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Operator
Good morning. Welcome to the Waters Corporation second quarter 2022 financial results conference call. All participants will be in a listen-only mode until the question and answer session of today's call. This conference call is being recorded. If anyone has objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Kasper Tudor, head of investors relations. Please go ahead, sir.
Kasper Tudor
Thank you, operator. Good morning, everyone, and welcome to the Waters Corporation second quarter earnings conference call. Before we begin, I'll 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 third 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 1, under the caption risk factors. And in our most recent quarterly report on form 10Q for the quarter ended April 2nd, 2022 in part 1A under the caption risk factors, both of which are on file with the SEC as well as the cautionary language included in this morning's press release. 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'll 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 second 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, Waters President and CEO.
Udit Batra
Udit. 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. The second quarter, we continue to deliver excellent results led by instrument growth of 12%, with continued broad-based strength across our end markets and geographies. I would like to take a moment to again acknowledge the unwavering efforts of our teams who have persistently worked through the challenging environment to deliver for our customers. We saw this with our China team whose dedication and agility through the lockdowns in Shanghai drove exceptional results again this quarter, which came ahead of our expectations. But importantly, we've seen this commitment across all our teams and regions, and it truly reflects the indomitable spirit we have here at Waters. Turning now to slide three, we have three messages. Our strong commercial momentum is driving great results in markets that remain healthy. This is reflected in the broad, sustained growth we are delivering across our products, geographies, and markets. Customer demand remains robust with orders that again outpacing sales as our strong momentum continued with double digit sales growth again in the second quarter. Innovation is contributing meaningfully to our growth. A refreshed product portfolio is highly competitive and providing key benefits to our customers which is again driving stronger option of these new products as well as market share gains. Over time, we expect that the strong instrument placements and resulting expansion in our installed base will drive growth in recurring revenue tied to these instruments. And thirdly, we have a robust business model serving an attractive and resilient base. Water serves end markets with sustainable growth drivers that are linked to key demographic areas such as fill count population growth and increasing regulatory requirements around testing. With our strong business model, we have growth levers that exist throughout the market cycle across instruments, service, chemistry, and informatics. Growth in one of these areas usually results in follow-through performance across our business model, and you can see this today with our strong pull-through of instrument sales into higher attachment rates, which is again driving recurring revenue growth. Now moving on to slide four. In the second quarter, our revenue The revenue grew 5% as reported and 10% on a constant currency basis, with broad strength across our end markets and geographies, as well as in both instruments and recurring revenues. Orders in the quarter exceeded sales of $714 million, as we continued to see very strong demand from our customers. Our Q2 non-GAAP adjusted earnings per share was $2.75, up 6% year-over-year despite FX headwinds. The impact of FX headwind lowered our non-GAAP earnings per share growth by 11% versus the prior quarter. Amol will cover the impact of FX in more detail later in the call. Now looking more closely at our top line results for the quarter on slide 5 in constant currency. First, by operating segment, Waters division grew 10% while TA grew 12%. By end market, our largest market category, pharma, grew 10%, industrial grew 8%, and academic and government grew 16%. In pharma, we saw continued broad-based strength across segments, geographies, and applications, with growth in large molecule and small molecule applications. Growth was led by the US, which grew mid-teens with large molecule applications growing twice the rate of small molecule applications. China, which grew in mid-teens, and India, which grew 12%. In industrial, growth was driven by the US up mid-teens, Europe up high single digits, and India, which grew over 50%. Our food and environmental business is performing well, with PFAS testing also positively impacting growth. In academic and government, after seeing a slower recovery than our other end markets last year, customer spending continued to be more active during the quarter, with mid-teens growth for the quarter led by strength in China, India, and the Americas. Now, by geography, sales in Asia grew 9%, the Americas grew 15%, and Europe grew 7%. In Asia, growth was led by China, where sales grew 9%, despite the presence of COVID-related lockdowns for much of the quarter. Customer demand in China remained strong, and we're observing great activity levels which rapidly picked up in June relative to April and May when the lockdowns were in effect. Meanwhile, sales in India grew 24%. The Americas was again our fastest growing region, with the U.S. growing 14%, which was led by strong instrument sales, which grew 20%, along with recurring revenues, which grew 11%. In Europe, the growth was led by pharma and industrial, which both grew high single digits. By products and services, instruments grew 12% with our LC, mass spec, and DA portfolios each growing double digits. Recurring revenues grew 8% with chemistry up 9% and service up 8%. New products again contributed meaningfully to growth in the quarter with unit sales of ARK HPLC and Acuity Premier more than doubling versus the second quarter of last year. Unit sales of Maxpeak Premier columns also more than doubled and have continued to add strength and incremental growth to our chemistry business, driven by large molecule applications. In mass spec, we saw strength across our portfolio, including for our Zevo TQ-XS and cyclic IMS instruments, as well as strong traction for our newly launched Zevo TQ Absolute, which sold out at launch and has already developed a backlog. Customers are seeing the value that TQ Absolute provides