Waters Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2021

There are 11 speakers on the call.

Operator

Good morning. 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. It is now my pleasure to turn the call over to Mr. Casper Tudor, Manager of Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to the Waters Corporation Third Quarter Earnings Conference Call. Before we begin, I will cover the cautionary language. During the course of this conference call, we will make various Forward looking statements regarding future events or future financial performance of the company. In particular, we will provide guidance regarding possible future results of the company and commentary on potential market and business conditions that may impact Waters Corporation over the Q4, Full year 2021 2022.

Speaker 1

We caution you that any and all such statements are only our present expectations and that actual events or results that could cause our actual performance to differ significantly from our present expectations, see the risk factors included in our annual report on Form 10 ks for the fiscal year ended December 31, 2020 in Part 1 under the caption Risk Factors and in our most recent quarterly report on Form Thank you for the quarter ended July 3, 2021 in Part 1A under the caption Risk Factors, both of which are on file with the SEC as well as the cautionary language included in this morning's press release, including with respect the risks related to the effects of the COVID-nineteen pandemic on our business. We further caution you that The company does not intend to update any of its predictions or projections except during our regularly scheduled quarterly earnings release conference calls and webcast, whereas otherwise required by law. The next earnings release call and webcast is currently planned for February 1, 2022. During today's call, we will be referring to certain non GAAP financial measures. Reconciliations of the non GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and in the appendix of our presentation, which are available on the company's website.

Speaker 1

In our discussions of the results of operations, we may refer to non GAAP results, which exclude the impact of items such as those outlined in our schedule titled Reconciliation of GAAP to adjusted non GAAP financials included in this morning's press release and in the appendix of our presentation. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the Q3 of fiscal year 2020. In Now I'd like to turn the call over to Doctor. Uday Patchef, Warder's President and CEO. Uday?

Speaker 2

Thank you, And good morning, everyone. Along with Casper, joining me on this morning's call is Amol Jobel, Waters, Senior Vice President and Chief Financial Officer. We have reported another quarter of Strong broad based momentum across our portfolio and geographies. Let me 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 1 year since I joined The company and what a year it has been.

Speaker 2

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 deep 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 execution, a sense of urgency and accountability.

Speaker 2

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 stacked sales growth of 6%, showing solid business performance with minimal COVID Meanwhile, our commercial initiatives and strong traction of new products like Premier Columns and Instruments and ARC HVLC were well positioned to deliver market to 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 Our Q3 operating results as well as commentary on our end markets, geographies and technologies.

Speaker 2

Amol will then review our financial results in detail 4, in the 3rd quarter, our revenue grew 11% as reported and on a constant currency basis, reflecting continued In our Pharma and Industrial end markets, the balanced demand for our instruments and recurring revenue products. This translates to a 6% stacked For the quarter versus 2019 on a constant currency basis. Year to date, revenue has increased 21 with the constant currency stacked CAGR versus 2019 also above 6%. Our top line growth resulted in Q3 non GAAP adjusted earnings per share of $2.66 growing 23% 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 YDA grew by 27%. By end market, our largest market category, pharma, Grew 16%, Industrial grew 9%, while Academic and Government declined by 11%.

Speaker 2

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. In industrial, growth was regionally broad and led by Our TA business, which saw strong growth globally in turban, microcalorimetry and rheology. 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 now to our sales performance by geography.

Speaker 2

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 a bit of clarification on China. Demand remains very healthy as does the execution of our initiatives.

Speaker 2

A shipment Approximately $12,000,000 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 1st few days of Looking therefore at China orders for the quarter, this was up mid teens year over year. So really no challenge from a demand In the U. S, growth was led by a broad based continued strength in our pharma and industrial end markets. In pharma, we saw Europe demand remains robust across all end markets with continued strength in pharma, industrial and academic and government. For the For the quarter, India was our fastest growing market driven by very strong growth in instrument sales to our pharma customers.

Speaker 2

As you know, India is primarily a small molecule and generic market for export, and this is indicative of continued strength in global Our products and services customer demand for our instruments remains strong after an impressive first half And recurring revenues also continued to see sustained growth. Overall, instrument sales Grew 10% for the quarter, driven by robust demand, our improved commercial execution, new product contribution and Instrument replacement. In LC, the newly released ARC HPLC continued to see strong growth and uptake of our premier instruments, both Arc and Acuity, especially for applications in novel modalities like mRNA and biologics, remain solid. The strength we are seeing in our In mass spec, demand strength from pharma customers continued with strong demand for our single quartz led by uses for oligo and biologics purification as well as 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.

