Waters Corporation

Q1 2022 Earnings Conference Call

5/3/2022

spk07: 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. Casper Tudor, Director of Investor Relations. Please go ahead, sir.
spk04: 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 second quarter of 2022 and full year 2022. 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 K for the fiscal year ended December 31st, 2021 in part one 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-19 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. In our discussions of the results of operations, we may refer to non-GAAP results, which exclude the impact of items such as those outlined in our schedule titled Reconciliation of GAAP to Adjusted Non-GAAP Financials, included in this morning's press release and in the appendix of our presentation. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter 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 Dr. Udit Batra, Water's President and CEO. Udit.
spk01: Thank you, Kasper, and good morning, everyone. Along with Kasper, joining me on this morning's call is Amol Chauvel, Waters, Senior Vice President and Chief Financial Officer. We had a record start to the year with first quarter sales led by instruments which grew over 25% with a broad-based, strong performance across all our end markets and geographies. Before summarizing the quarter, let me start by saying how extremely proud I am of our teams who work tirelessly to manage our supply chain, delivering operational excellence and exceptional support for our customers through the ongoing challenges of the pandemic. It is a result of the indomitable spirit of all my colleagues at Waters. I will now provide a brief overview of our first quarter operating results and deliver our key messages. Amol will then review our financial results in detail and provide comments on our financial outlook. We will then open up the phone lines to take your questions. Turning now to slide three, we have three key messages. First, we had a very good start to 2022 with great traction for our new instrument products, strong operational performance, and sustained commercial momentum. Demand has remained robust across all our end markets. Second, we're laser focused on execution, innovation, and growth. We continue to make great progress large and small molecule workflows, as well as in our non-pharma markets such as food testing, environmental and material science. And thirdly, Waters has a firm commitment to leave the world better than we found it. We are delivering sustainable value to our shareholders and stakeholders through our ESG programs. Now moving to slide four, in the first quarter our revenue grew 13% as reported and 16% on across all our end markets and geographies. Orders in the quarter exceeded our sales of 691 million, reflecting a very strong demand. Instruments grew at 26% in constant currency, with strong growth across our LC, mass spec, and TA portfolios. New products contributed meaningfully to growth in the quarter, versus the first quarter of last year. In mass spec, new instruments in our high-end TandemQuad portfolio such as our Zevo TQ-XS also saw strong growth in both industrial and pharmaceutical applications. Instrument strength is a positive indicator for future growth of our consumables and service revenues. Recurring revenues grew 9% for the quarter with chemistry up 8% and service up 9%. This quarter had one fewer day than the first quarter of 2021, which translates to a headwind of approximately 1% for our recurring revenues. Without that, recurring revenues would have also grown double digits. Our 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. we're seeing increased service plan attachment rates in our key regions at instrument point of sale. By geography, growth was led by the Americas, with the U.S. up 28%, driven by broad performance in each of our end markets. In China, sales grew 17%, with pharma, industrial, and academic and government all up double digits. As lockdowns in certain regions persist, We're beginning to see more of an impact to our business, but we're in close contact with our customers and demand remains robust. Once the lockdowns ease, we expect activity levels to catch up, then normalize with limited impact to our full-year growth. 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 five, 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, and Max Premier columns. 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 modalities such as mRNA, peptides, and glycans, just to name a few examples. Meanwhile, small molecule growth remains solid, with customers continuing to purchase new capital equipment, including RKH PLC. Now on slide six, we recently launched the Zevo TQ Absolute, which is up to 15 times more sensitive when analyzing negatively ionized compounds compared to other tandem quads currently on the market, while also using less samples. 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 which high resolution mass spec have typically been required. The instrument is highly efficient, using approximately 50% less electricity and gas, and also producing 50% less heat than other high performance quantum quads 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 in analytical labs is limited and costly. Our TandemQuad 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 seven, Immerse Delaware Our second innovation and research lab will be opening tomorrow, part of a multi-year 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, as well as characterize critical quality attributes that will be a key step towards separating the process from the product in biologics. On slide eight, 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 Corporate Equality Index, earning Waters a designation as one of the best places to work for LGBTQ plus equality. In addition, Barron's ranked Waters number six on its 100 most sustainable US companies list for 2022, based on a set of 230 performance indicators, and reflects our efforts of continuous improvement in social and environmental responsibility. On the list, we were the highest placed Recently, within our diversity and inclusion and STEM education efforts, Waters has partnered with three historically black colleges and universities to create STEM opportunities for students through funding, instrument donations, mentoring, and the awarding of scholarships to students exploring the analytical sciences. In summary, we are pleased with our strong start to the year and 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 first quarter financials as well as our outlook for the remainder of the year. Amol.
