Waters Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 31, 2022

There are 8 speakers on the call.

Operator

Welcome to the Waters Corporation 4th 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 begins. 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.

Operator

Casper Tudor, Director of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to the Waters Corporation 4th 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 In particular, we will provide guidance regarding possible future results of the company and commentary on potential market and business We caution you that any and all such statements are only our present expectations and that actual events or results may differ materially from those indicated in the forward looking statements. For a detailed discussion of some of the risks and contingencies 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 10 Q for the quarter ended October 2, 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 respects to risks related to the effects of the COVID-nineteen pandemic on our business.

Speaker 1

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 or as otherwise required by law. The next earnings release call and webcast is currently planned for May 3, 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. In our discussions of the results of operations, we may refer to non GAAP results, press release and in the appendix of our presentation.

Speaker 1

Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the Q4 of fiscal year 2020. In addition, unless stated otherwise, all year over year revenue growth rates, including revenue growth ranges given on today's call given on a comparable constant currency basis. Now I'd like to turn the call over to Doctor. Udit Batra, Waters' President and CEO. Udit?

Speaker 2

Thank you, Casper, and good morning, everyone. Along with Casper, joining me on this morning's call is Amol Shobel, Waters' Senior Vice President and Chief Financial 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 continued 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 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.

Speaker 2

We 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 And the 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 instrument systems chemistry, consumables and services in end markets that are supported by sustainable Growth Drivers.

Speaker 2

We've revitalized this goal 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 I will now provide a brief overview of our Q4 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 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% 2 year stacked CAGR for the quarter versus 2019 on a constant currency basis.

Speaker 2

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% 2 year 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 2 year stack basis.

Speaker 2

Now looking more closely at our top line results for the quarter on Slide 5, In constant currency, 1st, by operating segment, the Waters division grew 7% while By 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 Turning to academic and government, we saw an improvement with growth across most of our geographies into the year end.

Speaker 2

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 have familiarity and a fan base amongst KOLs who have often used 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's worked closely with Waters for the better part of 2 decades to build up proteomics capabilities at this institution and currently has over 40 Waters LCs and 20 March spec instruments from our company. Moving now to our sales performance by geography. On a On a constant currency basis, sales in Asia grew 9% with China up 13%, Americas 8%, with U.

Speaker 2

S. Up 8% and Europe grew 5%. In China, we saw strong demand throughout the quarter with growth led by contract orgs, biopharma and a strong recovery in clinical. We also saw strong growth in food testing and chemical assays. In the U.

Speaker 2

S, growth came from ongoing strength our Pharma and Industrial end markets. In pharma sales were strong in LC and mass spec, which combined grew in the mid teens with chemistry up low double digits. Industrial RTA business saw strong instrument placement across applications led by advanced materials, chemicals and battery In Europe, all end markets continue to grow led by Pharma and Industrial with Food and Environmental businesses, resulting in strong demand for our tandem Meanwhile, Pharma sales remained solid with growth led by large molecule applications. By product and services, customer demand for our Overall, instrument sales grew 12% for the quarter with 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.

Speaker 2

Meanwhile, Our Acuity and ARC Premier instruments continue to see strong adoption driven by applications in large molecule and novel modalities such as mRNA. In March spec, we saw growth in our high end tandem quad portfolio led by Xevo TQ XS, Xevo TQ and 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 res Mark's Tech 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 platform, the customers using it for biopharma, discovery and omics applications.

Speaker 2

For recovery for recurring revenues, Despite the quarter having 6 fewer days than the Q4 of 2020, chemistry sales grew 5%, led by continued high utilization by our pharma customers. Our new MaxPeap premier columns continue to provide incremental growth for our chemistry business. This technology provides important benefits Separation and purification of mRNA, oligonucleotides, peptides and glycans, which is effectively answering the needs of our customers as they work with more complex Mollicles. Service grew 2% despite a tough double digit comparison a year ago with strong growth in in both China and in India, which has been a theme throughout the year. Finally, PA had another great quarter with sales 16% led by strong growth in thermal analysis, microcalorimetry and rheology.

Speaker 2

Demand for TA products continues to be Strong in all regions with 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 DA Grew 25%. By end market, pharma grew 19% and industrial grew 15%, while academic and government came at 5% Pharma, which is our largest market, has grown 10% on a 2 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 In academic and government, which has been our slowest market to recover, sales in Europe and the U.