in application areas such as food safety and pharma development in small and large molecules, small molecule applications, given its dramatic leap in performance and efficiency compared with other instruments in its class. Here in New England, one state public health laboratory was the first to purchase and install a TQ Absolute for the express purpose of PFAS testing in water and environmental samples. That customer told us their TQ Absolute is giving them a 100 to 400 fold increase in sensitivity versus their prior instrument while being far easier to use in terms of sample prep and in quickly giving them highly accurate results. Meanwhile, at the high end, we're seeing good demand for our cyclic ion mobility technology. One example is researchers at MD Anderson Cancer Center at the University of Texas. We're using it for precision molecular profiling within omics research. We're getting feedback that it is enabling significant progress in discovering and validating novel blood and plasma biomarkers for early disease detection in oncology. Finally, TA had another great quarter with sales up 12% led by strong growth in thermal analysis, microcalorimetry, and rheology. Demand for TA products continues to be strong across all regions led by electronics and batteries. Now moving to slide 6, I would like to reflect on the excellent strength and momentum we have sustained in the first half of the year, driven by our commercial execution, product innovation, and pricing offsetting inflation leading to these great results. So far this year, instruments have grown almost 20% with recurring revenue up just under 10% against strong stacked comps last year. In the US, instruments have grown over 35% year-to-date. All our regions have seen growth led by Americas, which has grown 20% year-to-date. Meanwhile, China has grown low teens despite the COVID-related lockdowns, which we were able to successfully navigate through in both the first and second quarters of 2022. Each of our end markets have seen double-digit growth, which speaks to our broad execution across regions and segments. Meanwhile, we continue to observe strong demand from our customers and are seeing ongoing positive impacts from our Market Plus growth initiatives. Now turning to slide seven, while each of these initiatives continue to progress, the three areas I would like to highlight this quarter are service attachment, e-commerce adoption, and launch excellence. First, with service attachment, we're seeing strong pull-through of our instrument sales into service plan coverage, which has driven our attachment rates over 100 basis points higher so far this year, which is ahead of our expectations and builds on excellent results last year. The progress we're making with service underscores the opportunity ahead to grow our recurring revenues, which layers on top of our instrument growth. Second, also part of our recurring revenues, e-commerce adoption of chemistry has continued to move higher, which is having a positive effect on sales by making it easier for our customers to do business with us and driving incremental growth opportunities. Thirty-one percent of our chemistry is now sold through digital channels, which is a ten-point increase compared to 2019 when the initiative began, and we see further runway to over 50 percent in the long term. Since we started the initiative in 2019, revenue from digital sales has more than doubled, and in the first half of this year, it grew over 30 percent versus the first half of 2021. Our revitalized portfolio is contributing to growth as demand has scaled up for ARK HPLC, for Acuity Premier, and MaxPeak Premier columns. Our product vitality index has grown 300 basis points versus the second quarter of last year to 15% as sales of these products have quickly ramped with launch excellence and the impact of innovation driving strong market uptake. As I've shared before, Acuity Premier and MaxPeak Premier were specifically designed to solve challenges that are particularly relevant for large molecules. This technology is capturing growth opportunities as shawarma customers seek to expand their capacity and build capabilities for biologics and novel modalities such as oligonucleotides, mRNA, and peptides. Meanwhile, small molecule growth remains solid with customers continuing to refresh and expand their capital equipment with RKH PLC. Now, on slide 8, in June at ASMS, we announced our new Zivo G3 high-resolution mass spec. The G3 is our latest generation benchtop Q-top, and it provides increased sensitivity and range for large molecule analysis over its predecessor, the G2, which is one of our best-selling high-res mass spec products. This instrument is described by our customers as an analytical workhorse, given that it offers the power and range needed to characterize complex biotherapeutics while also providing the reliability, robustness, and reproducibility needed in late-stage development. As biologics and novel modalities increasingly move into later stages, this instrument supports the associated workflows by allowing more detailed characterization of these molecules in product and process development. This occurs before they move downstream into higher-volume manufacturing QAQC, where routine analysis will then be performed on instruments such as BioChord. A further key piece of innovation is the software we've developed on Waters Connect, which allows the compliant workflows developed on the G3 to seamlessly transition to BioChord with just a few mouse clicks. This ease of transfer had been unheard of before now, and it allows our customers to transfer data between instruments and global locations within their enterprise network, all while remaining in an industry-compliant setting. On Waters Connect, our latest apps are enabling exciting new analytical areas for the G3 and BioChord, including cell culture media analysis and peptide analysis with in-depth protein and glycan profiling. Most recently, we've added the ability to characterize oligonucleotides and conduct impurity analysis, as well as perform lipid nanoparticle compositional analysis and stability testing, which is highly relevant for mRNA molecules. These are all new analytical areas in large molecule characterization where there is a lot of long-term potential as the market looks for more advanced characterization capabilities for biologics and novel modalities. As we continue to innovate and expand our offering, we are increasingly well positioned to support biologics and novel modalities as they move downstream into routine analysis. Now, I'd like to pass the call over to Amol to guidance for the remainder of 2022. Amol? Thank you, Udit, and good morning, everyone.
