Q2 2021 Waters Corp Earnings Call

Future results of the company and commentary on potential market and business conditions that may impact waters Corporation over the third quarter and full year 2021.

We caution you that any annual such statements only on our present expectations and that actual events or results may differ materially from those indicated and 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 and see the risk factors included and.

And our annual report on form 10-K for the fiscal year ended December 31, 2020, and part 1 under the caption risk factors and and our most recent quarterly report on form 10-Q for the quarter ended April 32021, and part 1 under the caption risk factors.

Of which are on file with the SEC as well as the cautionary language included in this morning's press release.

Including with respect to risks related to the effects of the COVID-19 pandemic on our business.

We further caution you that the company does not intend to update any of its predictions or projections, except during our regularly scheduled quarterly earnings release conference calls and webcast or otherwise required by law.

The next earnings release call and webcast is currently planned for November 2nd 2021.

During today's call, we will be referring to assess and 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.

And 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 earnings results, increasing or decreasing are in comparison to the second quarter of fiscal year 2020.

In addition, unless stated otherwise all year over year revenue growth rates, including revenue growth ranges given on today's call are given on a comparable constant currency basis.

Now I'd like to turn the call over to Dr departure waters, President and CEO through debt.

Thank you Kasper and good morning, everyone.

Along with GAAP for joining me on this morning's call is ammonia <unk>.

What are the senior Vice President and Chief Financial Officer, and John Lynch Waters, and Vice President and corporate Treasurer.

Because I'm old first conference call as waters CFO.

And welcome everyone.

And so with it.

I would like to start the call on slide 3 by being on our snack.

The founder of our company, Jim Waters, Boston Day on May 17.

Jim was a brilliant and competitive scientist and a pioneer and liquid chromatography.

I made him the first name and 2019 when he came to talk to me about the medicine and for technology, We had acquired and our previous company.

We spent hours and fund of the whiteboard debating how to manage and innovation and in particular how.

The application of <unk> technology can deliver benefit.

Jim continued reaching out to meet not just on technology, but also on our mutual love for Science Education, and then more recently on waters.

And as legacy will live on with each and every 1 of our innovations as we continued to strive to deliver benefit.

And I've been around the globe have continued to manage admittedly to the pandemic, which is still very much with us most of all.

We've kept the working environment and safer employees and have remained flexible and thoughtful as we continue to support our customers.

And I remain grateful for the ongoing resilience commitment and dedication net athene has shown.

Moving on to slide 4.

During today's call I will provide a brief overview of our second quarter operating results as well as some commentary on our end markets geographies and technologies I will also update you on the progress of our transformation plan.

Continue to be focused on 3 primary objectives number 1 beginning on commercial momentum and Madhu further strengthening our organization and number 3 building on our Corp. On a strong call to access even higher growth areas.

And all.

We will then review our financial results in detail and provide comments on our.

Updated third quarter and full year financial outlook. We will then open up the phone lines to take your questions.

As outlined on slide 5 and the second quarter, our revenue grew 31% as reported and 27% on a constant currency basis, reflecting continued strength and our pharma and industrial end markets with strong demand for both our instrument systems and recurring revenue products across our major geographies.

Sales for this quarter and represent a 6%.

Compounded average yearly growth versus our 2019 results on a constant currency basis. This translates to a 7% stacked CAGR versus 2019 for the first half of the year again on a constant currency basis.

Our strong top line growth resulted in year on year over year Q2, non-GAAP adjusted earnings per share growth of 24% to $2.60 per.

Sure.

On top and bottom line performance translated into solid free cash flow performance and allowed us to strengthen our balance sheet.

Looking more closely at our top line results in the quarter on slide 6.

By operating segment, our waters Division grew 27%, while EBITDA grew by 32% on a constant currency basis.

By end market, our largest market category pharma grew 31% and constant currency industrial grew 28% and academia and government grew 7%.

And it continued strength and sales to pharma customers withdraw.

And based across customer segments geographies and applications.

Late stage drug development activity drove sales of our tandem quad and instrument systems, such as the vivo <unk> excess and vivo TQ S micro.

And all molecule applications and manufacturing QA and QC grew across Asia, Europe, and North America, and were particularly strong and India and.

Industrial and market growth was also broad based across geographies and applications continuing its recovery so far this year.

Food testing and environment environment, and momentum demand grew nicely and in the quarter as did on thermal and geometry portfolios.

Turning to academic and government.

And is less than 10% of our business.

And the U S and Europe was partially offset by Lumpiness and China year to date, our primary geographies have all returned to growth versus last year.

Moving now to our sales performance by geography on a constant currency basis sales and Asia grew 28% with China.

Almost 40% and India up almost 60%.

Sales in the Americas grew 28% with the U S growing 26% and sales and Europe grew 25%.

And the U S. All end markets had strong year over year performance led by pharma and industrial and academic and government saw a return to growth for the quarter as the market continues to recover.

Europe growth was also broad based across end markets and some regions overall pharma drove growth with strong demand and small molecule and large molecule applications industrial and academic and government markets continued day recovery with both having strong quarters and strong starts to the first half of the year.

China sales were up sharply and our pharma business and we had solid growth and in our industrial and applied end markets there as well.

We're encouraged by our continued strength.