spk05: Thank you, Udit, and good morning, everyone. As Udit outlined, we recorded net sales of $691 million in the first quarter, 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 nine, in constant currency, first by operating segment. Waters division grew 16%, while TA grew by 18%. By end market, our largest market category, pharma, grew 19%. Industrial grew 17%, and academic and government grew 4%. 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 percent, India up just under 30 percent, and China, which grew mid-dates. In industrial, our performance was also strong across all major geographies. with U.S., Europe, and China all growing 20% or above. 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. 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. 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. Woodward 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, microcalorimetry, and rheology. Demand for our TA products continue to be strong in all regions, with growth driven by advanced materials and chemicals, including batteries and sustainable polymers. Now I would like to comment on our first quarter non-GAAP financial performance versus the prior year. Gross margin for the quarter increased by 40 basis points to 58.6%, despite higher instrument mix, inflation pressures, and stronger U.S. dollars. This was driven by volume leverage and pricing. 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 million shares, which is about 1.7 million less than the first quarter of last year. Our non-GAAP earnings per fully diluted share for the first quarter 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. 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 first quarter of 2022, free cash flow was about 25% of sales, at 176 million after funding 28 million of capital expenditures. Excluded from free cash flow was 6 million relating to investment in our Taunton precision chemistry operations. In the first quarter, accounts receivable DSO came in at 81 days, down three days compared to first quarter 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 million 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&A, and returning capital to shareholders. We continue to evaluate M&A opportunities that will meaningfully accelerate value creation, in well thought out, attractive, high market, high growth adjacent opportunities. In Q1, we repurchased approximately 493,000 shares of our common stock for 160 million. At the end of the quarter, our net debt position was 941 million 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. These dynamics support increasing the full year 2022 guidance to 7.5% to 9% constant currency sales growth, up from our initial guidance in February of 5% to 7%. At current rates, a negative currency translation is expected to subtract approximately three 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%, and operating margin is expected to be approximately 30.5%. We expect our full year net interest expense to be approximately $35 million and full year tax rate to be approximately 15.5%. Average diluted 2022 share count is expected to be approximately $60.6 million. 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 $12.10. This includes negative currency impact of approximately 4 percentage points or 45 cents at current rates. Looking at the second quarter of 2022, we expect constant currency sales growth to be 6% to 8%. At current rates, currency translation is expected to subtract approximately 4 percentage points, resulting in second 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 second quarter, assuming lockdowns do not worsen, which is factored in our second quarter guidance. Second quarter non-GAAP earnings per fully diluted share are estimated to be in the range $2.55 to $2.65. This includes a negative currency impact of approximately 5 percentage points or 13 cents at current rates. Now I would like to turn it back to Udit for some summary comments. Thank you Amol.
spk01: So in summary, our teams continue to deliver excellent results despite the challenging environment with strong instrument growth and great traction for our new instrument products. We are laser focused on execution, innovation and growth. We continue to make progress executing against our enterprise priorities with our core initiatives delivering positively and contributing positively to our results. With that, we will now begin the Q&A session. Operator.
spk07: If you would like to ask your question at this time, please unmute your phone, press star 1 on your telephone keypad. Only record your first and last name. To withdraw your question, you may press star 2. And the first question comes from Vijay Kumar of Evercore ISI. And your line is open.