Amol
Udit already covered the breakdown of our sales growth for the quarter, so I will now cover the remaining elements of our non-GAAP financial performance versus the prior year. Gross margin for the quarter was 57%, compared to 58.9% in the second quarter of 2021, driven primarily by foreign exchange headwinds from the strong US dollar as well as higher instrument mix. Pricing for the quarter was over 300 basis points, successfully offsetting the impact of material and freight inflation. Operating margin for the quarter was 28.4% compared to 29.2% in the second quarter of 2021. This represents 70 basis points of margin expansion in constant currency before 150 basis points of foreign exchange headwind. For the first half of the year, operating margins have expanded 120 basis points before 80 basis points of foreign exchange headwind. Our effective operating tax rate for the quarter was 14.1%. Average share count came in at 60.5 million shares, which is about 1.6 million less than the second quarter of last year. Our non-GAAP earnings per fully diluted share for the second quarter increased 6% to $2.75 in comparison to $2.60 last year. The foreign exchange headwind lowered our EPS growth by 11%. On a GAAP basis, our earnings per fully diluted share was $2.72 compared to $2.69 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 our earnings call 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 second quarter of 2022, free cash flow was 67 million after funding 39 million of capital expenditures. Excluded from free cash flow was $11 million related to the investment in our Taunton precision chemistry operations and a 38 million tax reform payment. Our free cash flow in the quarter was impacted by our proactive measures to secure supply and rebuild safety stock, resulting in a 40 million increase in inventory before exchange rates. Additionally, timing of shipments and installations, particularly in China, resulted in an eight-day increase of DSO to 81 days and an increase in accounts receivable of approximately 60 million before FX. We expect this dynamics to correct in the second half of the year, as we have already observed an increase in collections in July. For the full year, we anticipate being close to our historical free cash flow conversion levels. We maintain a strong balance sheet, access to liquidity, and a 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 growth adjacent markets. In Q2, we repurchased approximately 479,000 shares of our common stock for 152 million. At the end of the quarter, our net debt position was approximately 1.1 billion with a net debt to EBITDA ratio of about 1.1. Now as we look 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 seen continued strong performance this year, driven by robust end market demand and strong commercial execution across all our geographies. As we look ahead, we expect our solid momentum to continue and that our near-term growth initiatives and innovation will provide a lasting contribution to our performance. We also expect to continue to successfully address supply chain constraints and inflationary pressures, assuming these challenges do not worsen over the remainder of the year. These dynamics support increasing the full year 2022 guidance to 9.5% to 10.5% constant currency sales growth, up from our prior guide of 7.5% to 9%. At current rates, a negative currency translation is expected to subtract approximately 5 percentage points, resulting in full-year reported sales growth guidance of 4.5% to 5.5%. Gross margin for the full year is expected to be about 58%, and operating margin is expected to be approximately 30.5%. as our resilient business momentum is able to mitigate the impact from exchange rates. 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 $60.4 million. Our share repurchase program will continue into the year and will provide quarterly updates as appropriate. Now rolling all this together and on a non-GAAP basis, full year 2022 earnings per fully diluted share are now projected in the range of $11.95 to $12.05, which includes a negative currency impact of approximately 9 percentage points. Currency impact is 56 cents incrementally more worse than our previous guide. However, our stronger than expected results for Q2 and our increased full year growth outlook are expected to offset the currency headwind. Looking to the third quarter of 2022, we expect constant currency sales growth to be 8% to 10%. At today's rates, currency translation is expected to subtract approximately six percentage points, resulting in third quarter reported sales growth guidance of 2% to 4%. Third quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $2.50 to $2.60. This includes a negative currency impact of approximately 10 percentage points. Now I would like to turn it back to Udit for some summary comments. Udit.
Udit Batra
Thank you Amol. So in summary we are pleased with our sustained broad strength for the quarter which was driven by our strong commercial execution and the impact of innovation in our highly competitive refreshed product portfolio. Demand has remained strong across our end markets as we've continued to capture growth opportunities in both large and small molecule applications food and environmental testing, and battery material analysis, which each have long-term durable growth opportunities that we're well positioned for. To reflect our strength, we're raising our full year constant currency sales growth guidance from 7.5% to 9% to 9.5% to 10.5%. Meanwhile, we have delivered great operating results despite the challenging macroeconomic environment. And for EPS, our strong results for Q2 and our increased full-year growth outlook are expected to offset the impact of foreign exchange headwinds. With that, we will now begin the Q&A session. Operator?