And the contract labs business due to strong execution of our growth initiatives and India sales for the quarter were again very strong even at the <unk>.

And we continue to feel the effects from the pandemic, we're really grateful for the hard work and dedication of our colleagues, who persevered through these challenging and chats and challenging and tragic conditions.

And in Q2 and year to date for our LC instrument portfolio is a positive indicator for sustainable growth and consumables and service plans and the second quarter LC instruments group grew across all major geographies and more than 40% growth driven by our instrument replacement initiatives and new products, especially on.

<unk> plc, and a strong uptake of our generic premier instruments, both arc and acuity line.

This week I spent time with customers that are immersed innovation lab, and Cambridge discussing the separation and purification of and modern day and oligonucleotide molecules, while mrna vaccines have developed at a record pace. We are far from solving key issues, such as aggregation and selected binding of plasmids and mrna molecules to various debt.

This is something that a premier technology addresses really well.

Further strengthening our upnp portfolio the arc.

Our system was launched earlier this year for customers, who need ultimate sensitivity with our premier delivered 5 fold improvement and detect our sensitivity and tenfold improvement and asset to asset precision, helping labs accelerate time to market.

Mass spec Mastech sales grew in excess of 30% driven by demand from pharma research and development and food and environmental applications and this included high resolution system used for research applications, such as the vivo kudos tandem quad led by our vivo <unk> excess and TQ S micro systems.

And our <unk> and <unk> single Quad detectors utilized and high performance and CNS applications.

We introduced the waters connect Cds and Marty a high resolution mass spectrometer that combined and might be reflecting final flight.

The technology.

And with both enhanced Desi and new modesty, and making sources. The MRC provide scientists with a unique combination of speed resolution and months' accuracy, especially relevant for applications in proteomics and <unk>.

Ben and conversations with customers to see how we can collaborate using a marquee to analyze libraries of samples to create a database of proteins and metabolites to further understand the impact on therapeutics on a variety of issues.

Sales of precision chemistry columns sample prep kits and.

And reagents grew 28% driven by increased utilization by our pharma customers and improved industrial demand.

Demand for our Premier columns continues to be strong and.

Low double digit 2 year stacked growth of chemistry.

Revenue in Q2, when compared to our 2019 based underscores the rebound and customer activity the strong position of our portfolio and building momentum of our E Commerce initiative.

Service also also showed strong double digit growth on.

Our service engineers continue to have good and improved access to our customer sites and I'm grateful for the way they serve customers, while continuing to navigate the challenges of the pandemic.

Finally, with respect to Ta demand continues to rebound and was balanced across all major geographies and product lines with particular strength and the U S and Europe.

Let me and I'll give you some highlights on our progress with the implementation of our transformation plan on slide 7.

<unk> that our first priorities are gaining on commercial momentum there.

We continue to see progress and our instrument replacement initiative and recently released arc HPLC has played an important role and the LC replacement initiative.

Improved and <unk>.

Anika specs and ability to seamlessly transfer metrics from alliance HPLC or other HPLC platforms have been very well received by our customers. We're already crossing and mid single digit stack growth versus 2019 on a year to date basis and LC.

With our Seattle, and CMO customers, our ability to develop and provide metric transfer support continues to be a strong driver of growth.

This segment grew 60% on a year to date basis versus the comparable period in 2019 on.

And these trends that we saw and China has now been replicated in Europe, as well as and the U S.

Our e-commerce and recurring revenue attachment initiatives are also starting to boost the momentum observed in a year to date 2 year stack CAGR for chemistry and service revenue.

Moving on.

Our second priority on slide 8.

We have strengthened our organization with the addition of wage and to our board of directors.

And currently serves as president of <unk> Pharmaceuticals for China, and APAC and result, driven experience will further.

And further expand the perspective of the board and directly aligns with waters, a strategy to accelerate growth and innovation.

And also pleased to welcome Dr. Daniel Rush to waters as senior Vice presidents on strategy and transformation.

Dan joins us from Bristol Myers.

He was VP of worldwide commercialization strategy and innovation.

Dan joined several of our other technically trained executive committee members with experience and orchestrating transformations, and M&A and relevant customer segments like pharma and diagnostics.

This brings me to our third priority of building our core per drive durable growth.

As you will see on slide 9 waters already has a strong foundation and large and growing end markets with a leading position of science and innovation and roughly $65 billion market.

A high exposure high exposure to and markets that go around mid single digits with a deep rooted presence and regulated and markets like your AUC.

A large installed base of instruments with over 50% recurring revenues.

Diversified geographic base with.

Over 40 per almost 40% sales in Asia and.

And industry, leading margins with our strong financial and flex and flexibility.

Agreement means that this is a solid base to build off.

Now Im on slide 10.

A bit of Bemis leaders, who have a strong track record of execution.

Both John and Brad and Ginger and Bennett.

And of the waters Division and the day Division, respectively are highly experienced commercial leaders and are now very focused on building capabilities to sustain our commercial momentum.

What gives me most measure is that we have started to hit our stride with new product introductions across the portfolio and these are contributing to our sales momentum already.

The leadership that is focused on execution and innovation is preparing us well to further build our portfolio to access even faster growing adjacencies.