spk06: Hey, guys. Thanks for taking my question. And congrats on a really strong Q1 print share. Would it make me... Just diving into the performance within the queue, you noted new products in CROs. I guess what the market is trying to debate is, is there any pull forward of demand? Can you talk about your order books? When you say new products, it feels like this is incremental demand coming in and perhaps not a pull forward of demand. So if you could just talk through the drivers here in Q1 and how the order book is shipping up, that would be fantastic.
spk01: Thank you, Vijay. Really, 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 healthy quarter. Now, turning to the overall growth, and 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 five initiatives that I mentioned in the past. and really significant traction for our new products. In fact, our KHPLC and Acuity Premier have had really outsized performance. In fact, the number of units were three times 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 doing substantially well really meeting a significant need in the market.
spk06: 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, 6 to 8 for Q1, that annualizes to 200 basis points. You look at the annual guideways, it was raised by 200 basis points. I'm curious, Udit just said order book is trending well above revenues. Is that perhaps conservatism, China lockdowns, or perhaps the macro? Maybe just talk about what the guide is assuming here for the year.
spk05: 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 dragging it down is how the US dollar has moved between our last guide and this guide, right? So when we guided last in February, there was close to 25 million FX headwind on the full year revenue. Now it's at 85 million. So almost $60 million headwind coming in on top line. And likewise on EPS, there is a 25 cent incremental headwind versus what we guided before because now the EPS headwind is at 45 cents. So that's all factored into our guide. And despite some of these challenging macroeconomic conditions, we are raising both our revenue guide and our EPS guide. What that does assume is a 6 to 8 to 2 and sort of a 5 to 7 second half of the year. And again, there we are putting our guide given the macroeconomic conditions, and we continue to monitor that.
spk01: 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 can be no doubt about that. It's a broadly good performance across instruments, across consumables, across all geographies and in markets. That said, I mean, there are still geopolitical issues, there are still macroeconomic concerns, and there are still supply chain challenges out there. And we feel that it's prudent to guide the way we have, and I think that's really what's going on in our mindset at this point. But it's still a race, right? Even despite all those challenges, it's still a race from what we had said in the past.
spk07: The next question is coming from Rachel Vattenstahl of J.P. Morgan. Your line is open.
spk08: 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 can you reach beyond that this year at all? And then have you faced any pushback from your customers on price increases at all so far?
spk01: Rachel, good morning and thank you for your question. Let's take a step back and I would just now think about pricing alone. Our gross margin has gone up in the quarter by about 40 basis points and the operating margin about 170 basis points. So that is a result of three things. One, 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, giving us even more leverage. If I now just comment a bit more on the pricing, this quarter has seen about 200 basis points. I also remind you that during this quarter, 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. 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.
spk08: Great. And then just another question on China here. So you plagued the 100 to 200 basis points of headwinds in China during PQ 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. So can you just spend a minute talking about what specifically drove that outpaced growth in the China CRO segment? Thank you.
spk01: Thanks, Rachel. I mean, China, look, despite the rolling lockdowns, has been one 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. And the underlying demand is based on a lot of what we see globally, so great execution of our initiatives, including instrument replacement, including the fraction of our new products, our KHPLC and Acuity 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's 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. 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's going to be and how open the access is going to be. While we are optimistic overall on China, and we think we'll end the year with low double-digit to mid-double-digit growth, or mid-teen growth for the full year, and we're really optimistic about the trends that we see in China, I think it's just prudent to sort of manage Q2 context. 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.
spk07: The next question is coming from Dan Brennan of Cowan & Company. Your line is open.
spk10: Great. Thanks for taking the questions. Congrats on, obviously, a very strong quarter. Maybe could you walk us through a little bit, Udit, on the instrument side, I don't know if you quantified what the new instrument impact was in the quarter. I know you spoke about year-over-year growth, but could you back up a little bit and just give us a sense of what the impact was? And also, if you could, remind us, as you 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? Okay.