Speaker 2

So far this year, our NST consumables have grown almost double digits when compared to our 2019 base. We're Pleased that our premier technology is continuing to provide important benefits in separation and purification of mRNA and Service also grew double digits again this quarter, even as last year's comps have become tougher. On a 2 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 That we will continue to deliver market plus growth. I think you are used to seeing these initiatives, so let me use the same frame.

Speaker 2

Starting from the left hand side of In 2021, we expect our instrument replacement initiative to deliver over $30,000,000 in revenue. In 2022, we expect this to become over $40,000,000 which means an incremental $10,000,000 over 2021. Our focus on commercial execution is positively impacting our service business with planned coverage rates having increased by 2% so far this Compared to the 1st 3 quarters of 2019, in 2022, we think a further 100 basis points of expansion in service plan adoption Growth in e commerce adoption also remained strong with chemistry sales through 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.

Speaker 2

Next year, we expect this to grow 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 $45,000,000 revenue expected from these sources for this year in total and separate to the replacement initiative. 2022, we are This number to be over $60,000,000 So in all, these initiatives alone should give us approximately 1% over our base business growth for 20 which reaffirms our belief in market class growth rates.

Speaker 2

Moving now to Slide 7, We operate a strong core business in healthy and durable 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 There are 3 areas of focus, which also happen to be in high growth end markets. 1st, in the biologics On the reagent side and bioseparations, we believe there are significant problems to solve in separating and purifying These newer mortalities, having a deeper understanding of reagents coupled with our chemistry expertise will allow us to solve these problems. 2nd, In bioprocessing, the largest challenge I felt as an engineer in bioprocessing versus small molecule processing was that once you defined the process, you got Because it was in the Drug Master file.

Speaker 2

We have to decouple the process from the product. Separately, the process development timescales are longer versus small Given the sheer complexity of attributes you need to measure, a simple and robust tool that can measure multiple attributes is a potential We believe that the BioAccord is the right LC MS tool that can begin to address this challenge. 3rd 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 Moving now on to Slide 8, let me illustrate what I mean by sharing what we are doing to solve some of the key problems in bioprocessing. Last week, we announced a partnership with Sartorius, a leader in bioprocessing.

Speaker 2

We will combine our Waters BioCore system as a bioprocess analyzer with Sartorius Amber Bioreactors, giving scientists both faster and at line direct access to advanced Quality characterization information. Scientists across Sartorius, Waters and some of our customers have already shown that the combined offering will shorten We have demonstrated development time lines considerably, taking what currently takes 6 weeks to analyze down It also lays the foundation for using the BioAccord as a bioprocess analyzer for process control and quality testing in the future. In fact, one of our customers had summer interns 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 will allow direct analysis of drug substance, Through this partnership researchers from both Waters and the University of Delaware will identify and develop In summary, 2021 so far has been a very successful year for Waters.

Speaker 2

We are laser focused on our The markets we serve are in a healthy state and our geographic regions have rebounded solidly from And with that, I'd like to pass the call over to Amol for a deeper review of Q3 financials and our outlook for the remainder of 2021. Amol?

Speaker 3

Thank you, Uddit, and good morning, everyone. As Uddit outlined, we recorded net sales of $659,000,000 in the 3rd quarter, an increase of 11% in constant currency. Reported sales growth was also 11%. Looking at product line Our recurring revenue, which represents the combination of chemistry and service revenue, increased by 11% for the quarter, while As we noted in our last earnings call, recurring revenues were not impacted by a difference in calendar days this quarter. Looking ahead, There are 6 fewer days in Q4 of this year compared to 2020.

Speaker 3

Now I would like to comment on our 3rd quarter non GAAP financial performance versus the prior year. Gross margin for the quarter was 58.9% compared to 5.8 percent in the Q3 of 2020. Improvement was driven primarily by volume leverage and revenue mix. The foreign exchange benefit in the quarter was about 1%. Moving down to P and L, Operating expenses increased by approximately 17% on a constant currency basis and on a reported basis.

