Waters Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Waters Corporation First Quarter 2022 Financial Results Conference Call. All participants will be in a listen only mode until the question and answer session of today's call. The conference is being recorded. If you have any objections, Please disconnect at this time. Now it is my pleasure to turn the call over to Mr.

Operator

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

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to the Waters Corporation First 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 Q2 of 2022 and full year 2022.

Speaker 1

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, 2021, in Part 1 under the caption Risk Factors and the cautionary language included in this morning's press release, including with respect to 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 webcasts, or as otherwise required by law. 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 excludes 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 Q1 of fiscal year 2021. In addition, unless stated otherwise, all year over year revenue growth rates, including revenue growth ranges given on today's call are given on a comparable constant currency basis. Now I'd like to turn the call over to Doctor. Uday Batra, WADA's President and CEO.

Speaker 1

Uday?

Speaker 2

Thank you, Casper, and good morning, everyone. Along with Casper, joining me on this morning's call is Amol Jawbol, Waters' Senior Vice President and Chief Financial Officer. We had a record start to the year with 1st quarter sales led by instruments which grew over 25% with a broad based strong performance across all our end markets and geographies. Before summarizing the quarter, let me start by saying How extremely proud I am of our teams who've worked tirelessly to manage our supply chain, delivering operational excellence and exceptional support for our customers through the ongoing challenges of the pandemic. It is a result of the indomitable spirit of all my colleagues at Waters.

Speaker 2

I will now provide a brief overview of our Q1 operating results and deliver our key messages. Amol will then review our financial results in detail and provide comments on our financial outlook. We will then open up the phone lines to take your questions. Turning now to Slide 3. We have 3 key messages.

Speaker 2

First, we had a very good start to 2022 with great traction For our new instrument products, strong operational performance and sustained commercial momentum. Demand has remained robust across all our end markets. 2nd, we're laser focused on execution, innovation and growth. We continue to make great progress in executing against our enterprise priorities with our core initiatives positively impacting our results. We have a revitalized portfolio with innovation that is answering the needs of our customers in both large and small molecule workflows as well as our non as well as in our non pharma markets such as food testing, environmental and material science.

Speaker 2

And thirdly, Waters has a firm commitment to leave the world better than we found it. We are delivering sustainable value to our shareholders and stakeholders through our ESG programs. Now moving to Slide 4. In the Q1, our revenue grew 13% as reported and 16% on a constant currency basis, reflecting Broad growth across all our end markets and geographies. Orders in the quarter exceeded our sales of 691,000,000 reflecting a very strong demand.

Speaker 2

Instruments grew at 26% in constant currency with strong growth across our LC mass spec and TA portfolios. New products contributed meaningfully to growth in the quarter with unit sales of ARC HVLC and acuity premier more than tripling versus the Q1 of last year. In mass spec, New instruments in our high end tandem quad portfolio such as our Xevo TQ XS also saw strong growth in both industrial and pharmaceutical applications. Instrument strength is a positive indicator for future growth of our consumables and service revenues. Recurring revenues grew 9% for the quarter with chemistry up 8% and service up 9%.

Speaker 2

This quarter had 1 fewer day than the Q1 of 2021, which translates to a headwind of approximately 1% for our recurring revenues. Without that, recurring revenues would have also grown double digits. Our MaxPeak Premier columns have continued to provide strength and incremental growth to our chemistry business, given the benefit this technology provides for novel modality applications and our increased exposure to biologics. Meanwhile, we're seeing increased service plan attachment rates in our key regions at instrument point of sale. By geography, growth was led by the Americas with the U.

Speaker 2

S. Up 28%, driven by broad performance in each of our end markets. In China, sales grew 17% with pharma, industrial and academic and government all up double digits. As lockdown in lockdowns in certain regions persist, we're beginning to see more of an impact to our business, but we're in close contact with our customers and demand remains robust. Once the lockdowns ease, We expect activity levels to catch up that normalize with limited impact to our full year growth expectations for China.

Speaker 2

However, we anticipate some sales impact the second quarter, if customer access continues to be constrained. Our Q1 non GAAP adjusted earnings per share was $2.80 up 22% year over year, driven by sales growth, volume leverage and an ability to manage inflation through pricing. Given the global nature of our business, we're seeing ongoing supply constraints and inflationary pressures. Despite this, We've been successful in working through these challenges, leveraging our global manufacturing footprint and working closely with our customers and suppliers while delivering Good operating results. Turning now to Slide 5.

Speaker 2

While each of our initiatives continues to progress, The two areas I would like to highlight this quarter are contract organizations and launch excellence. For contract organizations, our unique Technical abilities and ability to collaborate closely with our customers are resulting in market share gains and strong revenue growth. Revenues from these customers were up over 25% for this quarter, led by over 50% growth in China. Turning now to Launch Excellence. Our revitalized portfolio is contributing to growth with demand, ramping for ARC HVAC, Acuity Premier and Max Premier columns.

