Q3 2021 Waters Corp Earnings Call
Good morning, and welcome to the Waters Corporation third quarter 2021 financial results Conference call. All participants will be in a listen only mode until the question and answer session of the conference call. The conference call is being recorded and if you have any objections you may disconnect at this time.
It is now my pleasure to turn the call over to Mr. Kasper tutor manager of Investor Relations. Please go ahead Sir.
Thank you operator good.
Good morning, everyone and welcome to the Waters Corporation third quarter earnings Conference call.
Before we begin I will cover the cautionary language.
During the course of this conference call, we will make various forward looking statements regarding future events.
The financial performance of the company.
In particular, we will provide guidance regarding possible future results of the company and commentary on potential market and business conditions that may impact while this cooperation over the fourth quarter.
2021 and 2022.
We caution you that any and all such statements are only our present expectations and that actual events or results may differ materially from those indicated in the forward looking statements.
For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations due to the risk factors included in our annual report on Form 10-K for the fiscal year ended December 31, 2020 in part one under the caption risk factors.
Most recent quarterly report on Form 10-Q for the quarter ended July 2021, and part one under.
Under the caption risk factors, both of which are on file with the SEC as well as the cautionary language included in this morning's press release, 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 regularly scheduled quarterly.
Quarterly earnings release conference calls and webcast or as otherwise required by law.
Next earnings release call and webcast is currently planned for February five 2022.
During today's call, we will be referring to certain non-GAAP financial measures reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and in the appendix of our presentation, which are available on the Companys web site.
In our discussions of.
The results of operations, we may refer to non-GAAP results, which exclude the impact of items such as those outlined in our schedule titled reconciliation of GAAP to adjusted non-GAAP financials included in this morning's press release and in the appendix of our presentation.
Unless stated otherwise references to quarterly results, increasing or decreasing are in comparison to the third 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 Doctor, who departure water's President and CEO.
Ed.
Thank you Kasper and good morning, everyone.
Along with that joining me on this morning's call is a more jumbo.
<unk> Senior Vice President and Chief Financial Officer.
We have recorded another quarter of strong broad based momentum across our portfolio and geographies.
Tank are over 7000 colleagues around the globe, who represent the indomitable spirit of Warner's are being.
We have remained focused on supporting our customers in developing and delivering exciting new products. Despite the continuing impact of the pandemic.
September marked one year since I joined the company and what a year it has been I'm.
I'm often asked what is different I would first like but I.
I would first like to talk about what is the same because that is what is giving us the ability to compete more effectively our brand stands for deep scientific excellence expertise clear understanding of our customers' challenges and courage to invest and game changing innovation.
This remains the same.
But we have injected with our new leadership team is a stronger focus on execution and sense of urgency and accountability.
We are a work in progress, but the trend is positive.
Now moving to slide three which summarizes where we are on our journey.
Christy we're sustaining our commercial momentum with another strong quarter delivering sales growth of 6% showing solid business performance with minimal.
Bailment. Meanwhile, our commercial initiatives and strong traction of new products by Premier columns in instruments, and <unk> were well positioned to deliver market profit growth through 2022.
Finally, we are building on this momentum by taking decisive steps in solving key problems that are present in higher growth adjacencies like biologics manufacturing.
Now I'll provide a brief overview of our third quarter operating results as well as commentary on our end markets geographies and technologies I'm older then review our financial results in detail.
And provide comments on our updated financial outlook. We will then open up the phone lines to take your questions.
Moving now to slide four in the third quarter, our revenue grew 11% as reported and on a constant currency basis reflected reflecting continued strength in our pharma and industrial end markets with balanced demand for our instruments and recurring revenue products. This translates to a 6% stacked CAGR for the quarter.
<unk> 2019 on a constant currency basis.
Year to date revenue has increased 21% with the constant currency tax CAGR versus 2019 also above 6%.
Our top line growth resulted in Q3 non-GAAP adjusted earnings per share of $2 $2 66.
23% year over year year to date non-GAAP adjusted earnings per share have grown 39% from $7 54.
Looking more closely at our top line results for the quarter on slide five in constant currency.
By operating segment and water Division grew 9% <unk> grew by 27%.
By end market, our largest market category pharma grew 16% industrial grew 9%, while academic and government declined by 11%.
In pharma we.
Saw a broad based continued strength in sales across customer segments geographies and applications.
Expense was both in small molecule and large molecule applications, which both grew in mid teens for the quarter.
Industrial growth was reasonably broad and net by our <unk> business, which saw strong growth globally in terminal micro catheter imagery and rheology.
Academic and government, which is about 10% of our business continued strength in Europe was offset by softer performance in China and other regions.
Moving now to our sales performance by geography on a constant currency basis sales in the Americas grew 16% with the U S growing 13% sales in Europe grew 8% sales in Asia grew 8% with India over 40%.
China sales were down 3%.
Now from a bit of classification on China.
Demand remains very healthy as does the execution of our initiatives a shipment of approximately $12 million.
Delayed at an airport in the last few days of the quarter due to a third party shipping issue.
