Q1 2021 Waters Corp Earnings Call
That could cause our actual performance to differ significantly from our present expectations.
And the risk factors included in our annual report on form 10-K.
For the fiscal year ended December 31, 2020, and part one under the caption risk factors.
And the cautionary language included in this mornings press release included with respect, including with respect to risks related to the effects of 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 call and webcast.
Or as otherwise required by law.
The next earnings release call and webcast is currently planned for August 3rd 2021.
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 available and the company's website.
And our discussions of the results of operations, we may refer to non-GAAP results, which exclude the impact of items.
And so those outlined in our schedule titled reconciliation of GAAP to adjusted non-GAAP financials included in this morning's press release.
Unless stated otherwise references to quarterly results, increasing or decreasing are in comparison to the first quarter of fiscal year 2020.
In addition, unless stated otherwise all year over year revenue growth rates, including revenue growth for income and revenue.
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. <unk> Entre waters, President and CEO.
And it.
Thank you Bryan and good morning, everyone.
Along with Bryan and joining me on this morning's call is Mike Sabella waters, as Vice President corporate controller and interim CFO.
I would like to start by expressing how grateful I am to our colleagues for their continued hard work and commitment, especially to those who are continuing to experience the devastating effects of the pandemic.
We have not yet seen a uniform recovery.
And in many regions around the world that are being evaluated by the pandemic as many of you are aware and yes, it's facing a particularly dire situation at the moment.
Our colleagues and customers that are very much on our minds and we're working closely with our team in India to ensure safety of our employees and their families and we're doing all weekend to support our customers.
During today's call I will provide you a brief overview of our first quarter operating results as well as an update on our three phased transformation plan focused on number one the gaining commercial momentum number two further strengthening on organization with leadership and performance management and number three and aligning our portfolio with growth areas.
Next I will provide some thoughts on how our business is positioned to drive sustainable growth.
Mike will then review our financial results in detail and provide comments on our updated second quarter.
On our updated second quarter and full year financial outlook. We will then open up the phone lines to take.
And take your questions.
Please be reviewing and operating results for the first quarter revenue grew 31% as reported 27% on a constant currency basis and non-GAAP adjusted earnings per share grew 99% year over year.
This strong start to the year was driven by growth across all end markets. As we saw continued strength and pharma and earlier than expected recovery and non pharma spending by our customers new products, new product traction and strong commercial execution by our team.
Looking more closely and our topline results.
From a customer and market perspective, all our end markets grew double digits during the first quarter.
Our largest market category pharma grew 28% and constant currency industrial grew 24% and academic and government grew 29%.
Moving now to our sales performance by geography on a constant currency basis sales and Asia grew 41% with China up 109% sales.
Sales and Americas grew 14% with U S growing 13% and sales and Europe grew 25%.
From an operating segment perspective, our waters Division grew 26%, while EBITDA grew by 28% on a constant currency basis.
Customer activity continued to improve and the first quarter with pharma, leading the way of driving better than expected trends and recurring revenues and a significant growth in instrument revenue.
Recurring revenues grew 15% with services growing 14% and chemistry consumable revenue growing 18% driven by combined pharma strength and improved industrial demand.
Etsy instruments grew across all of our major geographies and market categories with more than 40% growth.
It's encouraging to see both HPLC and <unk> LC instrument units grew double digits, driven by pent up demand.
Integration of the arc HPLC and strong execution of our LC replacement initiative.
And success of the launch of the Ark, HPLC and the general purpose HPLC space and cannot be understated and the acuity premier.
It has been which has been received very well by customers since its February launch.
Mass spec sales were also strong and the first quarter with growth in excess of 50% as demand and the pharma market remains robust and addition to rebounds, we saw and other markets, including clinical food and environmental and Biomedical research demand was solid for our tandem quads, and Europe, and China, particularly in pharma and and food.
Finally to Ta revenue grew 28% as demand rebounded and the core industrial business and strength continued and pharma medical devices and semiconductors growth was robust across all major geographies and product lines with particular strength and terminal and electro force.
Looking deeper at our sales performance by geography, all major regions grew double digits, China bird.
On last quarter's strength more than doubling sales year over year results were strong across all end markets as China continued its recovery from last year's COVID-19 disruptions.
From our particularly strong and China, driven by Triple digit growth in both contract labs and traditional Chinese medicine, our food business in China also saw meaningful growth driven by a significant rebound and contract testing organizations to the level above those we saw in 2018 and in 2019.
This is just one quarter and not indicative of a trend, but it demonstrates that the market is recovering and our execution has improved.
India sales grew double digits for the third consecutive quarter, despite worsening conditions and continued pandemic challenges throughout the country.
Europe experienced broad based strength across all customer end markets, including meaningful sequential improvements in both industrial and academic and government markets and the U S.
<unk> pharma and industrial market had strong growth in the quarter, while demand and academic and government market remains soft as it lags behind other markets and reopening.
In summary, we had a great start to the year with strong year on year growth that was broadly based than last quarter.
Width and breadth of performance across all our regions and markets and product categories from our demand has not subsided and many of our many of our non pharma markets and now in the process of recovering which gives us greater confidence as we look to the remainder of the year.
Now I would like to talk more broadly about our business and its overall direction moving forward, including the strength of the company and the effectiveness of the markets that we serve and our deep commitment to innovation as we look beyond this quarter into the longer term.