Speaker 2

Acuity Premier and Max Premier were specifically designed to solve challenges that are particularly relevant for large Complex molecules. Our customers are using the technology for oligonucleotide analysis as well as separation and purification of novel mortalities such as mRNA, peptides and glycans, just to name a few examples. Meanwhile, small molecule Small molecule growth remains solid with customers continuing to purchase new capital equipment, including Archage PLC. Now on Slide 6. We recently launched the Xevo TQ Absolute, which is up to 15x more sensitive when analyzing negatively ionized compounds compared to other tandem quads currently on the market, while also using less sample.

Speaker 2

It is designed to help Pharmaceutical, Food and Environmental Labs meet regulations requiring trace level quantitative mass spec analysis for a broad set of applications. In food testing, the instrument takes detection of anionic pesticides and their metabolites to a new level of quantitation. In pharma, it can provide highly sensitive analysis for oligonucleotides and peptide bioanalysis as well as quantification of estrogens in clinical research, uses for which high resolution mass spec have typically been required. The instrument is highly efficient, using approximately 50% less electricity and gas and also producing 50% less heat And other high performance standing quartz on the market, both of which reduce the carbon footprint of analytical labs. It is also 50% smaller than other instruments in its class, which also adds value to our customers as space and analytical labs is limited and costly.

Speaker 2

Our TandemCoat portfolio was stronger than ever, and together with Waters Connect, we're able to make customers' workflows easier, faster and more efficient without compromising performance. Now on Slide 7. IMerge Delaware, our 2nd innovation and research lab will be opening tomorrow, part of a multiyear collaboration with the University of Delaware. Its purpose is to develop analytical solutions to better characterize the manufacturing process for biologicals and novel modalities, which will support our path into bioprocess characterization. Researchers from both Waters and the University of Delaware will develop solutions, including sensor and instrument improvements, data analytics and process control.

Speaker 2

This partnership will help us expand our capabilities to drive improvements in Quality, yield and efficiency as well as characterize critical quality attributes that will be a key step towards separating the process from the product in Biologics. On Slide 8, we are delivering sustainable value to our shareholders And stakeholders through our ESG activities, which continue to be recognized in a number of areas. Earlier this year, we Achieved a score of 100 on the 2022 Corporate Equality Index, earning Waters a designation as one of the best places to work for LGBTQ plus In addition, Barron's ranked Waters number 6 on its 100 Most Sustainable U. S. Companies list for 2022 based on a set of 230 performance indicators and reflects our efforts of continuous improvement in social and environmental responsibility.

Speaker 2

On the list, we were the highest placed company in the healthcare sector and in the Life Science Tools segment. Recently, within our diversity and inclusion and STEM education efforts, Waters has partnered with 3 Historically Black Colleges and Universities to create STEM opportunities for students through funding, instrument donations, mentoring and the awarding of scholarships to students exploring the analytical sciences. In summary, we are pleased with our strong start to the year and our results in revenue growth and operational performance, which are demonstrating a continued success in our focus areas of execution, innovation and growth. With that, I'd like to pass the call over to Amol for a deeper review of the Q1 financials as well as our outlook for the remainder of the year. Amol?

Speaker 3

Thank you, Udit, and good morning, everyone. As Udit outlined, we recorded net sales of $691,000,000 in the Q1, an increase of 16% in constant currency and an increase of 13% as reported. Looking more closely at our top line results for the quarter, On Slide 9, in constant currency, 1st by operating segment. Waters division grew 16%, White TA grew by 18%. By end market, our largest market category, pharma, grew 19%, Industrial grew 17% and Academic and Government grew 4%.

Speaker 3

In Pharma, We saw broad based strength across segments, geographies and applications and in both large molecule and small molecule. Growth was led by the U. S, which was up over 35% India, up just under 30% and China, which grew mid teens. In Industrial, our performance was also strong across all major geographies with U. S, Europe and China all growing 20% or above.

Speaker 3

Turning to academic and government, We saw a similar trend to last quarter with mid single digit growth as customer spending has become more active led by China and the U. S. Now by geography, sales in Asia were up 14%, with China up 17%. The Americas grew 26% with the U. S.

Speaker 3

Up 28% and Europe grew 9%. In China, we saw broad performance across all our end markets, which grew each up double digits. In the U. S, Growth, too, was broad based led by pharma, which was up almost 40% and industrial, which grew over 20%. Growth was very strong in both instrument sales, which grew almost 60% and recurring revenues, which grew in the mid teens.

Speaker 3

In Europe, growth was led by Industrial, which grew 20%, driven by strong growth in Food and Environmental. Sales of LC and MS Instruments to pharma customers grew high teens as strong capital purchasing patterns continued on from last year. Udit already covered our growth by products and services, where instruments grew 26% for the quarter, Chemistry grew 8% and service grew 9%, driven by our commercial execution and new product contribution. Finally, TA had another great quarter with sales up 18%, led by strong growth in thermal analysis, Microcolorometry and rheology. Demand for our TA products continued to be strong in all regions with growth driven by Advanced Materials and Chemicals, including batteries and sustainable polymers.

