't find something that is financially reasonable and sensible, will of course continue to do buybacks as we've done in the past. But growth remains the priority. As far as timing is concerned, that's always better to comment in the rearview mirror. Amol, do you want to talk about the leverage ratios?

Operator:

The next question is coming from Derik De Bruin, Bank of America. Your line is open.

Udit Batra:

So Michael, I can give you the algorithm, and I'm going to disappoint you that I'm not going to give you very, very deep specifics on each of these. So just to review the drivers, right? First, I mean, the end markets that we serve are resilient and robust, as you know, right? So 80% as I've talked repeatedly are pretty robust and we feel good about the resiliency of these end markets. Now whatever that number is historically been X and now it's definitely X plus delta X, some of it driven by volume and some of it also driven by increased pricing, right? So take that as a starting point. Then from a Water specific standpoint, there are three different contributors. We had said at our Analyst Day about 100 basis points, you can expect probably a bit higher this particular year from our commercial initiatives, instrument replacement, CDMO, service, as well as e-commerce, all of those are contributing quite handsomely and so definitely north of 100 hundred basis points this year. What we're seeing very nicely now dovetailed into that is the second independent driver, which is innovation, right? And I took some time today and I’ve -- and we had a big debate internally how much we should elaborate, but I felt it was necessary given the questions that I think you guys have asked on the durability of growth. Innovation is really, really contributing already significantly, right? MaxPeak Premier fastest launch in Waters' history in terms of columns. And we've been launching columns since 1970 and some of them are still in the market and this one's done better than anything they’ve launched. Second, the MassSpec portfolio is totally revived and we're definitely in the early innings of extraction. PFAs testing is a significant need for water testing and we have the best instrument in class. So really feel good about that and we didn't talk much about TA today, right? But TA has also revitalized innovation with our powder rheology instrument that test powders that go into coating, anodes and cathodes for battery testing. So feel extremely good about it, I won't give you a number, I mean, likely in Q4, we can comment looking backwards on what the contribution has been from innovation, but innovation is contributing handsomely. The adjacencies now, again, a question that I think several of you've asked, how good is attraction? I took some time today to talk about BioAccord, I mean, the same thing we see with batteries. We're starting to see with LCMS, I was at the AACR, this is the American Association of Clinical Research in Chicago with the team and there's a strong demand from our spec for early disease detection in the clinical space. So again, the different adjacencies are starting to contribute. And remember, we said that they will more meaningfully contribute beyond 2024, but we're already starting to see them contribute. And that I think overall explains the beyond market performance. And I think, again, we took some time to give you the three-year stacked growth rate, because I mean short-term changes quarter-on-quarter can sort of dilute the outperformance. But if you look at it on a stack basis, on a two to three year basis, we're outperforming quite significantly the peer group. So I hope that gives you clarity and helps you think through how the demand is going to shape up for the coming years.

Udit Batra:

Thank you.

Operator:

Good morning. Welcome to the Waters Corporation Second Quarter 2022 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 call is being recorded. If anyone has objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Director of Investor Relations. Please go ahead, sir.

Udit Batra:

Thank you, Caspar and good morning, everyone. Along with Caspar, joining me on this morning's call is Amol Chaubal, Water's Senior Vice President and Chief Financial Officer. In the second quarter, we continued to deliver excellent results, led by instrument growth of 12% with continued broad-based strength across our end markets and geographies. I would like to take a moment to, again, acknowledge the unwavering efforts of our teams who have persistently worked through the challenging environment to deliver for our customers. We saw this with our China team whose dedication and agility through the lockdowns in Shanghai drove exceptional results against this quarter, which came ahead of our expectations. But importantly, we've seen this commitment across all our teams and regions, and it truly reflects the indomitable spirit we have here at Waters. Turning now to Slide 3, we have three messages; how strong commercial momentum is driving great results in markets that remain healthy. This is reflected in the broad sustained growth we are delivering across our products, geographies and end markets. Customer demand remains robust with orders that again outpacing sales as our strong momentum continued with double-digit sales growth again in the second quarter. Innovation is contributing meaningfully to our growth. Our refresh product portfolio is highly competitive and providing key benefits to our customers, which is again driving stronger option of these new products, as well as market share gains. Over time, we expect that the strong instrument placements and resulting expansion in our install base will drive growth in recurring revenue, tied to these instruments. And thirdly, we have a robust business model serving an attractive and resilient base. Waters serve end markets with sustainable growth drivers that are linked to key demographic areas, such as fill [ph] count population growth and increasing regulatory requirements around testing. With our strong business model, we have growth levers that exist throughout the market cycle, across instruments, service, chemistry and informatics. Growth in one of these areas, usually results in follow-through performance across our business model and you can see this today with our strong pull through of instrument sales into higher attachment rates, which is again driving recurring revenue growth. Now moving on to Slide 4; in the second quarter, revenue grew 5% as reported and 10% on a constant currency basis with broad strength across our end markets and geographies, as well as in both instruments and recurring revenues. Orders in the quarter exceeded sales of $714 million as we continued to see very strong demand from our customers. Our Q2 non-GAAP adjusted earnings per share was $2.75 up 6% year-over-year, despite FX headwinds. The impact of FX headwind lowered our non-GAAP earnings per share growth by 11% versus the prior quarter. Amol will cover the impact of FX in more detail later in the call. Now looking more closely at our top line results for the quarter on Slide 5 in constant currency. First by operating segment, Waters division grew 10% while DA grew 12%. By end market, our largest market category pharma grew 10%, industrial grew 8% and academic and government grew 16%. In pharma, we saw continued broad based strength across segments, geographies and applications with growth in large molecule and small applications. Growth was led by the US, which grew mid-teens with large molecule applications growing twice the rate of small molecule applications. China, which grew in mid-teens and India, which grew 12%. In industrial, growth was driven by the US up mid-teens; Europe, up high single digits and India, which grew over 50%. Our food and environmental business is performing well business is performing well with EFAS [ph] testing also positively impacting growth. In academic and government, after seeing a slower recovery than our other end markets last year, customer spending continued to be more active during the quarter with mid-teens growth for the quarter, led by strength in China, India and the Americas. Now by geography, sales in Asia grew 9%, the Americas grew 15% and Europe grew 7%. In Asia, growth was led by China, where sales grew 9% despite the presence of COVID-related lockdowns for much of the quarter. Customer demand in China remained strong and we're observing great activity levels which rapidly picked up in June relative to April and May when the lockdowns were in effect. Meanwhile, sales in India grew 24%. The Americas was again our fastest-growing region, with the U.S. growing 14%, which was led by strong instrument sales, which grew 20% along with recurring revenues, which grew 11%. In Europe, the growth was led by pharma and industrial, which both grew high single digits. By products and services, instruments grew 12%, with our LC mass spec and TA portfolios each growing double digits. Recurring revenues grew 8% with chemistry, up 9%, and service, up 8%. New products again contributed meaningfully to growth in the quarter with unit sales of Arc HPLC and ACQUITY Premier more than doubling versus the second quarter of last year. Unit sales of MaxPeak Premier columns also more than doubled and have continued to add strength and incremental growth to our chemistry business, driven by large molecule applications. In mass spec, we saw strength across our portfolio, including for our Xevo TQ-XS and cyclic IMS instruments as well as strong traction for our newly launched Xevo TQ Absolute, which sold out at launch and has already developed a backlog. Customers are seeing the value that TQ Absolute provides in application areas such as food safety and pharma development in small and large molecules -- small molecule applications given its dramatic leap in performance and efficiency compared with other instruments in its class. Here in New England, one state public health laboratory was the first to purchase and installed TQ Absolute for the express purpose of PFAS testing in water and environmental samples. That customer told us that TQ Absolute is giving them a 100 to 400-fold increase in sensitivity versus their prior instrument while being far easier to use in terms of sample prep and in quickly giving them highly accurate results. Meanwhile, at the high end, we're seeing good demand for our cyclic IM mobility technology. One example is researchers at MD Anderson Cancer Center at the University of Texas who are using it for precision molecular profiling within OMEX research. We're getting feedback that it is enabling significant progress in discovering and validating novel blood and plasma biomarkers for early disease detection in oncology. Finally, TA had another great quarter with sales up 12%, led by strong growth in thermal analysis, microcalorimetry and rheology. Demand for TA products continues to be strong across all regions, led by electronics and batteries. Now moving to Slide 6. I would like to reflect on the excellent strength and momentum we have sustained in the first half of the year driven by our commercial execution, product innovation and pricing offsetting inflation, leading to these great results. So far this year, instruments have grown almost 20%, with recurring revenue up just under 10% against strong stacked comps last year. In the U.S., instruments have grown over 35% year-to-date. All our regions have seen growth, led by Americas, which has grown 20 years -- 20% year-to-date. Meanwhile, China has grown low teens despite the COVID-related lockdowns, which we were able to successfully navigate through in both the first and second quarters of 2022. Each of our end markets have seen double-digit growth, which speaks to our broad execution across regions and segments. Meanwhile, we continue to observe strong demand from our customers and are seeing ongoing positive impacts from our market plus growth initiatives. Now turning to Slide 7; like each of these initiatives continue to progress, the 3 areas I would like to highlight this quarter are service attachment, e-commerce adoption and launch excellence. First, with service attachment, we're seeing strong pull-through of our instrument sales into service plan coverage which has driven our attachment rates over 100 basis points higher so far this year which is ahead of our expectations and builds on excellent results last year. The progress we're making with service underscores the opportunity ahead to grow our recurring revenues which layers on top of our instrument growth. Second, also part of our recurring revenues, e-commerce adoption of chemistry has continued to move higher which is having a positive effect on sales by making it easier for our customers to do business with us and driving incremental growth opportunities. 31% of our chemistry is now sold through digital channels, which is a 10-point increase compared to 2019 when the initiative began, and we see further runway to over 50% in the long term. Since we started the initiative in 2019, revenue from digital sales has more than doubled. And in the first half of this year, it grew over 30% versus the first half of 2021. Third, our revitalized portfolio is contributing to growth as demand has scaled up for Arc HPLC, for ACQUITY Premier and MaxPeak Premier columns. Our product vitality index has grown 300 basis points versus the second quarter of last year to 15% as sales of these products have quickly ramped, with launch excellence and the impact of innovation driving strong market uptake. As I've shared before, ACQUITY Premier and MaxPeak Premier were specifically designed to solve challenges that are particularly relevant for large molecules. This technology is capturing growth opportunities as pharma customers seek to expand their capacity and build capabilities for biologics and novel modalities, such as oligonucleotides, mRNA and peptides. Meanwhile, small molecule growth remains solid with customers continuing to refresh and expand their capital equipment with Arc HPLC. Now on Slide 8. In June, at ASMS, we announced our new Xevo G3 high-resolution mass spec. The G3 is our latest generation benchtop Q-top [ph] and it provides increased sensitivity and range for large molecule analysis over its predecessor, the G2, which is one of our best-selling high-res mass spec products. This instrument is described by our customers as an analytical workhorse given that it offers the power and range needed to characterize complex biotherapeutics while also providing the reliability, robustness and reproducibility needed in late-stage development. As biologics and novel modalities increasingly move into later stages, this instrument supports the associated workflows by allowing more detailed characterization of these molecules in product and process development. This occurs before they move downstream into higher volume manufacturing QA/QC where routine analysis will then be performed on instruments such as BioAccord. A further key piece of innovation is the software we've developed on waters_connect which allows the compliant workflows developed on the G3 to seamlessly transition to BioAccord with just a few mouse clicks. This ease of transfer had been unheard of before now and it allows our customers to transfer data between instruments and global locations within their enterprise network, all while remaining in an industry compliance setting. On waters_connect, our latest apps are enabling exciting new analytical areas for the G3 and BioAccord, including cell culture media analysis and peptide analysis with in-depth protein and glycan profiling. Most recently, we've added the ability to characterize oligonucleotides and conduct impurity analysis as well as perform lipid nanoparticle compositional analysis and stability testing which is highly relevant for mRNA molecules. These are all new analytical areas in large molecule characterization where there is a lot of long-term potential as the market looks for more advanced characterization capabilities for biologics and novel modalities. As we continue to innovate and expand our offering, we are increasingly well positioned to support biologics and novel modalities as they move downstream into routine analysis. Now I'd like to pass the call over to Amol to continue covering our second quarter financial performance and provide our guidance for the remainder of 2022. Amol?