And we're exploring and nurturing opportunities, both organic and inorganic to increase our exposure to biologics b bio processing and reagents are novel modalities.

And we're actively shaping the promise of CMS and diagnostics and proteomics discovery applications and.

And advancing lab connectivity applications through our informatics portfolio.

High growth areas, such as sustainable polymers and renewable energy on a focus of the Ta Division and summary.

We've had a strong start to the year.

With a broad base with broad based contributions from our end markets product portfolio and geographies to our revenue growth.

In addition, and addition to the impressive growth versus our 2020 base of <unk>.

Paterson, our business dynamics and customer demand for Kelly on a 2 year run rate basis.

Markets, we serve are and a healthy state and a geographic regions are rebounding solidly from pandemic loss.

We remain focused on the continued progress and success of our short term initiatives index tactically strengthening our core business.

We're confident and the opportunities ahead to bring ltm's products separations expertise and compliant data management experience into high growth Biopharma and diagnostic applications I look forward to continuing to share more with you as we progress on these various fronts the back.

I'd like to pass the call over to AMOLED for a deeper review of the second quarter financials, and our outlook for the remainder of 2021.

Thank you and good morning, everyone.

As noted outline we recorded net sales of $682 million in the second quarter and increase of 27% and <unk>.

Constant currency.

Currency translation increased sales growth by approximately 4%.

Resulting in reported sales growth of 31%.

Looking at the product line growth.

Recurring revenue, which represents the combination of chemistry and service revenue increased by 18% for the quarter, while instrument sales increased 40%.

Chemistry revenues were up 28% and.

Service revenues were up 13%.

As we noted in our last earnings call.

Net revenues were not impacted by a difference and calendar days this quarter.

Looking ahead there is no.

Difference and the number of days for the third quarter. EBIT. However, please note there are 6 fewer days and the fourth quarter of this year.

Compared to 2020.

Now I would like to comment on our second quarter non-GAAP financial performance versus the prior year.

Before I do so.

And does that in the second quarter of 2020.

Decisive actions to manage our costs as part of our near term cost savings plan in light of the pandemic, while on Covid cost savings plan was successful totaling approximately 100 million for 2020. It does have some implications.

Year over year comparisons as we normalize from an abnormally low expense base.

Gross margin for the quarter was 58, 9%.

Down 10 basis points compared to the second quarter of 2020.

Driven by 80 basis points foreign exchange headwinds.

Excluding the impact of foreign exchange gross margin improved by 70 basis points, despite higher instrument mix and COVID-19 cost actions in 2020.

This improvement was driven by volume leverage and productivity gains.

Moving down the P&L operating expenses increased by approximately 39% on a constant currency basis, and 42% on a reported basis. So on.

Increase was primarily attributable to higher labor costs and variable compensation and the majority of which relates to normalization of the variety of cost actions.

And the quality of our effective operating tax rate was 14, 8%.

Decrease from last year as the comparable period included from unfavorable discrete items.

Our average share count came in at $62.2 million shifts.

Approximately flat versus the second quarter of last year.

Our non-GAAP earnings per fully diluted share for the second quarter increased 24%.

$2.6 defense and comparison to $2.10 last year.

On a GAAP basis, our earnings per fully diluted share increased to $2.60 line.

Compared to $1.98 last year.

Conciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning and and.

And the appendix of this presentation.

Turning to free cash flow capital deployment, and our balance sheet reached.

And we define free cash flow and cash from operations less capital expenditures and excluding special items.

In the second quarter of 2021 free cash flow declined 12% year over year to $155 million. After funding 37 million of capital expenditures excluded from the free cash flow was $14 million related to the investment and our Taunton precision chemistry operations of 38 million per.

<unk> reform payment and a $3 million and litigation settlement proceeds.

In the second quarter on this resulted in 23 of.

Of each dollar of sales converted into free cash flow.

Year to date free cash flow has increased 17%.

$348 million.

In the second quarter accounts receivable DSO came in at 73 days down 14 day as compared to the second quarter of last year.

And when <unk> increased slightly by 5 million and comparison to the prior year.

We maintain a strong balance sheet access to liquidity and well structured debt maturity profile.

In terms of returning capital to shareholders, we repurchased approximately 535000 shares of our common stock for $168 million and the second quarter.

At the end of second quarter on net debt position was $940 million and a net debt to EBITDA ratio of about 1.

Our capital deployment priorities remain consistent and the extra growth maintain balance sheet strength and flexibility and return capital to shareholders. We remain committed to deploying capital against these priorities inhibition.

We'll evaluate and deploying capital to well talk out attractive and adjacent growth opportunities.

And as we look forward to the remainder of the year I would like to provide you some update on our thoughts for 2021 on slide 11.

And the first half of the year, we saw good momentum in all market segments, driven by robust demand and strong commercial execution.

We believe that this momentum will continue and the second half of the year, but the comparisons are more challenging.

Fourth quarter of 'twenty, and 'twenty was the first quarter and I'll transformation journey and was further favorably impacted by higher year end budget flush spending.

In addition, we have 6 fewer calendar days in the fourth quarter of this year.

We are also keeping a watchful eye on the potential impact of newer COVID-19 variance and the likely disruption day may cause to both supply and demand.

We expect that near term growth initiatives and commercial momentum to continue.