Speaker 3

Now I would like to comment on our 1st quarter non GAAP financial performance versus the prior year. Gross margin for the quarter increased by 40 basis points to 58.6 percent despite higher instrument mix, Inflation pressures and stronger U. S. Dollar. This was driven by volume leverage and pricing.

Speaker 3

Operating margin for the quarter increased by 170 basis points to 30.3%, driven by volume leverage on operating expenses. In the quarter, our effective operating tax rate was 14.8%. Our average share count came in at 61,000,000 shares, which is about $1,700,000 less than the Q1 of last year. Our non GAAP earnings per fully diluted share for the Q1 increased 22% to $2.80 in comparison to $2.29 last year. On a GAAP basis, our earnings per fully diluted share increased to $2.62 compared to $2.37 last year.

Speaker 3

A reconciliation of our GAAP to non GAAP earnings is attached to the press release issued this morning and in the appendix 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. In the Q1 of 2022, free cash flow was about 25% of sales at $176,000,000 after funding $28,000,000 of capital expenditures. Excluded Free cash flow was $6,000,000 relating to investment in our Taunton Precision Chemistry operations.

Speaker 3

In the Q1, accounts receivable DSO came in at 81 days, down 3 days compared to Q1 of last year. Given higher sales volume and our proactive measures to secure supply, including building some electronic component safety stock, Inventory increased by approximately $54,000,000 in comparison to the prior year. We maintain a strong balance sheet, access to liquidity and well structured debt maturity profile. This strength allows us the ability to prioritize investing in growth, including M and A and returning capital to shareholders. We continue to evaluate M and A opportunities that will meaningfully accelerate value creation in well thought out attractive high market, high growth adjacent opportunity.

Speaker 3

In Q1, we repurchased approximately 493,000 shares of our common stock for 160,000,000 At the end of the quarter, our net debt position was $941,000,000 with a net debt to EBITDA ratio of about 0.9. Now as we look ahead for the remainder of the year, I would like to provide some updated context on our thoughts for 2022, which is on Slide 10. We've had a strong start to the year, driven by robust end market demand and strong commercial execution across our geographies. As we look ahead, we expect solid momentum to continue and that our near term growth initiatives will continue to contribute to our performance. We also expect that we will be able to continue to address supply chain constraints and inflationary pressures, and these challenges do not worsen over the remainder of the year.

Speaker 3

These dynamics support increasing the full year 2022 guidance to 7.5% to 9% constant currency sales growth, up from our initial guidance February of 5% to 7%. At current rates, a negative currency translation is expected to subtract Approximately 3 percentage points, resulting in full year reported sales growth guidance of 4.5% to 6%. Gross margin for the full year is expected to be approximately 58.5 percent and operating margin is expected to be approximately 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 60,600,000.

Speaker 3

Our share repurchase program will continue into 2022, and we'll provide quarterly updates as appropriate. Rolling all this together and on a non GAAP basis, we are raising our full year 2022 earnings per fully diluted share guidance to the range of $11.90 to 12 point Quarter of 2022, we expect constant currency sales growth to be 6% to 8%. At At current rates, currency translation is expected to subtract approximately 4 percentage points, resulting in 2nd quarter reported sales growth guidance of 2% to 4%. Given the ongoing lockdowns in China, we anticipate a headwind of approximately 100 to 200 basis points to our growth for the 2nd quarter, assuming lockdowns do not worsen, which is factored in our 2nd quarter guidance. 2nd quarter non GAAP earnings per fully diluted share are estimated to be in the range of $2.55 to $2.65 This includes a negative currency impact of approximately 5 percentage points or $0.13 at current rates.

Speaker 3

Now I would like to turn it back to Uday for some summary comments. Uday?

Speaker 2

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

Speaker 2

Operator?

Operator

And the first question comes from Vijay Kumar of Evercore ISI. And your line is open.

Speaker 4

Hey, guys. Thanks for taking my question and congrats on a really strong Q1 pretty share. Uddit, maybe just diving into the performance within the queue. You noted New products in CROs, maybe I guess what the market is trying to debate is, is there any pull forward of demand? Can you talk about your Order books and when you send new products, it feels like this is incremental demand coming in and perhaps not a portfolio of demand.

Speaker 4

So if you could just talk through the drivers here in Q1 and how the order book is shaping up, that would be Fantastic.

Speaker 2

Thank you, Vijay. Really proud of what the team's been able to accomplish in the quarter. The simple answer to your question is no. Orders keep outpacing sales, and that's happened this quarter as well. So we have a A healthy backlog.

Speaker 2

Now turning to the overall growth, and you just you can just look at the overall market and us in particular. I think some of our peers have reported analytical instrument sales in their segments sometime last week, And they're in the low double digits, so we're a bit higher than that. And that, delta is largely attributed to, of course, The operational excellence, the SiFive initiatives that I mentioned in the past and really significant traction for our new products, in fact, ARC HVLC and Acuity Premier have had really outsized performance. In fact, the number of units were 3x as what we sold In the same quarter last year, and we continue to see very good traction for our MaxPeak Premier Columns, Really specially designed for large molecules and biologics where, as you know, the tailwind is very good for biologics. So overall, No pull forward of demand and new products substantially doing substantially well, really Meeting a significant need in the market.