And has been delivered in the first few days of the fourth quarter looking therefore at China orders for the quarter. This was up mid teens year over year, So really no challenged from a demand perspective.
In the U S.
Growth was led by a broad based continued strength in our pharma and industrial end markets and finally, we saw strength across our instrument and <unk> portfolios in industrial and water. The VA businesses, both saw strong growth.
Demand remains robust across all end markets with continued strength in pharma industrial and academic and government.
The quarter for the quarter, India was our fastest growing market driven by very strong growth in instrument sales to our pharma customers.
As you know, India, its primarily a small molecule and generic market for export and this is indicative of continued strength in global pharmaceutical demand for small molecule drugs.
Our products and services customer demand for our instruments remained strong up trending better first half of the year on recurring revenues also continued to see sustained yield.
Overall.
Instrument sales grew 10% for the quarter driven by robust demand.
Improved commercial execution, new product contribution and instrument replacement in Etsy, the newly released arc HPLC continued to see strong growth and uptake of our premier instruments, both art and acuity.
Z for applications in novel modalities, like <unk> and biologics remain solid.
We are seeing in our <unk> instrument portfolio remains a positive indicator for sustainable future growth in consumables and service.
And mass spec demand strength from pharma customers continued strong demand for our single Quad led by users for illegal in biologics purification.
As well as strength in our tandem quads used a late stage drug development.
We're also encouraged by early interest in our <unk> time of flight platform, which delivered highest quality resolution act fast speeds.
Our put our recurring revenues chemistry sales grew 13% driven by an increase in utilization of our pharma customers as well as strength in our industrial end markets.
Demand for our new Premier columns remained strong while our E Commerce initiative is progressing and making it easier for our.
Customers to do business with us.
So far this year, our energy consumables.
It will almost double digits when compared to 'twenty compared.
Compared to our 2019.
Please that our premier technology is continuing to provide important benefits and separation and purification of ammo.
And oligonucleotide molecules given its unique ability to reduce <unk>.
<unk> binding of plasmid mrna to data services.
Service also grew double digits again this quarter.
Even at last years comps have become tougher.
On a two year stack basis service grew 7% in constant currency for the quarter and 6% year to date.
By focusing on our value proposition and commercial execution, we have seen an increase in service attachment rates and Matt renewals finally da.
Had a great quarter with sales up almost 30% as demand has rebounded with strong growth across all regions.
Instrument sales have grown at 8% on a two year stack basis. So far this year driven by strong demand for our southern instruments used in the analysis of advanced materials as well as micro preliminary instrument demand biopharma and academic customers.
Moving now to slide six let me now focus on why we believe that we will continue to deliver market plus growth. I think you are used to seeing these initiatives. So let me use the same frame starting from the left hand side of this slide.
In 2021, we expect our instrument replacement initiative deliberately come over $40 million, which means.
An incremental $10 million over 2021.
Our focus on commercial execution is positively impacting our service business with planned coverage rates.
Having increased by 2% so far this year compared to the first three quarters of 2019.
In 2020, do we think a further 100 basis points of expansion and service plan adoption.
Daniel.
Growth in the E. Commerce adoption also remained strong with dentistry sales to our E. Commerce channel is approaching roughly 30% versus a 21% we saw in 2019.
This to continue reaching over 35% by the end of next year.
So far this year revenue from contract organizations has grown over four.
40% versus the comparable period in 2019 next.
Next year, we expected.
This to grow low double digits for the year versus 2021.
Hello.
And new products continue to do well we are just taking the example of <unk> from here to illustrate the point here.
Arc HPLC and <unk> continue to be strong drivers with over $45 million revenue expected from these sources, while this year total <unk> and.
And separate and separate to the replacement initiative.
2022, we are expecting this number to be over $60 million.
So in all these initiatives alone should give us approximately 1% over our base business growth for 2022, which reaffirms our belief in market growth rates.
Moving now to slide seven we operate we operate a strong core business is healthy and beautiful end markets. This strong foundation provides us a platform for solving critical problems facing our industry.
We can bring our scientific expertise and product portfolio and capabilities.
I'd like to and the biologics arena on the reagent side and bio separations.
We believe there are significant problems to solve and separating a unifying these newer modalities, having a deeper understanding of the agents coupled with our chemistry expertise will allow us to solve these problems.
Second in bio processing.
Largest challenge I felt as an engineered and bio processing versus small molecule processing was that <unk> defined the process, you've got stuck with it because it wasn't a drug master file we have decoupled the process from the product.
Separately, the process development timescale or longer versus small molecule given the sheer complexity of attributes you need to measure that.
Simple and robust tool that can measure multiple attributes is a potential solution.
We believe that the bio CT is a night and CMS tool that can begin to address this challenge.
Third area of diagnostics, where we need to see fast unbiased detection of multiple biomarkers to enable early disease detection. We believe again mass spec has a significant role to play here.
Moving now on to slide eight let me illustrate what I mean by sharing what we are doing to solve some of the key problems in bio processing.
Last week, we announced a partnership with <unk> a leader in bio processing.
We will combine our waterlase <unk> system as the bioprocess analyzer, the <unk>, giving scientists both foster and airline direct access to advanced quality characterization information.