Our three phase transformation plan is number one beginning our commercial momentum number two strengthening our organization with leadership and performance management and number three aligning our portfolio with growth areas.
Looking at our first priority of regaining our commercial momentum and review some initiatives I mentioned previously.
First and instrument replacement initiative, we delivered a significant acceleration and instrument revenue growth to 45% and.
In February we launched the acuity Premier system augmenting the already solid placement of arc HPLC launched in June of 2020, creating new opportunities for instrument placements. Additionally, we have gained traction with customers to replace aging tandem quad mass spec instruments with newer instruments.
Second as part of our Seattle, a CMO expansion initiative and we've seen revenue growth accelerated from strong double digits and both these customer segments customers continue to perceive us perceive us as a strong technical partner as they transfer methods from originators and they see us as a strong collaborator rather than a competitor.
Our e-commerce initiatives has begun to deliver tangible results search engine optimization and paid search and led to net to search impressions that are up more than 40% year on year on year.
And by not every click translate to immediate revenue increasing traffic and it is an important first step and our e-commerce efforts fourth driving launch excellence.
Let me start with liquid chromatography, while the Ark HPLC as a leader and general purpose HPLC space I wanted to focus on.
On the acuity Premier last year, we launched security Premier columns, and followed that up with the acuity Premier system last quarter.
Though we're still in the early stages of the revenue ramp up for both the columns and the system sales of acuity Premier columns are significantly outpacing prior successful chemistry launches, including.
The original acuity comes true.
Turning to mass spec.
In 2019, we launched the <unk> cyclic IMS and Opex as speak use Kronos and a next generation version of our <unk> Michael.
And our tandem quads that acuity premier create industry, leading reproducibility insensitivity from challenging assays with expanding applications of the <unk>, we maintained our focus on bringing a versatile easy to use and robust ltm's system for the QA QC space.
During Q1, we launched a full workflow for peptide multi attribute method.
And the new waters connect platform to enable the monitoring of quality attributes at the peptide level.
This adds to already existing simple to use applications of peptide mapping impact sub unit mass analysis, released like and profiling and oligonucleotide Moscow information over the last year, we established a biofuel into the workflows for characterizing characterizing mrna molecules out of that.
And since become vaccines and.
In fact, bio and tech recognized waters for us the bulk of its COVID-19 vaccine development and release efforts lastly.
Cyclic was launched in September of 2019 and is targeted at the most advanced high resolution mass spec users.
And our meeting traditional LTE Ms with high resolution and mobility allows us to separate molecules with additional but identical molecular weight based on their different shapes and this is now, especially relevant from monitoring structural changes and the sugar pattern of the spike protein of the Sars COVID-19 two wireless.
We do recognize that we still have a bit of work to do on our mass spec informatics applications and we are addressing this through the development and rollout of our waters connect software platform across our full mass spec portfolio.
Today waters connect supports biopharma characterization and monitoring workflows with a range of capabilities on the <unk> and <unk> and with the launch of our RDA bench Stauff Benchmarked off and Q1 waters connect also enabled small molecule workflows.
We are grateful to have earned the trust and partnership with our customers as we develop further applications and beta test upcoming products and software.
Next from our Ta instruments Division last year, we launched the extra Dfc, which offers unique advantages for.
<unk> high throughput labs, and R&D, especially and pharma electronics and advanced materials.
And the ability of the X three DSC to deliver high sensitivity measurements of physical properties more quickly than comparable products. This is enabling these measurements to be more broadly deployed and manufacturing processes, where scientists and evaluate multiple formulations and battle and reducing time to market.
Volta and my spend with my <unk> colleagues together with our customers the more interest I am with the strength of our deeply deeply technical culture.
Moving on to our second priority you've already seen the planned leadership transition, we announced last month and.
And while juggle.
The joined US as CFO on May 12, and all has deep experience and pharma and diagnostics and has led many transformations and history and his prior roles through both organic and inorganic growth.
I would like to sincerely thank Mike Sabella from his full months of services as interim CFO.
Mike will continue to serve as our corporate controller and Im pleased to add that Mike will also assume the role of Chief Accounting Officer.
Secondly, we have established a dedicated innovation board, which I will share that includes lead us from R&D business development and marketing.
The innovation Board will review unmet needs and markets, we serve assess technology proof of concept and monitor the execution of top R&D programs.
Certainly I'd like to thank Mike Harrington, and Ian King, our SVP of global markets and global products.
Secondly for their decades of dedication to walk us, though the retirement or effective July 2nd graciously offered to service consultants for a period of time.
To ensure a smooth transition.
Finally, we welcome our own John Pratt and as the leaders of the waters Division Biogen Chang Bennett.
And then succeed John at the Ta Division.
John and John Zang.
Deep commercial and transformation experience and global leadership roles and fast growing markets, such as molecular diagnostics and bio processing.
And I'm really pleased with our new team and I look forward to introducing them to you and the coming months that brings us to our third priority and.
Aligning our portfolio with high growth areas, while we won't take our eye off commercial execution, which remains our top priority. We have recently started our strategic planning process and I would like to share you share with us some high level thoughts on where we are today.
Our number one priority is to continue strengthening the core meaning LC, Ms and materials characterization instruments, informatics and service and consumables second and staffing into faster growing adjacencies, where we can bring our strength of managing compliant data without competing directly with our customers. These adjacencies and good opportunities.