Udit Batra:

Thank you, Amol. So in summary, we are pleased with our sustained broad strength for the quarter which was driven by our strong commercial execution and the impact of innovation in our highly competitive refreshed product portfolio. Demand has remained strong across our end markets as we've continued to capture growth opportunities in both large and small molecule applications, food and environmental testing and battery material analysis, which each have long-term durable growth opportunities that we're well positioned for. To reflect our strength, we're raising our full year constant currency sales growth from -- sales growth guidance from 7.5% to 9% to 9.5% to 10.5%. Meanwhile, we have delivered great operating results despite the challenging macroeconomic environment. And for EPS, our strong results for Q2 and our increased full year growth outlook are expected to offset the impact of foreign exchange headwinds. With that, we will now begin the Q&A session. Operator?

Vijay Kumar:

Congrats on the quarter. Udit, maybe my first one for you. You did mention orders were about of revenues in the quarter. Can you give a little bit color on where the order strength is coming from? Which customer segment, which product class? And any comment on order growth rates, if you will. I think in the past call, there's been some debate on instrument pull forward, so color on orders would be helpful.

Vijay Kumar:

That's helpful, Udit. And maybe one for Amol. I think FX, Amol, you said incremental $0.50 plus. So what is the total impact now? I think it's close to $1. And I think your guide implies back half gross margin step-up. Why would gross margin step up if you have this FX dynamic? And I think you're also assuming tax rate steps up in the back half. First half has been sub-15%. So any color will be helpful.

Udit Batra:

So maybe just one sort of summary comment on really the very precise and nice description that Amol has given. I mean our top line continues to do extremely well, right? And we've just guided to a double-digit growth for the full year after printing a 6% -- 16% growth for last year and then 16% in Q1, first half of the year in the teens. So top line momentum continues. This flows very nicely through the P&L. And the EPS on an organic basis is in the high teens, right, even for the full year in the guide, right? On an organic basis, it's in the high teens, which basically sets us up really well as we go into next year, right? And in our trends, in our sort of results, there is no benefit of COVID or M&A embedded, right? So it's a very clean number that you can build off for the next year and shows the strength of our business provided we continue to deliver on the top line. And with resilient end markets with great innovation and such a good team executing, we feel very good about where we stand.

Operator:

Our next question comes from Luke Sergott with Barclays. Your line is open.

Udit Batra:

Luke, firstly, thank you for the question. I mean, we're very pleased with our performance. I'll start with the back end of your question and answer your instrument question as I go through the answer. Relatively speaking, when we look at our competitive environment, I mean, we're performing extremely well, right? And instrument has been a big -- instruments have been a big part of -- a big part of the story, where in the first half, as you mentioned, instruments are growing close to 20% and overall 13% or so growth and orders again being higher than sales. So yes, we read a lot about the macro challenges. But if you look at what we've been through from an execution perspective and now less than 2 years -- I joined slightly less than 2 years ago, we've gained our leading position, that, too, during a pandemic. Innovation is starting to contribute meaningfully to growth. So I have a lot of faith in the team that has been able to pull this off. So if at all there is a downturn, which we don't see from what we have as visibility to our end markets. And across our end markets, we are extremely well positioned. Even back in 2009, Waters was one of the few companies that showed a positive EPS growth. And today, we are even better positioned, right? So if you just look at our portfolio, at that point we had 40% recurring revenues, today, it's over 55%. Our end markets where we're seeing incredible strength, especially with large molecules in pharma, our end markets, we're over 60% levered towards pharma, and that, too, in late stages of pharma which is super resilient. In applied industrial and applied, over 50% is in food and environmental. And in the TA segment, more and more levered towards higher growth segments like batteries. So I feel extremely good about how we're positioned towards the -- in the end markets as well. And with such traction, even with such heavy headwinds from FX, we're able to deliver and commit to the EPS that we signed up for before. So feel extremely good about where we are. Now to your instrument question, look, historically, instruments, if you just look at Waters' history over the last 15 years, are 3% to 4% growers. We're clocking 19%. So it's naive to think that we will continue to be at 19% or so in instrument growth. So I'm sure it will slow down. But we have a lot left in the -- from the initiatives that we started with earlier in the year. The replacement cycle is still ongoing, we expect this to continue to go for the next 2 to 3 years. We see better and better attachment rates as a consequence. We've expanded into new segments with CDMOs and CXOs. So feel very good about where we are in the implementation of our initiatives and that continues to benefit the instrument growth rate. So in summary, to your instrument question, no, don't expect 19% growth forever, but do expect our initiatives to help us continue to drive higher than the 3% to 4% that we've seen historically. I hope that gives you more color.

Udit Batra:

Yes. Firstly, incredibly proud of the team. I mean, if you'd asked me in April and May where we were going to land, I mean it was -- it was the headwinds that we talked about. In June, incredible, incredible performance from the teams to be able to ship the products that we did and get them to our customers. So I feel very good about what we achieved. And for the back half of the year, I mean, the full year, we think will be in the mid-teens for China. So no real slowdown. Again, strength across all end markets. And also in the TA business, right? So strength across, especially where we see our instrument replacement cycle doing very well, Arc HPLC doing very well. Increasingly the biopharmaceutical applications for our premier technology, ACQUITY Premier, doing very well. So across the board, China feels extremely good from a demand perspective. So mid-teens for the full year, barring any significant shutdowns in that geography.

Udit Batra:

I mean it's a lumpy sort of environment, as you can see, quarter-to-quarter. But I mean, overall, look, 16% growth last year, mid-teens already at the middle point of this year, and we feel very good where we sit today.

Daniel Brenna:

Congrats on the quarter. Maybe -- just first question, just kind of back to the answer that you just provided in terms of the macro. You guys sound very confident which is great. Just the perspective that we have is like, I guess, in '08, you guys were up 4.5%. In '09, you contracted around the same amount, so a 9-point swing. And as you mentioned, business is dramatically different plus all the commercial initiatives that you guys are executing on, so -- as well. I don't think -- hopefully, most of us don't expect another recession like we had back then. But net-net, to the extent that the economy does continue this level, presumably borders won't be immune from that, so could you just give a little more color about like the sensitivity or lack thereof across your different businesses? what might be a decent starting point to think about if in fact the economy does worsen how you would react in that in '23?

Operator:

And our next question comes from Matt Sykes with Goldman Sachs. Your line is open.

Udit Batra:

Matt, thank you for the question. We're very happy with where we are with academic and government. I mean, first half of the year, double-digit growth. This quarter, 16% or so growth. But I'll remind you that this is a lumpy market and we have a low base from last year, right? So if you look at a three-year stack growth rate, we're roughly 40-ish percent inorganic growth rate in that segment. It's very heavily levered towards instruments and instruments did extremely well this quarter and the last quarter. So still rather volatile segment because -- or lumpy segment because of the heavy instrument portfolio that we have in that segment. That said, we are -- we have initiated our focus and our turnaround in that segment but we are far from done, right? So we still have work to do on increasing our e-commerce presence and e-procurement presence. I mean, that's going well but not yet done. From a commercial standpoint, we are reinitiating and -- reinitiating our KOL contracts which help with our high-resolution mass spec portfolio. Even though the portfolio is renewed, from a commercial standpoint, we still feel we have work to do. So while we are happy with the results, I would not declare victory yet.

Josh Waldman:

Just one for Udit and one for Amol. Udit, orders again outpaced sales. Can you provide more context on the backlog at this point? I guess the magnitude of the backlog and the level of visibility you think that provides into the second half and maybe even into '23. You had previously commented you didn't think orders are benefiting from pull forward. Is that still your sense?

Josh Waldman:

Got it. And Amol, I guess, in light of that and in light of kind of the stronger-than-guided Q2, the backlog build, the second half guide, organic guide, seems a bit conservative. I guess can you comment on the considerations that went into the updated organic growth guide? Maybe where there might be opportunities for upside, maybe risk to the downside. And then the guide seems to assume a lighter Q4 is -- I mean is there a concern around budget flushing or anything like that, that's being reflected in the guide?

Udit Batra:

And then I think I didn't address your backlog question. I mean the backlog is at healthy levels, right? Waters did not have for a while, I would say, a healthy backlog. We feel more than feel at least a bit better that we have a reasonable backlog. It's not -- it's reasonable, but it's not super, super substantial, right? It's reasonable it allows us to navigate through any sort of turbulence. A lot of visibility into Q3, and we feel good again about how we will end the year.

Rachel Vatnsdal:

So first up on pharma, drug pricing reform continues to be a headline topic. So can you just walk us through how you see that impacting Waters' portfolio especially given your unique exposure in small versus large molecule in QA/QC. And then have you started to have any conversations with your pharma customers regarding that drug pricing reform and do you expect that it could have any impact on your pricing power?

Operator:

Our next question comes from Derik De Bruin with Bank of America. Your line is open.

Udit Batra:

I'll start off, Derik, and I'll let Amol comment a little bit on the FX piece as well. Really, India has been doing extremely well given the demand for small molecule production, again reviving, and some of this has to do with the government initiatives in India that were initiated last year and us being so heavily focused on that part of pharma, QA/QC for genetics, QA/QC for small molecules, in India, we've seen an outsized benefit and that's continued well into this year. So it's a fundamental demand driver that we can explain based on government policy and again driven heavily by instrument growth. Consumable is doing well but driven heavily by instrument growth. Amol, do you want to comment on the FX piece?

Operator:

The next question comes from Puneet Souda with SVB Securities. Your line is open.

Udit Batra:

Puneet, thanks for the question. Look, I mean, our capital allocation priorities remain the same. Growth is still where we are focused, right? And it starts with organic growth, right? So that's where we allocate capital first. And that is going extremely well. And we're funding internal innovation, we're funding our high-growth adjacencies, seeing really nice results. I was at AACC last week with the team on LC, MS for diagnostics, and there is a clear value proposition where as customers discover new biomarkers, mass spec has a meaningful role to play. And that reaffirmed -- we took our R&D team, we took our commercial team and we had many different workshops there with different customers. And so really feel good about what we're doing from an organic perspective and want to fund that set of adjacencies, bioseparations, analytical bioprocessing as well as batteries and LC, MS and diagnostics, so we want to fund that first. Second, from an M&A perspective, really what you should take away is, I mean, we are, of course, on the lookout for things that fit into our strategic priorities. But there's really no rush, right? I mean we've announced a few collaborations. They're going extremely well, especially the one with Sartorius on the bioanalytical characterization space, especially upstream. But really no rush. And from an M&A environment perspective, lots of discussions ongoing. We are, of course, on the lookout. But again, super financially disciplined, right? So really nothing has changed from the time we spoke. And as we have conversations, I mean, of course, people still have memories of their 52-week highs in certain areas, but look, our organic business is performing very well and the focus remains on that, on partnerships and we have a list of -- and a nice pipeline of M&A targets that we're looking at now constantly.