Scientists across sartorius waters, and some of our customers have already shown that the combined offering will sharpen product development timelines considerably.
King what currently takes six weeks to analyze down to only two days.
It also lays the foundation for using the <unk> as the bioprocess analyzer for process control and quality testing in the future.
<unk> is both versatile and easy to use and we expect that that forces engineers will be able to monitor its operation within one to two weeks.
In fact, one of our customers had similar insurance you have the <unk> NDA raving reviews on how simple it is to us and also.
So from an engineer who has been out of the lab for many years and I was able to get done quickly.
Is that the configuration will allow a direct analysis.
<unk> substance not just cell culture media via targeting over 250 cell culture media analytics.
Separately, we also announced a multiyear collaboration with University of Delaware to develop technology for analytic and taxation of manufacturing processes for biologics and novel modality.
The partnership's researches from both waters and the University of Delaware will identify and develop solutions that can provide better asos exactly makes center and analytical instrument improvements and develop data analytics and process control.
<unk> will help us expand our capabilities to characterized biological manufacturing processes in order to drive improvements in quality.
Efficiency and process control.
In summary.
2021, so far has been a very successful year for waters, we are laser focused on our commercial execution.
<unk>, we serve in a healthy state and our geographic regions have rebounded solidly from pandemic loss. Meanwhile, I'm convinced of the great opportunity that lies ahead of us and highlight those adjacencies to impact and deliver value by extending our scientific expertise and product portfolio to what's helping customers solve the most.
Complex problems in our industry.
With that I'd like to pass the call over to a hold for a deeper review of our third quarter financials, and our outlook for the remainder of 2021.
Thank you <unk> and good morning, everyone. As you the outline we recorded <unk> $659 million in the third quarter.
An increase of 11% in constant currency.
Reported sales growth was also 11%.
Looking at product line growth, our recurring revenue, which represents the combination of chemistry and service revenue increased by 11%.
The quarter, while instrument sales increased 10%.
Chemistry revenues were up 13%.
Service revenues were up 10%.
As we noted in our last earnings call.
Revenues were not impacted by difference in calendar. This quarter looking ahead there are.
Six fewer days in the fourth quarter of this year compared could bring to 'twenty.
Now I would like to comment on our third quarter non-GAAP financial performance versus the prior year.
Gross margin for the quarter was 58, 9% compared to 55, 8% in the third quarter of going to currently.
Improvement was driven primarily by one leverage and revenue mix.
The foreign exchange benefited in the quarter was about 1%.
More inbound with BMO.
<unk> expenses increased by approximately 17% on a constant currency basis.
Among other portal pieces.
The increase was primarily attributable to higher labor cost due to the normalization of prior year cost actions as well as higher variable compensation on the higher sales volume.
In the quarter unexpectedly operating tax rate was 11, 7%.
Increased from last year due to some we are able to offer specific discrete items.
Excluding the impact of these discrete items our year to date tax rate is consistent with the prior year.
Our average share count gaming.
61, 9 million shares or about 400000 less than the third quarter of last year.
Both of our share repurchase program.
Our non-GAAP earnings per fully diluted share for the third quarter increased 23%.
$2 16 last year.
On a GAAP basis, and three last year.
A reconciliation of our GAAP to non-GAAP earnings is attached.
As in the press release issued this morning.
In the appendix of this presentation.
Turning to free cash flow capital deployment, and our balance sheets less capital expenditures.
And excludes special items.
But in 'twenty, one free cash flow.
It was 140 million after funding 40 million of capital expenditures.
Excluded from free cash flow was $12 million.
Yeah.
Ladies to investments in Olive garden precision chemistry operations.
Year to date please.
Cash flow increased to $48 million.
Similar to the growth in the third quarter accounts receivable DSO gave me that 71 days down five days compared to the fourth quarter of last year and down two days compared to the last quarter.
Inventory.
Decreased by 13 days compared to the third quarter of last year.
The higher sales volume.
Measures to secure supply and we increased by $62 million in comparison.
We maintain a strong balance sheet.
The structured debt maturity profile.
In terms of returning capital to shareholders.
We purchased approximately 369000 shares of our call.
Common stock or one.
At the end of the quarter.
$958 million.
With net debt to EBITDA ratio of about one.
Our capital deployment priorities to invest in growth maintain balance sheet strength and flexibility and returning capital to.
Who will talk about.
So after an adjacent growth opportunities.
I would like to provide you with some of them.
Based on our thoughts for 2021 on slide 11.
While we still have we've seen good momentum driven by robust.
End market demand and strong commercial execution.
We believe that this momentum will continue and expect our near term growth initiatives to continue to contribute meaningfully to our performance.
Looking at the fourth quarter. The comparison is more challenging.
The first quarter in our transformation journey.
And was favorably impacted by full lockdown elevated year end budget flush spending in <unk>.
We have six fewer calendar days in the fourth quarter of this year.
This dynamic supports of AZ will be 2021 guidance.
<unk> percent to 16% constant currency sales growth.
Current exchange rates.