And to contribute meaningfully to our performance.

These dynamics support updated full year 2021 guidance of 13% to 15% constant currency sales growth.

At current rates the positive currency translation is expected to add approximately 1 to 2 percentage points, resulting in a fully on board.

<unk> sales growth guidance of 14% to 17%.

Gross margin for the full year is expected to be approximately 58% and operating margin is expected to be approximately 29% free.

We expect our full year net interest expense to be $37 million and.

Full year tax rate to be 15%.

Average diluted 2021 and share count is expected to be approximately $62 million throughout the year, we evaluate our share repurchase program and provide quarterly updates as appropriate.

All in all this together and on a non-GAAP basis.

Full year 2021 earnings per fully diluted share are now projected and the range $10 and 50.

To $10 and 70.

And this includes a positive currency impact of approximately 3 percentage points at todays rates and assumes no on demand or supply impact from COVID-19.

Looking at the third quarter of 2021, we expect constant currency sales growth to be 7% to 9% and <unk>.

Today's rates currency translation is expected to add approximately 1 percentage point, resulting in third quarter reported sales growth guidance of 8% to 10%.

Third quarter non-GAAP earnings per fully diluted share are estimated to be and the range $2.25.

To $2.35.

This includes a positive currency impact of approximately 3 percentage points to base rates and also assumes moored worse demand or supply impact from COVID-19.

Now I would like to turn it back to <unk>.

Some summary comments thank.

Thank you our mall and summary, there is much to be pleased about the first half of the year driven by strong growth across our.

Our major end markets.

Thanks to solid execution and double digit growth and instrument sales, we saw broad based revenue growth across every region.

Our transformation plan continues to progress the commercial momentum and strong leadership team in place.

Now turn towards deploying on strategy and large and growing end markets, we operate through accelerating innovation to our portfolio as well as progressively aligning our portfolio with higher growth and it is in adjacent markets with that and we'll now begin the Q&A session of day.

And then.

And thank you at this time to ask a question from the phone line. Please press star followed by the number 1 on mute your line record Ginny and Carlos.

We will be taking 1 question and 1 follow up question and our first question is from Tycho Peterson Jpmorgan.

And your line is open.

Hey, good morning, nice quarter I wanted to add.

And with the replacement cycle I know you talked about our HPLC driving replacement is on that side and I'm. Just wondering if you could share on your latest thinking on how you're sizing that opportunity I know last quarter, you opened it up and competitive instruments. So if you could talk to both <unk> and MSI.

In terms of where we are and that replacement cycle and latest thinking on the site and that opportunity.

Great.

And you take hold.

For the question look D&C replacement cycle lost lost momentum within the third innings, using a baseball analogy I would say there now and the seventh inning or so in terms of having track down all customers.

And that are relevant for replacement, especially our own and to some extent our competitors I would say we've reached out to almost 80% of our own customers and 20% to 30% of the competitive replacements, both across and see.

And as well as mass spec and we've recently and like all you added the <unk> segment to it as well so it really.

We start with the customers really solid solid feedback and especially with the SP.

Especially with the introduction of our HPLC last year and now the promise of the art the near as well as the acuity Premier columns, which are really relevant for high and separations and we're having very good luck with with and very good performance without placement initiatives. So from a from an overall contribution perspective.

I had.

And we should think about it in terms of the stacked growth. So if you just look at our first half of the year on.

Organic constant currency stacked growth versus 2019 is roughly 7%.

And if you compare it to our peer group.

And the same period on a stacked basis, and we've seen numbers anywhere anywhere ranging from about 253% to closer to 5 ish percent. So that if you take and weighted average gives you a lead of let's say, 2% to 3% versus versus the roughly defined market and.

And I would say part of it is explained by our initiatives and part of it and as explained this 2% to 3% lead versus the market part of it is explained by our.

Outperformance of our initiatives and D&C Debasement initiative being a strong contributor to it and part of it is the place by really a strong uptake of our new products and I hope that gives you a bit of followed on from quantification and the best way to compare it is to just look at the stacked growth versus the overall market and we are now trending I think probably second or third.

Quarter on a row.

<unk> plus organic performance.

Yes.

Very helpful. And then second question on line with the guidance increase and just wondering if across kind of the 3 key end markets pharma industrial and academic how you think about transacted in the quarter sustainability and the momentum you're seeing and in the back half of the year could you just provide some updated thoughts across each industry groups.

Sure.

And again just first on first the fact side so for the second half of the year.

Stacked growth would would need us and between signing and north of 5 per site in north of 6%.

And then a year ago, who will deploy would've thought that we would be here already so they're very.

They're very happy with the ability to provide such guidance across the 3 end markets pharma goes from strength to strength and a strong presence and pharma benefits us as you can see disproportionately. So we expect that expect that to continue.

And on industrial as you know.

It can be quite a lumpy market, but if you again look at the stacked growth of industrial.

We are slightly higher than than our overall average which is closer to those are the per.

5% of our closer to 6% on a stack basis for industrial growth on a year to day basis. So that again bodes well I mean again, if you look at look at it over a longer period of time and bodes well for what we're seeing on the industrial side barring any sort of cyclicality due to the pandemic and the emerging strongly we think that should continue for the balance of the year.