Speaker 4

That's helpful, Udit. And maybe one for Amol on the guidance here, Amol. Revenues, you beat the Q by 800 basis points versus your prior guidance, right, 68 basis points for Q1 that annualizes to 200 basis points. You look at the annual guide raise, it was raised by 200 basis points. So I'm curious, Udi just said order book is trending well above revenues.

Speaker 4

So is that perhaps conservatism China lockdowns or perhaps some macro, maybe just talk about the what the guide is assuming here for the year?

Speaker 3

Yes. So thanks a lot Vijay for the question. So look, I mean, we are raising our full year guide by approximately 2% at Constant currency. What is sort of driving it down is how the U. S.

Speaker 3

Dollar has moved between our last Guidance is guide, right? So when we guided last in February, there was close to 25,000,000 FX headwind on the full year revenue. Now it's at $85,000,000 so almost $60,000,000 headwind coming in on Top line and likewise on EPS, that is a $0.25 incremental headwind versus what we guided before because now the EPS headwind is at 0.45 Thanks. So that's all factored into our guidance. Despite some of these challenging macroeconomic conditions, we are raising both our revenue guide and our EPS guide.

Speaker 3

What that does assume is a 6% to 8% Q2 and sort of a 5% to 7% second half of the year. And again, there, we are putting our guide prudently given the macroeconomic conditions, and we continue to monitor that.

Speaker 2

Yes. So Vijay, I think just maybe one other comment to build on this. Look, we're super, super pleased with what's happened in Q1. I think there could be no doubt about that. It's a broad, broadly good performance Across consumables across all geographies and end markets.

Speaker 2

That said, I mean, there are still geopolitical There are still macroeconomic concerns, and there are still supply chain challenges out there. And we feel that it's It's prudent to guide the way we have, and I think that's really what's going on into our in our mindset at this point. But it's still a raise, Right. Even despite all those challenges, it's still a raise from what we had said in the past.

Operator

The next question is coming from Rachel Van Stal of JPMorgan.

Speaker 5

Hi, thanks for taking the questions. So first, could you just walk us through your latest thoughts around pricing for the year? You previously flagged about 150 bps, But inflation continues to be a concern. So have you reached beyond that this year at all? And then have you faced any pushback from your customers on price increases at all so far?

Speaker 2

Rachel, good morning and thank you for your question. Look, let's take a step back, and I would just now think about pricing alone. We have our gross margin has gone up in the quarter by about 40 basis points and the operating margin about 170 basis points, right? So that is a result of 3 things: 1, of course, pricing, which I'll get into in a minute but also Productivity improvements and productivity due to a higher volume. And thirdly, new products, right, giving us even more leverage.

Speaker 2

So if I now just comment a bit more on the pricing, I mean we This quarter has seen about 200 basis points. And I also remind you that during this quarter, a lot of A fraction of the sales have come due to orders that were placed in Q3 and Q4 last year, where the pricing had not fully taken hold. So We feel very comfortable with where we are, largely because we're collaborating very closely with our customers. I mean, there's a lot of conversation On pricing, whenever we increase prices, there's a lot of discussion with our customers on why and what and where and when. So we feel reasonably comfortable that as long as our customers are aware of why we are doing what we're doing and we're Communicating transparently, we should be able to sustain the price increases.

Speaker 5

Great. And then just another question on China here. So you played the 100 to 200 basis points of headwinds in China during 2Q stemming from the current lockdowns. So can you just talk about what you're seeing in that marketing or confidence and how quickly China can return to growth post lockdown? And then for China, you also flagged that CROs had over 50% growth year over year.

Speaker 5

So can you just spend a minute talking about what specifically drove that outpaced growth in the China CRO segment? Thank

Speaker 2

you. Thanks, Rachel. I mean China, look, despite the rolling lockdowns, has been 1 of the brightest stars in our overall geographic performance. Broad based growth, again, Pharma and Industrial, both growing, so 17% growth for the quarter for China, led by pharma and industrial, both in the mid teens. Even academic and government Was in the low teens this particular quarter.

Speaker 2

So and the underlying demand It's based on a lot of the lot of what we see globally. So great execution of our initiatives, including instrument replacement, including the fraction of our new products, ARC HPLC and ACQUITY Premier in particular, And really great demand for our products in the CDMO segment where we grew over 50%. And I'll remind you the value proposition we offer is not just the products. It's really training our CDMO customers on method transfer and method development for complex molecules. So Overall, the quarter has been great for China despite the fact that for the last week, we saw some headwinds for our recurring revenues when the access was limited.

Speaker 2

So Really pleased with what we've been able to do. Now going forward, we anticipate 100 to 200 basis points of headwind in the second quarter, largely Because the lockdowns are still sporadic and they're not over, we're starting to see them ease, but it's very difficult to predict How open the market is going to be and how open the access is going to be. So while we are optimistic Overall, on China, we think we'll end the year with low double digit to mid double digit growth, Our mid teen growth for the full year, and we have we are really optimistic about the trends that we see in China. I think It's just prudent to sort of manage Q2 with 100 to 200 sort of basis points of a headwind versus what we've already seen in Q1. So I think I hope that gives you enough context.