Currency translation is expected to add approximately one percentage points, resulting in reported sales growth guidance of 16% to 17%.
Gross margin for the full year is expected to be approximately 58%, 59% operating margin is expected to be approximately 29%.
We expect our full year net interest expense to be $34 million and full year.
Tax rate to be 14% to 15%.
Average diluted 2021 share count is expected to be approximately $62 million.
Our share repurchase program. We will also continue into Q4, and we will provide quarterly updates as appropriate.
All this together and on a non-GAAP basis.
21, <unk> per fully diluted share are now projected in the range of $10 94.
Kevin.
For this.
This includes a positive currency impact of approximately two percentage points at todays rates and assumed more material awards supply impacts going forward.
Looking at the fourth quarter or into 'twenty, one, we expect constant currency sales growth to be 5% to 7%.
Today's rates currency translation is expected to subtract approximately two percentage points.
And our fourth quarter reported sales growth guidance of 3% to 5%.
Fourth quarter non-GAAP earnings for fully diluted share are estimated to be in the range $3 40 to $3 50.
This includes a negative currency impact of approximately three percentage points at competitive rates and are seeking more material towards supply impact from COVID-19.
Now I would like to turn it back.
For some summary comments.
Thank you Ahmad.
Before I wrap things up I would like to make a few comments on ESG efforts on our core principles to fuel innovation and make a positive impact.
This includes doing lockbox to reduce our environmental footprint and leave the world better than we found it being representative of the diverse society, we live in and providing effective governance that enhances long term shareholder value.
You will see more of our progress in each of these areas in our 2021 sustainability report coming out later this month.
Moving to slide 10, I was particularly moved recently by the New internship program, we developed with the new team New England designed to increase access to stem education for students of all backgrounds over.
Over the course of six weeks began high school students are hands on learning experience with a mix of science business and soft skills.
Over 70 waters employees, when it Walt will gain practical exposure and mentorship.
Look forward to continuing these efforts in the future.
In summary.
We continue to be pleased with outperformance. This year, we're sustaining our commercial momentum the <unk> initiatives, which continue to perform well and should provide a multi year benefit as you continue to strengthen our core.
We're continuing to crack 6% on a two year CAGR.
6% on a two year CAGR for our revenue in constant currency.
That our core is.
It's strong.
Our focus on accelerating innovation to our portfolio in reaching these higher penetrated area communication market.
And that we will now begin the Q&A answer session. Thank you.
Great.
Thank you. Our first question is from Dan Brennan Allen Your line is open.
Great. Thanks, Scott Thanks for the call. Thank you for the questions here, maybe first off.
So far in 2020 period and you provided some early look here with some of the drivers come to how theyre going to impact I'm. Just wondering as we think ahead given the comp you're coming off of a bar for 2021, what's the right way to think about the early look for 2022 here consensus has you growing organically about 5%, which would imply a pretty nice acceleration on it.
Two year stack basis.
Thanks, Thanks for the question Dan.
First just to just for this year I mean, we're tracking it at.
Six plus percent so on a stack growth rate. So really the base business is doing rather nicely and then we would we would feedback.
The transformation is now hitting its stride. So the base business should continue to track along those along those things now.
We've always had market plus and what gives us conviction that it's going to be market versus the initiatives that we've outlined including the replacement, including additional penetration in different channels.
And by the launch of new products.
The market as we expect the market given the initiatives.
And in terms of what you should expect for next year again. The same same logic applies type of the market is for we should be for blood, if its five which would be five or six weeks would be six months and there's no reason to believe that the market should slow down.
The all of our end markets are doing super well.
Year to date Bose.
Pharma industrial are tracking close to 20% on a two year basis, well ahead of what we've seen.
Over the history of water, so feel really good going into the next year and we have complete initiatives that make us believe that we should be marketplace.
Great and then just maybe as a follow up you've been you've been.
At the helm about a year right now.
Done.
As you've outlined.
Areas for improvement, which we've executed on in terms of new product commercial execution customer identification, where you were lagging how do we think about the evolution of your impact on the business.
Is should we expect at some point here as we enter 2022 that theres going to be possibly a new wave of kind of initiatives just kind of thinking through what the next leg is.
For waters and related to that just wondering how M&A fits into that thank you.
Thanks, Thanks for the question the first yes.
You have to make sure we do more of the same right I mean, and that's that I feel really good about especially with the leadership of.
John Brian and John changed Randy.
Executing even further on initiatives.
Second we feel very good about.
Our ability to bring in new products to the market.
Tremendous tremendous traction right, especially the products that we've launched recently <unk> the premier columns, both adding significantly to the top line.
The MLP select cities MRP.
As a lot of interest from our customers.
Across four youll mix across imaging and across many different different segments. So feel very good about what our pipeline is contributing and there is more to come there and finally to your question on an M&A look I mean, we've outlined the areas of growth we are interested in.
And I think what.
You will see is that we're not just interested in entering these areas. We need to we are really thinking hard about what are the key problems to solve.
So as an example with bio processing.
As an engineer.
Freshly minted after finishing my Phd days into my new job I Shouldnt do manufacturing plant, where we were still manufacturing vaccines using chicken eggs. So in fact with eggs opening them up.