And then finally academic and government, which is our smallest segment.

And quite an important 1.2 per.

Base, especially on mass spec instruments.

For the first half of the year was roughly on in fact, this was roughly around 17% growth versus last year and.

And we expect that.

And then to start emerging even more strongly and the second half of the S&P. These nimbly good.

Across all key markets.

And the simplest way.

Despite the pandemic.

Most of our customers and our teams have figured out how to work through the difficulties and thats.

There is not 100% access everywhere, but I see and.

They figured out a day to work.

And with the ups and downs on the pandemic and I hope that gives you some color.

And thank you. Our next question is from Vijay Kumar with Evercore. Your line is open.

Hey, guys. Congrats on a good print this morning and <unk>.

Thanks for taking my question.

And maybe 1 or not and the Q and this guidance.

You look at instruments.

And the 20% growth.

It is an impressive number and no doubt.

Sequentially versus the <unk> 45, and Q1, perhaps.

In our slide deck and I look at the segments, maybe academia, but saw some I'm curious on that on.

On the <unk>.

Instrument performance into Q, and what's implied in the back half and.

In a mall on the back half you mentioned 6 fewer selling days for Q4 can you quantify what the impact us.

And let me, let me start with the instrument piece and then Alfonso growth hormone.

From the second part of the question and the instrument and fees.

And we are really really pleased with what we're seeing from for 3 reasons number 1.

On initiatives are working extremely well and having a 40% to 45% growth.

Versus last year, and then more investor really trending above our long term average and we're already at mid single digits on instrument growth on.

Stacked basis bodes very well.

Second it's it's.

Equally important as we look at the recurring revenues and the impact on the recurring revenues and you start to see some of that impact on the recurring revenues for the first half of the year already the mod and the larger the instrument placement the lodge and recurring revenues and.

And then finally, the third piece is around innovation and in our.

Our innovation across and this is probably the most and getting aspect of the transformation now on innovation and starting to hit its stride across the portfolio you.

And you talked that you asked about the instruments, let me focus on that we introduced arc HPLC last year and have talked several times about it its benefit.

In China, and the rest of the world for the World cost HPLC segment, we launched arc and the acuity Premier which are also doing extremely well and in fact, ironically and launch of acuity.

Premier has net to even increase increased demand for eyeglass and H class.

Each class a portfolio, which is meant for separating biologics and looking at high and separations. So the portfolio across LTE is really really like.

<unk> and then on the on the mass spec side, having introduced new platforms from abandoned carts and 2019. The latest is the MLP the monthly reflecting golf and we have a lot of interest from our customers on that front.

Early days on the head of sales will land on that as you know these are these.

And these are big ticket items, and then also dependent upon capital outlays, but I feel very good about where we stand with our instrument initiative of the instrument replacement initiative, but even more importantly, how innovation is helping us sustain that that placement going forward and then John Bryan and dancing.

Integrated systems.

Tim and replacement approach into on commercial execution. So this would not be new siding starting.

Net this year early next year, so very happy with where we are almost on the gate, yes, sure on which I can follow up on your question on 6 fewer days and Q4.

Impacts on our recurring revenue, particularly salaries because service is accrued on a day by day basis for the annual contracts as well as it impacts on it chemistry revenue because of lesser utilization base and the partner and so on at this point with 6 days and roughly 3 percentage point impact in the sales realized in the quarter.

John.

From 6 less days.

That's helpful and loan and Nick 1 follow up there is and some chatter about Alzheimer's as being a new opportunity for the entire life science tool space, but particularly for you guys and the <unk>.

Historically it hasnt been.

On an instrument.

Non per biologic area is there something different about this opportunity on the Alzheimer's side.

That makes a difference is this a meaningful opportunity for you guys. Thank you.

And we do.

We're very happy that there are additional therapy side as analysts coming out from the market and Thats force.

That means for patients.

Look it's very early to quantify and.

And so I'm thinking about.

Exactly.

The impact of this therapy on our on our.

Business I mean, suffice it to say we are well specced in.

And most of the compounds that are in the late stages, especially and the QA QC domain of large and small molecules. So.

And that's as much as I will comment on it I think it's too early to comment on the specifics and the quantification on such an opportunity.

And thank you. Our next question is from Douglas Schenkel with Cowen Your line is open.

Hey, good morning, guys. Thank you for taking my questions. So.

Clearly the street is giving waters a lot of credit for the solid progress made over the past few quarters under your leadership and I know you wouldn't take full credit if you're on the team, but 1 way or the other.

And Youre doing a great job and the stock reflects that.

That said its still hard from the outside to tell how much of this is favorable multi year comparisons versus better execution and keeping in mind that the company really struggled for a few years relative to peers heading into the pandemic.

It's obviously a bit of both and you tried to help cut through this by providing stacked growth figures relative to 2019, but again, even that some noisy given how the company was performing heading into the pandemic. So cutting through all of that what arguably matters. Most is how we should think about the future.

And for waters growth at the top line.

Stacked analysis that you talked about in your prepared remarks pointed to 6% to 7% growth at the top line.

And we sit here today based on the progress you've made and just cutting through the comps are you comfortable asserting that waters has built to compound revenue growth annually or 6% to 7% moving forward.

Yeah.