Speaker 2

Again, very optimistic about the market, really happy with the execution, both on new products and Customer traction and in the long term, super optimistic, but in the short term, a little bit careful about how we think about the market.

Operator

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

Speaker 6

Great. Thanks for taking the questions. Congrats on Very strong quarter. Maybe could you walk us through a little bit, Uddit, on the instrument side? I don't know if you quantified what the new The impact was in the quarter.

Speaker 6

I know you spoke about year over year growth, but could you back up

Speaker 7

a little bit and just give

Speaker 6

us a sense of what the impact was? And also if you could remind us As we think about the new instruments and the opportunity, kind of what's baked in for 2022? And then kind of related to that, Could you discuss I know you alluded to it earlier, but can you discuss what you're seeing from an end market growth basis and a share gain basis?

Speaker 2

Okay. So I'll take it one step at a time. And if I forget anything, I'm sure Dan, you'll remind me that I won't answer your question So overall instrument growth at 26%. We don't usually break down the contribution of new products to that. I mean, can imagine, and the way I would just back out that number or back out new products and execution is by just comparing it to the overall market.

Speaker 2

I think you'll agree with me that The 26% number really reflects a very, very strong performance versus what we're seeing from our peer group. And that has 2 contributions. 1 is the operational excellence, instrument replacement, increase in and increase in the traction of new products. And our new products, it's broad based, right? It's not just LCs.

Speaker 2

It's also Maaspex now, right? So from an LC perspective, you have ARC and Acuity, Premier and Acuity Premier, in particular, really targeting biologics and novel modalities applications. Now you turn Under the mass spec portfolio, where we, of course, launched our MRT platform, really great feedback from customers. That's a high resolution mass spec. But then The Xevo TQ XS Absolute that we've just Zevo TQ Absolute that we've just launched.

Speaker 2

And that has incredible And not surprisingly, right, it's 15 times more sensitive than the leading mass spec on the market for anionic compounds. And anionic compounds are ones that are ubiquitous in biopharma, mRNA, oligonucleotides, but also pesticides in food and environmental testing. So Really a strong introduction and what I'm most proud of is it's not just performance, but it has a lower footprint and lower environmental footprint, so 50% less consumption of electricity, 50% less generation of heat versus the top Random quartz in the market, so super optimistic about it. And in addition, it's not just the instruments that you sell, you also sell a full system with software, Right. And we had introduced our new watersconnect mass quantitation software in the last few months.

Speaker 2

That has incredible traction. So not only Getting a smaller box with a lower environmental footprint. They're getting better hardware performance and 50% More sensitivity for with our software. So it's an incredible new product in a space where remember we said There were about 800 or so tandem cords that we want to replace. So we feel very good about what we see as demand there.

Speaker 2

And I don't want to leave DA out. I mean, DEA again outperformed our Waters division, and we're not competitive internally with each other. But just To remind you, DEA grew 18%, waters grew 16% with broad based demand from for our thermal instruments, for our rheology instruments. But what I'm most excited about is what the TA team is doing, of course, operationally, but also attacking new Segments like battery testing. We have incredible demand for our products on that front.

Speaker 2

It's off a small base, so

Speaker 4

I won't give you a number,

Speaker 2

but it's off a Small base, but growing very rapidly. So very excited about new products, and very good feedback overall, and the 26% number And one other number that we've cited in the past is our new instrument vitality index, which is basically taking the last 3 to 4 years of sales And saying how much contribute the 3 to 4 years of launches and calculating how much contribution that has to our overall sales. And that number is at an all time high at 15%. These new products are meeting a need, but we also have a new process for launching the products, and you've seen how we repositioned the BioAccord. So I think that was one part of your question.

Speaker 2

The second part, I think you referred to as from an end market perspective. Look, No real weakness this quarter, right? So you see Pharma, again, doing extremely well with high teens growth, industrial also high teens growth And academic and government coming in at 4%. So really feel good about all end markets across different geographies. And Despite difficult conditions, India is still in the mid-20s in terms of growth, and we saw that all through last year.

Speaker 2

What I'm most excited about is what we see in the U. S. I mean, when was the last time you saw 29% growth from Waters in the United States? And as the U. S.

Speaker 2

Goes, So does our gross margin because the pricing in the U. S. Is a bit better, as you can imagine. So feel extremely good about the quarter, and I hope I have addressed Your questions.

Operator

The next question is coming from Josh Waldman, Cleveland Research. Your line is open.

Speaker 8

Good morning, guys. Thanks for taking my questions. One for Amal and then one for Uddit. Amal, I wondered if you could provide a bit more color on the moving pieces In the updated EPS guide, there may be a full bridge. Just trying to get a better sense on how variables beyond FX, Like the stronger revenue, improved margin outlook were factored into the guide and maybe if there are other offsets going on beyond Sx.