I won't tell you the rest of the process.
<unk> was designed for many many years ago, probably decades ago and the reason that you were that it was.
And then why vaccines are still manufacture today.
While we have much better technology in cell culture to be able to manufacture the same type of vaccine and the reason for that sort of conservatism into the process and the product in the indistinguishable in the drug Master files, when you file for biologics and Thats.
Something that we really want to work on we believe that our collaboration with the University of Delaware, We have let's make strides in that direction and I'm Super excited about what we've just announced with autologous I mean, it's I believe this is a needle in bio processing and.
They have probably the deepest penetration of small early stage bioreactors that are used for loan collection and that collaboration has two benefits one we're able to take the bio CT and improve our process takes about six weeks.
From down to two days and.
And that's been shown in collaboration with scientists and our scientists as well as <unk>.
As customers. So very excited about that there are several hundred ambler bioreactors out there and so we hope to be able to.
Take advantage of that and then secondly.
It opens up for waters, a higher growth area, where we would have not otherwise entered in this case, we wanted to enter with the capabilities that we possess a feel extremely good about the initiatives. So in summary.
Continuing the commercial momentum second recharging innovation and Todd looking to enter these faster growth areas to first partnerships.
Increasingly open to M&A, if it makes sense, but I remind you that for M&A.
In a financially disciplined company. So you won't you won't see us jumping in headfirst into something that doesn't mean.
Thank you. Our next question is from Tycho Peterson Jpmorgan.
Thanks, maybe I'll start with China, you noted the $12 million shipment delay it doesn't sound like you're flagging any huge but I'm. Just curious if you could elaborate a little bit on what youre seeing in that market and then any comments on supply chain. Obviously, there's a lot of focus on that in the current environment.
So tycho thanks for the question look.
China year to date is over 30% growth.
And the second.
India in organic growth.
From a demand perspective.
For the quarter, we were up mid teens, and unfortunately, a shipment bloodstock.
In the last few days of the quarter, which made it to our customers now and if you included that into the Q3 numbers it would be high single digits to low teens for China growth really nothing.
No nothing to flag from a China perspective in fact, I would say is very happy with our new leader in China, who has been implementing initiatives really really well <unk> has great traction.
We have.
We've built really strong commercial momentum even in.
In our food and environmental markets months excellent Super Wetzel, feeling extremely good about where we are in China. So nothing really to flag from a demand perspective.
And on your question on supply chain look.
Like everybody else in fact.
Like everybody else, we are seeing constraints in shipping and different ports that appears for radically like we don't think it's a systemic issue with the sporadic issue.
And we're not unique in experiencing those those challenges in fact I was with two colleagues from different industries last week and virtually everyone is experiencing sort of a little bit unpredictable changes in supply chain. So they are not immune to that and I think differently.
Yeah.
That's obviously not shipping as much and then the other two pieces are.
With my team.
That are being talked about a lot of inflation.
Do see inflation.
Specifically in the U S neighbors, but.
But nothing we haven't been able to offset by price increases.
With our with our customers.
Further on how we see it to China really nothing to flag no problem at all from a demand perspective and.
From a supply chain perspective.
Feeling what everybody else feels really happy with the way our teams are working through some of these issues in boxing on prices, where it makes sense to our customers.
Okay, and then for the follow up academic government is only 10%, but it was down 11% can you maybe just touch on what Youre seeing there and do you expect that in the fourth quarter.
Budget flush.
And the data.
For A&D I mean, we do year to date, its not that they are willing to 36%.
And.
If you if you look at the consumable revenue that is tracking nicely. So those activity across our customers. So tracking in double digits. So they're cutting revenues are still growing double digits with other end markets.
Nothing to sort of point out systemically overall.
If you look at the market now the performance is a bit sort of.
Difference by a different by region Europe is doing extremely well.
As China, and the U S a bit slower.
And that has to do with the two reasons one.
As we pointed out academic and government is a small portion of our business and historically has not been a huge focus for waters.
Have the Johns arrival, we have decided to increase our focus on that segment as well and if you think about the instruments part of the business that really depends on deep relationships.
Our relationships and customer relationships and this over time.
Sort of slowdown in many markets and in Europe, we've come off that come out of the gates for any well. We've just started to re establish those relationships and youll see the impact of that is obviously year to date in the U S and China. That's work in progress and we will give you updates as we as we go along and I'm optimistic with the activity.
On e-commerce and in procurement and Youll see the results in our consumables business.
And on the instrument side.
Improving kom relationships I expect that to return.
We've done as well.
And thank you. Our next question is Vijay Kumar of Evercore.
Hey, guys. Good morning, and thanks for taking my question.
One for you.
$12 million shipping.
In Q.
What segment did that impact what the instrument impact from Cowen Academia and I'm curious.
How did the rest of Q4 from any supply chain disruption.
I'd be curious like do you have.
So.
Similar to placebo and good morning and.
Similar to what I, what I just said.
Vehicle.
Really nothing to be concerned about from a demand perspective in China.