And to increase our exposure to biologics be it in the agents other instrument technologies, our Bioprocess, Inc. All and accelerating LTE, Ms <unk> diagnostics or other high growth markets.
Lastly, we will remain we will maintain our long standing disciplined approach to financial management capital structure and capital deployment and we are focused on maintaining a top tier ROIC.
Over the coming year I look forward to sharing more with you on our strategy as well as the data points that give us confidence that we have the foundation in place to sustainably grow and this attractive market.
I'd like to pass the call over to Mike Sabella from a deeper review of the first quarter financials and our outlook for the remainder of 2021 Mike.
Thank you.
Everyone and the first quarter, we recorded net sales of $609 million and increase of approximately 27% and constant currency.
Currency translation increased sales growth by approximately 4%, resulting in sales growth of 31% as reported.
Looking at product line growth our revenue, our reoccurring revenue, which represents the combination of precision chemistry products and service revenue increased by 15% for the quarter, while instrument sales increased 45%.
And to see revenues were up 18% for the quarter, driven by strong pharma market growth and improving industrial demand and the service side of our business revenues were up 14% net.
Customers continue to reopen labs, and catch up and performance maintenance professional services and repair services.
As we noted on our last earnings call reoccurring sales were impacted by five additional calendar day and for the quarter.
Which primarily impacted service revenues.
Looking ahead compared to 2020, there is no year over year difference and the number of calendar days for this year's second or third quarter. However, there are six fewer calendar days and the fourth quarter from this year.
Breaking first quarter operating segment sales down further sales related to waters Division sales grew 26%, while ta instrument sales grew 28%.
Combined LC and LC Ms instrument sales were up 47%, while Ta system sales grew 34%.
Now I'd like to comment on our first quarter non-GAAP financial performance versus the prior year.
Gross margin for the quarter was 58, 2%, a 350 basis point increase compared to 54, 7% and the first quarter of 2020, primarily due to decreased sales volume and favorable FX.
Yeah.
Moving down the first quarter P&L operating expenses increased by approximately 9% on a constant currency basis, and 11% on a reported basis the.
The increase was primarily attributed to higher labor and incentive compensation costs and higher depreciation from investments we made over the last few years.
And the first quarter.
Net operating tax rate was 14%.
And increase from last year as compared to the comparable period included some favorable discrete items and the prior year net.
Net interest expense was $7 million for the quarter, a decrease of about $3 million as anticipated and lower average outstanding debt balances.
Our average share count came in at 62 6 million shares flat with the first quarter of last year.
Our non-GAAP earnings per fully diluted share for the first quarter increased 99% to $2 29.
The comparison to the $1 15 last year.
On a GAAP basis, our earnings per fully diluted share increased to $2 37, compared to <unk> 86 last year.
A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning.
Turning to free cash flow capital deployment, and our balance sheet I would like to summarize our first quarter results and activities.
We define free cash flow as cash flow from operations less capital expenditures and excluding special items and the first quarter of 2021 free cash flow grew 60% year over year to $193 million after funding $40 million of capital expenditures.
Excluded from free cash flow was $14 million related to the investment and our Taunton precision chemistry operation.
And the first quarter. This resulted in 32 of each dollar of sales converted into free cash flow. Our increased free cash flow was primarily a result of sales growth and better operating margins compared to the prior year.
And the quarter accounts receivable days sales outstanding came in at 84 day down 16 days compared to the first quarter of last year.
Inventory decreased by $16 million and comparison to the prior year quarter on higher sales volume.
<unk> maintains a strong balance sheet access to liquidity and a well structured debt maturity profile in terms of returning capital to shareholders, we repurchased approximately 600000 shares of common stock for $173 million and the first quarter.
These capital allocation activities along.
And with our free cash flow results and cash and short term investments of $810 million and debt of $1 $7 billion on our balance sheet at the end of the quarter.
This resulted in a net debt position of $893 million and a net debt to EBITDA ratio of about one time at the end of the first quarter.
Our capital deployment priorities remain consistent and thats, the growth and maintain balance sheet strength and flexibility and return capital to shareholders.
We remain committed to deploying capital against these priorities and as <unk> commented earlier, we have begun and new strategic planning process.
We continue to execute against our priorities, we will evaluate deploying capital to open up attractive and adjacent markets.
As we look forward to the remainder of the year ahead, I would like to provide some updated contact on our thoughts for 2021.
One while the business environment Murray remained subject to volatility we are seeing good momentum and our market segments, which will help us exceed the 2019 levels too.
We believe this momentum will continue into the second quarter, but at a strong double digit growth will mostly occur and the first half and.
Due to more challenging comparisons and the second half of the year and.
Six fewer calendar days that we will have and the fourth quarter.
Three we continue to expect that all major geographies will perform better this year and they did in 2020 led by growth in China.
For our near term growth initiatives are expected to continue to ramp led by our LC replacement initiative, which we expect to contribute increasingly true performance.
These dynamics support updated full year 2021 guidance for constant currency sales growth.
<unk>, 211%.
At current rates the.
And the positive currency translation to 2021 sales growth is expected to be approximately 1% to two percentage points.
Gross margin for the full year is expected to be between 57, 5% and 58%.
Every year, we look to balance growth investment and profitability.
Accordingly, we expect 2021 operating margins of between 28% to 29% based on a combination of investments.
But normalization of COVID-19 related cost and disciplined expense controls.