Speaker 2

S. Are close to pre pandemic levels, While China has furthered in its recovery as university spending continues to be constrained. By geography, Asia grew 19%, China growing 25%, America grew at 16% with the U. S. Growing at 14% Europe also grew 14%.

Speaker 2

For the full year, on a 2 year stack basis, our 3 largest geographies, the U. S, China and Europe, grew 6%, 7% 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 SAC basis, instruments grew 6%, chemistry 9% and service 6% showing strong performance above our historical averages.

Speaker 2

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 e commerce as well as delivering higher attachment rates and service. Given the global nature of our business, we are 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 number 7. We covered this in our Q3 earnings call and also at the recent JPMorgan conference.

Speaker 2

Our initiatives across instrument replacement, Service attachment, contract organizations, e commerce and new product launch excellence have all been important components for us, Regaining 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 runway not just in 2022, but in years beyond, providing an average incremental growth impact of 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, deep customer relationships and importantly, its 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 increase the performance and capabilities for their high volume workhorse instruments without revalidating their existing methods.

Speaker 2

This is absolutely critical in compliant environments and helps us provide the benefits of newer technology to our customers while 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 a 100 times better detection sensitivity The non premier instruments and a 50% reduction in peak tailings. Within our chemistry portfolio, MaxPeak Premier columns, which also offer this high Performance Surface Coatings has set a record in terms of uptake for new columns as this technology continues to be well received by our pharma customers. Turning to our Maastricht 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 in mass accuracy.

Speaker 2

Its high throughput is enabling large sample studies of And we'll take our next question from the line of Waters' The acquisition of Charge Detection Mass Spec Technology, CDMS. CDMS will allow Waters to develop and commercialize CDMS technology to solve significant unmet needs in novel modality settings such as With the discipline my colleagues John Pratt and Jan Shane Bennett have brought into launches, new products Have meaningfully grown in their contribution this year and with our product vitality index around 150 basis points up around 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 insematics platform, Waters Connect, To our tandem quad mass spectrometers for core quantitation starting with food testing.

Speaker 2

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 difficult to use. Our 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 LC MS and mass spec data review It's 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 we plan to extend it to other applications in the near future.

Speaker 2

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 over time. 1st, In bioseparations, we see an opportunity to take our chemistry expertise from small molecule separation and apply 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.

Speaker 2

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 our 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 In this area specifically, we're looking at bioseparation solutions for mRNA and other nucleic acids, Proteins and lipid nanoparticles as well as viral vector gene therapies and vaccines and adeno associated viruses. 2nd, in bioprocess characterization. 1 of the key differences in bioprocessing versus small molecule processing is that once we define the manufacturing process, We're effectively stuck with it and cannot optimize it without completely revalidating the process because it is tied to the DrugMaster file.

Speaker 2

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 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 The 3rd application is of LC MS and diagnostics where we need a fast, Unbiased detection of multiple biomarkers to enable early disease detection. We believe MasTec has a significant role to play here and we've already demonstrated a proof Concept with the U. K. Government in characterizing the SARS CoV-two virus with excellent sensitivity and selectivity leading to a lower false positive rate than many other techniques.

Speaker 2

In review, our strong 4th quarter results capped a very successful year for Waters with broad based growth across our end markets and geographies. We sustained our momentum with strong 2 year stack revenue growth throughout the year with our 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 markets still 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.

Speaker 2

With that, I'd like to pass the call over to Amol for a deeper review of the Q4 and full year financials as well as our outlook for the Q1 and the full year of 2022. Amol?

Speaker 3

Thank you, Udit, and good morning, everyone. As Udit outlined, we recorded net sales of $836,000,000 In the Q4, an increase of 8% in constant currency and an increase of 6% as reported. We had a record instrument Despite 6 fewer calendar days, our recurring revenue, which represents the combination of chemistry and service revenue, increased by 3% for the quarter. Chemistry revenues were up 5% and service revenues were up 2%, both of which had tough Comparisons in the prior year. The 6 fewer calendar days in the quarter translated to a growth headwind of approximately 6% for recurring revenue and approximately 3% for total revenue.