The $12 million have made have made it through the customers and if there's a big spread.
And that's what it's basically all instruments.
And <unk>. So it's all instruments and it's made it to the customers a big spread across the different customer segments pharma industrial as well as academic and government. So nothing sort of one one segment.
Feeling more pain and in terms of how we're dealing with these issues look.
We have to both supply chain Department.
Dream transparency on on the shipments and the timing of the shipments and we've started to build inventory, where we see order spikes in the different regions and so we feel.
And that we should be able to.
<unk> managed through the one that entity that we are seeing an indifferent.
Okay.
Okay.
That's helpful.
One.
One on gross margins.
Gross margins were consistent with <unk>.
But we call it that's correct.
It has an impact on you guys at the gross margin line.
Given the 200 basis points headwind in Q4 any comments on that.
That FX impact on gross margin either in Q4 or as we look through.
Just a quick one here.
So we don't have I mean, we.
We do expect our gross margins in Q4 to be about 58% to 59% right.
And we've seen so far in Q3, as we said one question David.
Gross margin.
Looking ahead, I mean dollar sort of strength and we do have most currencies, we are operationally against excessive.
And then that's the currency exposure.
But other than Barack I mean, we've sort of include regarding archive and Thats why youll see close to our financings.
Etfs versus to last earnings call in our Q4 EPS guide.
And thank you. Our next question is from Jack Meehan with Nephron research.
Thank you good morning.
I wanted to just get a little bit more color on the shipment, we flagged in China $12 million.
So that was delivered in October.
Obviously, the supply chain dynamic seems to be getting incrementally more challenging each week. So I was just curious what.
How things are going there and do you think does your guidance contemplate any orders could slip from <unk> in 2022 as well.
Good morning, Jack.
Nothing nothing that we have visibility on that we go from Q4 to Q1.
As I said that is increase inventory in the different regions, where we are seeing the demand.
Extremely extremely well.
From a from an overall perspective.
The $12 million was shift rather promptly in Q4, it's just unfortunate the cost depends on the data and the shipping drive us towards the end of the quarter. So I don't see anything that gives us visibility at this point that that would tell us that they would be an impact in Q4.
And in terms of what is within our hands on the new.
Let me talk about earlier.
The extreme transparency that we have on supply chain the processes that are much much improved over the last year.
And then finally.
The increase in inventory and the different different reasons, so feel reasonably comfortable that we should be able to manage a lot of our ambitions.
End of the year.
Great.
And then.
I was just curious about labor trends you called out the.
The fact that you are now above the prepay.
Recovering from the pre pandemic levels.
Im just curious if you felt like there was more spend coming in in <unk>.
Just maybe overall competition for labor, how do you think youre managing in terms of retention.
Yes look I mean.
Labor continues to be sort of a place where we are seeing inflationary pressures Tonight.
With a strong HR function.
The measures in place.
To reduce attrition and sustained right.
However that doesn't play out so much in terms of cross channel trading expenses into Q4.
As you model Q4 would you have to keep in mind is Q4 is a heavy.
Revenue for us and that results in commission payments accrued heavily in Q4, which is licensed to <unk>.
Will you see historically your operating expenses, especially SG&A in Q4.
That's reflected in our product.
And thank you. Our next question is from Patrick Donnelly with Citi. Your line is open.
Great. Thanks, guys, maybe one on the 22 commentary certainly appreciate youre expecting to continue to grow above market. When you look at 'twenty one it feels like one of the accelerants for you guys with the replacement cycle I think last quarter, you talked about maybe the sixth or seventh inning using the baseball analogy. How do you think about that in 'twenty two.
Kind of setting up as an opportunity for you guys to continue on that front or was that mainly condensed into 'twenty. One when we think about what the growth rate could look like there.
Patrick Thanks for thanks for the question. Unfortunately, I was learning baseball, so I kept using the baseball analogy.
People have top 10 centimeter stock dockings and revenue numbers. So thats why we put that slide together, which is slide six in the in the prepared remarks.
Look we saw what say one to one 5%.
Acceleration.
On a stack basis.
Due to the initiatives and the initiatives, we're not just the instrument replacement.
We saw service attachment in feed so after market, we saw e-commerce adoption growth.
20 to 27, 28% on fact organizations grew which was the new channels for us.
Roughly 40% over two year basis, our new product contribution also did extremely well so across the board one to one 5% sort of.
Thats all a benefit over what I would say the base growth and robust end market next year, we think that's roughly 1%.
Versus a base market growth or whatever the base market growth with lease of the instrument replacement. This year, we had roughly $30 million or so.
Of benefit next year to be 40 million, which is $10 million incremental.
So thats, how I would think about the types of service 200 basis points. Another 100 basis points on top of the 200 basis points already benefits of next year, and then E. Commerce goes and anything we can read the job. So I think that for me.
All I would think about.
2022 and beyond right and as you think about what's happening beyond this is now part of our CRM system.
This is part of our execution that John John Pratt and <unk> are.
Our implementing <unk>.
We now have the full list of HPLC Ups's C as well as the tandem quads in the CRM system that are.
Going through step by step and replacing and this will continue next year and will go on into the year after.