Brandon Couillard:

Udit, you launched the new QTof at ASMS. It's been a long time since you refreshed that product line. Could you just talk about the importance of that introduction, whether you think it's a needle mover for the mass spec franchise overall relatively near term?

Operator:

And our next question comes from Patrick Donnelly with Citi. Your line is open.

Udit Batra:

Thanks for the question, Patrick. Look, I mean, again, it starts with the organic piece, right? So let's just take the bioseparations and the bioanalytical characterization, high-growth adjacencies, right? On the bioanalytical characterization adjacency, we started with our collaboration with Sartorius, with our work with the University of Delaware, developed a deep understanding of upstream bioprocessing, downstream bioprocessing. The team has taken and learned that area really well. And I insist, I mean, before we make any meaningful moves in that area, we must organically develop that business well. And I feel very good on what we've been able to do in the last year. Again, learning a lot from what Sartorius does, learning a lot from what's happening at University of Delaware. So significant resource allocation there. We're not -- we're not sparing any expense as that business grows. We've already developed 4 workflows for the BioAccord for upstream characterization and 1 that is doing extremely well is cell culture media analysis upstream for bioreactors. I mean, there are 3 or 4 other workflows that have also been implemented that have been received very well. So the organic part of the business is doing very well. Now if you look at the M&A aspects of it, that opens up a whole bunch of M&A ideas, right? I mean for sampling, for data analytics, for other analytical characterization methods in upstream and downstream bioprocessing. And you'll hear more about that as we go along. And now double-clicking on bioseparations. There, we have world-leading capabilities in separating small molecules. We've already developed some nice applications with the MaxPeak Premier technology with our columns, right? So to separate oligonucleotides, to separate larger molecules better. We think there's a long runway here organically. The team is being built up quite substantially on that front. But it also opens up avenues inorganically as we learn more about that segment. So it would be nice to be able to work with somebody who has deep capabilities in reagents that are larger molecules, right? And I think that's the sort of thing we're looking at really carefully. So the organic piece is first, it opens up, it educates us on what is possible. It opens up many possibilities and that's the sequence of events. And we are, as I mentioned earlier, quite active in that area. We have quite a few ideas. And they're in different stages of pursuit at this stage.

Udit Batra:

Thank you very much, and thank you for all your questions. You'll agree with me that we've again had a tremendous quarter. The team continues to execute in a turbulent environment. And thank you for your participation. And on behalf of our entire management team, I'd like to thank you for your continued support and interest in Waters. Thank you, and have a wonderful day.

Operator:

Good morning and welcome to the Waters Corporation First Quarter 2022 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 call is being recorded. If anyone has objections, please disconnect at this time. Now, it is my pleasure to turn the call over to Mr. Caspar Tudor, Director of Investor Relations. Please go ahead, sir.

Udit Batra:

Thank you, Caspar and good morning, everyone. Along with Caspar, joining me on this morning's call is Amol Chaubal, Water's Senior Vice President and Chief Financial Officer. We had a record start to the year with first quarter sales led by instruments which grew over 25% with a broad-based strong performance across all our end markets and geographies. Before summarizing the quarter, let me start by saying how extremely proud I am of our teams who've worked tirelessly to manage our supply chain, delivering operational excellence and exceptional support for our customers through the ongoing challenges of the pandemic. It is a result of the indomitable spirit of all my colleagues at Waters. I will now provide a brief overview of our first quarter operating results and deliver our key messages. Amol will then review our financial results in detail and provide comments on our financial outlook. We will then open up the phone lines to take your questions. Turning now to Slide 3. We have three key messages. First, we had a very good start to 2022 with great traction for our new instrument products, strong operational performance and sustained commercial momentum. Demand has remained robust across all our end markets. Second, we're laser focused on execution, innovation and growth. We continue to make great progress in executing against our enterprise priorities with our core initiatives positively impacting our results. We have a revitalized portfolio with innovation that is answering the needs of our customers in both large and small molecule workflows as well as our non -- as well as in our nonpharma markets such as food testing, environmental and material science. And thirdly, Waters has a firm commitment to leave the world better than we found it. We are delivering sustainable value to our shareholders and stakeholders through our ESG programs. Now moving to Slide 4. In the first quarter, our revenue grew 13% as reported and 16% on a constant currency basis, reflecting broad growth across all our end markets and geographies. Orders in the quarter exceeded our sales of $691 million, reflecting a very strong demand. Instruments grew at 26% in constant currency, with strong growth across our LC mass spec and TA portfolios. New products contributed meaningfully to growth in the quarter, with unit sales of Arc, HPLC and Acuity Premier more than tripling versus the first quarter of last year. In mass spec new instruments in our high-end tandem quad portfolio, such as our Xevo TQ-XS also saw strong growth in both industrial and pharmaceutical applications. Instrument strength is a positive indicator for future growth of our consumables and service revenues. Recurring revenues grew 9% for the quarter with chemistry up 8% and service up 9%. This quarter had one fewer day than the first quarter of 2021 which translates to a headwind of approximately 1% for our recurring revenues. Without that, recurring revenues would have also grown double digits. Our MAX peak premier columns have continued to strength and incremental growth to our chemistry business, given the benefit this technology provides for novel modality applications and our increased exposure to biologics. Meanwhile, we're seeing increased service plan attachment rates in our key regions at instrument point of sale. By geography, growth was led by the Americas, with the U.S. up 28%, driven by broad performance in each of our end markets. In China, sales grew 17% with pharma, industrial and academic and government, all up double digits. As lockdowns in certain regions persist, we're beginning to see more of an impact to our business but we're in close contact with our customers and demand remains robust. Once the lockdowns ease, we expect activity levels to catch up that normalize with limited impact to our full year growth expectations for China. However, we anticipate some sales impact in the second quarter if customer access continues to be constrained. Our Q1 non-GAAP adjusted earnings per share was $2.80, up 22% year-over-year, driven by sales growth, volume leverage and an ability to manage inflation through pricing. Given the global nature of our business, we're seeing ongoing supply constraints and inflationary pressures. Despite this, we have been successful in working through these challenges, leveraging our global manufacturing footprint and working closely with our customers and suppliers while delivering good operating results. Turning now to Slide 5. While each of our initiatives continues to progress. The two areas I would like to highlight this quarter are contract organizations and launch excellence. For contract organizations, our unique technical abilities and ability to collaborate closely with our customers are resulting in market share gains and strong revenue growth. Revenues from these customers were up over 25% for this quarter lead by over 50% growth in China. Turning now to launch excellence. Our revitalized portfolio is contributing to growth with demand, ramping for Arc HPLC, ACQUITY Premier and MAX premier columns. ACQUITY Premier and MAX Premier were specifically designed to solve challenges that are particularly relevant for large, complex molecules. Our customers are using the technology for oligonucleotide analysis as well as separation and purification of novel modalities such as mRNA, peptides and glycans, just to name a few examples. Meanwhile, small molecule growth remains solid with customers continuing to purchase new capital equipment, including Arc HPLC. Now on Slide 6. We recently launched the Xevo TQ Absolute which is up to 15x more sensitive when analyzing negatively Ionized compounds compared to other tandem quads currently on the market, while also using less sample. It is designed to help pharmaceutical, food and environmental labs, meet regulations requiring trace-level quantitative mass spec analysis for a broad set of applications. In food testing, the instrument takes detection of anionic pesticides and their metabolites to a new level of quantitation. In pharma, it can provide highly sensitive analysis for oligonucleotides and peptide bioanalysis as well as quantification of estrogens in clinical research, uses for which high-resolution mass spec have typically been required. The instrument is highly efficient, using approximately 50% less electricity and gas and also producing 50% less heat than other high-performance standard quads in the market, both of which reduce the carbon footprint of analytical labs. It is also 50% smaller than other instruments in its class which also adds value to our customers as space and analytical labs is limited and costly. Our tandem quad portfolio was stronger than ever and together with Waters Connect, we're able to make customers' workflows easier, faster and more efficient without compromising performance. Now on Slide 7. Immerse Delaware, our second innovation and Research Lab will be opening tomorrow part of a multiyear collaboration with the University of Delaware. Its purpose is to develop analytical solutions to better characterize the manufacturing process for biologicals and novel modalities which will support our path into bioprocess characterization. Researchers from both Waters and the University of Delaware will develop solutions, including sensor and instrument improvements, data analytics and process control. This partnership will help us expand our capabilities to drive improvements in quality, yield and efficiency as well as characterize critical quality attributes that will be a key step towards separating the process from the product and biologics. On Slide 8, we are delivering sustainable value to our shareholders and stakeholders through our ESG activities which continue to be recognized in a number of areas. Earlier this year, we achieved a score of 100 on the 2022 Corporate Equality Index earning Waters in designation as one of the best basis to work for LGBTQ+ equality. In addition, Barron's ranked Waters number 6 on its 100 most sustainable U.S. companies list for 2022 based on a set of 230 performance indicators and reflects our efforts of continuous improvement in social and environmental responsibility. On the list, we were the highest placed company in the health care sector and in the Life Science tools segment. Recently, within our diversity and inclusion and STEM education efforts, Waters has partnered with three historically black colleges and universities to create STEM opportunities for students through funding, instrument donations, mentoring and the awarding of scholarships to students exploring the analytical sciences. In summary, we are pleased with our strong start to the year and the results in revenue growth and operational performance which are demonstrating our continued success in our focus areas of execution, innovation and growth. With that, I'd like to pass the call over to Amol for a deeper review of the first quarter financials as well as our outlook for the remainder of the year. Amol?

Udit Batra:

Thank you, Amol. So in summary, our teams continue to deliver excellent results despite the challenging environment with strong instrument growth and great traction for our new instrument products. We are laser focused on execution, innovation and growth. We continue to make progress executing against our enterprise priorities with our core initiatives delivering positively and contributing positively to our results. With that, we will now begin the Q&A session. Operator?

Vijay Kumar:

Congrats on a really strong Q1 share [ph]. Udit, maybe just diving into the performance within the Q. You noted new products in CROs. Maybe -- I guess what the market is trying to debate is there any pull forward of demand? Can you talk about your order books and when you say new products, it feels like this is incremental demand coming in and perhaps not a pull forward of demand. So if you could just talk through the drivers here in Q1 and what the -- how the order book is shaping up, that would be fantastic.

Vijay Kumar:

That's helpful, Udit. May be one for Amol on the guidance here, Amol. Revenues, you beat the Q by 800 basis points versus your prior guidance, right, $68 million for Q1 that annualizes to 200 basis points. You look at the annual guide raise, it was raised by 200 basis points. So I'm curious -- Udit just said, order book is trending well above revenue. So is that perhaps conservatism in a China lockdown or perhaps some macro? Maybe just talk about what the guide is assuming here for the year?

Udit Batra:

Yes. So Vijay, I think just maybe one other comment to build on this. Look, we're super, super pleased with what's happened in Q1. I think there will be no doubt about that. It's a broadly good performance across instruments, across consumables, across all geographies and end markets. That said, I mean, there are still geopolitical issues. There are still macroeconomic concerns and there are still supply chain challenges out there. And we feel that it's prudent to guide the way we have. And I think that's really what's going on into our -- in our mindset at this point. But it's still a raise even despite all those challenges, it's still a raise from what we have said in the past.