Speaker 3

For the full year, Sales grew by about 16% in constant currency and 18% as reported. Recording revenues grew 11% with chemistry up 15% and service up 9%, while instrument sales grew 23%, driven by strong customer demand and new product introductions. Our 2 year stacked constant currency sales growth was 7.5 for Q4 and 7% for the second half of twenty twenty one versus 6.5% for the first half. This acceleration underscores our good commercial momentum heading into 2022. Looking ahead, Comparing 2022 to 2021, there is one fewer day in the 1st quarter, no change in the second or third quarters And one additional day in the 4th quarter.

Speaker 3

Now I would like to comment on our 4th quarter and full year non GAAP financial performance versus for prior year. Gross margin for the quarter came in as expected at 58%. On a full year basis, gross margin was 58.5 and a 30 basis points tailwind from FX. Moving down the P and L. For Q4, operating expenses increased by approximately 12 on a constant currency basis and include an increase of approximately 7% due to the normalization of our Prior year COVID related cost actions.

Speaker 3

For the year, operating expenses were approximately 18% higher in constant currency and include an increase of 15% due to the normalization of prior year COVID related cost actions. In the quarter and for the full year, our effective operating tax rate was 14.4% 13.8%, respectively. For the full year, our effective tax rate decreased by 100 basis points due to a favorable change in our income mix by jurisdiction. Our average share count came in at 61,400,000 shares, which is about 1,100,000 less and the Q4 of last year. Our non GAAP earnings per fully diluted share for the 4th quarter increased 1% to $3.67 in comparison to $3.65 last year, Excluding the impact of foreign exchange and the normalization of prior year COVID related cost actions, non GAAP EPS increased 8%.

Speaker 3

On a GAAP basis, our earnings per fully diluted share increased to $3.52 compared to $3.49 last year. For the full year, our non GAAP earnings per fully diluted share was up 24% at $11.20 versus $9.05 in the prior year. On a GAAP basis, full year earnings per share was $11.17 versus 8.3 of this presentation. Turning to free cash flow, capital deployment and our balance sheet. We define free cash flow as cash from operations, Less capital expenditures and excludes special items.

Speaker 3

In the Q4 of 2021, free cash flow was $187,000,000 after funding $45,000,000 of capital expenditures. Excluded from the free cash flow was $9,000,000 related For the full year, free cash flow was $675,000,000 with approximately 0 point 2 $4 of each dollar of sales converted into free cash flow. In the 4th quarter, accounts receivable DSOs Inventory DIO decreased by 9 days compared to the Q4 of last year. Given higher sales volumes and our proactive measures to secure supply, inventory increased by $52,000,000 in comparison to the prior year. We maintain a strong balance sheet, access to liquidity and a well structured debt maturity profile.

Speaker 3

In terms of returning capital to shareholders, we repurchased approximately 448,000 shares of our common stock for $156,000,000 in Q4. At the end of the quarter, our net debt position was $945,000,000 with a net debt to EBITDA ratio of about 1. Our capital deployment priorities are investing for growth, Maintaining balance sheet strength and flexibility and returning capital to shareholders, along with focus on deploying capital to well thought out, Attractive and adjacent growth opportunities. Now as we look towards the year ahead, I would like to provide you with our thoughts For 2022, which is on Slide 11. In 2021, our momentum has progressively accelerated, driven by robust end market demand and strong commercial execution across our geographies.

Speaker 3

As we head into 2022, we expect our momentum to continue and that we will be able to address Supply chain constraints and inflationary pressures and believe that our near term growth initiatives will continue to contribute to our performance. These dynamics support full year 2022 guidance of 5% to 7% constant currency sales growth. At current rates, a negative currency translation is expected to subtract approximately 1 percentage Approximately 58% and operating margin is expected to be approximately 30% to 30.5 We expect our full year net interest expense to be approximately 35,000,000 and full year tax rate to be approximately 15.5%. Average diluted 2022 share count is expected to be approximately 61,000,000. Our share repurchase program will continue into 2022 and we'll provide quarterly updates as appropriate.