Moving now below the operating income line other key assumptions for the full year guidance are as follows net interest expense of 35% to $38 million.
And full year tax rate and the range of 14 five to 15, 5%.
Net impact of our share repurchase program and 2021 that will result in an average diluted 2021 share count of 61, five to 62 million shares outstanding over the course of the year, we will evaluate our share repurchase program and provide quarterly updates as appropriate.
Rolling all this together and on a non-GAAP basis full year 2021 earnings per fully diluted share are now projected and the range of $9 85 to.
<unk> hundred $10, and <unk>, which assumes a positive currency impact on full year earnings per share growth of approximately three percentage points.
Looking at the second quarter of 2021, we expect constant currency sales growth to be 14% to 16%.
Todays rates currency translation and are expected to increase second quarter sales growth by approximately three percentage points.
Second quarter non-GAAP earnings per fully diluted share are estimated to be and a range of $2 15 to $2 25.
And the significant prior year COVID-19 cost savings actions and start to normalize and <unk>.
Current rates a positive currency impact on second quarter earnings per share growth is expected to be approximately one percentage point.
Now I'd like to turn it.
And for some summary comments and put it.
Thank you Mike.
In summary, there is much to be pleased about about with our first quarter results driven by strong growth across each of the major and engine and markets with pharma, leading the way.
And thanks to solid execution and double digit growth and instrument sales, we saw broad based revenue growth across every region.
China sales more than doubling.
Our transformation plan is well underway with commercial momentum and a strong leadership team in place, we now turn towards developing a new strategy as we work more closely to align our portfolio with higher growth areas of the market with that we will now begin the Q&A session operator.
And our first question comes from Dan Brennan of UBS. Sir Your line is open and you May go ahead.
Great. Thank you. Thanks for the question and congrats obviously on the strong start to the year.
And maybe just looking at the guidance. If you don't mind I know you talked about.
Good day, and the fourth quarter and tough comps, but nonetheless that from a strong start and a good second quarter guidance. Your full year guidance does imply something on the order and 1% growth and the back half of the year. So maybe you could do to tease out a little bit.
Like what's going on with the back half like how much are you still assuming dependent then moving with us.
And further color there because I would expect that will be a question that we're going to be getting.
Firstly, thanks, Dan.
And good morning.
We're very pleased with the first quarter and as we look at the rest of the year I mean as Mike also mentioned the pandemic is still ongoing that's the first the first consideration second we saw pent up demand to be released in Q1.
Which had five extra days with that.
Through our base quite nicely and the second half as us and has a higher comps, which makes us prudent.
We guide towards the full year now of course, if our initiatives continue to do what they're doing and we see good execution there.
And the other end markets continue to improve we would be on the higher end of that guide. So I think to me, it's prudent to use and other world.
Why is why is guidance, which basically takes these factors and north zone.
Okay, and then and then you've talked a lot about new product launches, particularly on the LC side and the possible.
Got a little bit in terms of what impact. These are actually having again really strong 2010% organic growth, but could you give us a flavor for kind of the impact from these new product launches.
And the quarter and kind of what youre, assuming kind of from a full year and then if you can also make any comment on what you're seeing from a relative market share trends across the LC and LC in there.
Sure I think.
First of all new products I'm very excited about our whole portfolio across LC across mass spec across informatics.
In terms of in terms of in terms of overall quantitation and I think as we look at the contribution it's probably 2% to 3% is it a bit higher but lower.
I think you would have to do you'd have to be very very sophisticated math, but it's true the 3% contribution.
And thats quite impressive and especially on the LC side, given the launches just took place right arc HPLC and <unk> was launched only in June of last year smack in the middle of the pandemic and that has a great uptake, especially in China for general purpose, HPLC and and acuity Premier. The columns were launched last year and we saw I would say absolutely terrific.
Uptake in fact better than the acuity launched originally.
And then finally.
And then finally as I as I look at the day.
MS spec mass spec growth I mean, our replacement initiative is doing well, especially with the launch of our renewed tandem quad portfolio, so really lots to be not to be excited about on the new product side.
And then if I could sneak one more and just China, obviously, you're up against an easy comp down 45, or thereabouts, but 120% growth and certainly significant because how do we think about you were facing some unique challenges and turn it over the past couple of years and food and pharma, how do we think about.
Like like what's kind of expected from here as you think about that for 2021 back from China.
And so look I mean, super happy with China, and especially given given the pandemic is still not over and.
Colleagues have really done a great job of implementing our initiatives and some of that is contributing to the growth I mean, it's terrific growth across all.
All segments, especially especially pharma, which doubled and then you saw industrial also grew very nicely.
And academic and government was and the mid 70 percentages.
But that said what I would I would argue with pharma and <unk>.
<unk> to show strength industrial is also starting to get stronger, especially in the VA business academic and government on stacked basis still still has some work to do right. So we still want to make sure that we focus on it as the market recovers and then I look at it.
The portfolio the portfolio side.
And our instruments grew very nicely.
As you again saw from the prepared remarks.
And the consumables portion of the business was in the mid Forty's and during the percentage growth.
And I look at the implementation of our.
The initiatives that I mentioned earlier, they are contributing nicely.
We singled out the food market and the boss for comments and we've talked about transformation. So let me just comment on that we saw incredible growth in the contract testing market.
And for food.
And the government segment and with new customers and if you remember I spoke about that when we talked about the transformation plan and with the <unk> segment. Some of our best performance is in China, and then finally I have a lot to think in terms of.