spk01: 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 fully. So, overall instrument growth at 26%. We don't usually break down the contribution of new products to that. I mean, you can imagine, 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. I think you'll agree with me that the 26% number really really reflects a very, very strong performance versus what we're seeing from our peer group. And that has two contributions. One is the operational excellence, instrument replacement, and increase in the traction of new products. And on new products, it's broad-based. It's not just LCs. It's also mass specs now. So from an LC perspective, you have Arc and Acuity Premier, and Acuity Premier in particular really targeting biologics and novel modalities applications. Now you turn to the mass spec portfolio where we, of course, launched our MRT platform, really great feedback from customers. That's a high-resolution mass spec. But then the Zevo TQXS Absolute that we've just launched, and that has incredible traction, and not surprisingly, 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 a lower environmental footprint. So 50% less consumption of electricity, 50% less generation of heat, versus the top quantum 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. And we introduced our new Waters Connect mass quantitation software in the last few months. That has incredible traction. So not only are our customers getting a smaller box with a lower environmental footprint, They are getting better hardware performance and 50% more sensitivity with our software. So it's an incredible new product in a space where remember we said there were about 800 or so tandem quads that we want to replace. So we feel very good about what we see as demand there. And I don't want to leave DA out. I mean, DA again outperformed our waters division, and we're not competitive internally with each other, but just to remind you, TA grew 18%, waters grew 16%, with broad-based demand for our thermal instruments, for our rheology instruments. But what I'm most excited about is what the TA team is doing, of course, operationally, but also attacking new segments like battery testing. We have incredible demand for our products on that front It's of a small base, so I won't give you a number, but it's of a small base but growing very rapidly. So very excited about new products and very good feedback overall, and the 26% number sees that. And one other number that we cited in the past is our new instrument vitality index, which is basically taking the last three to four years of sales and saying the three to four years of launches and calculating how much contribution that has to our overall sales. And that number is at an all-time high at 15%. These new products are meeting a need, but we also have a new process for launching the products. And you've seen how we repositioned the BioPort. So I think that was one part of your question. The second part I think you referred to 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 I think from a geographic standpoint, I would point out that still in the mid-20s in terms of growth, and we saw that all through last year. What I'm most excited about is what we see in the U.S. I mean, when was the last time you saw 29 percent growth from waters in the United States? And as the U.S. goes, so does our gross margin, because the pricing in the U.S. is a bit better, as you can imagine. So I feel extremely good about the quarter, and I hope I've addressed your questions.
spk07: The next question is coming from Josh Waldman, Cleveland Research. Your line is open.
spk11: Morning, guys. Thanks for taking my questions. One for Amal and then one for Udit. Amal, I wondered if you could provide a bit more color on the moving pieces in the updated EPS guide and maybe 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.
spk05: Sure. Thanks, Josh. So look at it from two vantage points. So on a full year basis, we are raising our EPS guidance, but that does include a 25 cent 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 45 cents, 25 cents of that is lost in year to go in sort of FX and the rest of it we are increasing our guide on EPX, plus or minus a little bit of spending timing, switching between Q1 to Q2. 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.
spk11: Okay. And then, Udit, maybe a follow-up on Vijay's question. Can you talk a bit about pacing in the first quarter and maybe how sales track versus order intake rates? Is it fair to assume that 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 your backlog continues to be at kind of an elevated level, entering 2Q, maybe similar to where it was as you entered the first quarter?
spk01: In fact, Josh, thank you for the question. But in fact, the orders outpaced the sales yet again. 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, 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? Look, I will not sit here and tell you that it's all over. And that we are, after three quarters of dealing with the supply chain challenges, 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 one, 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. We have a deeper understanding of the supply chain to produce these semiconductors, the tier two, tier three, tier four suppliers. Second, we've invested a ton of time on collaboration. I have personally met the top seven suppliers of chips that go into our instruments. We have incredible collaboration across Waters. I like to call Waters as a large startup where we have deep relationships that have been built over many, many years and they help us in times that are difficult. And we have collaboration with our customers. So often we will have a conversation with our customers. If something is short on supply, we will basically try to substitute it with something else. And then finally, the third piece is collaborative problem solving. When you build these relationships, it's easier to solve problems with folks when you get into trouble. And it's not just within the organization. We are sitting down with customers asking what should be replaced with what, 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. Amol, me, a lot of our senior leaders across the board, we are on the ground floor talking to our customers. So it's really, I would say, operational excellence, deep collaboration, and a deeper understanding of the full supply chain. Really didn't have to tap into the backlog to achieve these results. I hope that gives you more color.