Speaker 3

Rolling all this together and on a non GAAP basis, Full year 2022 earnings per fully diluted share are now projected in the range of $11.75 to $12 This includes a negative currency impact of approximately 2 percentage points at today's rates. Looking at the Q1 of 2022, we expect constant currency sales growth to be 6% to 8%. At today's rates, currency translation is expected to subtract approximately 3 percentage points, resulting in 1st quarter reported sales growth guidance of 3% to 5%. 1st quarter non GAAP Earnings per fully diluted share are estimated to be in the range

Speaker 2

Now, I would like to turn it back to Uddit for some summary comments. Uddit? 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've built really good commercial momentum going into 2022.

Speaker 2

We're now laser focused on our commercial execution and accelerating innovation to our portfolio while reaching higher growth 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 and A session. Operator?

Operator

Thank you, sir. At this time, we'll begin our Our first question is from Vijay Kumar with Evercore ISI. Your line is

Speaker 4

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, Udi. I look at the insurance growth of 12%, that came in well above expectations.

Speaker 4

Was there any Year end budget flush, Rob, is this a continuation of the execution momentum we've seen throughout Throughout the course of 'twenty one, maybe talk about what happened in Q4, why instruments came in so strong?

Speaker 2

So Vijay, thank you for the question and good morning. Look, we've seen strong instrument momentum instrument growth momentum throughout The year in Q4 is no exception, and this is largely attributed to our commercial initiatives, Especially the replacement initiative and the successful launch of new products, especially the ARC HPLC, The Acuity Premier and more recently the Hi Res Mass Spec platform, the full year numbers from an instrument perspective are, I would say, even more interesting. I think their instruments have really led the growth with mid-20s sort of growth rate with LC coming around that range, Maersk back a little bit slower and PA really endearing in the high 20s in growth rates. So instruments have really led The charge in terms of our recovery and that bodes, as you know, very well for the future for our service and recurring businesses. So it's to summarize really, it's commercial momentum, new products that we've seen throughout the year and nothing sort of dramatic that Taking place at the end of the year, that was very different from what we've seen throughout the year.

Speaker 4

That's helpful, Udi. And maybe one for Amol on the guidance. It looks like Q4 gross margin came in a little bit Is there anything on the gross margin line for fiscal 'twenty two? Because I look at your revenue growth, reported revenue growth of 4% to 6%, Earnings growth of 5% to 7%, you do have some share repurchase going on. So that implies maybe perhaps margins Or flat to down?

Speaker 4

What would cause margins to be down and is that a gross margin issue?

Speaker 3

Good morning, Vijay, and thanks So look, I mean, the gross margin for Q4 came in as we had guided. And if you compare it versus prior year, the gross margin is lower because of 3 factors. There is a 50 basis points headwind from Exchange rate, but then there were also prior year COVID cost actions that normalized this year. And then the quarter was heavier on instruments, And instruments are lower margin compared to other elements of our portfolio. So when you put those three things together, it sort of reconciles with the gross is in line with what we This year, as you know, 30.5%.

Speaker 3

What is the difference between there is also the tax rate, which We are saying tax rate we are expecting 15.5 percent, that's 2017 regs have a pro R and D expenses when capitalized will have an impact on the GILTI provisions. So that had added about A little over a percentage point into the tax rate. That's included in our guidance.

Operator

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

Speaker 5

Great. Thanks for the questions, guys. Congrats on the quarter. Maybe just How what is it doing from

Speaker 4

a share perspective, particularly across the LC and NASDAQ portfolios? Sure.

Speaker 2

Good morning, Dan. Look, 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 digits, right? And what we've seen on the Pharma side is really strong, up Take not just numerical averages, but also water specific execution first from Commercial perspective, across our 5 commercial initiatives, as well as new product introduction, which has had very good uptake, Especially in Pharma. Arch HPSC has done very well, especially in China and increasing MaxPeak Technology has really hit a real sweet spot with novel modalities, which have higher affinity to So new products, especially on the instrument side, and now we have introduced Our next generation of informatics platform for mass spec, 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 Extremely well from a commercial perspective as well as with new product introduction.

Speaker 2

So that bodes well for what we think about in the future for this largest end

Speaker 5

Great. Thank you for that. And then maybe, if I can ask a 2 parter, just one on China. Obviously, Q4 was a really nice stack acceleration. You had some color in the prepared remarks.