Operator
As a reminder, if you'd like to ask a question, please press star then 1. Remember to record your name and company clearly when prompted. If you'd like to withdraw your question, you may press star 2. The first question comes from Vijay Kumar with Evercore.
Vijay Kumar
Your line is open. Hey, guys. Congrats on the quarter, and thanks for taking my question. Udit, maybe my first one for you. You did mention orders. You know, we're about in the quarter. Can you give a little bit of color on where the order strength is coming from, which customer segment, which product class, and any comment on order growth rates, if you will? I think in the past call, There's been some debate on instrument pull forward to color orders would be helpful.
Udit Batra
Sure. So firstly, thank you, Vijay. Really, it's been another fantastic quarter. And the growth has again been driven by instruments really leading the charge. Orders came in ahead of sales again, which increases our backlog. From a demand perspective, it's really very much broad-based. I mean, pharma grew 10%, industrial 8%, and you also saw academia grow 16%. And for the first half of the year, all three of our end market segments are now in the double-digit range, right? So pharma is 14, industrial and applied is at 12, and academic and government at 10%. So we see really broad-based demand across our end markets. And from a geographic perspective, Again, nice momentum across the board. I mean, the U.S. and India are sort of leading the charge. The U.S. at 14%, India at 24%. And very nice to see China really in the high single digits at 9%. And again, first half of the year, America is at plus 20%. China, mid-teens, India again in the 20s. So really broad-based strength across countries. customers and geography. And we see really no sign of any sort of slowdown.
Vijay Kumar
That's helpful. And maybe one for Amol. I think FX, Amol, you said incremental 50 plus cents. So what is the total impact now? I think it's close to a dollar. And I think your guide implies back half growth margin step up. Why would growth margin step up if you have this FX dynamic? And I think you're also assuming tax rate steps up in the back half. The first half has been sub-15%, so any color will be helpful.
Amol
Yeah, so let me take those three one by one. So on exchange rate, the full year guidance last time was about $0.45. Now it's 9% adverse, so $1.01, so incrementally $0.56 worse. And that plays out across our Q2, Q3, and Q4. And so as you see, we are covering that 55 cents with a better business performance. 31 of that already came in Q2, because Q2 versus our previous guide, the exchange rates were worse off roughly by 18 cents, and we delivered 15 cents higher than our guidance midpoint, so a total of 31. And then in Q3, when we guided last time, there was embedded assumption of $0.08 FX, and now it's $0.26. So that sort of creates a $0.18 headwind on Q3, which is reflected in our guide for Q3. So that's the story on FX. Coming to gross margin, so look, I mean, Typically, in the second half of the year, we have more sales, and that produces volume leverage, both in terms of our operations and absorption. And also in the first half of the year, two things happened, right? One, there was more activity around spot buys, and that flew through the P&L. We expect that activity to somewhat slow down. I mean, the whole supply chain situation is improving, but improving in baby steps. We are clearly not out of the woods, but it feels a little better than before. And the second piece is the exchange rates moved so quickly that, you know, you have transaction and translation gains and losses that also flow through our cost of goods, which is reflected in the gross margin. So net of those things, you know, we think in the second half you will see a better impact on the gross margin side. And then the third question on the tax, yes, the tax rate for the first half of the year is lower than 15.5, but that's driven by one of discrete items. which we don't think will repeat in the second half, and there'll be some catch up given sort of how our phasing of the profit is across the year. So at this point, 15.5% is a prudent guidance for tax rate.
Udit Batra
So maybe just one sort of summary comment on really the very precise and nice description that Amol has given. I mean, our top line continues to do extremely well, right? And we've just guided to a double digit growth for the full year after printing a 16% growth for last year, and then 16% in Q1, first half of the year in the teens. So top line momentum continues. This flows very nicely through the P&L. And the EPS on an organic basis is in the high teens, even for the full year in the guide. On an organic basis, it's in the high teens, which basically sets us up really well as we go into next year. And in our print, in our sort of results, there is no benefit of COVID or M&A embedded. So it's a very clean number that you can build off for the next year and show us the strength of our business, provided we continue to deliver on the top line. And with resilient end markets, with great innovation, and such a good team executing, we feel very good about where we stand.
Amol
Exactly. And just to build on that, the $0.55 sticks with us in the baseline, and the $0.55 adores FX. Once the currency is recorrected, it will come back.
Operator
Thank you. The next question comes from Luke Serga with Barclays. Your line is open.
Luke Serga
Great. Thanks for the question, guys. So I want to follow up what you were just talking about with the kind of the jump off point. You guys are doing like high teens right now from instrument perspective. And then how should we think about that being able to continue to run here? You gave some backlog commentary. you're starting to build on the high-end mass spec and on from a new upgrade cycle. So just give us a sense of how you guys think that that continues to progress throughout the rest of the year and even early into 23 in a potential recessionary environment.