In terms of our leadership in China, we have a new leader and China and really a renewed focus on growth.
That said I would I would caution against taking two data points of recovery and saying that we have completely turned the business, we still remain focused but I'm very happy with the stock.
Great. Thanks, a lot.
And I didn't answer your question for the full year full year and I think no reason to expect anything thats been and high teens.
In China and that could be a very good stacked growth as well as versus versus last year.
Excellent. Thank you.
And thank you. Our next question is from Tycho Peterson Jpmorgan. Your line is open.
Okay, Thanks, and I want to follow up on the interconnect growth, 45% on a 90% accomplished and pretty impressive and just curious how much and <unk>.
Pent up demand versus some of the stuff you essentially drive away from our clinical clinical initiatives, you mentioned, 2% to 3% from new products and I get that but how much came from new customer penetration and CRM and <unk>.
And again, it's kind of the sustainability and what Youre seeing right now.
Cycle excellent excellent point and I think the there are many things to be happy about on the instrument side right. I mean, if you place more instruments, we get more consumables and most of that.
On the line and we saw very nice recovery.
It is a it is a mix of everything so we saw recovery from <unk>.
And continued strength and pharma, but we also saw a nice recovery in industrials.
Industrials and and also and academia in.
In terms of the contribution our initiatives.
I have been doing extremely well on LC replacement initiative and now we've added the.
Mass spec initiative as well as doing Super well and that is now being helped by the launch of.
Launch of arc, Hbo's ambiguity premier, which are allowing us to focus both on the general purpose segment.
And also on the <unk> segment, so it's very difficult to food to extract how much is coming from.
Going and finding on the replacement and then how much is coming from the new products that are actually helping that conversation. So really added together. It's a very good it's a very good it's a very good performance.
And then also from a stock comp basis, it's looking very good as you as you've already as you've already commented I mean LC is.
And is doing very nicely on a from a 29 basis from a 2019 basis and mass spec growth almost double digits on that front. So really very happy would really happy with what we've been able to do on do with our initiatives and then finally on the Seattle <unk>.
Area I mean, we have had and critical in fact last Friday I was with incredible conversations with <unk>, especially.
Right.
The CEO of one of the leading CDM OS and.
And they perceive us as <unk>.
Very strong partners to help them transfer methods for complex molecules.
And this is something that has come more and more to the front and center globally as we talked and many of these many of these customers of course and that focus on cost, but even more importantly, they are focused on transferring these methods from originators. So.
I think the initiatives are doing well, but theres a lot more not more true lots more to do there, we've just and I would say in terms of penetration.
And of our instrument space.
And with 30%.
Along the way on non spec.
I'd say were about slightly more than that on the LC side. So we still have we still have flow diagram.
To see more growth.
That's helpful. And then you mentioned the innovation Board and just curious other implications here and comes with how Youre approaching R&D and what you want to spend and R&D should we assume kind of six 5%.
Sales and scaled the rate and bogie or how do you think about that.
I think that question came up last time as well, we don't think of.
R&D and percentage terms and being being an engineer myself and announced that only by people and innovation Board, we really look at the quality of the ideas and if the quality of the ideas.
And we see a market opportunity, we will invest behind it. So let me give you an example.
CMS for diagnostics and so we work very closely with the UK government on the COVID-19 Moonshot program and and.
And we were able to develop and CMS for as a diagnostic tool for.
And detecting pathogens. This is now going to be submitted as and our usual.
Later data mid this year later this year.
For research use only at least initially, but we see incredible traction in that area and we are investing behind it. So those are the kinds of examples that come to the innovation growth and if you see room to invest we will.
The second type of ideas, where we invest our platforms. So I already mentioned from a commercial perspective e-commerce, but also taking the disparate data that exists and the organization to organization and putting them into a data lake.
I would be loath to tell you Hey, this is a ratio that we're trying to manage of course.
It's a cost conscious organization as you know from the vast all day.
And we'll not do silly things at the same time, if we see good ideas that have good bases, we will invest behind them. So I hope that satisfactory.
Okay.
And then just lastly on the model I am curious five extra days could you quantify what that added in the quarter was that around 300 basis points and then as we look ahead and second quarter, given the traveling public and it will be I'm, just curious how you're thinking about your exposure there.
So let me comment on India, and then I'll, let Mike comment on the contribution of the extra day is look I mean, our heart goes out to everybody everybody, who has gone through the pandemic and India.
We have still seen customers as you can imagine continuing to produce.
And to continue to produce small molecules and large molecules to address the challenges of the pandemic and.
And so are our sales are tracking back and.
We're heavily focused on the LC market in India.
Which is still the method of choice.
Joyce to release small molecules and India continues to produce so we're seeing very good growth.
Very good access for our service engineers.
Fight the pandemic I do expect.
Do we expect bump it can be bumpy, but the underlying demand.
As we look at the full year I would expect to continue to continue to rise Mike on the extra day.
And the types of additional days.
It added about 3% of growth to our reoccurring revenues.
And the quarter.
And thank you. Our next question is from D. J Kumar of Evercore. Your line is open.
Hey, guys, Congrats and a really strong from this morning.
Two from me and maybe on the first one.
And look at the guidance for <unk>.
A 14% to 16% constant currency comps actually get easier from <unk>.
And I look at the 27% you guys did in Q1 next day is it.