Same thing is true for our service attachment rates, we know where the attachment rates are they're using that database that will now go. After so it has become part of the DNA of the organization.
And I think that gives me confidence that we will be able to accelerate also next year and then finally new products as I mentioned.
With very well.
We have just started to pick up a lot of interest we've talked about our HPLC and <unk> doing very well.
We feel really good about that 1% incremental over what would be any sort of market growth.
Yeah. That's helpful. I appreciate that and then maybe just a quick one on the industrial market you guys put up pretty good results. There it's been a little more mixed across the sector can you just talk about what you're seeing there and expectations going forward.
Look I mean across all end markets and then you look at farmland that industrial industrial roughly.
Roughly six to six 5% stacked growth historically, that's been <unk>.
4% to 5% so we're still seeing even a bigger acceleration relatively speaking in industrial versus versus <unk> pharma and.
I must say, we're seeing extremely extremely good performance out of the VA business, So nice performance across.
The different customer segments be it in advanced materials.
<unk>.
<unk> studies for renewable doctors and I don't need to tell you why that's important in these days of electronics Thats growing in the high teens double digits life science part of the acreage is also growing nicely. So.
We are seeing really really good momentum.
And again on a stacked basis, even outpacing the overall business roughly 8% parcel growth so I think industrial.
<unk> that our customers have found a way to work despite the pandemic.
Our service engineers and our sales teams have access to many of these customers initially virtually but in many regions regions increasingly also physically our service engineers both across waters NDA.
Actually more welcome at our customer site.
Many of their own employees so.
Industrial is.
Picked up nice strength and it's true across all geographies, China is doing well.
Yes.
Rest of Asia also doing going places.
Yes.
We are an area of strength and we're lucky to have a business like VA, that's kind of pointed in that direction.
And thank you. Our next question is from Derik de Bruin from Bank of America.
Thanks for taking my question. This is my question on for Derek.
I want to follow up a little bit on the instrument performance you saw in the quarter I was wondering if you could break out.
Different in terms of the LC versus mass mass spec.
And particularly sort of tying it back to the academic and government question.
That was more on the mass spec side, and just sort of how you see some of those new product introductions, playing out this quarter and going forward.
So firstly overall.
Yes.
I'll talk more in terms of stacked growth instrument growth for the year is roughly roughly 30%.
<unk> and mass spec.
Doing extremely well.
Even even higher than 30% MOSFET expecting shy of 30% so nothing to choose between the two product platforms, but I think it makes more sense to talk about it on a on a stacked basis historically, what does athene instrument growth between three and 4%.
Sort of.
Steadily now year to date stacked growth is 75.
Five ish percent, so really nice nice momentum and this is true both across SC as well as.
As mass specs and nothing related to sort of differentiate that now you asked about my second particular in mass spec the demand is driven by.
Across all our portfolios.
Russ.
Across users in.
In high Res mass spec.
Tandem quads, which I will use a single parts are used for intact MOSFET and also our tandem parts that are used in development as well as food and environmental.
And then of course as I mentioned, the biomarker, we see renewed momentum and a lot of interest in the bio processing arena build mass spec is going from strength to strength.
Now turning to the second part of your question on new products.
As I pointed out on.
In the prepared remarks Tonight on HBO.
Just focusing on <unk> for a minute arc HPLC as well as the Premier technology, which includes columns.
As well as the application of this unique technology to our instruments.
Roughly $45 million in sales in 2021, we expect that to go up to 60 plus million.
$15 million or so incremental.
That's in the <unk> space on mass spec.
New applications mobile cohort I already mentioned that in the prepared remarks and the <unk>.
It has a lot of interest from many of our many of our customers, especially.
We want to use in the proteomics space and for imaging radar technology.
Technology, which can be used under ambient conditions, which is quite quite unique so again new products.
What does that have a history of introducing game changing new products I think what we are doing differently is just making sure that that is a lot of collection. Once we launch these products. They are not just.
Lots of stuff.
Okay great.
A quick follow up actually on the.
On the Opex side.
SG&A and R&D, both came in a little bit better than we expected in our model I was just wondering if there's any any one time effect there I know thats probably.
Played a role, but as well being less of a tailwind.
Just wondering if you could comment on any trends there.
12 million shipment that got the weight of <unk> in China, how should that flow through the bottle.
At about a five to 10 cents benefit to <unk> PFS.
Yes, so on the two questions. The first one there was no one time activity in R&D on SG&A, So it's pretty straightforward.
On the 12 million shipments that got delayed.
Could assume its largely instruments and <unk>.
Moderate I think Australia gross margin by quarter.
Thank you. Our next question is from.
So Todd with SBB Leerink your line is open.
Yes, hi, thanks for taking my question.
So first wanted to just wanted to clarify.
Obviously instrumentation was strong last quarter and if you pull them that's 12 million.
Dollars order back into <unk> that would be strong this quarter as well. So just wanted to understand if there is sort of application wise what is driving the instrumentation sale.
And maybe just if you could elaborate a little bit if there was any in terms of QA QC of vaccines, maybe the analysis of mrna cap structure. There were some applications notes published by waters teams around that so just wanted to understand it.