Speaker 5

Just wondering what's assumed for 'twenty two in China? And then on a related basis, just bioproduction, You did the deal today, which is likely a very small tuck in. You have the Sartorius deal. But how do we think about your organic and inorganic investments going forward over the next few years in bioproduction? Thank you.

Speaker 2

Sudan, I mean, China, thanks for the question. Really excited. I mean, it all starts with leadership. We have 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 percent for the year.

Speaker 2

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 especially our focus on CDMOs there has grown the business in excess of 40%. So excited 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 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 And then turning to your question on bioproduction. Look, in general, the 2 growth initiatives that we've highlighted that are focused on biologics and novel modalities are number 1 on bioseparations and number 2 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, collaboration we have with Sartorius, where we first focused on characterizing the process for a high volume application called loan selection, where we took the workflow from about 6 weeks to less than a week and that has a lot of traction with our customers.

Speaker 2

We are now adding on Other attributes that we want to measure for the process, creating a seamless software bridge between the Amber of Sartorius Like again, organucleotides and more complex proteins. So a lot of runway on the bioproduction side and the deal that we announced Small tuck in. As you know, CDMS, thanks for asking about it. It's something that's getting dear to my heart. And I must admit, I started off as a skeptic 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?

Speaker 2

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 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 IMerge Lab, roughly 40 showed up. I was so excited. I asked Amol and our Head of Strategy, And Raj to join me to listen to the customers and that sealed the deal, right? So we basically said, look, this is the 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.

Speaker 2

So super excited about what we are seeing in the bioproduction, bioseparations area.

Operator

Thank you for your question. Our next question is from Puneet Soudi with SVB Leerink. Your line is open.

Speaker 6

Question. So first of all, congrats on the strong quarter here. Really strong instrumentation growth. So I 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 $40,000,000 or so replacement initiative for 2022 as you were Before, is it more now?

Speaker 6

And how much contribution in the full year guide from maybe new growth initiatives, the separations, the bioprocessing, clone selecting The diagnostics?

Speaker 7

My first one is around biologics revenue. Doctor. Pulled out

Speaker 2

I'm sorry, there's a bit of a background noise.

Speaker 6

No worries. Yes, please. Just those yes, contribution overall from the in the guide from the replacement initiatives and these new initiatives that you have In place now because I mean, Udi, you joined 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 These new efforts that you have underway?

Speaker 2

So, Puneet, the way I would think about the contribution across the 5 initiatives, instrument placement, service attached, e commerce, CDMO is about 100 basis points of Acceleration beyond what we see in the market, right? So that's how I would look at that piece, sort of lump it altogether and it's about 100 basis 2nd, on the new growth initiatives, as I commented in the previous quarter as well as at a recent conference, This is something that we expect to meaningfully contribute in the mid to long term, right? We are very excited about the traction we have On bioprocessing with our collaboration with Sartorius, we're doing very well on the early stages of adapting CMS for specialty applications in diagnostics, and we have a very good start on bioseparations as Initiatives that are already ongoing and in the midterm, these other initiatives will start to contribute meaningfully. It's a great start, but I would say mid Starting 2023, 2024 is when you should start seeing some impact of these initiatives.

Speaker 6

Got it. And then on the order book and overall demand, just maybe could you update us where the backlog stands? I think it was fairly strong in the Q4, even in Q3. Just maybe just give us how do you see that conversion in the Q1 and And just update us if you could on the supply chain, obviously that's impacting number of companies, but how do you how should we balance that Order conversion versus the supply chain and any other inflation concerns that you're seeing in the market? Thank you.

Speaker 2

So Puneet, you asked 2, maybe 3 questions in one. I'll try to take them each in turn. First, in terms of The order book is extremely strong. We don't give specific numbers on the backlog, but it's higher than it's been in the past. You can safely Hi, Shane.

Speaker 2

On pricing, let's take a step back. We're not immune to those challenges like anybody else, Especially on the material side, where there are material constraints, what I would say on that front, having now Screen transparency into the primary, secondary, tertiary suppliers, deep sort of discussions with those colleagues in different companies and the fact that We have a nimble organization here, and here our size and our simple portfolio is a huge advantage. We're able to communicate any sort of changes rapidly through organization through supply chain into commercial and be able to deal with it. And we've dealt successfully with any sort of disruption in Q3 and Q4. I'm not it was easy, but we've dealt with it given our given the transparency and given the communication we have internally and externally with stakeholders.