And about 24, so can you maybe just walk us through the 24 to.
Perhaps 15 16 from <unk>.
Was there any timing element input and a pull forward from Q2 or is this up perhaps.
Like you said prudent guidance.
And I think with AUR and <unk> question and this is actually food and guidance and then given that where the pandemic is still not still not over there was a bit of pent up demand at game relative from last year into Q1, not a pull forward from Q2 and and then finally I mean, our initiatives are ongoing they have shown incredible traction with <unk>.
Are you happy with what's.
And what's happening.
However.
I think they still are getting traction.
Despite the pandemic, we have seen good traction for our LC initiatives and some good traction from E Commerce.
As you know the page views have increased quite dramatically, we're seeing good production and reaching out to new customers.
And two data points don't make a flow trend.
We're just being wise to use and other world I think thats that would be the answer.
Understood and then and other guidance questions.
I guess simplistically.
<unk>.
Q1, EPS by about 70 cents right and the annual guidance range by about <unk> <unk>.
Is there I guess.
From an expert standpoint.
Is this also perhaps prudence.
And from an Opex perspective was there something else going on.
And the spend perspective.
Mike.
And the Q1 hundred basis points contribution from extra day, it should be zero, and 300 basis headwind and not Q4, given the fewer selling days. Thank you Mike.
And Mike go ahead.
So from an EPS perspective, one thing to remember here is last year with the pandemic.
And place many cost actions.
For example, salaries were reduced furloughs and place spending was reduced significantly Jonathan conference throughout the Corporation.
<unk> is a huge normalization and the rest of this year.
That will mitigate the growth in EPS.
And said another way does the kind of normalization that needs to happen this year as far as the gross margins.
This margin there was so much volume that led to a ton of operating leverage.
So that will.
And mitigate itself and the rest of the year and because of that normalization that I mentioned, so I would expect the full year, we're going to get back from the 57, 5% to 58%, but I don't expect it.
And the inconsistent with the past.
And the digest and sorry on the days is that a 300 basis points headwind in Q4.
Headwinds that would be about 3%.
Understood. Thanks, guys.
Thank you. Our next question is from Derik de Bryan with Bank of America.
Hey, Thanks. This is Microsoft's Derik I appreciate you taking the question.
I want to follow up on some of your comments earlier on.
And sort of the instrument growth you saw and a quarter.
You gave a lot of prepared remarks on <unk>.
And with the drops and those upgrade and replacement I'm. Just wondering if you could comment how many of those were competitive or you look like and existing <unk>.
Product.
And you're having to discount to drive upgrade there is there any any bundling across the portfolio.
And what are the puts and takes to that program.
And you make those gains besides comps.
Sure.
I think look.
Virtually all of the above but that said look let's start with especially for LC. I mean, we have we focus on solutions for our customers and as we go go in the new products definitely help mark HPLC, and the acuity premier, especially health and having the conversation.
Any anything and we started the program for us with our own installed base then looking at the competitor install base and the third step would be day looks at everybody and anybody who's using using and powered right. So it's a pretty large food and we have we are just I would say one third of the way.
With our own instruments in terms of getting that getting that replacement cycle and done. So theres a lot of a lot of room a lot of room. There that said the conversation is more straightforward. If you have new products, especially the Ark HPLC as well as as well as the acuity premier.
And then finally, given our reputation is.
As a solid service company and our service engineers, absolutely helped so I think the answer is and your question. It's all of the above from mass spec.
We're also we've also launched a similar program and there.
Our success rates are absolutely terrific, we're going after our own installed base from there.
And at tandem Quad perspective, and replacing the older instruments with newer generation of tandem quads that were introduced in 2019. So.
Nice progress some of it is is the market, but I think a significant amount as a renewed focus on the replacement cycle of older instruments helped by new products.
And a broader value proposition as far as pricing and bundling, except the pricing is concerned.
We have not had to use a heck of a lot of pricing to make this happen and people cross the quality that Dr waters brings and the innovation that we're bringing to them to solve these problems.
Got it appreciate all Nicole and then.
As a follow up on mentioned and the strategic review process one of the areas Youre thinking about some of these faster growth adjacencies.
Are there any opportunities here that you see organically or is it sort.
And sort of part of the growth can you review that with Boeing and be handled through M&A.
Obviously, recognizing again, but the really good leverage from Michigan.
All of the above right. So we will have organic.
And initiatives, we will have partnership opportunities and we will look at inorganic options as well so all of the above from an organic standpoint, I can give you give you examples.
And we think the molecular diagnostic space is interesting and LC Ms has rights to get into that space. We are really serious progress and working closely with with many academics and the U K and the NHS.
Take LC, Ms and to build a diagnostic space for pathogens with COVID-19, who also worked with will from Sweden on the same same topic and we will introduce LC Ms. As a research use only technique.
Technique, rather and rather in the near future. So organically, we see we see tremendous opportunity as well.
And another example would be entering bioprocess and we're looking at partnerships.
And with leading academic institutions and many of our learning from our partners.
And to take and at CMS into the into the bioprocess and sweet and not just leave it and the QA QC space.
Still we still have room to grow.
And then finally on inorganic.
Inorganic areas. We are we are.
Looking at that very very carefully and there'll be more to say about it as as time progresses, the all of the above.
Thank you. Our next question is from Doug Schenkel with Cowen Your line is open.
Hey, good morning, everybody and thank you for taking my questions.