Udit Batra
Look, firstly, thank you for the question. I mean, we're very pleased with our performance. I'll start with the back end. go through the answer. I mean, relatively speaking, when we look at our competitive environment, I mean, we're performing extremely well, right? And instruments have been a big part of the story, where in the first half, as you mentioned, instruments are growing close to 20%, and overall 13% or so growth, and orders, again, being higher than sales. So, Yes, we read a lot about the macro challenges, but if you look at what we've been through from an execution perspective, and now less than two years, I joined slightly less than two years ago, we've gained our leading position. That too during a pandemic. Innovation is starting to contribute meaningfully to growth. So I have a lot of faith in the team that has been able to pull this off. So if at all there is a downturn, which we don't see from what what we have as visibility to our end markets. And across our end markets, we're extremely well positioned. Even back in 2009, Waters was one of the few companies that showed a positive EPS growth. And today, we are even better positioned. So if you just look at our portfolio, at that point, we had 40% recurring revenues. Today, it's over 55%. Our end markets, where we're seeing incredible strength, especially with large molecules in pharma. Our end markets were over 60% levered towards pharma, and that too in late stages of pharma, which is super resilient. In applied, industrial and applied, over 50% is in food and environmental, and in the TA segment, more and more levered towards higher growth segments like batteries. So I feel extremely good about how we're positioned in the end markets as well. And with such traction, even with such heavy headwinds from FX, we're able to deliver and commit to the EPS that we signed up for before. So I feel extremely good about where we are. Now to your instrument question, look, historically instruments, if you just look at water's history over the last 15 years, are 3-4% growers. We're clocking 19%, so it's naive to think that we will continue to be at 19% or so in instrument growth. I'm sure it will slow down, but we have a lot left from the initiatives that we started with earlier in the year. The replacement cycle is still ongoing. We expect this to continue to go for the next two to three years. We see better and better attachment rates as a consequence. We've expanded into new segments with CDMOs and CXOs. So feel very good about where we are in the implementation of our initiatives, and that continues to benefit the instrument growth rate. So in summary to your instrument question, no, don't expect 19% growth forever. But do expect our initiatives to help us continue to drive higher than the 3 to 4% that we've seen historically. I hope that gives you more color.
Luke Serga
It does. It does. And then on China, can you talk about, I mean, you guys got into 200 to 300 basis points in the quarter. It came in at 9%. So talk about how that kind of paced out versus your expectations. And then the low to mid-teens guide is essentially there already with the first half performance. So how should we think about China in the back half?
Udit Batra
Yeah, I mean, firstly, incredibly proud of the team. I mean, if you'd asked me in April and May where we were going to land, I mean, it was the headwinds that we talked about. In June, incredible, incredible performance from the teams to be able to ship the products that we did. and get them to our customers. So feel very good about what we achieved. And for the back half of the year, I mean, the full year, we think we'll be in the mid-teens for China. So no real slowdown. Again, strength across all end markets and also in the TA business, right? So strength across pharma, especially where we see our instrument replacement cycle doing very well, our KHPLC doing very well. Increasingly, the biopharmaceutical applications for our premier technology, Acuity Premier, doing very well. So across the board in China feel extremely good from a demand perspective. So mid teens for the full year barring any significant shutdowns in that geography.
Amol
Just one thing to add. Last year we had a shipment issue in Q3 and so close to 12 million of sales moved from Q3 to Q4. So the baseline for Q3 is somewhat lower and And so you will see a more pronounced growth in China in Q3, but a more subdued growth in Q4 because of last year's shipment dynamics.
Udit Batra
I mean, it's a lumpy sort of environment, as you can see, quarter to quarter. But, I mean, overall, look, 16% growth last year, mid-teens already at the middle point of this year, and we feel very good where we sit today.
Operator
Thank you. The next question comes from Dan Brandon with Cowan. Your line is open. Great. Thank you. Thanks for taking the questions, guys.
Dan Brandon
Congrats on the quarter. Maybe just first question, just kind of back to the answer that you just provided in terms of the macro. You guys sound very confident, which is great. Just the perspective that we have is like I guess in 08, you guys were up 4.5%. In 09, you contracted around the same amount, so a nine-point swing. And as you mentioned, business dramatically different. plus all the commercial initiatives that you guys are executing on. So, and as well, I don't think hopefully most of us don't expect another recession like we had back then, but net net to the extent that the economy does continue to slow, presumably borders won't be immune from that. So could you just give a little more color about like the sensitivity or lack thereof across your different businesses and you know, what, what, what might be a decent starting point to think about if in fact, you know, the economy does worse and how you would react in that in 23.