Rachel Vatnsdal:

So first, could you just walk us through your latest at rent pricing for the year. You previously flagged about 150 bps but inflation continues to be a concern. So -- can you reach me on that this year at all? And then have you faced any pushed back from your customers on price increases at all so far?

Rachel Vatnsdal:

Great. And then just another question on China here. So you flagged the 100 to 200 basis points of headwind in China during 2Q stemming from the current lockdown. So can you just talk about what you're seeing in that marketing or confidence and how quickly China can return to growth post lockdown? And then for China, you also flagged that CROs had over 50% growth year-over-year. So can you just spend a minute talking about what specifically drove that outpaced growth in the China CRO segment.

Operator:

The next question is coming from Dan Brennan of Cowen & Company.

Udit Batra:

Okay. So I'll take it one step at a time. And if I forget any I'm sure, Dan, you'll remind me that I won't answer your question fully. So overall instrument growth at 26%. We don't usually break down the contribution of new products to that. I mean you can imagine in the way I would just back out that number or back out new products and execution by just comparing it to the overall market. I think you'll agree with me that the 26% number really reflects a very, very strong performance versus what we're seeing from our peer group. And that has two contributions. One is the operational excellence, instrument replacement increase -- and increase in the traction of new products. And our new products, it's broad-based, right? It's not just LCs, it's also mass specs now, right? So from an LC perspective, you have Arc and Acuity Premier and Acuity Premier, in particular, really targeting biologics and novel modalities applications. Now you turn to the mass spec portfolio where we, of course, launched our MRT platform, really great feedback from customers. That's a high-resolution mass spec. But then the Xevo TQ-XS Absolute -- that we've just -- the Xevo TQ Absolute that we've just launched. And that has incredible traction and not surprisingly, right? It's 15x more sensitive than the leading mass spec on the market for anionic compounds and anionic compounds are ones that are ubiquitous in mRNA and oligonucleotides but also pesticides in food and environmental testing. So really a strong introduction. And what I'm most proud of is it's not just performance but it has a lower footprint and a lower environmental footprint. So 50% less consumption of electricity, 50% less generation of heat versus the top tandem quads in the market. So super optimistic about it. And in addition, it's not just the instruments that you sell, you also sell a full system with software, right? And we had introduced our new Waters connect mass quantitation software in the last few months, that has incredible traction. So not only are our customers getting a smaller box with a lower environmental footprint, they're getting better hardware performance and 50% more sensitivity for -- with our software. So it's an incredible new product in a space where, remember, we said there were about 800 or so tandem quads that we want to replace. So we feel very good about what we see as demand there. And I don't want to leave TA out. I mean, TA again, outperformed our Waters division and we're not competitive internally with each other. But just to remind you, TA grew 18%, Waters grew 16% with broad-based demand from -- for our thermal instruments, for our rheology instruments, -- but what I'm most excited about is what the TA team is doing, of course, operationally but also attacking new segments like battery testing. We have incredible demand for our products on that front -- it's off a small base, so I won't give you a number but it's off a small base but growing very rapidly. So very excited about new products and very good feedback overall and the 26% number sees that. And one other number that we've cited in the past is our new instrument Vitality Index which is basically taking the last three to four years of sales and saying how much contribute three to four years of launches and calculating how much contribution that has to our overall sales. And that number is at an all-time high at 15%. These new products are meeting the need but we also have a new process for launching the products and you've seen how we repositioned the BioAccord. So I think that was one part of your question. The second part, I think you referred to as from an end market perspective, look, no real weakness this quarter, right? So you see pharma, again, doing extremely well with high-teens growth industrial also high-teens growth and academic and government coming in at 4%. So we really feel good about all end markets across different geographies. And I think from a geographic standpoint, I would point out that, of course, China is doing well despite difficult conditions. India is still in the mid-20s in terms of growth and we saw that all through last year. What I'm most excited about is what we see in the U.S. I mean, when was the last time you saw 29% growth from Waters in the United States? And as the U.S. goes, so does our gross margin because the pricing in the U.S. is a bit better, as you can imagine. So we feel extremely good about the quarter and I hope I have addressed your questions.

Josh Waldman:

One for Amol and then one for Udit. Amol, I wondered if you could provide a bit more color on the moving pieces in the updated EPS guide, there may be a full bridge. I mean just trying to get a better sense on how variables beyond FX, like the stronger revenue, improved margin outlook were factored into the guide and maybe if there are other offsets going on beyond FX?

Josh Waldman:

Okay. And then Udit, maybe a follow-up on Vijay's question. Can you talk a bit about pacing in the first quarter and maybe how sales track versus order intake rates? Is it fair to assume that we have the 16% organic growth, you saw some relief on the supply chain side and we're able to work down backlog or have orders remained such that your backlog continues to be at kind of an elevated level entering 2Q maybe similar to where it was as you entered the first quarter.

Operator:

The next question is coming from Puneet Souda, SVB Securities.

Udit Batra:

Thanks for the question, Puneet, it's really broad-based. But it, again, starts with operational excellence. I mean, the five initiatives that we've mentioned earlier we have a new-ish leader in the United States. Our sales has a long tenure in Waters but he was newly appointed right before I got here. And he's just been incredible with his team, right? We've put more feet on the street. We have been using our CRM system really religiously to get an understanding of where the demand is. And there was a replacement backlog built up in the U.S. for our instruments. The new products have done extremely well. E-commerce is doing better in the U.S. than anywhere else and the CMO traction is very, very good in the U.S. Turning then to new products. I mean you're well aware, these new products have been designed specifically for our biologics customers, right? And we start with the BioAccord which I know you know extremely well. We repositioned the product to go upstream into clone selection and that's gaining a ton of traction. Downstream in QA/QC, the work that we started about two years ago with several large pharma players who have significant monoclonal antibody pipelines, we're seeing them gain -- seeing the product gain traction in QA/QC and that bodes well for the future. Second, MAX peak columns and Acuity Premier as a technology was custom designed for biologics that have affinity to metal surfaces. And that product -- that set of products has gained a ton of traction. And most recently, the Xevo TQ Absolute. I mean it has terrific performance as hardware and lower environmental footprint. So all of that combined, meaning operational excellence, new products, a leader who's really sort of embraced collaboration and embraced the operational excellence is really what's behind the U.S. doing as well as it does. And that, of course, has an impact on the gross margin as well.

Udit Batra:

Puneet, I'll repeat what I've said also in the last quarter. I mean we've basically said, look, in the short-term, you should expect us to grow 5% to 7%, about a 1% impact of our five initiatives. And in the midterm 2024 onwards, you should see Waters going to the sort of range where you should start to see an impact of these new initiatives, right? And is it a bit sooner? Is it a bit later? I mean, I can't be more precise. All I can tell you is there's a ton of traction and just staying with the bioseparations area, just staying with the BioAccord in particular, there's a ton of traction for what we're doing with Sartorius, for clone selection. The BioAccord, just as it was initially designed has sort two very large applications. The first is on spent medium where we can analyze close to 200 analytes. So our customers in that category are interested in a simple instrument but they don't want to give up any of the sophistication. They don't want to look at five compounds and 15 compounds. They still want to look at 200 compounds because they are still trying to ascertain at that point which of these -- what race quantities of materials are going to impact their cell culture. So BioAccord is simple to use but a highly sophisticated instrument. And I think that's really important to keep in mind when you think about spend media. And then, the other application is on peptide mapping and the drug substance itself, the whole drug substance. And there, again, the applications are very wide. And here, where Waters has an advantage is with our ability to develop simple workflows, right? So our customers, again, are not willing to give up the sophistication. They want to know each amino acid in the sequence of the peptide, they want to know the confirmation. They want to know the size of the molecule. They don't want to give up any information. They want the instrument to be simple to use, the workflow to be simple to use and we're developing a whole bunch of workflows on that front. And again, feel extremely good about it. As I said, mid -- you should -- in the midterm, you should expect 100 basis points of sort of growth impact based on all the sort of adjacencies that I've talked about in the past. I can't be no precise on that but I can tell you there's a lot of excitement amongst our team and the customers in applications of bioseparations as well as bioprocessing.

Matt Sykes:

Congrats on the quarter. Udit, maybe just big picture first question. I mean one of the things that you did earlier in 10 year was to try to bring the R&D and commercial functions closer together? And then noticing how the new instrument demand has really picked up and pretty successful launches. How much do you attribute to the success of these new products to some of the reorganization you did within the R&D commercial teams? And how much more there to go for in bringing those two close together? Like should we look for increased momentum with the new products because of the changes that you made?

Matt Sykes:

Great. And then just quickly, just to maybe on the academic end market. Just talk about trends you're seeing there. You had some pretty strong growth in China. But maybe ex-China, what you're seeing in the academic end market in this quarter? And what you're looking for, for this year?

Operator:

The next question is coming from Jack Meehan of Nephron Research.

Udit Batra:

Yes. So Jack, great question. I mean the instrument growth will continue to drive recurring revenue growth, both chemistry and service. At this point, our guidance sort of assumes service and chemistry would be around high single digits, low double digits for the second half of the year. But again, I mean, this thing is not just here and now, right? These instruments will continue to produce revenue for the next seven, eight years. And the way we are performing on instrument replacement, we also think our instruments are recurring revenue because we've now built muscle strength and systems and processes so that the entire organization looks at instruments as a requiring revenue.

Udit Batra:

And plus e-commerce is accretive and CDMOs are high volume. So they are all adding up to recurring revenue.

Dan Arias:

Amol, just as a follow-up to the things that you've done on the supply chain, how much inventory safety stock on critical components would you say you have at this point?

Udit Batra:

Yes. And Dan, it's an excellent question. Look, as Amol summarize, it's a deeper understanding of the supply chain, not just ours but also the chips and who else is getting them [indiscernible] in a lot of discussions across Tier 1, Tier 2, Tier 3, many top-to-top conversations and then finally, collaboration and creative problem solving. I mean that's what's gotten us this far. And our teams are continuing to do it, the fights far from over, right? I mean we see it still out there. But I think if there is an algorithm, again, as I said earlier, knock on wood, as I said, we seem to have something in our hands and our teams are dedicated to solving these problems. Let me now thank you for your participation. And on behalf of Waters' management team, I'd like to thank you for your continued support and your interest. I would also like to make you aware that we are hosting our 2022 Investor Day in just over two weeks on May 19 in New York City at the New York Stock Exchange, starting at 8:30 a.m. Eastern Time. The main presentation from the event at 10 a.m. will be broadcast -- will be webcast live on our Investor Relations website. If you would like to join us in person for the event, please reach out to our IR team via the contact details on Slide 13. Thank you very much and have a wonderful day.

Operator:

Good morning. Welcome to the Waters Corporation Fourth Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the conference call begin. This conference call is being recorded. If anyone has objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Director of Investor Relations. Please go ahead, sir.