And I wanted to ask one and market question and then one guidance question on the end market specifically industrial cyclical.
Recognizing all end markets were pretty solid I'd love to hear more about what youre seeing in terms of pickup and cyclical demand.
How does that evolve over the course of Q1 and are there signs that demand is picking up and a sustainable way that need.
Meeting this just isn't a catch up it is actually a function of global economic improvement.
And if youre seeing signs of that as exemplified per thing things like backlog.
Are there certain geographies, where this is more or less notable so that's the first topic.
Second topic is just again I'm sorry to go back to guidance, but specifically below the top line as we think about operating expense.
When I look at our model for Q1, R&D and SG&A together were about $10 million below our forecast.
And I think we were the high on the street for revenue and you came in and $50 million above our forecast. So that was really nice leverage and the model I'm. Just wondering was there any hold back on investment and the early part of the year.
And just given all the uncertainty.
Because it doesn't seem like Youre looking at this is that the normal I say that because it seems like guidance assumes there is going to be and increase in operating investment moving forward over the balance of the year, which is which I think makes sense given the strength and your business and some of the initiatives you talked about in your prepared remarks here today. So.
So I guess I'm, just hoping you could provide some clarity there it seems like Q1 operating leverages. Its normal just because you want and with vast I just want to make sure we got that right. Thank you.
Excellent questions Doug.
First on the from the other two end markets industrial and academic and government.
I think you rightly note that it is one quarter and we are we are seeing a nice rebound and.
And cautious here right. So we're seeing good conversations with our customers, but the industrial and industrial end markets are desperate right I mean.
The growth from polymers to to semiconductors.
And in other areas, which inherently are.
Our cyclical theyre seeing good demand for hardware.
Especially especially on the VA side.
But that said I would say, it's one quarter, we're seeing good conversations I would not start to immediate extrapolate and this is why we are a bit cautious on moving on the guidance on a stacked growth basis.
When you look at specific regions.
China is almost on.
Most almost 20% Europe is and the mid teens and industrial and under U S is as mid single digit so even on a stack basis. This is a this is a good performance on the industrial and market, but largely driven by a lot of.
And of hardware spend now on academic and government, which is also cyclical and we will you will not asking in particular, what I would take the opportunity to comment on this already we saw very good growth and 29% growth.
Overall.
And largely driven by what we saw in China and.
And Europe continued its strength doses, 70% growth the U S is still and sparkling and recovering.
And the stack basis.
There's still work to do on China, and the U S and both are still not positive versus 2019 Europe is so.
I think industrial a little bit more confidence in.
In.
In the overall trend with academic and government, we're seeing slower return back into into the different labs more so in Europe.
Definitely and China, but still.
And that of his declined in Europe as party and you.
As for the across across the across the country.
If I move to your guidance question and I'll first give you the qualitative remark and then Mike can comment on the numbers as well.
And we're not holding back any investment Doug and and in fact, if you if you look at.
How much we have approved and tons of operating investment, it's fairly significant and Q1 to start.
To support our initiatives that we already mentioned, so expanding our field force and contract testing having.
Having more informatics folks to build up waters waters connect even further.
And to invest behind our Arana.
Depots and as I mentioned LC Ms already and there are several others. It's just a question of the recruiting cycle, taking a bit of time and people finding the right people and getting them into the system, So really not holding back that at all.
Mike do you want to comment on on the numbers.
Ed.
And with the strong customer demand that we're actually seeing.
We have started to make the investment into the P&L, but all of those expenses Hasnt hit our Q1, P&L and you are going to see some increase and expense.
As we move through the rest of the year that catches up with these initiatives.
Turning to.
This is a gated process when you look at the projects.
We look at each of the products.
Initiatives and depending on what it is and we navigated process. It make sure. It makes sense before we actually start the process. So it's.
It is a gated process and we will expenses.
And the leverage to be not as good as it was in Q1 share.
And then I think one closing remark on that Doug just reminding you how we how we talked about the transformation plan. We said look we want to get our top line growth back for us.
This is such a good business and.
And such a good installed base.
And the leverage and the.
And the P&L that allows us to invest without.
Without any dilution and youre seeing the sustainability of the business as we recover as we recover our topline and it's not just.
Versus last year Q1, and that's also on a stacked basis across many different segments and geographies.
Thank you. Our next question is from <unk>.
Brandon Couillard with Jefferies. Your line is open.
Hey, Thanks, good morning.
And in terms of some of your E. Commerce initiatives are you starting to see any incremental pull through in terms of consumables revenue.
Did you quantify and kind of what's next.
Commerce strategy and some.
And those initiatives over the balance of the year.
Bryan and thank you from an e-commerce, basically, but just search engine optimization and paid search we saw a 45% increase according to our own numbers and I know you look at it independently as well.
On the number of viable and it's coming onto our site, it's very difficult to translate that as you know and do the exact impact on revenues. So I won't attempt that but you can imagine the largest impact on the consumable side.
And especially with newer products.
It's worked out extremely well, having the having the ability to drive more people onto the channel and find out more information.
Leading to a budget and a great uptake for fall.
From an acuity premier launch now in terms of.
In terms of the overall plan for E. Commerce I mean this is just the start queso.
Ive said early on that we won't update the hand, we have and do the best we can with it at the beginning as we make our plans to revitalize our platforms and I mentioned, a couple of those investments and the previous question as well so we do believe.