Speaker 3

The increase was primarily attributable to higher labor costs due to the normalization of prior year cost actions as as well as higher variable compensation

Speaker 1

on the higher sales volume.

Speaker 3

In the quarter, our effective operating Tax rate was 11.7%, a decrease from last year due to some favorable quarter specific discrete items. Excluding the impact of these discrete items, our year to date tax rate is consistent with the prior year. Our average share count came in at 61,900,000 shares or about 400,000 less And the Q3 of last year as a result of our share repurchase program. Our non GAAP earnings per fully diluted share For the Q3 increased 23 percent to $2.66 in comparison to 2.16 $0.15 last year. On a GAAP basis, our earnings per fully diluted share increased to $2.60 compared to $2.03 last year.

Speaker 3

A reconciliation of our GAAP to non GAAP earnings is attached in the press release issued this morning and in the appendix of this presentation. Turning to free cash flow capital deployment in our balance sheet. We define free cash flow as cash from operations, less capital expenditures and excludes special items. In the Q3 of 2021, Free cash flow was $140,000,000 after funding $40,000,000 of capital expenditures. Excluded The free cash flow was $12,000,000 relating to investment in our Crandon Precision Chemistry operations.

Speaker 3

Year to date, Free cash flow increased to $488,000,000 and at approximately $0.25 of each dollar of sales converted into free cash In the Q3, accounts receivable DSO came in at 71 days, down 5 days decreased by 13 days compared to the Q3 of last year. Given the higher sales volume and our proactive measures to secure supply, Inventory increased by $62,000,000 in comparison to the prior year. We maintain a strong balance sheet, access to liquidity and well structured debt maturity profile. In terms of returning capital to shareholders, we repurchased approximately 360 9,000 shares of our common stock were 151,000,000 in Q3. At the end of the quarter, our net debt The acquisition was $958,000,000 with net debt to EBITDA ratio of about 1.

Speaker 3

Our capital deployment priorities are to invest in growth, maintain balance sheet strength and flexibility, return capital to shareholders And to deploy capital to well thought out attractive and adjacent growth opportunities. As we look forward to the remainder of the year, I would like to provide you with some update on our thoughts for 2021 on Slide 11. Throughout this year, we've seen good momentum driven by robust End market demand and strong commercial execution. We believe that this momentum will continue and expect our near term growth We continue to contribute meaningfully to our performance. Looking at the 4th quarter, the comparison is more challenging as it was the 1st quarter transformation journey and was further favorably impacted by post lockdown elevated year end budget plus spending.

Speaker 3

In addition, we have 6 fewer calendar days in the Q4 of this year. This dynamic supports raising full year 21 guidance to 15% to 16% constant currency sales growth. At current exchange rates, The positive currency translation is expected to add approximately 1 percentage point, resulting in full year reported sales growth guidance of 16 Our operating margin is expected to be approximately 29% to 30%. We expect our full year net interest We expect it to be approximately $62,000,000 Our share repurchase program will also continue into Q4 And we'll provide quarterly updates as appropriate. Rolling all this together on a non GAAP basis, full year 2021 earnings per Fully diluted share are now projected in the range of $10.94 to $11.04 This includes a positive currency impact of approximately 2 percentage points at today's rates and assumes no Looking at the Q4 of 2021, we expect constant currency sales growth to be 5% to 7%.

Speaker 3

At today's rates, currency translation is expected to subtract approximately 2 4th quarter non GAAP earnings per fully diluted share are estimated to be in the range of $3.40 to $3.50 This includes a negative currency impact of approximately 3 percentage points at today's rates and assumes no material adverse supply impact Now I would like to turn it back to Uddiv for summary comments. Uddiv?

Speaker 2

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 the diverse society we live in and providing effective governance that enhances long term shareholder value. 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.

Speaker 2

Over the course of 6 weeks, we gave high school students a Hands on learning experience with a mix of science, business and soft skills. Over 70 Waters employees were involved We gave practical exposure and mentorship. We look forward to continuing these efforts in the future. In summary, we continue to be We are pleased with our performance this year. We are sustaining our commercial momentum with our initiatives, which continue to perform well and should provide a multi year benefit as we continue to strengthen We're continuing to track 6% on a 2 year CAGR for our revenue in constant currency showing that our core is strong.