Udit Batra:

Thank you, Caspar, and good morning, everyone. Along with Caspar joining me on this morning’s call is Amol Chaubal, Waters Senior Vice President and Chief Financial Officer. We've ended a very successful year at Waters. In end markets with sustainable growth drivers, we have revived our resilient business and are now focused on growing our portfolio. Despite higher comparables, we saw strong growth continue with an acceleration on a stacked basis as the year went on. The strength we've seen in our instrument portfolio is a positive indicator for the future, as our new products have gained traction and this all supports the sustainable future growth we expect to see in our consumables and service. Before summarizing the quarter and full year, let me start by thanking my colleagues around the globe who represented the indomitable spirit of Waters throughout 2021, remain focused on supporting our customers and delivering exciting new products despite the challenging conditions of the pandemic. Achieving these results in a normal year would have been quite an accomplishment but to do so while balancing the continued ups and downs of the pandemic with a major transformation and a new leadership team is indeed quite remarkable. Now I'm turning to Slide 3, we have three messages. We have a resilient and attractive portfolio of instruments systems, chemistry, consumables and services in end markets that are supported by sustainable growth drivers. We revitalize the score by engaging our customers progressing on a number of growth initiatives and continuing to innovate across our portfolio while launching exciting new products. And now we're focused on growth of our core business as well as accessing high-volume applications and faster-growing adjacencies. I will now provide a brief overview of our fourth quarter and full year operating results as well as commentary on our end markets, geographies and technologies. Amol will then review our financial results in detail and provide comments on our financial outlook. We will then open up the phone line to take your questions. Moving on to Slide 4. In the fourth quarter, our revenue grew 6% as reported and 8% on a constant currency basis, reflecting broad strength across our end markets and geographies with double-digit year-end demand for our instruments and continued growth in our recurring revenue products. This translates to a 7.5% two-year stacked CAGR for the quarter versus 2019 on a constant currency basis. For the full year, revenue grew 18% as reported and 16% in constant currency as we saw strong growth in 2021 across all our regions led by pharma and industrial end markets. This translates to a 7% two years stacked CAGR for the year versus 2019 in constant currency. Our Q4 non-GAAP adjusted earnings per share was $3.67 per share, up 1% year-on-year and 7% stacked. Excluding the effect of our prior year COVID cost actions and FX, EPS grew 8% versus last year. For the full year, non-GAAP adjusted earnings per share grew 24% to $11.20 and 12% on a two-year stacked basis. Now looking more closely at our top line results for the quarter on Slide 5. In constant currency first, by operating segment, the Waters division grew 7%, while TA grew 16%. The end market, our largest market category, pharma grew 8%, industrial grew 7% and academic and government grew at 5%. In pharma, we saw continued broad-based strength in sales across segments, geographies and applications. Biopharma and contract organizations grew well above 20%. In industrial, growth was led by our TA business, which saw strong global strength in thermal as well as microcalorimetry and rheology. Within the Waters division, we saw broad demand for LC instruments across our geographies as well as our customers, as well as our customer segments who continue to invest in new capital equipment. Turning to academic and government, we saw an improvement with growth across most of our geographies into the year-end. We're actively revitalizing our relationships with KOLs, which is an integral part of achieving long-term success in academic and government. While it takes some time for us to regain traction, Waters has familiarity and a fan base amongst KOLs, who have often used instruments throughout their careers. Just last week, I was talking with the head of a leading core lab at one of our – one of the top medical institutions in the United States. He has worked closely with Waters for the better part of two decades to build up proteomics capabilities at this institution and currently has over 40 Waters LCs and 20 mass spec instruments from our company. Moving now, to our sales performance by geography. On a constant currency basis, sales in Asia grew 9% with China up 13%, Americas 8%, with U.S. up 8% and Europe grew 5%. In China, we saw strong demand throughout the quarter with growth led by contractors, biopharma and a strong recovery in clinical. We also saw strong growth in food testing and chemical assays. In the U.S. growth came from ongoing strength in our pharma and industrial end markets. In pharma, sales was strong in LC and mass spec, which combined grew in the mid-teens with chemistry up low double digits. In industrial, our TA business saw strong instrument placement across applications, led by advanced materials, chemicals and battery testing. In Europe, all end markets continued to grow led by pharma and industrial with food and environmental businesses, resulting in strong demand for our Tandem Quads. Meanwhile, pharma sales remained solid with growth led by large molecule applications. By product and services, customer demand for our instruments finished the year strong, continuing the trend of instrument growth that we saw throughout the year, while demand for recurring revenue products remained strong. Overall instrument sales grew 12% for the quarter with a robust demand driven by our commercial execution and new product contribution. In LC, Arc HPLC continued to see strong global growth in our core segments as demand continues to ramp. Meanwhile, our acuity and arc premier instruments continued to see strong adoption, driven by applications in large molecule and novel modality such as mRNA. In mass spec, we saw growth in our high-end tandem quad portfolio, led by Xevo TQ-XS, Xevo TQ-XS micro. We also saw strong demand from our biopharma and CRO customers as well as for food safety applications. In our high risk mass spec portfolio, we saw the demand for cyclic with drug discovery applications. We're also encouraged by the early adoption of our new, SELECT SERIES MRT, Time-of-Fight platform, the customers using it for biopharma discovery and OMEX applications. For recurring revenues, despite the quarter having six fewer days in the fourth quarter of 2020, chemistry sales grew 5%, led by continued high utilization biopharma customers. Our new MaxPeak, Premier Columns continued to provide incremental growth for our chemistry business. This technology provides important benefits in separation and purification of mRNA, oligonucleotides, peptides and glycans, which is effectively answering the needs of our customers as they work with more complex molecules. Service grew to 2% despite a tough double-digit comparison a year ago with strong growth in both China and in India, which has been a theme throughout the year. Finally, TA had another great quarter, with sales up 16% led by strong growth in thermal analysis, microcalorimetry and rheology. Demand for TA products continues to be strong in all regions, the growth driven by advanced materials and chemicals including batteries and electronics. Looking now, at our top line results for the full year on Slide 6, in constant currency, the Waters division grew 15%, while TA grew 25%. By end market, pharma grew 19% and industrial grew 15%, while academic and government came at 5% for the year. Pharma which is our largest market has grown 10% on a two-year stack basis driven by strong demand in our instruments and recurring revenues with strength in both large and small molecule applications. We've also seen ongoing strength in our industrial and applied market, which has grown 6% on a two-year stack basis led by China as well as North America and Europe. In academic and government, which has been our slowest market to recover sales in Europe and the U.S. are close to pre-pandemic levels as China has further in its recovery as university spending continues to be constrained. By geography, Asia grew 19%, China growing 25%, Americas grew at 16% with the U.S. growing at 14% and Europe also grew 14%. For the full year on a two-year stack basis, our three largest geographies, the U.S. China and Europe was 6%, 7% and 8% respectively. What is especially pleasing is that the demand is balanced across all geographies including a robust recovery in the U.S. By products and services, instruments grew 23% for the year, chemistry 15% and service grew 9%. On a stack basis instruments grew 6%, chemistry 9% and service 6%, showing strong performance above our historical averages. The strength we've seen in our LC instrument portfolio throughout the year remains a positive indicator for sustainable future growth in consumables as well as service. Our growth in recurring revenues has also been supported by the progress we've made in ecommerce as well as delivering higher attachment rates in service. Given the global nature of our business, we're certainly not immune to the ongoing supply chain constraints and inflationary pressures. But we are proactively addressing these challenges, leveraging our global manufacturing footprint and working closely with our customers and suppliers. Now moving on to Slide #7. We covered this in our Q3 earnings call and also at the recent JPMorgan conference. Our initiatives across instrument replacement, service attachment, contract organizations, ecommerce and new product launch excellence have all been important components for us to gaining our momentum and delivering strong performance in 2021. We've continued to exceed expectations and milestones on these initiatives and believe that each has further one way not just in 2022 but in years beyond providing an average incremental growth impact of roughly 100 basis points annually across the base business in the next two to three years, as our transformation program is firmly on track. Moving now on to Slide 8. The strength of our business is being supported by instrument innovation with recent product launches that have revitalized our core. Waters continues to build on its robust base with customer relationships. And importantly, it's highly technical team of scientists and engineers with deep understanding of our customers problems to solve. For example, Arc HPLC which was launched in 2020, allows customers to increase the performance and capabilities for their high volume workhorse instruments without revalidating their existing methods. This is absolutely critical in compliant environments and helps us provide the benefits of newer technology to our customers while ensuring backwards compatibility. Meanwhile, our MaxPeak Premier technology provides important benefits and applications where sensitivity and reproducibility is key by virtually eliminating the metal binding affinity of compounds, like mRNAs, oligonucleotides, peptides and glycans. On the instrument side, acuity Premier is a UPLC that was custom designed for biologics and novel modality applications, providing 100x better detection sensitivity than non-premier instruments and a 50% reduction in peak scaling. Within our chemistry portfolio MaxPeak premier columns which also offer this high performance, surface coatings have set a record in terms of uptake for new columns as this technology continues to be well received by our final customers. Turning to a mass spec portfolio, one additional example of innovation is our Select Series MRT, which is a high resolution multi reflecting time of flight instrument that provides remarkable accuracy at high speed with outstanding clarity. This instrument is setting the benchmark and mass accuracy. It's high throughput is enabling large sample studies of proteins and metabolites which previously would have taken too much time to conduct. Additionally, you may have seen our announcement this morning of what is this acquisition of charge detection mass spec technology CDMS. CDMS overcomes limitations of conventional mass spec in characterizing, analyzing and quantifying complex large molecules. This investments will allow Waters to develop and commercialize CDMS technology to solve significant unmet needs and novel modality settings such as cell and gene therapy for drug development. For the discipline my colleagues, Jon Pratt and Jianqing Bennett have brought into launches new products meaningfully grown in their contribution this year and with our product vitality index around 150 basis points up around 150 basis points to approximately 15% in Q4. Turning now to Slide 9. A key element of our informatics strategy is to provide customers with tools that help them better manage their workflows and achieve faster, easier results with high quality compliant data. Last month, we extended our next generation informatics platform Waters Connect to our Tandem Quad mass spectrometers for core quantitation starting with food testing. As any scientist who works in mass spec will tell you current software across the industry is powerful, but designed to fit all purposes and as a result can be complicated and difficult to use. A new software is built around the purpose and end market application for which it is being used. Delivering on our key principle of providing advanced technology that is fast, robust and easy to use. It reduces review times by up to 50% compared to the current market leading platform by allowing labs to meet their compliance and data integrity requirements. The overriding benefit here is that analysts can reduce review time to a minimum which is one of the largest bottlenecks in the lab, improving workflows for quantitative LCMS and mass spec data review is critical for our customers as it helps improve the throughput and efficacy. I spent time with our launch team last week and the rollout has begun with food testing applications and the plan to extend it to other applications in the near future. Now turning to Slide 10. Let me turn to the critical problems in higher growth adjacencies that we identified this year and believe we can solve overtime. First, in Bioseparations, we see an opportunity to take our chemistry expertise from small molecule separations and apply it to novel modalities and large molecule separation. Despite the rapid growth, there are significant challenges in characterizing and confirming the quality of these large complex molecules. Take mRNA as an example. The industry has a key unmet need of sustaining analytical control when measuring molecular integrity. Current practices for newer modalities like this are not as reproducible as desired, because there is not enough precision. So by advancing a biologic capabilities, we can unleash our chemistry expertise and our engineering expertise to better characterize and separate these molecules and then identify items such as process related impurities and degradation that are critical in later stage development and high volume manufacturing. In this area specifically, we're looking at bioseparations solutions for mRNA and other nucleic acids, proteins and lipid nanoparticles, as well as viral vector gene therapies and vaccines, and adeno associated viruses. Second, in bioprocess characterization, one of the key differences in bioprocessing versus small molecule processing is that once you define the manufacturing process, you're effectively stuck with it and cannot optimize it without completely revalidating the process because it is tied to the drug master file. By providing analytical techniques that are powerful enough to characterize the product sufficiently, we believe that we can overcome this barrier and separate the process from the product. This is a significant need in the industry and has the potential to be a very attractive market. Our partnership with Sartorius is a key step in this journey and as we bring the processing power of LCMS [outlines] [ph] the biocode in a workflow that is simple, powerful and fast and can be easily used on site by bioprocess engineers. The third application is of LCMS and diagnostics, where we need a fast, unbiased detection of multiple biomarkers to enable early disease detection. We believe mass spec has a significant role to play here. They've already demonstrated a proof of concept that the U.K. government in characterizing the past CoV2 virus with excellent sensitivity and selectivity, leading to a lower false positive rate than many other techniques. In review, our strong fourth quarter results cap a very successful year for Waters with broad based across our end markets and geographies. We sustained our momentum with strong two years stack revenue growth throughout the year, without transformation now embedded in how we operate. Our core business has been revitalized with growing contributions from innovative new products and initiatives. We are laser focused on our commercial execution. The market we serve remain in a healthy state and our regions have rebounded solidly from pandemic lows. Meanwhile, we see opportunities in higher growth adjacencies that will raise our exposure to faster growing market segments as we start to solve the critical problems we've identified over time. With that, I'd like to pass the call over to Amol for a deeper review of the fourth quarter and full year financials as well as our outlook for the first quarter and the full year of 2022. Amol?