That investing in a data lake that takes all and structured unstructured data from different parts of the organization.
And putting that into and easily accessible middle layer will help us.
Services, our e-commerce customers, better and we do believe investing and content even more.
And is going to lead to better better conversion on the E Commerce channel and we do believe investing and mobile is going to lead to a better conversion and so you can see that there are some infrastructure infrastructural investments that we have started to look at.
And as the organization becomes stronger and stronger we will start to and that you would start to see us invest and dose with ecommerce land.
As a few phases. The first one was just to get the quick wins and we're not done with that yet.
That's just a stock and there is a long term plan that will build and world class E Commerce platform for waters.
Hope that helps.
And thank you. Our next question is from Patrick Donnelly with Citi. Your line is open.
Great. Thanks, just wanted to.
A follow up on one of the earlier questions on capital deployment side.
It seems youre a bit more open about pursuing some inorganic opportunities can you just talk about the size and we should be thinking about how large you guys would go and then again one vertical.
Make the most sense from you guys pursue inorganic reverse and be organic investments you're right.
Patrick and all that I want.
Oh and talk too much about the size and the exact exact.
Ideas and the exact.
Exact domains and generally you can assume that.
The bottom of the market, we are and is a good mid single digit growth I mean, we have a bit of catch up to do so youll see us doing better than that and the short to midterm given the initiatives, we've put in place and and.
And the market share we've had to be one of the flying back and gain right. So I think that will be the first lift as you look at Adjacencies. There are ones that fundamentally go faster like molecular diagnostics like bio processing and bio reagents and we're looking at each of those categories to see how we can organically and to those.
And how we can do partnerships and all.
Also looking at inorganic ideas and the process has begun and.
You'll hear more about it as as we progressed further with concrete ideas.
Thank you. Our next question is from Josh Waldman with Cleveland Research.
Hey, guys wondering if you could provide more color on the replacement initiatives I guess what inning do you think we are in here and I think I remember you and PVC senior that deep dive and systems that you are targeting is this still how youre thinking about the opportunity or has that number Barnett.
And then I guess lastly, do you think it's driving and replacement gate and into your system or at this point are you seeing it replace maybe competitor system.
And just seems like.
Growth of 40% and LC <unk>.
Business is probably represented share gains.
Yeah.
And for picking that up Josh.
LC.
The <unk> number was.
HPLC and <unk> only and it.
Especially on the waters instrument and when you talk about innings, if youre talking about baseball probably were in the third inning. There is a lot more work to do and lot more lots more to pick up there and we haven't done that and the boss, we haven't replaced our old and instrumental I mean, we are going in and it's working out super well, especially with.
The new products.
Being available as well and both on the HPLC side and the Upnp sites, we're very happy with.
To your question on competitor instruments.
Definitely that's the second second step and then the third step everybody and anybody who was using empower.
That probably also hits the competitors and so theres, a large installed base and anytime somebody is trying to replace.
And HPLC or Youll plc, you should expect waters to be in that conversation, especially and this is especially important given that empower is installed as the most ubiquitous Cvs systems. So we are going to leverage the strength of empower to try and make sure that we have.
You'll see to the table and virtually everywhere.
The second.
And that I wanted to add is from an instrument perspective, and we don't forget mass spec mass spec also has an older army of instruments that we've sold over many years and they are to the completely renewed our tandem quad portfolio and.
And 2019, and we are using back to get in and have conversations with our customers. So that also that probably is and your baseball analogy and the first innings.
And Thats also started off very well.
Expect to hear more.
As the year progresses, and we do intend to make sure that that continues and gets tracked very carefully and and.
Last piece on that I'll add this is relative to the previous question on the areas of investing and.
We've been invested in.
Basically collecting all the data that we have on the installed base.
And power based instrument based and of course to automated and we make it to make it readily usable and <unk>.
And in technology, and that's what I believe and I hope that gives you more volume.
And thank you and our last question today comes from Catherine Schulte with Baird. Your line is open.
Hey, guys congrats on the quarter and thanks for your questions and.
I guess first and you made a comment and your premier prepared remarks on net PRL and CMO side that your customers.
Operator, rather than a competitor and just given some of the M&A Orange Stephens. Thanks Steven.
Churn among customers that some of the analytical and riders are increasingly becoming customers and these people thought that component finance that income.
Hey, good morning, John.
Yes.
And definitely hearing that.
Mentioned conversations I've had with heads of CD and organizations.
This is front and center I mean day, they view us as a collaborator who they can trust with their with their methods with and ideas and and I think this is something that we're definitely hearing and we intend to we intend to take the intent to service our customers Accordingly zone.
I think you heard right and.
Especially I would even argue especially given waters, it's technical strength and unique focus on.
And on science and technology, and they view us as people, who can help them transform net tubes.
And get deeper into them with depot with them into technical conversations and non are not worried about us competing or using their technology from <unk>.
So.
I would say quite a quite a benefit but to drive was one might be what's happening and the competitive universe Buck. The other is our own reputation is strong scientifically based organization.
But at this point I want to thank you for your participation and questions and on behalf of our full management team I'd like to thank you for your continued support and interest and waters. We look forward to updating you on our progress during our Q2 2020 one.
<unk>, which we currently anticipate to hold.
On August <unk> 2021, Thank you all.
And thank you. This does conclude today's conference you may disconnect your lines and thank you for your participation.