Speaker 2

We're focused on accelerating innovation to our portfolio and reaching these higher growth rate

Operator

Thank you. Our first question is from Dan Brennan, Allen. Your line is open.

Speaker 4

Great. Thanks guys. Call. Thanks for the questions here. Maybe first off, Udi, just on 2022, you provided some early look here with some of the drivers And how they're going to impact.

Speaker 4

I'm just wondering if we think ahead, given the comps you're coming off of for 2021, what's the right way to think about the early look 2022 here, consensus had you growing organically about 5%, which would imply a pretty nice acceleration on a 2 year stock basis.

Speaker 2

Thanks for the question, Dan. Look, first, just for this year, I mean, we're tracking at a 6% plus Stack growth rate. So really the base business is doing rather nicely. And we would feel that The transformation is now hitting its stride, so the base business should continue to track along those lines. Now We've already said Market Plus and what gives us conviction that it's going to be Market Plus is the initiatives that we've outlined, including the replacement, including Additional penetration in different channels and better launch of new products.

Speaker 2

So wherever the market is, we expect to be Market Plus given The initiatives and in terms of what you should expect for next year, again, the same logic applies, right? If the market is 4, we should be 4 plus if it's We are doing super well. I mean you saw that year to date both Pharma and Industrial are tracking close to 20% on a 2 year basis. They're well ahead of what we've seen over the history of quarter. So we're really good going into the next year and we have concrete initiatives that make us believe that

Speaker 4

Great. And then just maybe as a follow-up, you've been at the helm about a year plus right now. Yudan, 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 we 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 kind of initiatives, just kind of thinking through what the next leg is for Waters.

Speaker 4

And related to that, just wondering how M and A

Speaker 2

Thanks for the question. First, we have to make sure we do more of the same, right? I mean, and that's that I feel really good about, especially with the leadership of John Pratt and Jian Qing really Executing even further on our initiatives. 2nd, feel very good about our ability to bring in new products to the market. They have tremendous, tremendous traction, right, especially the products that we launched recently, ARC HVLC, the Premier Columns, both Significantly to the top line.

Speaker 2

And the MRT, the Select Series MRT has a lot of interest from our customers across proteomics, Across imaging and across many different segments. So feel very good about what our pipeline is contributing and there is more to And finally to your question on M and A, look, I mean, we've outlined the areas of growth we are And I think what you will see is that we're not just interested in entering these areas really needing. We are really thinking And freshly minted after finishing my PhD days into my new job, I was ushered into a manufacturing plant where we were still Vaccine vaccines using chicken embryo eggs. So I sat with eggs opening them up and I won't tell you the rest of the process. The was designed many, many years ago, probably decades ago.

Speaker 2

And the reason that you were that you and that's how MMR Vaccines are still manufactured today, while we have much better technology in cell culture to be able to manufacture the same type And the reason for that sort of conservatism is that the process and the product are indistinguishable in the drug And that's something that we really want to work on. We believe that our collaboration with the University of Delaware will help us make Right in that direction. And I'm super excited about what we've just announced with Sartorius. I mean Sartorius is a leader in bioprocessing and They have probably the deepest penetration of small early stage bioreactors that are used for clone selection. And that collaboration has two benefits.

Speaker 2

1, we're able to take the BioAccord and improve a process that takes about 6 weeks from down to 2 days. And that's been shown in collaboration with Artois scientists and our scientists as well as customers. So very We're excited about that. There are several 100 amber bioreactors out there, and so we hope to be able to take advantage of that. And then secondly, It opens up for Waters a higher growth area where we would have not otherwise entered.

Speaker 2

I mean in this case we want to With the capabilities that we possess, we feel extremely good about the initiative. So in summary, continuing momentum 2nd, recharging innovation and 3rd, looking to enter these faster growth areas through first partnerships and increasingly open to M and A, if it Makes sense. But I remind you that for M and A, we are a financially disciplined company. So you won't see us jumping in headfirst into something that doesn't make.