Udit Batra:

Thank you, Amol. In summary, we are pleased with our performance this year. Our core business is reenergized, our transformation is on track. And we built really good commercial momentum going into 2022. And we are laser focused on our commercial execution and accelerating innovation through our portfolio while reaching higher growth, close adjacent markets. With a new leadership team in place and our transformation well underway, we're also expanding our focus on environmental, social and governance topics. We've initiated a complete materiality assessment which will allow us to look at areas where Waters can contribute and ensuring we do our part to leave the world better than we found it. I look forward to sharing an update on this later this year. With that, we will now begin the Q&A session. Operator?

Vijay Kumar:

Hey, guys, thanks for taking my question. I had one on the Q and one on guidance. And maybe we'll start with the Q, Udit”. If I look at the instrument growth of 5%, 12% that came in well above expectations. Was there any year-end budget flush? Or is this the continuation of the execution momentum we've seen throughout the course of ’21? Maybe talk about what happened in Q4, why instruments came in so strong?

Vijay Kumar:

That's helpful, Udit. And maybe one for Amol on the guidance. It looks like Q4 gross margin came in a little bit light. And I thought I heard you say it was in line with expectations. Is there anything on the gross margin line for fiscal '22? Because I look at your revenue growth -- reported revenue growth of the four to six, earnings growth of a five to seven, you do have some share repurchases going on. So that implies maybe perhaps margins were flat to down, what would cause margins to be down and is that a gross margin issue?

Operator:

Thank you so much for your question. Our next question is from Dan Brennan with Cowen. Your line is open.

Udit Batra:

Sure. Good morning, Dan. Look, overall, the best way to look at this is to look at stacked growth rates, right? If you just look at the stacked growth rates, we finished the year around 7% overall in the business where pharma came in higher at double-digit. And what we've seen on the pharma side is really strong uptake, not just the demand, not just the increasing demand in the market. So it's slightly higher than historical averages, but also water specific execution. First, from a commercial perspective, across our five commercial initiatives, as well as new product introduction which has had very good uptake, especially in pharma, arc HPLC has done very well, especially in China. And increasingly in the U.S. and Europe, the acuity premier with the MaxPeak technology has really hit a real sweet spot with novel modalities, which have higher affinity to metal surfaces. So new products, especially on the instrument side. And now we have introduced our next generation of informatics platform for mass spec. So we expect new products to continue to do well. So to summarize, the pharma end market has been a bit more robust than historical averages. But in that robust market, we have been executing extremely well from a commercial perspective, as well as with new product introductions. So that bodes well for what we think about in the future for this largest end market.

Udit Batra:

Dan, I mean, China, thanks for the question, really excited. I mean, it all starts with leadership. We have a new leader in China who's really executing what I've talked about at a global level from a commercial perspective. Overall, I mean, as the overall business grew 16% for the year, China was in the mid-20s, driven again, by very, very strong instrument growth rates, well in excess of 30% growth where LC is doing very well. From an end market perspective in China, pharma, and/or especially our focus on CDMOS there has grown the business in excess of 40%. So excited about what we're seeing in China. New products are doing extremely well. And there's no reason to believe that that should slow down going into the New Year. If anything, we expect newer products to gain even more traction. And there's a lot more to do in China, by the way, increasing penetration across the board. And then, turning to your question on bioproduction, look, in general, the two growth initiatives that we've highlighted, that are focused on biologics and novel modalities are number one on bioseparations, and number two on bioproduction. On bioseparations, we are a world leader in separating small molecules. And with our chemistry and engineering expertise, we're simply turning that to larger molecules, like mRNA oligonucleotides proteins. And then from a bioproduction perspective, we've talked about first, the collaboration, we have Sartorius, where we first focused on characterizing the process for a high volume application called clone selection, where we took the workflow from about six weeks to less than a week. And that has a lot of traction with our customers, we are now adding on other attributes that we want to measure for the process, creating a seamless software bridge between the [indiscernible] of Sartorius as well as the biocode that we have. And then looking at other applications, be it scale up to larger bio reactors, or other modalities like again, oligonucleotides and more complex protein. So a lot of runway on the bioproduction side, and the deal that we announced a small tuck-in as you know, CDMS, thanks for asking about it. It's something that's good and dear to my heart. And I must admit, I started off as a skeptic. When I first heard about the technology, the team sent me some publications and said, hey, it's a technology. And I thought it's another hobby, but it's a really good fit, right. So basically, the CDMS technology takes mass spec to larger molecules, where we can now separate mRNA as well as viral vectors, which are larger proteins, intact proteins where mass spec reaches its limits. And what excited us the most is a demonstration we did with our customers several months ago, where we expected roughly 20 customers to come in Kendall Square, where we have our immerse lab roughly 40 showed up, I was so excited, I asked them all and our Head of Strategy. Dan Welch to join me to listen to the customers that sealed the deal, right? So we basically said, look, this is a technology that our customers really, really want. It's going to allow them to analyze more complex molecules much more carefully. And now we have the development, commercialization manufacturing rights for the technology. So super excited about what we are seeing in the bioproduction, bioseparations area.

Puneet Souda:

So first of all, congrats on the strong quarter here. Really strong in instrumentation growth. So have a bit of a question on the guide. First, 5% to 7% full year guide, how much are you expecting in terms of contribution from the replacement initiative here? I mean, is this still a 40 million or so replacement initiative for 2022 as you were expecting before or is it more now? And how much contribution in the full year guide from maybe new growth initiative with the separations and bioprocessing clone selection the diagnostics? Yes, contribution overall from -- in the guide from the replacement initiatives and these new initiatives that you have in place now because I mean, Udit you joined them in 2020. It's been one full year of lift that we're seeing in the replacement cycle, and just wanting to get as to sort of how should we think about this year and maybe even into next year for the replacement initiatives in these new efforts that you have underway?

Puneet Souda:

Got it. And then on the order book and overall demand. Just maybe could you update us where the backlog stands? I think that's fairly strong in the fourth quarter, even in third quarter, maybe just give us, how do you see that conversion in the first quarter and through the year? And just update us if you could on the supply chain, obviously, that's impacting number of companies. But how should we bounce that order conversion versus the supply chain and any other inflation concerns that you're seeing in the market? Thank you.

Amol Chaubal:

I mean just to build on it, Puneet, as you know, I mean, our products are differentiated. And that's not just instruments. I mean, we have very innovative chemistry portfolio that the customers like. We have a great track record and a seamless service. And we have an informatics platform that's really valued by our customers. So that puts us in a great spot to have these discussions to with our customers walk them through what's happening in the market. And then internally, what we've done is, we're keeping a close eye on how prices are moving in the market, especially labor freight and electronic components. We are constantly training and educating our sales teams so that they are aware about what's happening on the operation side so that they can have productive dialogue with our customers. And through Q4. we've navigated that well and that gives us a lot of confidence going into 2022.

Jack Meehan:

So strong end to the year on the chemistry front, was hoping you could comment more on customer ordering trends. Do you think there was any stocking benefit in the quarter or any quantifiable budget flush across the portfolio?

Jack Meehan:

Great. And then just was hoping either you or Amol could comment on expectations for operating expenses in 2022. So gross margins of 58%, it'd be down something like 50 bps year-over-year, the op margin is more like flat. So just talk about the investments in R&D, and sales and marketing for 2022. What's the plan there?

Udit Batra:

I think just to sort of conclude the formula is very simple. I mean, we drive the top line with our initiatives, there's a lot of leverage in the P&L. And with the productivity initiatives, we make a bit more room. We're not skimping on the investments. We believe that these are really necessary and helpful for us to set up the future. And hence we deliver a 20 to 30 basis points increase in margin. So the idea is very simple.

Josh Waldman:

Hi, guys, thanks for taking my questions. First, Amol, I wonder if you could comment on how you're thinking about growth across instruments, consumables and service for 2022 or within your 2022 guide.

Udit Batra:

And Josh, not much different than what you would have seen in and how we exited 2021. So 7% stack rose with consumables being closer to double-digit, instrument being slightly lower at 6%, but well above historical averages.

Mike Ryskin:

This is Mike Ryskin on for Derek. I'm going to ask two quick ones. First on the academic and government markets. didn't really touch on the prepared remarks. You guys had a little bit of a bounce back to end the year. But I know that can be super volatile and 2020 was an easy comp. So could you give us an update on what you're seeing in that probably more than the mass spec portfolio. But still is that end market across geographies, starting to come back to normal, or is there still some choppiness there? And then, the quick follow is on M&A, the Megadalton deal. Most technology tuck-in, is that, something like that technology or an underlying platform deal, something we should expect going forward. Just given your leverage in the balance sheet, are you willing to look at bigger assets? Thanks.

Amol Chaubal:

I just wanted to add on the previous question, so on the academics and government, China is one area of focus for us because if you look at China, we grew on a stack basis in [indiscernible] constant currency, industrial stack 16%. But what brought it down was academics and government. And we are laser focused on revitalizing growth in that business. There are two parts to the problem, part of it is our own commercial execution, which we are focused on. But there's also drag from the VAT reimbursement issue, which we think will progressively resolve over the course of 2022.

Patrick Donnelly:

Udit, maybe just a follow up on Mike's question there in terms of M&A. You've mentioned the large [mall] [ph] strategy a few times, obviously, one, where you see investment [indiscernible]? I mean, how do you think about balancing organic versus inorganic investments in that segment? I mean, is the base business, do you feel like the technology isn't a good enough place to kind of go after some of those high growth areas? Or do you feel like it really needs to be supplemented in organically with some deals just curious on the strategy on that front?

Operator:

That does conclude our Q&A portion of today's conference. I will now turn our call back over to Mr. Udit Batra.

Operator:

This does concludes today's conference call. We thank you all for participating. You may now disconnect and have a great rest of your day.

Operator:

Good morning, and welcome to the Waters Corporation Third Quarter 2021 financial results conference call. All participants will be on a listen-only mode until the question-and-answer session of the conference call. The conference call is being recorded, and if you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Manager of Investor Relations. Please go ahead, sir.