Thank you, Doug and I cant help but left there.

Although the overall question and not none that I'm, making fun of the question and I just.

And.

It's a long it's a serious progress and a year.

But to answer your question legitimately I would say it has to.

If you look at the long term growth I won't give you a number I think it is very difficult to do and what you can safely assume is our ambition is to remain a top tier.

Our top tier performer, especially when you look at the organic growth rate. So we have now for the last 2 or 3 quarters on a stack basis been on.

<unk> plus and our margins remain at the high end of the industry. So that is our ambitions and that's what I'll tell you is at 4%, 5%, 6% I don't know, but if the 12% we have the ambition to be higher than for the device.

On a higher and you can go on from there, but there are 2 drivers that make me confident actually 3 drivers that make and confidence.

And that we can be at the higher end of the market number 1 we put a very solid and together with experienced leaders who have.

As shown on the path that they can execute very well above.

Above market on the above above market growth and they have experience and of course conducting transformations and integration. So I feel very good about the team we've put together.

And we're starting to develop and rhythm and on execution and you end up seeing the results that we see a lot of leading indicators and I've tried to give you some color.

Around around the different initiatives and these are these initiatives that should help us on the longer term. The LC replacement initiative has changed the way we work at waters are probably brought us back to the water started long long time ago and looking at each and every replacement initiative and diligently going after it to us the item channel, that's a long term improvement and execution.

E Commerce last year at the same time, we were less and less and 20% of our consumables went through the ecommerce channel today that number is in excess of 25% and thats in less than a year and there is a long runway ahead of us.

And seeing the benefit of that execution, they started to tap into newer customer segments and again I mean that was pretty open about how under weighted we were in the Seattle CMO food.

<unk> testing segments, and China and then we've just started to hit the site and you can see on a 3 year stack basis that 60% growth on a <unk> basis, Thats, a 40% growth.

And the same channel and we are seeing our value proposition resonate very well with our customers. Our sales teams are super excited.

And about what we're hearing from our customers. So these the execution.

Execution platforms that we've built and as they've gone through 3 of these are going to help us for many many years to come and.

And the last piece is innovation, which is most enduring Denis.

I mean, we have really been very precise about identifying unmet needs and this is something definitely I don't take credit for this has been going on at waters for a long period of time. If it was just starting to rekindle it and focusing us on the right problems to solve and seen already the impact of the recent launches and LTE.

He is strengthening our high res mass spec portfolio the premier launch for the premiere the Premier technology 4 columns.

And would not have come at a better time, given the need for <unk>.

Continued continued separation of more complex modalities, which have a higher affinity to metals. So I feel very good that there is a theme and place.

That is a strong execution track record.

Both organic and inorganic execution and the pipeline is starting to hit its stride and I think that gives me confidence.

Wherever the market is we can have the ambition to be a market growth.

Okay and hope that gives you color yes.

That's helpful and maybe just as a follow up kind of kind of along the same lines.

And recognizing higher instrument mix and the impact that has on margin and some of your comments on <unk>.

<unk> is having a negative impact on margin and in the quarter.

I think the incremental margin was only 21, 22%.

And I think guidance for the year implies.

<unk> and incremental margin.

And really strong top line growth.

I think 2 of the 2.2 of the big questions as it relates to waters are the longer term.

Growth outlook at the top line, which is why I asked the first question. The other question continues to be where margins can go from here recognizing mix, recognizing FX, recognizing youre investing and long term initiatives over time do you think the incrementals can get into the <unk> over the next few years.

Thanks, Thanks, again, Doug I'll, let <unk> comment on how we're thinking about margin progression and a second.

But and then you should also look at the impact of.

Additional instrument placement on the recurring revenues and and then when I talk about innovation and sustainability and our recurring revenues on a 2 year stack basis on double digits right.

Especially on a 2 year stack index organically double digits and recurring revenues and high single digits on a 2 year stack basis on a <unk> basis, it's a double digit performance. So.

Instrument placement has with consumables statement, which are a force higher margin part of the business and Latam all comment on on.

On the breakdown on the margin yes.

And all I mean look from a from.

From a longer term outlook point of view.

Margin profile as you know we have 1 on.

Margins within the industry.

You should sort of margin management and profiled within the company and.

And then I will step back, though and so many opportunities in terms of margin and I for 1 I believe you'd mentioned, there's a huge opportunity and increasing our recurring revenue and accurately and recurring revenue is a higher margin product are between chemistry, and salaries and that helps expand margin.

As you look into operations and Digi huge effort underway on operational excellence and on procurement programs, which are starting to deliver and backward held on <unk>.

<unk> profile and we have a similar program underway on our service and productivity initiatives and.

And that will expand margin and then there is.

And the whole area around capability centers, and we haven't really invested and capability centers. So flawed.

And that will bring margin expansion now at the same time as our clients, we continue to explore and mercury and really fantastic.

And growth opportunities and those opportunities will need from investment so.

And the plan is for you.

This margin expansion in some way to fund some of these investment opportunities and yet deliver.

Steady margin profile.

And as these programs to deliver growth and you will see margin expansion chalk overtime.

And thank you. Our next question is from Derik de Bruin.

Bank of America.

Hello, Good morning.

Okay.

So a couple of questions.

And so.