Speaker 2

And by contrast, I think Q1 is like summer vacation versus Q4. So I'm not diminishing the topic. It's still with us, but We have developed that muscle. And in terms of pricing and freight, look, We've had about 100 basis points or so of pricing in 2021. You should expect, say, 150 basis points give or take.

Speaker 2

But I would like to emphasize here, this is not a willy nilly transfer of pricing to our customers. We have, as I said Many times very, very strong relationships with our customers. We have open discussions and wherever we see challenges, we discuss with them and there's a lot of understanding As we pass on some of the increases in pricing that we see. So I think I've addressed several of your questions. And Amol,

Speaker 3

Just to build on it, Puneet, as you know, right, I mean our products are differentiated and that's not just instruments. I mean we have 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 dialogues with our customers. And through Q4, we've navigated that well and that gives us a lot of confidence Going into 2022.

Operator

Thank you for your question. Our next question is from Jack Meehan with Nephron Research. Your line is open, sir.

Speaker 7

Thank you. Good morning. So strong end of the year on the chemistry front. I 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?

Speaker 2

Look, not really. Then see, I would say, what we saw, of course, there is always a run up at the end of the year in this business. But I would say it's nothing unusual. And the way the reason I say that is we are seeing similar trends persist Into the year as well, right. So we're seeing really continuation of what we saw towards the year end.

Speaker 2

And the orders, as we commented earlier, orders are outpacing the sales. So that gives us confidence that this is not sort of a big Going forward of any sort of products. And when you look at what are specific reasons, right, so we can And again, I'll draw your attention to the overall stacked growth numbers. We've basically ended the year with the second half being stronger than First half of the year, overall for the year, it's a roughly 7% stack growth, whereas where instruments are 6% growth, which is well above our historical averages. And again, the same thing for consumables, which are close to double digit growth.

Speaker 2

This is again above historical averages, but there are water specific reasons driving both of those, right? So in both cases, We have commercial initiatives that have driven that and new products that have contributed. So nothing really that one should look at as a blip. I mean, this is something that we Continue both the commercial as well as the new product momentum.

Speaker 7

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

Speaker 3

Yes. Thanks, Jack. That's a great question, right? So as we get into 2022, our focus is to drive productivity gains through various different Initiatives that are in place across service productivity, operational excellence in manufacturing, Both direct and indirect procurement programs as well as things like digitization and building capability And those will provide a great amount of space for us to fund the high growth adjacencies That we've talked about, right? And so net of that, we think, as we've said at JPMorgan Conference, allows us to deliver 20 30 basis points of year over year margin expansion, and that's what is embedded in our guide.

Speaker 3

So we've guided at 30% to 30.5% versus a 30.2% for 2021. So at the higher end of the guide, you do get the 20

Speaker 2

I mean, I think just to sort of conclude the formula is very simple. I mean, we drive the top With our initiatives, there's a lot of leverage in the P and L. And with the productivity initiatives, we make a 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, right?

Speaker 2

So the idea is very simple.

Operator

Thank you for your question. Our next question is from Josh Waldman with Cleveland Research. Your line is open, sir.

Speaker 7

Hi,

Speaker 5

First, Amal, wonder if you could comment on how you're thinking about growth across instruments, consumables and service For 2022 or within your 2022 guide?

Speaker 3

Yes. So look, I mean, as we've traditionally You would see service growth at the midpoint of the guide. Instrument growth is slightly lower than that and chemistry growth is Slightly above that. About 2 percentage point spread plus or minus.

Speaker 2

And Josh, not much different than what you would have seen in how we exited 2021, right? So 7% stack growth with Consumables being closer to double digit, instrument being slightly slower at 6%, but well above historical averages.

Operator

Thank you for your question. Our next question is from Derik De Bruin with Bank of America. Your line is open.

Speaker 6

Thanks. Thanks for taking the question. This is Mike Ryskin on for Derek. I'm going to ask 2 quick ones. First, on the academic and government markets, didn't really touch on that in the prepared You guys had a little bit of a bounce back to end the year, but I know they can be super volatile and 2020 was an easy comp.