Udit Batra
I mean, firstly, Dan, thank you for the question. It's similar to what I just mentioned. I mean, let's just take each of the end markets in turn and the composition in each of the end markets. So in pharma in particular, amongst our peer group, we probably have the highest exposure to late-stage pharma, QAQC, which is more proportional to pill count. In recession or no recession, people don't stop taking medicines, and they don't stop The pharma companies don't stop manufacturing their medicines. If anything, the R&D funding starts to slow down. So being levered more to QA, QC in pharma is very helpful, both in small and in large molecules. Second, if you look at our industrial and applied segment, over half of it is now food and environmental. Again, food safety, especially now PFAS testing with our renewed portfolio is a strong, strong growth driver, both in food and environmental testing. And then in the TA business, that too starts to look quite different, right, with the batteries testing segment becoming larger and larger. So we're looking at more secular drivers across the end markets. And the growth is broad-based. I mean, the business is geographically quite disparate. So we have significant presence ex-US, which of course, when the US dollar strengthens, we have to offset quite a significant FX impact. But it's much more diversified and it's much more helpful when you see changes across different geographies happening at different and different pace. So feel really good about where we stand in terms of our end market exposure. Second, this market responds to innovation. And you've seen that already, right? So back when I joined less than two years ago, people were telling me, hey, you know, the water is levered towards the small molecule QA, QC segment, and this is commoditized. Well, we've just shown quite the opposite with ARC HPLC coming in with better performance without having our customers refile their processes and revalidate their testing. And we've shown that segment growth. So this market responds to innovation, and we are in a very, very good place from an innovation standpoint. And finally, and most importantly, we have a team here with us that has navigated through the pandemic, through macroeconomic challenges, while eight out of nine of us are now new in our seats, right? So I'm very, very confident that whatever the economy throws at us, we'll be able to deal with it. And we are in a very good position versus what you saw back in 2008 and 2009. Even then, Waters was able to navigate pretty effectively. I hope that gives you more color.
Operator
Thank you. The next question comes from Matt Sykes with Goldman Sachs. Your line is open.
Matt Sykes
Yeah, hi. Thanks for taking my questions and congrats on the quarter. Maybe the first question, Udit, I know you've talked in the past about the academic government market, and that was an area of focus for you going forward. Clearly, some of the initiatives that you did there have paid off with the growth that you saw this quarter. Can you just maybe talk about what was the inflection for that end market this quarter? Was it water-specific initiatives, or is there something going on in that particular end market that results in that growth, and how sustainable is that in your mind?
Udit Batra
Matt, thank you for the question. We're very happy with where we are with academic and government. I mean, first half of the year, double-digit growth. This quarter, 16% or so growth. But I'll remind you that this is a lumpy market, and we have a low base from last year, right? So if you look at a three-year stacked growth rate, we're roughly 4-ish percent inorganic growth rate in that segment. It's very heavily levered towards instruments, and instruments did extremely well this quarter and the last quarter. So still rather a volatile segment or lumpy segment because of the heavy instrument portfolio that we have in that segment. That said, we have initiated our focus and our turnaround in that segment, but we are far from done. So we still have work to do on increasing our e-commerce presence and e-procurement presence. I mean, that's going well, but not yet done. From a commercial standpoint, we are reinitiating our KOL contacts, which help with our high-resolution mass spec portfolio. Even though the portfolio is renewed, from a commercial standpoint, we still feel we have work to do. While we are happy with the results, I would not declare victory yet.
Operator
Thank you. The next question comes from Josh Waldman with Cleveland Research. Your line is open.
Josh Waldman
Morning. Thanks for taking my questions. It's one for Udit and one for Amal. Oonid, orders, again, outpace sales. Can you provide more context on the backlog at this point? I guess the magnitude of the backlog and the level of visibility you think that provides into the second half and maybe even into 23? You had previously commented you didn't think orders were benefiting from pull forward. Is that still your sense?
Udit Batra
So Josh, thanks for the question. No pull forward. Orders are still higher than sales. All end markets, as I said before, are doing well. So feel good about where we stand from a demand perspective. And it's too early to talk about 2023, right? So there's a balance for the year to navigate in a turbulent environment. That said, the demand drivers are still there. Innovation is doing very well, and we feel that our commercial presence and our commercial execution is helping us grab opportunities, and differentially so, versus our competition. So thank you for the question, but I know pull forward feel very good about where we stand from a demand perspective.
Josh Waldman
Got it. In a mall, I guess in light of that and in light of kind of the stronger than guided Q2, the backlog build. The second half guide, organic guide, seems a bit conservative. I guess, can you comment on the considerations that went into the updated organic growth guide, you know, maybe where there might be opportunities for upside, maybe risks to the downside? And then the guide seems to assume a lighter Q4 approach. Is there concern around budget flushing or anything like that that's being reflected in the guide?