The constant currency number in <unk>. It didn't include any acquisitions, I don't think and I.

I guess can we talk a little bit about capital deployment.

And sort of like how you're thinking about balancing share buybacks with M&A opportunities.

And and also.

And I know you are talking about investing and certain new initiatives and diagnostics and some of these other areas could you put a little bit more clarity on where you sort of see.

And some of the more likely near term opportunities for bolt ons.

Yes, Thanks, Derik I think off the bat and then of course, we can't be specific on where the immediate M&A opportunity on the midterm M&A opportunities for obvious reasons, but from a capital deployment perspective, I mean, we remain flexible right I think that's been our that's been our approach and disciplined. So this is basically something that you have.

Hard to say many many times now in terms of the specific in terms of the specific areas, where they are interested of course.

And given our very strong core and then we want to continue to invest and our core had been on better technologies to perform separations.

And that are dedicated to novel modalities to biologics.

And we're very well placed to nurture those and capture those and Thats an area that we're looking at cheaply.

Looking at.

Augmenting our instruments with automation and we continue to continuing to create that space, rather rather carefully if I move to informatics.

And <unk> is the leader in chromatography data systems, but we also have the concept of creating a predicted lat and there too we look for partnerships and expanding our portfolio. That's in the core if you look outside the core.

Really where we see on technology is growing.

And some of the attractive and oversee our technology is growing as a force 1 of them is by and processing.

Inc.

On the decoupling the process from the product is an imperative and we believe technologies such as Lpns and technologies such as <unk> in particular can help us help us achieve that objective and we're seeing very good traction on that front, especially and receipt instruments.

Earlier and earlier with our customers so I feel very good about that.

And then secondly in.

And then just talk about CMS and particularly on our nighttime oil from went on this.

And to give you his view on capital deployment as well on LC, Ms and particular, we feel that it's a technology that belongs and and diagnostics and and.

Enhancing enhancing our ability to examine proteins and addition to in addition to and.

In addition to bringing genomics into that segment. So I feel very good about what we're doing on the CMS front. It's early days and we've done some pilots with Inc. We think we can do a fair bit of organically, but and also Mike acquired partnerships. So that hopefully gives you a flavor of the areas. We're thinking of all did you want to comment a bit on on how we're thinking about cash.

John I think you've covered it well and then it comes we outlined in our prepared remarks right on.

Sure.

Poverty, there is growth and.

And the team that is well talk about as we look at objection growth opportunities and that's how we will look at capital deployment, we will pursue growth remain flexible.

And he will talk about and walk reaches.

Okay, and 1 follow up if I may.

What was the percentage of new products and the percentage of revenues from new products. I mean, do you have a vitality index and was there any COVID-19 you would called out COVID-19 related sales and prior quarters and I'm. Just curious if you have and update on that thanks.

Sure. So we do.

On a like allergy index and we looked at it.

And our products on the instrument and launched in the last 3 years and products on the chemistry side launched and the last 5 years.

Got it and the index was close to 12% in the second quarter.

We had very little on virtually nothing in terms of OLED and Buck.

On our Q2 revenue.

And thank you. Our next question is from Patrick Donnelly with Citi. Your line is open.

Great. Thanks for taking my question guys.

Maybe 1 on China, and the performance, there, obviously <unk> and <unk>.

Over 100% growth and a very easy comp I think it is around 40%. This quarter, obviously still very strong can you just talk about what you saw there sequentially I mean was <unk> kind of a bit of a catch up on the span and this quarter, a little more normalized and seems to be what's going on on space, but would love your take on channel here.

Thanks, Patrick and the question on Super excited about what's happening in China, we have a new leader for the last few months and she is and making.

Tremendous changes that have led to acceleration.

And the first quarter.

You'll remember that debt.

<unk>, China for us for the first quarter comps were actually weaker than the second quarter in China and <unk>.

So you'll see a bit of a comp effect, but fundamentally.

All the initiatives that we've launched a global level are on China's feed and China. So let me explain.

And on factual perspective, right so the second quarter.

Growth was at roughly 40% versus the previous previous year.

Starting with instruments.

<unk> was designed for the China, China market, and it's done very well, especially given its better performance and any of the any of the other instruments available and the market.

Second from a consumables perspective, we've seen really good progress on in China and.

Mostly and the even in excess of the instrument growth in some cases and then finally on the on the Seattle, CMO and CTO of product initiatives and remember we talked about the food market and the bus and we said we were underweight and the food market in China, we have seen very good growth there almost doubling of the business.

Versus the same period last year, and then for the Seattle and the <unk> piece.

The growth that I mentioned with a global growth.

Meaning meaning 60% on a per year.

On a 3 year stack basis.

This in China.

<unk> done it on the growth versus the <unk>.

<unk> segment started in China, So feel very good about what's happening in China, and we're just I would say we've just begun.

And on on looking at newer segments type of contract testing segments growth in food and pharma.

And we've started to really efficiently and effectively on our on our.

And on our presence and placement of instruments.

And I feel very good about what we're going to do 1 of the consumable side as well so I hope that gives you a bit.

And the color on what they see and China.

And thank you. Our next question is from Puneet <unk>.

With.

D D.

Your line is open.

Okay great.

And welcome to the World of LC mass spec from Athens.