Udit Batra:

Thank you, Caspar. And good morning, everyone. Along with Caspar, joining me on this morning's call is Amol Chaubal, Waters' Senior Vice President and Chief Financial Officer. We have reported another quarter of strong, broad-based momentum across our portfolio and geographies. We first thank our over 7,000 colleagues around the globe who represent the indomitable spirit of Waters. Our teams have remained focused on supporting our customers and developing and delivering exciting new products, despite the continuing impact of the pandemic. September 1st, marked one year since I joined the Company, and what a year it has been. I'm often asked what is different. I would first like to talk about what is the same, because that is what is giving us the ability to compete more effectively. Our brand stands for these scientific expertise, a clear understanding of our customers' challenges, and courage to invest in game-changing innovation. This remains the same. What we have injected with our new leadership team is a stronger focus on execution, a sense of urgency and accountability. We are a work in progress, but the trend is positive. Now moving to Slide 3, which summarizes where we are on our journey. Firstly, we're sustaining our commercial momentum with another strong quarter, delivering SPAC sales growth of 6%, showing solid business performance with minimum COVID ailment. Meanwhile, our commercial initiatives and strong traction of new products by Premier Columns and instruments and Arc HPLC were Venn positioned to deliver market plus growth through 2022. Finally, we're building on this momentum by taking decisive steps in solving key problems that are present in higher growth adjacencies, like Biologics Manufacturing. I will now provide a brief overview of our third quarter operating results, as well as commentary on our end markets geographies and technologies. Amol will then review our financial results in did you guys provide comments on our updated financial outlook, we will then open up the phone lines to take your questions. Moving now to slide 4, in the third quarter, our revenue grew 11% as reported, and on a constant currency basis, reflects the second continued strength in our pharma and industrial end markets. That is demand for our instruments and regarding revenue products. This translates to a 6% stacked cater for the quarter versus 2019 on a constant-currency basis. Year-to-date, revenue has increased 21% with the constant currency stack CAGR versus 2019, also about 6%. Our top-line growth resulted in Q3 non-GAAP adjusted earnings per share of $2.66, growing 23% year-over-year. Year-to-date, non-GAAP adjusted earnings per share have grown 39% to $7.54. Looking more closely at our top-line results for the quarter on Slide 5 in constant currency. First, by operating segment, the Waters division grew 9%, while TA grew by 27%. By end-market, our largest market category Pharma, grew 16%, industrial grew 9%, while academic and government declined by 11%. In Pharma, we saw a broad-based continued strength in sales across customer segments, geographies and applications. Spend was both in small molecule and large molecule applications, which both grew in mid-teens for the quarter. industrial, growth was reasonably broad. And next our beauty business, which saw strong growth globally internal micro Calvin imagery and Realogy. Turning to academic and government, which is about 10% of our business, continued strength in Europe was offset by softer performance in China and other regions. Moving off last year's performance by geography on a constant currency basis, sales in the Americas grew 16%, with the U.S. growing 13%, sales in Europe grew 8%, sales in Asia grew 8%, with India over 40%, and China sales were down 3%. Now to the bit of clarification on China. Demand remains very healthy, as does the execution of our initiatives. A shipment of approximately $12 million got delayed at an airport in the last few days of the quarter due to a third-party shipping issue and has been delivered in the first few days of the fourth quarter. Looking, therefore, at China orders for the quarter, this was up mid-teens, year-over-year. So, really no challenge from a demand perspective. In the U.S., growth was led by a broad-based continued strength in our pharma and industrial-end markets. In pharma, we saw strength across our instrument and Galaxy portfolios. In Industrial, our Waters and [Indiscernible] businesses both saw strong growth. In Europe, demand remains robust across all end markets with continued strength in pharma, industrial, and academic, and government. For the quarter, India was our fastest-growing market, driven by very strong growth in instrument sales to our common customers.

Udit Batra:

The strength we're seeing in our LC instrument portfolio remains a positive indicator for sustainable future growth in consumables and service. In mass spec, demand strength from pharma, customers continued with a strong demand for our single-quads, led by users for Oligo and Biologics purification, as well as strength in our Tandem-quads used in late-stage drug development. We're also encouraged by early interest in our SELECT SERIES MRT Time-of-flight platform, which delivered highest quality resolution at fast speeds. Now for recurring revenues Chemistry sales grew 13% driven by an increase in utilization of our pharma customers, as well as strength in our industrial end markets. Demand for our new Premier Columns remain strong, while our e-commerce initiative is progressing and making it easier for our customers to do business with us. So far this year, our chemistry consumables have grown almost double-digits when compared to the -- compared to our 2019 [Indiscernible] We're pleased that our Premier Technology is continuing to provide important benefits in separation and certification of mRNA and oligonucleotide molecules, given its unique ability to reduce selected binding of plasmids and mRNA to various surfaces. Service also grew double-digits again this quarter, even as last year's comps have become tougher. On a two-year stack basis, service grew 7% in constant currency for the quarter and 6% year-to-date. By focusing on our value proposition and commercial execution, we have seen an increase in service fan attachment rates and revenues. Finally, DA had its -- had a great quarter with sales up almost 30% as demand has rebounded with strong growth across all regions. DA instrument sales have grown at 8% on a 2-year stack basis so far this year, driven by strong demand for our common instruments used in the analysis of advanced materials, as well as microperimetry instrument demand for our pharma and academic customers. Moving now to slide 6, let me now focus on why we believe that we will continue to deliver market plus growth. I think you're used to seeing these initiatives, so let me use the same frame, starting from the left-hand side of the slide. In 2021, we expect our instruments investment initiatives to become over $40 million, which means an incremental 10 million over 2021. The Fusion is positively impacting our service business with land companies. Having increased by 2% so far this year, compared to the first three quarters of 2019. In 2022, we think a further 100 basis points of expansion in service plan, adoption is available. Growth and e-commerce adoption also remains strong, with chemistry sales to our e-commerce channels approaching roughly 30% versus the 21% we saw in 2019. We expect this to continue reaching over 35% by the end of next year. So far, this year, revenue from contract organizations has grown over 40% versus the comparable period in 2019. Next year, expect us to grow that low double-digits for the year versus 2021. And new products continue to do well. We are just taking the example of Arc HPLC and Premier to illustrate the point here. Both Arc HPLC and Premier continue to be strong drivers with over 45 million revenue expected from these sources for this year in total in separate and unseparate to the replacement initiative. 2022, we are expecting this number to be over $60 million. So in all these initiatives alone should give us approximately 1% over our base business growth for 2022, which we upon our beliefs in market fast growth rates. Moving now to Slide 7, we operate -- we operate a strong core business in healthy and [Indiscernible] end-markets. This strong foundation provides us a platform for solving critical problems facing our industry where we can bring our scientific expertise and product portfolio capabilities. I would like to say that our 3 years of focus, which also happened to be in high-growth end markets both in the Biologics arena, on the reagent side and bio separations. We believe there are significant problems to solve in separating and purifying these newer modalities. Having a deeper understanding of reagents, coupled with our chemistry expertise, will allow us to solve these problems. Second, in bioprocessing, the largest challenge I cited as an engineer in bioprocessing, versus small molecule processing, was that once you defined the process, you got stuck with it, because it wasn't in a drug master file. We have to decouple the process from the product. Separately, the process development timescale, our number was a small molecule, given the sheer complexity of attributes you need to measure. A simple and robust tool that can measure multiple absolutes is a potential solution. We believe that the BioAccord is the right LC-MS tool that can begin to address this challenge. Third area is diagnostics, where we need a fast unbiased detection of multiple biomarkers to enable early disease detection. We believe, again, mass spec has a significant role to play here. Moving now onto slide 8, let me illustrate what I mean by sharing what we're doing to solve some of the key problems in bioprocessing. Last week, we announced a partnership with Cytori's, a leader in bioprocessing. If you could combine our waters BIO4 system as a bioprocess analyzer with Cytori's and their bioreactors, giving scientist both faster and at-line direct access to our launch quantity characterization information. Scientists across Cytori's, Waters, and some of our customers have already shown that the combined offering will shorten product development timelines considerably, making what currently takes 6 weeks to analyze down to only 2 days. It also lays the foundation for using the BioAccord as a bioprocess analyzer for process control and quality testing in the future. BioAccord is both versatile and easy-to-use, and we expect that most of engineers will be able to master its operation within 1 to 2 weeks. In fact, one of our customers had summer intern use the BioAccord and gave raving reviews on how simple it is to use. I'm also an engineer who has been out of the lab for many years, and I was able to learn quickly. Resulting configuration with our direct analysis of rough substance, not just cell-culture media while targeting over 250 cell-culture media analyzed. Separately, we also announced a multi-year collaboration with the University of Delaware to develop technology for analytical characterization of manufacturing processes for Biologics and Novel modalities. [Indiscernible] partnerships, researchers from both Waters and the university of Delaware would identify and develop solutions. That can provide better aseptic sampling, makes center and analytical instrument improvements, and develop data analytics and process control. This partnership will help us expand our capabilities to characterize biological manufacturing processes in order to drive improvements in quality, deals, efficiency, and process control. In summary, 2021, so far, has been a very successful year for Waters. We are laser-focused on our commercial execution. The markets we serve are in a healthy state and our geographic regions have rebounded solidly from dynamic loss. Meanwhile, I'm convinced of the great opportunity that lies ahead of us in higher growth adjacencies to impact and deliver value by extending our scientific expertise and product portfolio towards helping customers solve the most complex problems in our industry. With that, I'd like to pass the call Operator Amol for a deeper review of third quarter financials and our outlook for the remainder of 2021. Amol?

Udit Batra:

Thank you, Amol. Before I wrap things up, I would like to make a few comments on our ESG efforts and our core principles to fuel innovation and make a positive impact. This includes doing our part to reduce our environmental footprint and leave the world better than we found it. Being representative of a diverse society we live in and providing effective governance that enhances long-term shareholder value pack. You will see more of our progress in each of these areas in our 2021 sustainability report coming out later this month. Turning to Slide 10. I was particularly moved recently by the new internship program we developed with team New England, designed to increase access to stem education for students of all backgrounds. Over the course of six weeks,we give high-school students, a hands-on learning experience with a mix of science, business, and soft skills. Over 70 Waters employees were involved who gave practical exposure and mentorship. We look forward to continuing these efforts in the future. In summary, we continue to be pleased with our performance this year. We're sustaining our commercial momentum with our initiatives which continue to perform well and should provide a multi-year benefit as we continue to strengthen our core. They're continuing to crack 6% on a two-year CAGR tax 6% on a two-year CAGR for our revenue in constant currency, showing that our core is strong. Our focus on accelerating innovation to our portfolio and reaching these higher growth rate area in adjacent markets. With that, we will now begin the Q&A session. Thank you. Operator?

Dan Brennan Alan:

Great. Thanks, guys. Thanks for the call, Thanks for the questions here. Maybe first off, Udit, just on 2022, you had provided some early look here with some of the drivers, come to how they're going to impact -- and just wondering if we think ahead, given the comp becoming off of for 2021, what's the right way to think about the in the early look for 2022 here? Consensus had you growing organically about 5%, which would imply a pretty nice acceleration on a 2-year stack basis.

Dan Brennan Alan:

Great. And then, just maybe as a follow-up, you've been at the helm about a year plus right now. You've done, obviously, you've outlined some areas for improvement which you've executed on in terms of new product, commercial execution, customer identification, where you were lagging, how do you think about the evolution of your impact on the business? Should we expect at some point here, as we enter 2022, that there's going to be possibly a new wave of initiatives? Just thinking through what the next leg is for Waters. And related to that, just wondering how M&A fits into that? Thank you.

Operator:

And thank you. Our next question is from Tycho Peterson, JPMorgan.