Operator

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

Speaker 5

Thanks. Udi, maybe I'll With China, you noted the $12,000,000 shipment delay. It doesn't sound like you're flagging any demand issues, but I'm just curious if you could elaborate a little bit on what you're seeing in that market. And then Any comments on supply chain? Obviously there's a lot of focus on that in the current environment.

Speaker 2

So Tycho, thanks for the question. Look, China year to It 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, Shipment got stuck in the last few days of the quarter. It's made it to our customers now.

Speaker 2

And if you include That into the Q3 numbers, it will be high single digits to low teens for China growth. So really nothing to flag 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. HVAC has great traction. We have we've built really strong commercial momentum even in Food and environmental markets, Monstex doing super well.

Speaker 2

So we're extremely good about where we are in China. So nothing 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 In shipping in different ports that appear sporadically, right? We don't think it's a systemic issue. It's And we are not unique in experiencing those challenges.

Speaker 2

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 chain. So we're not immune to that. And I think I think if somebody tells you that they are, they're probably not shipping as much. And then the other two pieces are of the supply chain that are being talked I think we haven't been able to offset by price increases with our customers. So hopefully that gives you enough color And how we feel.

Speaker 2

So 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 to surmount these issues and passing on prices where it makes sense to our

Speaker 5

Okay. And then for the follow-up, academic government is only 10%, but it was down 11%. Can you maybe just touch on what You're seeing there and do you expect that to turn into the 4th quarter? I don't think budget flush.

Speaker 6

It looked

Speaker 2

like For AMG, I mean we do year to date, we're growing roughly 6%. And if you look at The consumables revenue, that's tracking nicely. So there's activity across our customers are tracking in double digits. So recurring revenues are still growing double digits like with other So nothing to sort of point out systemically overall if you look at the market. Now The performance is a bit sort of different by region.

Speaker 2

Europe is doing extremely well, Whereas China and the U. S. Are a bit slower and that has to do with 2 reasons. 1, As we pointed out, academic and government is a small portion of our business and historically has not been a huge focus for We have with John's arrival, we have 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 deep AOL relationships and customer relationships.

Speaker 2

And this over time has sort Slow 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 We see the impact of the results year to date. In U. S.

Speaker 2

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 e commerce and in procurement and you see the results in our consumables business. And on the instrument side with Improving KY relationships, I expect that to return as well.

Operator

Our next question is Vijay Kumar, Evercore.

Speaker 6

Hey, guys. Good morning and thanks for taking my question. Udita, one for you. The $12,000,000 shipping delay in 2Q, What segment did that impact? Was the instrument impact for government academia?

Speaker 6

And I'm curious how dearest is Q4 from any Supply chain disruption, I'll be curious what visibility you have.

Speaker 2

Firstly Vijay, good morning and similar to what I just said to Tycho, really nothing to be concerned about from a demand In China, the $12,000,000 has made it to the customers and it is a bit spread. It's basically all instruments. It's not Any consumables, it's all instruments and it's made into the customers, a bit spread across the different customer segments, pharma, industrial As well as academic and government, so nothing sort of one segment feeling more pain. And In terms of how we're dealing with these issues, look, we have a superb supply chain department. We have extreme transparency And the timing of the shipments.

Speaker 2

And we have started to build inventory where we see order spikes in And so we feel that we should be able to manage to the volatility that we are seeing in different

Speaker 6

That's helpful. And I didn't have 1 on gross margins. 3Q gross margins were consistent with 2Q, but if you recall, FX Has an impact on you guys, the gross margin line. Given the 200 basis points headwind in Or any comments on FX impact on gross margins either in Q4 or as we look to fiscal 'twenty two?

Speaker 3

Yes. So Vijay, I mean, we do expect our gross margins in Q4 to be about 58% to 59%, Right. And we've seen so far in Q3, as you said, 1% tailwind on the gross Looking ahead, I mean, dollar has sort of strengthened and we do have most currencies we are operationally And that's the currency where we are exposed. But other than that, I mean, we've sort of included that in our guide. And that's why you see

Speaker 7

we are close to a

Speaker 3

$0.10 headwind on EPS versus the last earnings call

Operator

And thank you. Our next question is from Jack Meehan with from Research.