Speaker 3

Sure. Thanks, Josh. So looking at it from 2 vantage points, right? So on a full year basis, We are raising our EPS guidance, but that does include a $0.25 incremental headwind versus the guide that we provided in February. And so in a way, if you say, look, we beat consensus in Q1 By about $0.45 $0.25 of that is lost in year to go In sort of FX and the rest of it we are increasing our guide on EPS plus or minus a little bit of Spending timing switching between Q1 to Q2.

Speaker 3

So it's largely consistent with how we are guiding full year revenue increase And most of the gap is largely driven by change in FX assumptions.

Speaker 8

Okay. And then Udi, maybe a follow-up on BJ's question. Can you talk a bit about pacing in the Q1 and maybe how sales track versus order intake rates? Is it fair to assume that with the 16% organic growth you saw some relief on the supply chain side and were able to work down backlog or have Orders remained such that the backlog continues to be at kind of an elevated level entering 2Q and maybe similar to where it was As you entered the Q1.

Speaker 2

In fact Josh, thank you for the question. But in fact, the orders outpace the sales yet again, Right. So the backlog continues to build. We did not have to draw down the backlog to achieve the incredible results that you saw In the quarter, if anything, I would attribute, of course, it to the operational performance in the quarter and really the strong dedication of our teams. And this question keeps coming up, how did you deal with the supply chain issues?

Speaker 2

Look, I will not sit here and tell you that it's all over, yes, and that we are after 3 quarters of dealing with We know exactly what to do. But we have an algorithm, and I'm knocking on wood while I say this, that seems to work. Number 1, we have really spent a lot of time studying the supply chain of key materials, Including semiconductors and what additional materials that are based on the chips industry that go into our instruments. And so you have a deeper understanding of the supply chain to produce these semiconductors, the Tier 2, Tier 3, Tier 4 suppliers. 2nd, we've invested a ton of time on collaboration, right?

Speaker 2

So I have personally met the top seven Suppliers of chips that go into our instruments. We have incredible collaboration across Waters. I mean, It's a I mean, I like to call it as a I like to call Waters as a large start up where we have deep relationships that have been built over many, many years, and they help us In times of times that are difficult. And we have collaboration with our customers. So often, we will have a conversation with our customers.

Speaker 2

If something is short on supply, we will basically try to substitute it with something else. And then finally, the 3rd piece is collaborative problem solving, right? When you build these relationships, It's easier to solve problems with folks when you get into trouble, right? So and it's not just true within the organization. We're sitting down with customers asking what should We replaced with what?

Speaker 2

Rebuilding some of the chips, moving Ethernet ports from one location to the other. I won't get into more details. And all of us are on the ground floor. This is not a spectator sport, right? Amol, me, a lot of our senior leaders across the board, we are on the ground floor talking to So it's really, I would say, operational excellence, deep collaboration and an understanding and a deeper understanding The full supply chain, really not didn't have to tap into the backlog to achieve these results.

Speaker 2

I hope that gives you more color.

Operator

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

Speaker 9

Yes. Hi, Uddit, Amol. Thanks for taking the question. And really impressive growth here in instrument indeed. Maybe just pulling back to a higher level, when you look at the pharma and the 29% growth number that you mentioned in What is driving this demand when you talk to the customers' modalities, specifically more importantly, Well, are you seeing this demand come from new facilities expansion among CDMOs versus the demand from the existing facilities?

Speaker 9

Because obviously you are outpacing what the demand with I mean the strength we're seeing from peers as well. But peers are growing, but you guys are So just trying to understand at a high level, what is the sort of the dynamic across pharma and given the Backdrop of these macroeconomic environment right now.

Speaker 2

Thanks for the question, Puneet. It's really broad based, but it again Starts with operational excellence. I mean, the 5 initiatives that we've mentioned earlier, we have a newish leader in the United States. Our sales head has a long tenure in Waters, but he was newly appointed right before I got here. And he's just Been incredible with his team, right?

Speaker 2

We've put more feet on the street. We have been using our CRM system really religiously to get an understanding where the demand is. And there was a replacement backlog built up in the U. S. For our instruments.

Speaker 2

The new products have done extremely well. E commerce is doing better in the U. S. Than anywhere else, and the CMO traction is very, very good in the U. S.

Speaker 2

Turning then to new products. I mean, you're well aware these new products have been designed specifically for our Biologics customers, Right. And we start with the BioAccord, which I know you know extremely well. We repositioned the product to go upstream Into clone selection, and that's gaining a ton of traction. Downstream in QAQC, the work that we started about 2 years ago with several large pharma players Who have significant monoclonal antibody pipelines.

Speaker 2

We're seeing them gain track seeing the product gain traction in QAQC, And that bodes well for the future. 2nd, MaxPeak columns and Acuity Premier as a technology was custom designed for biologics that I have affinity to metal surfaces, and that product has that set of products has gained a ton of traction. And most recently, The VODQ Absolute, I mean, it has terrific performance as hardware and Lower Environmental Footprint. So all of that combined, meaning operational excellence, new products, A leader who's really sort of embraced collaboration and embraced the operational excellence is really what's behind the U. S.