Udit Batra:

China year-to-date is over 30% growth. Only second to India in organic growth. From a demand perspective, for the quarter we were up mid-teens. And unfortunately, the shipment got stuck in the last few days of the quarter, which made it to our customers now. And if you included that into the Q3 numbers, it will be high single-digits to low-teens for China growth. So really, nothing to flat from a China perspective. In fact, I would say very happy with our new leader in China who's been implementing initiatives really really well, Arc HPLC has great traction. We have built really strong commercial momentum even in our food and environmental markets [Indiscernible]. we are extremely good about where we are in China, so nothing is really to flag from a demand perspective. And on your question on supply chain, look, like everybody else in fact -- like everybody else, we are seeing constraints in shipping in different boards that appear sporadically, right? We don't think it's a systemic issue. It's a sporadic issue, and we're not unique in experiencing those challenges. In fact, I was with a few colleagues from different industries last week, and virtually, everyone is experiencing sort of a little bit of unpredictable changes in supply chains. So we're not immune to that, and I think if somebody tells you that they are -- that's why we're not shipping as much. And then the other two pieces are of the supply chain s that are being talked a lot are are inflation; we do see inflation specifically in U.S. labor. But nothing we haven't been able to offset by price increases with our customers. So hopefully that gives you enough color on how we feel to China. Really nothing to flag, no problem at all from a demand perspective, and from a supply chain perspective. Feeling what everybody else feels, really happy with the way our teams are working through some of these issues and starting on prices where it makes sense to our customers.

Udit Batra:

And then Tycho, for AMG, I mean, we do year-to-date growing up 36%. And if you look at the consumables revenue, that's tracking nicely. So there's activity across our customers. So tracking in double-digits, so the recurring revenues are still growing double-digit with other end-market. So nothing to point out systemically overall, if you look at the market. Now, the performance is a bit different by region. Europe is doing extremely well. But as China and the U.S. are bit slower, and that has to do with [Indiscernible] One, I do have pointed out, academic endowment is a small portion of our business and historically has not been a huge focus for Waters. We have, with John 's arrival, we had started to increase our focus on that segment, as well. And if you think about the instruments part of the business, that really depends on the [Indiscernible] relationships and customer relationships. And this over time -- and pharma slowed down in many markets. And in Europe, we've come out of the gates very well. We've started to reestablish those relationships and you'll see the impact on the results year-to-date. In U.S. and China, that's work in progress and we'll give you updates as we go along. I'm optimistic with the activity I see, especially on the e-commerce and in procurement. And you see the results in our consumables business. And on the instruments side, we're improving [Indiscernible] relationships. I expect that to return, as well.

Vijay Kumar:

Hey guys, good morning and thanks for taking my question. Udit, that one for you. The $12 million shipping delay in 2Q. What segment did that impact? Was the instrument impact or government, academia. I'm curious how do you risk as Q4 from any supply chain disruption, I'm a bit curious which visibility you have.

Vijay Kumar:

That's helpful, Udit. I did have one on gross margins. 3Q gross margin is very consistent with 2Q, but if we recall, FX has an impact on you guys, at the gross margin line. Given the 200 basis points headwind in Q4, any comments on FX impact on gross margins either in Q4 or as we look through fiscal '22?

Operator:

Thank you. Our next question is from Jack Meehan with Nephron Research.

Udit Batra:

Morning, Jack. Look, nothing that we have visibility on that will go from Q4 to Q1. As I said, there is increased inventory in the different regions where we are seeing the demand going extremely, extremely well. And from an overall perspective, the $12 million was shipped rather promptly in Q4, right? It's just unfortunate that hinge on the days of Doug and the shipping throughout that Doug do it at the end of the quarter. So I don't see anything that gives us visibility at this point that would tell us that they would be an impact in Q4. And in terms of what is within our hands or you heard me talk about earlier, the extreme transparency that we have on supply chain, the processes that are much, much improved over the last year, and then finally, the increased inventory is a different reason. So feel reasonably comfortable that we should be able to manage a rather ambitious end of the year.

Amol Chaubal:

Yeah, look, U.S. labor continues to be a place where we're seeing inflationary pressures, right? I think with a strong HR function, we've put a lot of measures in place to reduce attrition and sustained talent, right? However, that doesn't play out so much in terms of cost and operating expenses into Q4. What -- as you model Q4, what you have to keep in mind is Q4 is a heavy revenue partner for us. And that results in commission payment accrued heavily in Q4, which is why it's typically seen as historically operating expenses especially as G&A on every other Q4. And that's reflected in archives.

Patrick Donnelly:

Thanks, guys. Udit. maybe one on the '22 commentary. You said you appreciate you're expecting to continue to grow above market. When we look at 2021, it feels like one of the accelerants for you guys with the replacement cycle, I think last quarter you talked about maybe setting up as an opportunity for you guys to continue on that front or was that mainly condensed into 2021 when we think about what the growth rate could look like there?

Patrick Donnelly:

That's helpful. Appreciate that. And then maybe just a quick one on the industrial market [Indiscernible] a pretty good results there. It's has been a little more mixed across the sector, you could fuse talk about what you're seeing there and expectations going forward?

Operator:

And thank you. Our next question is from Derik De Bruin from Bank of America.

Udit Batra:

Actually, overall -- and again, I talked more in terms of stack growth, the estimated growth for the year is roughly 30% and mass SPAC doing extremely well as even higher than 30% mass spect psyche Shiloh's 30%. So nothing that you will between the two sort of product platforms. But I think it makes more sense to talk about it on a stack basis. And historically, Waters have seen instrument growth between 3% and 4%. We've sort of steadily now year-to-date stack fuel is steadily on 5%. So really nice momentum. And this is through both of course, as well as mass specs and nothing really can sort of differentiate the two. Now, you asked about mass spec in particular. In mass spec, the demand is driven by across all our portfolios for us, I mean, across users in IVAS mass spec across our Tandem-quads, which are both used -- with the single quarter used for intact masks and also our Tandem-quads that are used in development, as well as food and environmental. And then of course, as I mentioned, the bioprocessing yields momentum and a lot of interest in the bioprocessing arena. So mass spec is going from strength to strength. Coming to the second part of your question on new products, as I pointed out on the -- in the prepared remarks right on -- just focusing on HPLC for a minute. Arc HPLC, as well as the premier technology, which includes columns, as well as the application of this unique technology to our instruments as that to roughly $45 million in sales in 2021, we expect that to go up to $60 plus million, sort of $15 million or so incremental. That's in the anticipate on March SPAC. New applications from BioAccord, I already mentioned that in the prepared remarks. And the MRT has a lot of interest from many of our customers, especially ones who want to use it in the proteomics space and for imaging with our DESI technology, which can be used under ambient conditions which is quite unique. Again, new products, what is that? How HQ, introducing game-changing new products. I think what we're doing differently is just making sure that there is a lot of collection once we launch these products. And they're not just [Indiscernible].

Amol Chaubal:

Yeah. So on the two questions, the first one, there's no one-time activity in R&D or SG&A. So it's pretty straightforward. On the 12 million shipment that got delayed and I mean, you could assume it's largely instruments and modeling that instrument in gross margin.

Puneet Souda:

Yeah, hi. Thanks for taking my question. So first one is just I wanted to clarify. Obviously, it's instrumentation was strong last quarter. And if you pull in this $12 million order back into 3Q, that would be strong this quarter as well, since -- just wanted to understand if there is sort of application-wise, what is driving the instrumentation sale? And maybe just if you could elaborate a little bit, if there was any in terms of QA/QC of vaccines, maybe the analysis of mRNA cap structure, there were some applications, notes published by Waters teams around that. So I just wanted to understand if you're working on QA/QC side of the proteins or mRNA Vaccines, or what does the applications that are driving the instrumentation growth that we've seen here over the last few quarters?

Operator:

Thank you. Our next question is from Josh Waldman with Cleveland Research.

Udit Batra:

The second question, on a year-to-date instrument growth is roughly 30%, quite good about that -- I don't know [Indiscernible] In Q3, we saw nice growth, double-digit again on instruments with [Indiscernible] comps in Q3 for last year already. So double-digit growth across the 2 pieces of -- 2 lines of instruments as we [Indiscernible]. As I mentioned earlier, on a year-to-date basis and the quarter is the same, LC grew an excess of 30% mass spec in the mid 20s. So really nothing to choose between the 2 instrument backlogs, makes less sense to look at it quarter-by-quarter, given the instrument trajectory. But again, nothing to choose between the two field, that both LC and Mass Spec have significant momentum in Q3 and year-to-date. So, and also going into Q4, we're really feeling very good about where we are.

Catherine Schulte:

Hey, guys, thanks for the questions. I guess just first on the instrument side of the business, revenue was down about 8% constant currency last year. Do you think you've largely recaptured that revenue at this point, or is there still some of the makeup, or do you think there's some that is just revenue that won't be recaptured. Will just be curious how you would allocate across those three buckets.

Operator:

Thank you. That concludes the questions session of today's call.

Operator:

And thank you. This does conclude today's call. You may disconnect your lines and thank you for your participation.

Operator:

Good morning. Welcome to the Waters Corporation's Second Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode until the question and answer session of the conference call. This call is also being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Caspar Tudor, Manager of Investor Relationships. Please go ahead, sir.

Udit Batra:

Thank you, Caspar, and good morning everyone. Along with Caspar joining me on this morning's call is Amol Chaubal, Waters' Senior Vice President and Chief Financial Officer; and John Lynch, Waters' Vice President and Corporate Treasurer. This is Amol's first conference call as Waters' CFO. Welcome, Amol.

Udit Batra:

I would like to start the call on Slide 3 by paying our respects to the founder of our company, Jim Waters, who passed away on May 17. Jim was a brilliant and spirited scientist and a pioneer in liquid chromatography. I met Jim the first time in 2019, when he came to talk to me about the merits of a technology we had acquired in a previous company. We spent hours in front of a whiteboard debating how to manage innovation and in particular how the application of certain technology could deliver benefit. Jim continued reaching out to me, not just on technology, but also on our mutual love for science education and then more recently on Waters. Jim's legacy will live on with each and every one of our innovations as we continue to strive to deliver benefits. Our teams around the globe have continued to manage admittedly through the pandemic, which is still very much with us. Most of all, we've kept the working environment safer employees and have remained flexible and resourceful as we continue to support our customers. I remain grateful for the ongoing resilience, commitment and dedication that our team has shown. Moving on to Slide 4, during today's call, I will provide a brief overview of our second quarter operating results as well as some commentary on our end markets, geographies and technologies. I will also update you on the progress of our transformation plan. We continue to be focused on three primary objectives

Udit Batra:

Thank you, Amol. In summary, there is much to be pleased about the first half of the year driven by strong growth across our major end markets. Thanks to solid execution and double-digit growth in instrument sales we saw broad-based revenue growth across every region. Our transformation plan continues to progress the commercial momentum and strong leadership team in place. We now turn towards deploying our strategy in large and growing end markets. We operate through accelerating innovation to our portfolio as well as progressively aligning our portfolio with higher growth areas in adjacent markets. With that, we will now begin the Q&A session. Operator?

Tycho Peterson:

Hi, good morning. Nice quarter. Udit, I want to start with the replacement cycle. I know you talked about the Arc HPLC driving replacements on that side. I'm just wondering if you could share your latest thinking on how you're sizing that opportunity. I know last quarter you opened it up to competitive instruments. So if you could talk about the LC and MS side in terms of where we are in that replacement cycle and latest thinking on the size of that opportunity. That would be great.