Speaker 8

Thank you. Good morning. I wanted to just get a little bit more color on the You flagged in China, the $12,000,000 so that was delivered in October. Obviously, the supply chain dynamic seems to be getting incrementally more challenging each week. So I was just curious what how things are going there?

Speaker 8

And do you think Does your guidance contemplate any orders could slip from 4Q into 2022 as well?

Speaker 2

Good 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 $12,000,000 was shipped rather promptly in Q4, right? It's just Unfortunately, the quarter ends on the days it does and the shipping costs occurred towards the end of the quarter. So I don't see anything that gives us visibility at this point That will tell us that there will be an impact in Q4.

Speaker 2

And in terms of what is within our hands, I mean you I 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 in the different regions. So feel reasonably comfortable We should be able to manage our other ambitious end of the year.

Speaker 8

Great. And then, was just curious about labor Trends you called out the fact that you were now above the recovering from the pre pandemic levels. Was just curious if you felt like there was more spend coming in, in 4Q, and just maybe overall competition for labor, how you think you're Managing in terms of retention?

Speaker 3

Yes, Alok, I mean U. S. Labor continues to be Sort of a place where we are seeing inflationary pressures, right? I think with a strong HR function, we've put a lot of measures in place to Reduce attrition and sustain talent, right? However, that doesn't play out so much in terms of cost and operating expenses into As you model Q4, what you have to keep in mind is Q4 is a heavy revenue quarter for us.

Speaker 3

And that results in commission payment accrued heavily in Q4, which is why you typically see

Operator

And thank you. Our next question is from Patrick Donnelly with Citi. Your line is open.

Speaker 7

Great. Thanks, guys. Udi, maybe one on the 'twenty two commentary. Certainly, I 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 was the replacement cycle.

Speaker 7

I think last quarter you talked about maybe the 6th or 7th inning Using the baseball analogy, how do you think about that in 2022 kind of setting up as an opportunity for you guys to continue on that front? Or was that mainly condensed into

Speaker 2

Baseball, so I kept using the baseball analogy and people have talked sense into me to start talking in revenue numbers. So that's why we Put that slide together, which is Slide 6 in the prepared remarks. Look, we saw Say 1% to 1.5% acceleration on a stacked basis due to the initiatives. And the initiatives We're not just the instrument replacement. We saw service attachment increase of aftermarket.

Speaker 2

We saw e commerce adoption go from 20% to 7%, 28%. Contract Organizations grew, which was a new channel for us, grew roughly 40% on year basis and new product contribution also did extremely well. So across the board 1% to 1.5% That's sort of benefit over what I would say the base growth and robust end markets. Next year we think that's roughly 1% Versus the base market growth or whatever the base market growth will be. So for instrument replacement, this This year, we had roughly $30,000,000 or so of benefit.

Speaker 2

Next year, it will be $40,000,000 which is $10,000,000 incremental, right? So that's how I would think about Right. So for service, 200 basis points, another 100 basis points on top. So the 200 basis points already benefits us next year. And then e commerce goes and then you can read the So I think that for me is how I would think about 2022 and beyond, right?

Speaker 2

And as you think about what's happening beyond, this is now part of This is part of our execution that John Pratt and Yan Ching Are implementing, right? So we now have the full list of HPLC, UPLC As well as the tandem quads in the CRM system that our reps are going through step by step And this will continue next year and will go on into the year after. Same thing is true for our service attachment rates. We know where the attachment rates are. We're using that database to now go after it.

Speaker 2

So it has become part of the DNA of the organization. And I think that gives me confidence that we will be able to accelerate Also next year. And then finally, new products, as I mentioned, are doing very well. MRT has just started to pick up A lot of interest we've talked about our HVAC and Premier doing very well. So feel reasonably good about that 1% incremental

Speaker 9

over what would be any

Speaker 7

Yes, that's helpful. Appreciate that. And then maybe just a quick one on the industrial market. You guys put up pretty good results there. It's been a little more mixed Across the sectors.

Speaker 7

Can you just talk about what you're seeing there and expectations going forward?

Speaker 2

Look, I mean across all end markets, right? I mean you look at pharma and now you Industrial, it's roughly 6% to 6.5% stacked growth, right? Historically, that's been 4% to 5%. So we are seeing even a bigger acceleration relatively speaking in industrial versus And I must say we're seeing extremely, extremely good performance out of the DA business, right. So nice performance across the different customer segments, be it in Advanced Materials, be it batteries, Where we test sluddies for renewable batteries and I don't need to tell you why that's important these days.