Speaker 2

Doing as well as it does. And that of course has an impact on the gross margin as well.

Speaker 9

That's great. And then a brief follow-up on The BioAccord actually, we recognize that the field team is doing a number of demos throughout the quarter and the last couple of months for BioAccord and Bioprocessing Applications and you're obviously highlighting the University of Delaware work that you're doing here with the new center. Maybe just help us understand when should we start to think about meaningful contribution from some of the new bioseparations initiatives and Broadly bioprocessing customers taking on BioAccord. Thank you.

Speaker 2

Puneet, I'll repeat what I've said Also, in the last quarter, I mean, we've basically said, look, in the short term, you should expect us to grow 5% to 7%, About a 1% impact of our 5 initiatives. And in the midterm, 2024 onwards, you should see Waters go into the 6% to 8% sort of range where you should start to see an impact of these new initiatives, Right. And is it a bit sooner? Is it a bit later? I mean, can't be more precise.

Speaker 2

All I can tell you is there's a ton of traction. And just staying with the bio Separations area, I would say with the BioAccord in particular, there's a ton of traction for what we're doing with Sartorius for clone selection. The BioAccord, Just as it was initially designed, has sort of 2 very large applications. The first is on spent media, where we can analyze close to 200 analytes. So our customers in that category are interested in a simple instrument, but they don't want to give up any of the sophistication.

Speaker 2

They don't want to look at 5 compounds and 15 compounds. They still want to look at 200 compounds because they are still trying to ascertain at that point, Which of these what trace quantities of materials are going to impact their cell culture? So BioAccord is It's simple to use but a highly sophisticated instrument. And I think that's really important to keep in mind when you think about spent media. And then the other application is on peptide mapping and the drug substance itself, the whole drug substance.

Speaker 2

And there again, the applications are very wide. And here, where Waters has an advantage is with our Ability to develop simple workflows, right? So our customers, again, are not willing to give up the sophistication. They want to know each amino acid in the sequence of the peptides. They want to know They want to know the size of the molecule.

Speaker 2

They don't want to give up any information. They want the instrument to be simple to use, the workflow to be simple to use, and we're developing A whole bunch of workflows on that front and again feel extremely good about it. As I said, mid You should in the midterm, you should expect 100 basis points of sort of growth impact based on all the sort of Adjacencies that I've talked about in the past, but I can't be more precise than that, but I can tell you there's a lot of excitement amongst our team and The customers, in applications of bioseparations as well as bioprocessing.

Operator

The next Question is coming from Matt Skiles of Goldman Sachs. Your line is open.

Speaker 7

Hi, good morning, Udi and Namal. Congrats on the quarter. Udi, maybe just big picture first question. I mean, one of the things that you did earlier in your tenure was to try to bring the R and D and commercial functions closer together. And then Noticing how the new instrument demand has really picked up in pretty successful launches, how much do you attribute to the success of those new products to Some of the reorganization you did within the R and D commercial teams.

Speaker 7

And how much more is there to go for in bringing those 2 close together? Like should we look for increased momentum with the new products because of the changes that you made?

Speaker 2

It's a great question, and thanks for asking a more sort of qualitative question. Look, I mean, It's a question of collaboration, right? I mean, Waters is known for its technical excellence and closeness to customers. But I think by bringing the commercial team closer To our development colleagues, we're now as we think through our launch process, and John Pratt will talk to you a bit more about it in our Investor Day in a few weeks, As we brought these two teams together, we're able to bring the commercial input much sooner into development, number 1. Number 2, there's a lot more ownership from our commercial teams, not just the understanding, but also a lot more ownership from our commercial teams as we launch the new products.

Speaker 2

And Without a doubt, that has a lot to do with the traction we've seen with the MaxPeak Premier columns. The sales team are super excited. The Acuity Premier, the ARC HPLC, which was a demand or a request from our customers through our sales team And the R and D teams responded to it. And now as they are closer together, they sit in operational reviews together. I chair an innovation board where we have Both commercial as well as R and D input.

Speaker 2

And I can tell you that has a significant amount to do with how we are seeing new products pick up in the market and the feedback, right? So I mean in this space, you don't expect to hit a home run-in the 1st day that you go out to bat, right? So you basically have to get feedback from our From the customers and those that feedback goes back into R and D seamlessly, right? And the best example of that is our software launch, Right. We launched our MASK 1 application for with watersconnect, basically a compliant ready software.

Speaker 2

And some of the customers wanted enterprise capabilities with that software. So our development team got that feedback very early on and has developed the solution. Same is true with BioAccord. Early on, we went head first into QAQC. That was a few years ago.

Speaker 2

Now with closer collaboration between commercial and R and D sitting at the same table, as the customers come back and say, hey, I want a simpler workflow for oligos That's my pipeline. Or I want a simpler workflow for spent media. That's what the R and D team focuses on optimizing. So it's I could go on and on. I mean, it's incredibly exciting.

Speaker 2

And as a former researcher myself, I find the discussions very pragmatic, Hugely collaborative and a learning experience of both parties, both commercial as well as R and D. Great. Thanks for that.