spk07: The next question is coming from Punit Sura, SVB Securities. Your line is open.
spk09: Yeah. Hi, Uda. Amol, thanks for taking the question. Really impressive growth here in instruments indeed. Maybe, Uda, just pulling back to a higher level, when you look at the pharma and the 29% growth number that you mentioned in U.S., You know, what is driving this demand when you talk to the customers, modalities specifically? More importantly, are you seeing this demand come from new facilities expansion among CDMOs versus demand from the existing facilities? Because obviously, you know, you're outpacing of what the demand would, I mean, the strengths we're seeing from Pierce as well. But Pierce are growing, but you guys are obviously ahead of that. So just trying to understand at a high level, What is the dynamic across pharma and given the backdrop of these macroeconomic environments right now?
spk01: Thanks for the question, Puneet. It's really broad-based, but it again starts with operational excellence. The five 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? We've put more feet on the street. We have been using our CRM system really religiously to get an understanding of where the demand is. And there was a replacement backlog built up in the U.S. for our instruments. The new products have done extremely well. E-commerce is doing better in the U.S. than anywhere else. And the CMO traction is very, very good in the U.S., Turning then to new products, I mean, you're well aware these new products have been designed specifically for our biologics customers, right? And we start with a 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 two years ago with several large pharma players who have significant monoclonal antibody pipelines, we're seeing the product gain traction in QAQC and that bodes well for the future. Second, MaxPeak columns and Acuity Premier as a technology was custom designed for biologics that have affinity to metal surfaces and that set of products has gained a ton of traction and most recently There's Evo TQ Absolute. I mean, it has terrific performance as hardware and lower environmental footprint. So all of that combined, meaning operational excellence, new products, a leader who's really sort of embraced collaboration and embraced the operational excellence is really what's behind the U.S. doing as well as it does. And that, of course, has an impact on the gross margin as well.
spk09: That's great. And then a brief follow-up on the BioChord, actually. We recognize that the field team was doing a number of demos throughout the quarter and the last couple of months for BioChord 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, you know, broadly bioprocessing customers, you know, taking on BioCorp. Thank you.
spk01: 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 go 5% to 7%, about a 1% impact of our five 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, we can't be more precise. All I can tell you is there's a ton of traction and just staying with the bioseparations area or staying with the BioAccord in particular, there's a ton of traction for what we're doing with Sartorius for clone selection. The BioAccord, just as it was initially designed, has sort of two 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. 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 trace, what trace quantities of materials are going to impact their cell culture. So BioCord is simple to use but a highly sophisticated And then the other application is on peptide mapping and the drug substance itself, the whole drug substance. And there, again, the applications are very wide. And here, where Waters has an advantage is with our ability to develop simple workflows. 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 the conformations. They want to know the size of the molecule. They don't want to give up any information. They want the instrument to be simple to use, the workflow to be simple to use, and we're developing a whole bunch of workflows on that front. Again, feel extremely good about it. As I said, in the midterm, you should expect 100 basis points of growth impact based on all the sort of adjacencies that I've talked about in the past. 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.
spk07: The next question is coming from Matt Skiles of Goldman Sachs. Your line is open.
spk03: Hi, good morning, Udur and Amal. Congrats on the quarter. Udur, maybe just big picture first question. I mean, one of the things that you did earlier in tenure was to try to bring the R&D and commercial functions closer together, and then noticing how the new instrument demand has really picked up and pretty successful launches. How much do you attribute to the success of those new products to some of the reorganization you did within the R&D commercial teams, and how much more is there to go for in bringing those two close together? Like, should we look for increased momentum with the new products because of the changes that you made?