Speaker 2

Electronics that's growing in the high teens double The Life Science part of our DA business also growing nicely. So in DA, we're seeing really, really Good momentum and again on a stack basis even outpacing the overall business roughly 8% or so growth. So I think In industrial, we feel that our customers have found a way to work despite the pandemic. Our Service engineers and our sales teams have access to many of these customers initially virtually, but in many regions increasing Also physically our service engineers both across Waters and PA are actually more welcome at our customer side than many of our Many of their own employees. So, industrial is has picked up nice strength and it's across all geographies.

Speaker 2

China is doing well, U. S, Europe, rest of Asia also doing It's a real area of strength and we're lucky to have a business like DA that's kind of pointed in that direction.

Operator

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

Speaker 5

Thanks for taking the question. This is Mike Ryskin on for Derek. I want to follow-up a little bit on the instrument performance you saw in I was wondering if you could break out anything you saw different in terms of the LC versus mass spec, and particularly sort of Tying it back to the academic and government question, I'm wondering if that was more on the mass spec side and just sort of how you see some of those new product introductions playing out this quarter and going forward?

Speaker 2

So firstly, overall and again, I talk more in terms of stack growth. I mean, instrument For the year, it's roughly 30%, right? Both LC and mass spec are doing extremely well, right? LC even Higher than 30%, mass spec, slightly shy of 30%. So nothing to choose between the 2 sort of

Speaker 3

product platforms.

Speaker 2

But I think it makes more sense to talk about it on a On a stacked basis, historically, Waters have seen instrument growth between 3% and 4%. We've got a steadily now Year to date, stack growth is steadily around 5 ish percent. So really nice momentum and this is true both across LC As well as mass spec, so nothing really to sort of differentiate the 2. Now you asked about mass spec in particular. In mass spec, The demand is driven by across all our portfolios across users in And then of course, as I mentioned, the BioAccord, we see renewed momentum and a On new products, as I pointed out in the prepared remarks, right, on HVAC, Just focusing on HPLC for a minute.

Speaker 2

ARC HPLC as well as the premier technology, which includes columns As well as the application of this unique technology to our instruments has led to roughly $45,000,000 in sales in 2021, we expect that to go up to $60,000,000 plus so about $15,000,000 or so incremental. That's in the LC space On mass spec, new applications for BioAccord, I already mentioned that in the prepared remarks and the MRT We have a lot of interest from many of our customers, especially ones who want to use it in the proteomic space and for imaging With our DESI technology, which can be used under ambient conditions, which is quite unique. So again, new products, I mean, Waters had a history of introducing game changing new products. I think what we are doing differently is just making sure that there is a lot of traction once we launch these products

Speaker 4

Okay, great.

Speaker 5

A quick follow-up actually On the OpEx side, SG and A and R and D both came in a little bit better than we expected on our model. I was just wondering if Any one time effect there? I know FX probably played a role there as well-being less of a tailwind. Just wondering if you could comment on any trends there And the $12,000,000 shipment that got delayed to 4Q in China, how should that flow through the model? Is that about a $0.05 to $0.10 benefit to 4Q PS?

Speaker 3

Yes. So on the two questions. The first one, there was no one time activity in R and D or SG and A, so On the $12,000,000 shipment that got delayed, I mean, you can assume it's largely instruments

Operator

Thank you. Our next question is from Praneeth Souda with SVB Leerink. Your line is open.

Speaker 9

Yes. Hi. Thanks for taking my question. So first one is just I wanted to clarify, obviously, instrumentation was strong last quarter. And if you pull in this $12,000,000 order back Into 3Q, that would be strong this quarter as well.

Speaker 9

So 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 QAQC of vaccines, maybe the analysis of mRNA cap structure, there were some applications notes published by Waters teams around that. So just wanted to understand if you are working on QAQC side of the proteins or mRNA vaccines Or what is the applications that are driving the instrumentation growth that we have seen here over the last two quarters?