Speaker 7

And then just quickly, just maybe on the academic end market, just talk about And you're seeing there, you had some pretty strong growth in China, but maybe ex China, what you're seeing in the academic end market in this quarter and what you're looking for, for this year?

Speaker 2

Academic and government did especially well both in the U. S. And in China. And I would separate the two things, right? I mean, again, I mean, we are While we have performed in line with many of the peers who've already reported with academic and government, I don't want you to assume that Our turnaround in academic and government is finished, right?

Speaker 2

We have just begun remapping the KOLs. We have started to work much harder on the e procurement, e commerce Availability for academic institutions. So there's a lot more to go. But the U. S.

Speaker 2

And China did super well in the Q1. And the U. S. In particular, Had a lot of traction again by putting more feet on the street, by talking to customers more directly. China Benefited from the VAT expense or the VAT Regulation being relieved a little bit step by step, right?

Speaker 2

So the customers are purchasing from what they I would not assume that we've already turned the corner there, right? While we have good results this quarter, we are still working on it. And so I expect more From that segment.

Operator

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

Speaker 10

Thank you and good morning. I wanted to ask about recurring sales. Just given the instrument upside in the Q1, What does guidance now assume for chemistry sales for the remainder of the year? I was curious whether you think some of this bolus of upside here could have some carry through on the recurring growth expectation.

Speaker 3

Yes. So Jack, good morning and great question. I mean the instrument growth will continue to drive Recurring revenue growth, both chemistry and service. At this point, our guidance sort of assumes service and chemistry would be around high single digits, Low double digits for the second half of the year. But again, I mean, this thing is not just here and now, right?

Speaker 3

These instruments will continue to produce revenues for the next 7, 8 years and the way we are performing on instrument replacement, we also think our instruments are recurring revenue because We've now built muscle strength in systems and processes so that the entire organization looks at instruments as recurring revenue.

Speaker 2

And then look, I mean, there too historically, we've seen Recurring revenues slightly higher than mid single digits in the best years of orders, and we've now for a few quarters running been double digits On low double digits, right? So even this quarter, if you account for the one day fewer than the previous year, recurring revenues This would be almost 10%, right? So feel extremely good about it, in particular, the new product contribution and what we're seeing from our service Right. So the new product contribution being MaxPeak Premier and a very rich pipeline that is specifically targeted towards large molecules. And on the service side, remember we talked about increased attachment rates.

Speaker 2

That is also that is continuing to contribute And our attachment rates for our service are increasing. So it's not just the translation of instruments To consumables and service, it's also unique contributions of new products and Interesting innovation on the service side. So really excited. I mean, as I said, wouldn't be prouder of the team. Across the board, there's been great performance.

Speaker 3

And plus, e commerce is accretive and CDMOs are high volume, so they're all adding up to the recurring revenue.

Operator

And our last question is coming from Dan Arias of Stifel. Your line is open.

Speaker 1

Good morning, guys. Thanks for the question. Amal, just as a follow-up to the things that

Speaker 8

you've done on the supply chain, how much inventory safety stock on critical components would

Speaker 3

It's a great question and a tough one, Dan. I mean, we try to build safety stock Wherever we can find inventory, the situation on electronic components Hasn't improved any bit versus Q4 or Q1. It's a 5 day in and day out. So I mean, part of that is in the $54,000,000 or so that the inventory has gone up. But there are components where we have a production plan in Q2, likely for a demand plan in Q3, where we may be missing components And we continue to try to solve these problems either with the suppliers or with the market or through innovative engineering.

Speaker 3

So if you were to assume everything is solved and in inventory, we are far from it, right? And That's the story with everybody. I mean, what Life Science Tools buys from electronic component suppliers is less than Probably single digit percentage of their annual production. So in a way, everybody is in the same queue behind Cellular Networks and Vehicles, right? So the fight is on and we continue to navigate it day in and day out.

Speaker 2

And Dan, it's an excellent question. Look, as Amora summarized, it's a deeper understanding of the supply chain, not just ours, but also the And who else is getting them? It's like in a lot of discussions across Tier 1, Tier 2, Tier 3, many top to top conversations. And then finally, collaboration And creative problem solving. I mean that's what's gotten us this far, and our teams are continuing to do it.

Speaker 2

The fight is far from over, right? I mean we see it still out there.

Speaker 9

But I think if there

Speaker 2

is an algorithm, again, as I said earlier, knock on wood, as I said, we seem to have something in our hands, and our teams are dedicated to solving these problems. Let me now thank you For your participation and on behalf of Waters' management team, I'd like to thank you for your continued support and your interest. I would also like to make you aware that we're hosting our 2022 Investor Day in just over 2 weeks On May 19 in New York City at the New York Stock Exchange, starting at 8:30 a. M. Eastern Time, the main presentation from the event At 10 am, we will be webcast live on our Investor Relations website.

Speaker 2

If you would like to join us in person for the event, please reach out to our IR team via the contact details on Slide 13. Thank you very much and have a wonderful day.

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Earnings Conference Call
Waters Q1 2022
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