Really great on the on board here.

So first 1 a bit.

It is really around the instrument replacement cycle.

My main question there.

You pointed to arc replacement being independent and Ingalls.

Correct me, if I'm wrong about 8000 instruments or so.

So my question is absolutely principle, and it's great to see this replacements and the replacement cycle, but in terms of.

When we think about next year. This does create tougher comparator for 2022, you are replacing your on legacy LT aligns here. So I'm just trying to understand what are some other initiatives that you have ongoing including acuity replacement tandem triple quads replacement that you've talked about before.

So just how should we think about that.

This level of growth continuing into next year with further replacement cycles, because obviously mass spec and a tandem quads and liquidity.

There is a maybe a smaller installed base there and the Ark..1 so if you could clarify that for next year that'd be great. Thank you.

And this too just to quantify a little bit right because it had been about 8000 or so on alliance instruments debt.

And the quantity of placements at our own.

4000 ish, which is half the number for <unk> plc acuity and of autopilot and tandem quads Tonight. So varying degrees of progress on all of those they should continue for a little bit of time, while we work through our own portfolio and then turn our attention from a competitive portfolio as well.

And especially on the LTE side, what I was plugged and to empower Victoria.

And anytime that when a patient and data we wanted to be we wanted to be and competition, especially if it's a bit of a competitive instruments. So.

Your question is more and onward challenges it creates for the future price, let me start with the opportunity the opportunity is that as you have more instruments.

You start to see a better recurring revenue I think that is the first and the most important piece the second.

Is on the replacement cycle and this will become modus operandi as soon as we book through our own.

Our own installed base and as we move to our competitors' installed base, our playbook, which has been honed over the last 6 months or so is now becoming standard operating procedure for us.

Set on the globe.

It will be of.

And of course, I mean from a mathematical perspective.

The growth on the instrument side has been has been terrific.

And we think it's a benefit for our recurring revenues with service and consumables.

But it's becoming now modus operandi as we go forward, so what is and no longer be net.

Adding instruments, it and perhaps even come from competitors go offline and installed base.

And thank you. Our next question is from Josh <unk> with Cleveland Research. Your line is open.

Alright, thanks for taking my questions.

Previously you've talked about benefiting from customers investing in Oregon and capabilities.

Wondered if you could talk through the opportunity you see here and I guess what is your current level of conviction that investments continue to serve and growth catalyst for waters and the 2022 and beyond and is it maybe just a onetime bolus that hits here and 2021.

I think Josh.

Very good question and.

Last week I was.

At our <unk>.

Site, unless innovation site, and Cambridge mass and had an opportunity to talk to several customers, especially ones, who are now working and the amount of net space and DSI on any space and I would say universally they're far from having solved the challenges for separating oligonucleotides and modern day and molecules.

And I think I mean existing of the progression there number 1.

Large number of very large number of compounds and the pipeline that are non leveraging Dan on the new technology and you must have seen from recent acquisitions in this space as well.

But if you break that up and down from a separation standpoint, the plasmid mrna molecule and then there's also the lipid nanoparticle for all 3 of these royalties we are far from having solved the aggregation problem the problem of infinity to metal metal surfaces, and as I said earlier the introduction of the Premier.

Second debt from at a better time, so I believe given.

The further investment and the pipeline of molecules in this space.

Basically illegal based components are technological focus, especially on separations of these complex molecules.

And with the Premier technology, and others that we're working on bodes very well for what we see and the future and I can tell you that and <unk>.

Customers, while we have delivered value to customers and us working together and have delivered vaccines and record time, we're really far from having native and efficient process. So something that is a significant opportunity for waters from an innovation standpoint, as we go forward.

And thank you and our last question for today comes from Jack.

Nihon with net.

Ron Research your line is open.

Thank you good morning.

My question is focused on gross margin.

Was curious if you could start and just give us an update on the supply chain and how youre managing through any constraints you might be seeing and then just looking at the full year guidance of 58%. It implies that the second half gross margins are below what you did and the first half how much of this is related to the selling days or is there some other dynamic.

Related to investments and are weighing on the seasonality this year.

Thanks for your quick answer your question Jack book from a supply chain perspective.

And so far and managed really well with our suppliers.

And we are monitoring any any dynamics and the supply chain, including shifts that are stranded and on the west coast on the U S.

Very closely monitoring all of those changes on constant conversations with our suppliers so far so good.

But and in there.

And we are monitoring as things change, especially on Medtronic box net.

Any thoughts over to a more to talk about the gross margin growth.

John.

Let me, particularly in the March month, and we take a minute and previous output back and loaded increase doesn't cloud and into the P&L because of England kicked on Tonight on the gross margin side and.

And if you assume sort of a 3% increase on a longer cloud into the second half of the other day and whimsical sort of explains why gross margin.

He is lower and the second half versus the first half.

And.

Thank you.

And thank you that concludes today's conference.

I'll go ahead and turn it back over to the speakers at this time.

Well. Thank you all for your participation and questions and on behalf of our entire management team I'd like to thank you for your support and interest and waters. We look forward to updating you on our progress during our third quarter 2021 call, which we currently anticipate holding on November 2nd from 8.

21, thank you.

And thank you you may disconnect your lines and thank you for your participation.