Speaker 6

So could you give us an update on what you're seeing in that, Probably more on the mass spec portfolio, but still is that end market across the geographies starting to come back to normal or is there still some choppiness there? And then the quick follow on is on M and A, the MegaDalton deal, this technology tuck in, is that Technology or an underlying platform deal is something we should expect going forward just given your leverage in the balance sheet, are you willing to look at bigger assets? Thanks.

Speaker 2

Thanks, Mike. On academic and government, look, we are pleased with how we ended the year with a 5% growth, But it's still very choppy across the geographies and across the portfolio. We saw a nice recovery in Europe, Very much driven by our mass spec portfolio, right? So in there, the business is rather lumpy. So that said, what I'd rather focus us on in that end market is what we're Trying to do to establish a base, this is reviving our KOL relationships.

Speaker 2

And recently, I was With AKOL, who's been with Waters for a very long time, Head of a proteomics institute at one of the top medical schools in the U. S. And he basically In no uncertain terms that his career has been sort of built together with Waters, especially on the mass spec side. So we are very optimistic what we will be able to do in that market, but it's early days, right, on the academic and government market. And then on M and A, On the MegaDalton deal, this is a very good fit, right?

Speaker 2

So for large novel modalities to characterize them better with mass spec and we know mass spec really, You should expect us to continue to look for such technology accelerators, but Also, we're open to building our portfolio, as I mentioned earlier, both in the core as well as the faster growth adjacencies where we find something relevant. But I will remind you that, look, our core business is performing extremely well and that is the number one focus to continue the commercial momentum, New products across our base portfolio and as you've noticed across the LC portfolio, across the mass spec portfolio now in Mattix, we're seeing a drumbeat of new products that are adding on to the growth. So the focus is on the core and we are very open to looking at M and A that accelerates I understand that position. Amul?

Speaker 3

Yes. I just wanted to add on the previous question, right. So on the academics and government, China is one area of focus for us because if you China, we grew on a stack basis in pharma 13%, constant currency, industrial stack 16%. 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.

Speaker 3

Part of it is our own commercial execution, which we are focused on, but there's also a drag from the VAT reimbursement issue, which we think will progressively resolve over course of 2022.

Operator

Thank you for your question. Our next Question is from Patrick Donnelly with Citi. Your line is open, sir.

Speaker 5

Great. Thanks for taking the questions. Maybe just

Speaker 6

a follow-up On Mike's question there, in terms of M and A, you've mentioned the large mall strategy

Speaker 4

a few times, obviously, one you're missing

Speaker 6

testing enthusiasm about. I guess, 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 is in a good enough place Go after some of those high growth areas or do you feel like it really needs to be supplemented inorganically with some deals? Just curious on

Speaker 2

the strategy on that front. Patrick, I mean, look, it's a great question. I mean, we don't have a dogma there, right? But it always starts with what we know how Right. So we know how to do analytical measurements and we've turned that focus towards Larger molecules and more complex molecules, both in the bioseparations arena, where there are significant challenges, even if you take mRNA as an In aggregation and separation of these molecules, lipid nanoparticles or plasmids, right.

Speaker 2

And there, we are perfectly capable of making The difference with our internal focus and collaborations with reagents companies and people who know how to do sample prep for biologics, right? So I think that for me It's a perfect combination. And on the bioprocessing side, we started with a partnership where we wanted our organization to learn the whole bioprocessing domain. And now we as we get a better understanding, we will surely be looking at augmenting our capabilities in the on the analytical front. You will not see us going and buying a bioreactor or a filtration company, but you will see us looking at Better analytical techniques to elucidate the structure and properties of these complex molecules.

Speaker 2

So but it's a mix, right? So it's a heavy focus on organic investments, where relevant partnerships and where we see opportunities that speed up the separations Of these molecules or help us characterize bioprocessing better, we will be active in the M and A space.

Operator

Thank you for your question. That does conclude our Q and A portion of today's conference. I will now turn our call back over Mr. Yudend Vatra.

Speaker 2

Thank you. Thank you all for your participation and your 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 Q1 2022 call, which is currently anticipated on May 3, 2022. Thank you, and have a wonderful day.

Operator

This does conclude today's conference call. We thank you all for

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Earnings Conference Call
Waters Q4 2021
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