If you're working on QA QC side.
Proteins or mrna vaccines or what is the applications that are driving the instrumentation growth that we've seen here over the last few quarters.
Sure.
Luke.
But I mean, the instrument growth is driven by strong robust end market.
Commercial execution.
It's on initiatives replacement via newer products than your question.
As increased applications and I would break it into two parts one.
We are indeed seeing increased applications of our technologies in oligonucleotides and mrna so claims since I met.
Somebody from the leading.
Net income Denise, Cambridge recently, and they basically said look.
Huge aggregation problems with plasmid mrna.
The amount of the molecule itself as well as with the independent gasoline.
R&D molecules so.
Turning to us to help us help them solve these problems one by gaining more samples by using premier.
And two by using as CMS to elucidate the structures of the molecules themselves.
Yes.
So good application there.
A lot of them none of them being in development and discovery.
Hopefully and pleasingly in QA QC.
The area that I would comment on is the wider application of the Biosimilar.
Because the product was initially launched.
Really focused on as CMS, which we still have in <unk>, we still believe that CMS has a strong place in cubic yossi provided the instrument that you have a simple robust.
And fast and gives you partner with us.
But that same value proposition is equally relevant in development of.
In early stage development of complex biologics and we're seeing really good application that we demonstrated with.
Sartorius.
Act of within.
Some experiments that take six weeks can now they've done their own within within two days and this has been replicated in scoliosis that non asset and several customer lab. So as you can imagine there's a ton of excitement on that fund and the <unk> is rather unique here.
The Tulsa fast with a simpler to use instrument, even somebody like somebody like me can use it.
And it related to it.
Wide range of results not just on cell culture media applications that it's much lighter.
And then any sort of application yesterday, but also on the drug substance so.
Seeing wider application of our technologies and really excited about that as CMS is going, especially the wildcard with the simplicity and robustness.
Steve.
In early stage development milestones.
Thank you. Our next question is from Josh <unk> with Cleveland Research.
Good morning, and thanks for taking my questions.
Wondered if you could provide a breakout growth in LC Ms separately here on the quarter I don't think you provided those numbers.
If you did and I guess <unk>.
It seems like the waters instrument business was a bit lighter than I expected I mean, any additional color you can provide on maybe what drove that would be helpful or was it was it largely timing related or is it more a reflection of.
Possibly a normalization in orders.
Tom.
Let's see.
Question on a year to date instrument growth.
It's roughly 30%.
Alright, good about about that so I don't know.
Later.
In Q3, we saw a nice growth double digit again on instruments, primarily comp in Q3 from last year already so double digit growth across across the two pieces.
The two lines of instruments as a reminder of instruments LC mass spec.
Okay.
As I mentioned earlier on the year to date basis.
In support of the same.
<unk> grew in excess of 30% mass spec in the mid twenties.
Really nothing to choose between the two sort of instrument platforms. It makes less sense to look at it quarter by quarter given the.
Instrument, given the instrument trajectory, but again nothing to choose between the two we'll see that both LC and mass spec has significant momentum.
In Q3 and year to date and also going into Q4.
Feel very good about where we are.
Thank you. Our next question is from Catherine Schulte with Baird. Your line is open.
Hey, guys. Thanks for the question I guess, just first on the instrument side of the business and our revenue was down about 8% constant currency last year do you think you largely recaptured that revenue at this point or is there still some to make up or do you think there is some that is fixed.
Sure Anthony.
Ill be recapture it would just be curious how you would allocate across those three buckets.
Catherine Thanks for the question I think on the instrument side.
We really feel that we are on a very very good track I mean, if you just look at.
Historical average at site I mean, 2020 can confound, thank Steven given all of the given all the COVID-19 impact on a stacked basis for LOE.
<unk> nicely in excess of five 6% in some cases.
Our instrument business historically that average for waters and across the industry is between 4% so really nicely clear off the historical averages.
And in terms of how much have you gone back and you think that just looking at three sort of data points.
One comparing our snack growth rates, both instrument and consumables with the rest of the industry wherever they are compatible products. We feel very good that we are operating.
Operating of running well ahead of the market that's market plus performance on rents.
Vince.
That's the first data point that makes us feel that we're flying back rather nicely. Secondly, we have been loss ratios that we measure internally those have been tracking ahead of historical averages.
For the last four quarters.
And finally, there are public reports that are available.
Or the other.
The other way to get Socratic, because they change to definitions every quarter. According to those also are doing very well on.
Our market share so feel very good about how we are reversing.
Great.
Our footings.
Our work in progress, there's a lot more to do lots more opportunity as well a lot of applications for that instrument.
Lot more penetration to be had but we are pretty good so far.
Any that we have.
Thank you that concludes our question session of today's call.
Thank you very much for your participation and questions and on behalf of our entire management team I'd like to thank you for your continued support and interest in waters.
Look forward to updating you on our progress during our fourth quarter 2021 call, which is going to be on February one 2021. Thank you.
And thank you. This does conclude today's call you may disconnect your lines and thank you for your participation.