Amol
Yeah, I mean, look, our Q3 guide is 8% to 10%. Adjusted for the shipment issue is like 6% to 8%. The implied Q4 guide is sort of 5% to 7%. Adjusted for the shipment is 6% to 8%. So again, you know, I mean, at this stage, We have visibility in our pipeline for Q3, Q4. We feel good about it. But at this stage, it's good to be prudent, especially for Q4. So we feel good about where the guide is at this stage. And our teams continue to execute flawlessly and continue to beat our expectations.
Udit Batra
And I think I didn't address your backlog question. I mean, the backlog is at healthy levels, right? Waters did not have, for a while, I would say a healthy backlog. We feel, Amol and I now feel at least a bit better that we have a reasonable backlog. It's reasonable in it, but it's not super, super substantial. It's reasonable and it allows us to navigate through any sort of turbulence. But a lot of visibility into Q3 and we feel good again about how we will land the year.
Operator
Thank you. The next question comes from Rachel Blackstock with JP Morgan. Your line is open.
spk09
Great. Thanks for taking the question. So first up on pharma, drug pricing reform continues to be a headline topic. So can you just walk us through how you see that impacting Waters' portfolio, especially given your unique exposure in small versus large molecule and QAQC? And then if you started to have any conversations with your pharma customers regarding that drug pricing reform, do you expect that it could have any impact on your pricing power?
Udit Batra
Rachel, thank you for the question. Really, no impact that we have seen, no discussions from a customer perspective on what they are expecting. I'll remind you, we are, again, focused more on the late stage part of the pharma value chain, so we're levered to QA, QC. Our costs are such a small portion of pharma, it usually does not impact us, right? So we don't expect that to be a discussion. COGS is such a small portion of most pharma companies' sales that it's not a place where they look for costs. So we have not seen that in the past when pricing discussions have come up and we don't expect it and we don't see any signals right now and we don't expect it to be in the future given that were in the QA, QC domain and Cox as such a small portion of their cost base. Now, in the early stages of research, perhaps there could be an impact, but we, as I said, we're very levered towards QA, QC.
Operator
Thank you. Now, next question comes from Derek DeBrown with Bank of America. Your line is open.
spk04
Hi, good morning. Thank you for taking my question. So, I'm just curious, you know, really good growth in India, 24%, but I do recall that few years ago when the dollar appreciated strongly against the rupee that some of your customers in india didn't have enough money budgeted um so they didn't have the purchasing power to stroke out and go out and do it and then it sort of delayed orders the combination of fx and price increases is are you worried at all about um some emerging economies particularly india sort of slowing in demand because they just simply don't have the budgets
Udit Batra
I'll start off, Derek, and I'll let Amul comment a little bit on the FX piece as well. Really, India has been doing extremely well given the demand for small molecule production, again, reviving. And some of this has to do with the government initiatives in India that were initiated last year and us being so heavily focused on that part of pharma, QA, QC for genetics, QA, QC for small molecules in India, we've seen an outsized benefit. And that's continued well into this year. So it's a fundamental demand driver that we can explain based on government policy. And again, driven heavily by instrument growth. Consumables is doing well, but driven heavily by instrument growth. Amol, do you want to comment on the FX piece?
Amol
Yeah, no, and just to build on what Udit said, right? I mean, we have a fantastic team in India. And if you go back to the second quarter of last year, when India was going through a very tough COVID environment, the team executed flawlessly and had a great growth in second quarter of last year. So the baseline was already high. And then again, this year, you see 24% growth in the second quarter. So a lot of confidence in that team. And then when you couple that with how we've sort of handled pricing through inflation, we've provided excruciating detailed transparency to our customers on what's happening on the semiconductor side, on the freight side, and that's allowed us to have the customers share the burden of pricing. And I think the same processes that we build, the same systems that we build, are going to start playing a role in explaining the impact of exchange rate and U.S. dollar and where our cost base lies. And I think not just India, but there are other markets that are impacted by this, and our commercial teams are doing a great job of providing this transparency to the customer so that we can work this through hand-in-hand.
Operator
Thank you. The next question comes from Puneet Sada with SVP, excuse me, B Securities.
spk13
Amol, thanks for taking the question. So first one, just wondering if there are any changes in the M&A approach that you talked about at the investor day. Just wanted to get any updated thoughts given the valuations you're seeing in the market here.