Speaker 2

Look, first, I mean the instrument growth is driven by strong robust end markets, better commercial execution. 2nd, It's our initiatives, be it replacement, be it Duo products. And your question is increased applications. And I would break it into 2 parts. 1, we are indeed seeing increased application of our technologies in oligonucleotides in mRNA.

Speaker 2

So for instance, I met Somebody from a leading mRNA company in Cambridge recently and they basically said, look, there are huge aggregation problems with plasmids, So they are turning to us to help us help them solve these problems, 1, by retaining more samples by using Premier And 2, by using LCMS to elucidate the structures of the molecules themselves. So good application there and a lot of them being in development and discovery and hopefully increasingly in QAQC. 2nd area that I would comment on is the wider application of the BioAccord. You'll recall the product was initially launched really focused on LC MS, which we still in QAQC. We still believe LC MS has a strong place in QAQC Provided the instrument that you have is simple, robust and fast and give you faster results.

Speaker 2

But that same value Proposition is equally relevant in early stage development of complex biologics, And we're seeing really good application there. We demonstrated with Sartorius that within that Some experiments that take 6 weeks can now be turned around within 2 days and this has been replicated in Sartorius' labs, our labs and in several customer labs. So as you can There's a ton of excitement on that front. And the BioAccord is rather unique here. The results are fast.

Speaker 2

It's a Simple to use instrument, even somebody like me can use it. And it provides you a wide range of Results not just on cell culture media applications, where it's much wider than any sort of Application used today, but also on the drug substance. So seeing wider application of our technologies and really excited about where

Operator

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

Speaker 5

Good morning. Thanks for taking my questions. Wondering if you could provide a breakout of growth And LC and MS separately here in the quarter. I don't think you provided those numbers. I missed them if you did.

Speaker 8

And I guess

Speaker 5

broadly, It seems like the Waters Instrument business was a bit lighter than expected. I mean any additional color you can provide on maybe what drove this would be Was it largely timing related or is it more a reflection of possibly a normalization in orders?

Speaker 2

Firstly, Your second question, I mean year to date instrument growth is roughly 30%. About that, so I don't know either. In Q3, we saw nice growth double digit again on instruments stronger comps in Q3 from last year already, so double digit growth across the two pieces of To two lines of instruments, 3 lines of instruments LC, Mass Spec, PA. As I mentioned earlier, on a year to And the quarter is

Speaker 8

the same.

Speaker 2

LC grew in excess of 30%, mass spec in the mid-20s. So really nothing to choose between the 2 sort of instrument platforms. It makes less sense to look at it quarter by quarter given The instrument given the instrument trajectory, but again nothing to choose between the 2. We feel that both LC and MasTec have significant momentum

Operator

Thank you. Our next question is from Catherine Schulte with Baird. Your line is open.

Speaker 10

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 to make up or do you think there's some that is just Revenue that won't be recaptured, would just be curious how you'd allocate across those three buckets?

Speaker 2

Catherine, thanks for the question. I think On the instrument side, we really feel that we are on a very, very good track. I mean, if you just look at historical averages, right, I mean, 2020 can confound, given all the COVID impact. But on a stacked basis, we're traversing nicely in excess of 5%, close 6% in some cases for our instrument business and historically that average for Waters and across the industry is between 4%. So really nicely clear of the historical averages.

Speaker 2

And in terms of how much have we clawed back, I mean, we think Just looking at 3 sort of data points. 1, comparing our stacked growth rates, both instrument and consumables with the rest of the The market, so it's market plus performance on that's the first data point that makes us feel that we're clawing back rather nicely. 2nd, we have been loss ratios that we measure internally. Those have been tracking ahead of historical averages For the last 4 quarters and finally there are public reports that are available which are rather idiosyncratic because they change The definition that we quoted, but according to those also, we're doing pretty well on our market share. So we feel very good about how we are traversing We are a work in progress.

Speaker 2

There's a lot more to do, a lot more opportunity as well. A lot of applications for our instruments, a lot more penetration to be had, but we've really good so far, the value that we have.

Operator

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

Speaker 2

Thank you very much for your participation and questions. And on behalf of our entire management team, I'd like to thank you for your continued support and interest in Waters. We look forward to updating you on our progress during our Q4 2021 call, which is going to be on February 1,

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Earnings Conference Call
Waters Q3 2021
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