spk01: It's a great question, and thanks for asking a more sort of qualitative question. Look, I mean, it's a question of collaboration. 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 one. Number two, 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. 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 RKH PLC, which was a demand or a request from our customer to our sales team, and the R&D team 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&D input, 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. In this space, you don't expect to hit a home run in the first day that you go out to bat. You basically have to get feedback from the customers, and that feedback goes back into R&D seamlessly. The best example of that is our... software launch. We launched our Mask One application with Waters Connect, basically a compliant ready software. 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 BioChord. Early on we went head first into QA, QC. That was a few years ago. Now with closer collaboration between commercial and R&D sitting at the same table, as the customers come back and say, hey, you know, I want a simpler workflow for oligos because that's my pipeline, or I want a simpler workflow for spent media, that's what the R&D team focuses on optimizing. So I could go on and on. I mean, it's incredibly exciting. And as a former researcher myself, I find the discussions very pragmatic, hugely collaborative, and a learning experience for both parties, both commercial as well as R&D.
spk03: Great. Thanks for that. And just quickly, just maybe on the academic end market, just talk about trends you're seeing there. You had some pretty strong growth in China, but maybe ex-China, what you're seeing in the academic end market in this quarter and what you're looking for for this year?
spk01: Academic and government did especially well both in the U.S. and in China. And I would separate the two things. Again, 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? We have just begun remapping the KOLs. We've 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. and China did super well in the first quarter. And the U.S. in particular had a lot of 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 so the customers are purchasing from what they had in the past. I would not assume that we've already turned the corner there. While we have good results this quarter, from that segment.
spk07: The next question is coming from Jack Meehan of Nefron Research. Your line is open.
spk02: Thank you, and good morning. I wanted to ask about recurring sales. Just given the instrument upside in the first quarter, 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 expectations.
spk05: Yeah, 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? These instruments will continue to produce revenue for the next seven, eight years. And the way we are performing on instrument replacement, We also think our instruments are recurring revenue because we've now built muscle strength and systems and processes so that the entire organization looks at instruments as recurring revenue.
spk01: higher than mid-single digits in the best years of Waters. And we now, for a few quarters running, have been double digits or low double digits. So even this quarter, if you account for the one day fewer than the previous year, recurring revenues would be almost 10%. So feel extremely good about it. In particular, the new product contribution and what we're seeing from our service team. So the new product contribution being Max Pick Premier and a very rich pipeline that is specifically targeted towards large molecules. I mean, Waters is the world leader in separations, and we are really turning our attention to complex large molecules collaborating with our customers. And on the service side, remember we talked about increased attachment rates. That is continuing to contribute, and our attachment rates for our service are increasing. So it's not just the the translation of instruments to consumables and services. 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 proud of the team. Across the board, there's been great performance.
spk05: And plus, you know, e-commerce is a creative and CDMOs are high volume, so they're all adding up to the recurring revenue.
spk07: And our last question is coming from Dan Arias of Stifel. Your line is open.
spk04: Good morning, guys. Thanks for the question. Amal, just as a follow-up to the things that you've done on the supply chain, how much inventory safety stock on critical components would you say you have at this point?
spk05: It's a great question and a tough one, Dan. You know, 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 fight day in and day out. Part of that is in the $54 million 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 We continue to try to solve these problems either with the suppliers or with the market or through innovative engineering. If you were to assume everything is solved and in inventory, we are far from it. That's the story with everybody. 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.
spk01: Yeah, and Dan, it's an excellent question. Look, as Amod has summarized, it's a deeper understanding of the supply chain, not just ours, but also the chips and who else is getting them. Second, a lot of discussions across Tier 1, Tier 2, Tier 3, many top-to-top conversations. And then finally, collaboration and creative problem solving. I mean, that's what's gotten us this far, and our teams are continuing to do it. The fight's far from over, right? I mean, we see it still out there. But I think if there is an algorithm, again, as I said earlier, and knock on wood as I say it, 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 two weeks on May 19th in New York City at the New York Stock Exchange, starting at 8.30 a.m. Eastern Time. The main presentation from the event at 10 a.m. will be broadcast live We will be webcast live on our investor relations website. If you would like to join us in person for the event, please reach out to our IR team via the contact details on slide 13. Thank you very much and have a wonderful day.
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