Udit Batra
Thanks for the question. Look, I mean, our capital allocation priorities remain the same. is still where we are focused and it starts with organic growth. So that's where we allocate capital first and that is going extremely well and we're funding internal innovation, we're funding our high growth adjacencies, seeing really nice results. I was at AACC last week with the team on LC-MS for diagnostics and there is a clear value proposition where as customers discover new biomarkers, mass spec has a meaningful role to play. And that was reaffirmed. We took our R&D team, we took our commercial team, and we had many different workshops there with different customers. And so really feel good about what we're doing from an organic perspective and want to fund that set of adjacencies, bioseparations, analytical bioprocessing, as well as batteries and LC-MS and diagnostics. So we want to fund that first. Second, from an M&A perspective, really what you should take away is, I mean, we are, of course, on the lookout for things that fit into our strategic priorities, but there's really no rush, right? I mean, we've announced a few collaborations, and they're going extremely well, especially the one with Sartorius on the bioanalytical characterization space, especially upstream. but really no rush. And from an M&A environment perspective, lots of discussions ongoing. We are, of course, on the lookout, but again, super financially disciplined, right? So really nothing has changed from the time we spoke. And as we have conversations, I mean, of course, people still have memories of their 52-week highs in certain areas. But look, a Our organic business is performing very well, and the focus remains on that, on partnerships, and we have a nice pipeline of M&A targets that we're looking at now constantly.
Operator
Thank you. Our next question comes from Brandon Couillard with Jefferies. Your line is open.
Brandon Couillard
Good morning. Udit, you launched the new QTOS at ASMS. It's been a long time since you refreshed that product line. Could you just talk about the importance of that introduction, whether you think it's a needle mover for the mass spec franchise overall over the near term?
Udit Batra
Absolutely, Brandon. Thanks for following up on that. Look, it's a workhorse instrument in that segment. And now, along with the instrument being upgraded, you also have the Waters Connect software, which is a compliance software that allows not only for us to introduce new applications, but allows us to transition methods from upstream more powerful QTOS to BioChord directly downstream. So that's a significant benefit, and that that product is done very well, right? It's already doing extremely well with our customers. I mean, the orders are again outpacing the sales. I mean, within the first few days, a significant backlog developed, right? So we feel very good about what we've done there. And as I said, it's not just the instrument being more powerful in those segments, but it's also the launch of the Waters Connect software, the informatics software that allows for an easier transition into the BioChord in late stages. So again, really consistent with a long-term strategy of doing analysis upstream and making it seamless for the customers to transfer that analytical method downstream, especially as you look at larger and larger molecules.
Operator
Thank you. Our next question comes from Patrick Donnelly with Citi. Your line is open.
Brandon Couillard
Hey, guys, thanks for taking the questions. Maybe just to follow up on kind of the M&A one earlier at a different angle. Udit, you talked about the large mall growth kind of outpacing small mall, I think even double the rate. Can you just talk about, I guess, balancing inorganic versus organic investments in that piece? Again, obviously a big growth area you guys are kind of pouring into. So can you talk about, again, the internal strategy and then also kind of the inorganic opportunities on that front?
Udit Batra
Thanks for the question, Patrick. Look, I mean, again, it starts with the organic piece, right? So let's just take the bioseparations and the bioanalytical characterization, high growth adjacencies, right? On the bioanalytical characterization adjacency, we started with our collaboration with Sartorius, with our work with the University of Delaware, developed a deep understanding of upstream bioprocessing, downstream bioprocessing. The team has taken and learned that area really well. And I insist, I mean, before we make any meaningful moves in that area, we must organically develop that business well. And I feel very good on what we've been able to do in the last year. Again, learning a lot from what Sartorius does, learning a lot from what's happening at University of Delaware. So significant resource allocation there. We're not sparing any expense as that business grows. We've already developed four workflows for the BioAccord for upstream characterization, and one that is doing extremely well is cell culture media analysis upstream for bioreactors. I mean, there are three or four other workflows that have also been implemented that are being received very well. So the organic part of the business is doing very well. Now, if you look at the M&A aspects of it, that opens up a whole bunch of M&A ideas, right? I mean, for sampling... for data analytics, for other analytical characterization methods in upstream and downstream bioprocessing. And you'll hear more about that as we go along. And now double-clicking on bioseparations, there we have world-leading capabilities in separating small molecules. We've already developed some nice applications now with the MaxSpeak Premier technology. with our columns, right? So to separate oligonucleotides, to separate larger molecules better. We think there's a long runway here organically. The team's being built up quite substantially on that front. But it also opens up avenues inorganically as we learn more about that segment. So it'd be nice to be able to work with somebody who has deep capabilities in reagents that are larger molecules, right? And I think that's the sort of thing we're looking at really carefully. The organic piece is first. It opens up. It educates us on what is possible. It opens up many possibilities, and that's the sequence of events. And we are, as I mentioned earlier, quite active in that area. We have quite a few ideas, and they're in different stages of pursuit at this stage.
Patrick
Thank you, and now back to you, Kasper.
Udit Batra
Thank you very much, and thank you for all your questions. You'll agree with me that we've, again, had a tremendous quarter. The team continues to execute in a turbulent environment, and thank you for your participation. And on behalf of our entire management team, I'd like to thank you for your continued support and interest in Waters. Thank you, and have a wonderful day.
Operator
Thank you, and that concludes today's conference. You may all disconnect.
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