Q1 2022 Waters Corp Earnings Call
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 as otherwise required by law.
During today's call, we will be referring to certain non-GAAP financial measures reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and in the appendix of our presentation, which are available on the company's website.
In our discussions of the results of operations, we may refer to non-GAAP results, which exclude the impact of items such as those outlined in our schedule titled reconciliation of GAAP to adjusted non-GAAP financials included in this morning's press release and in the appendix of our presentation.
Unless stated otherwise references to quarterly results, increasing or decreasing are in comparison to the first quarter of fiscal year 2021.
In addition, unless stated otherwise all year over year revenue growth rates, including revenue growth ranges given on today's call are given on a comparable constant currency basis now.
I'd like to turn the call over to Dr. <unk> Patria water's President and CEO .
Thank you guys.
Good morning, everyone.
Along with gas for joining me on this morning's call is amongst shovel waters, senior Vice President and Chief Financial Officer.
We had a record start to the year with first quarter sales led by instruments, which grew over 25% with a broad based strong performance across all our end markets and geographies.
Before summarizing the quarter, let me start by saying how extremely proud I am of our teams.
Listening to manage our supply chain delivering operational excellence and exceptional support for our customers through the ongoing challenges of the pandemic.
And as a result of the indomitable spirit of all my colleagues at waters.
I will now provide a brief overview of our first quarter operating results and deliver our key messages.
All of them then review our financial results in detail and provide comments on our financial outlook. We will then open up the phone lines to take your questions.
Turning now to slide three we have three key messages first.
We had a very good start to 2020 due the great traction for our new instrument products strong operational performance and sustained commercial momentum demand has remained robust across all our end markets.
They're focused on execution innovation and growth.
Continue to make great progress in executing against our enterprise priorities without core initiatives positively impacting our results. We have revitalized portfolio with innovation that is answering the needs of our customers in both large.
And small molecule workflows as well as our known as well as in our non pharma markets, such as food testing environment and material science and thirdly waters has a firm commitment to leave the world better than we found it we are delivering sustainable value to our shareholders and stakeholders and to our ESG program.
Now moving to slide four.
In the first quarter, our revenue grew 13% as the Baltic and 16% on a constant currency basis, reflecting broad growth across all our end markets and geographies orders in the quarter exceeded our sales of $691 million, reflecting a very strong demand.
Instruments grew at 26% in constant currency with strong growth across our LC mass spec and Ta portfolios new products contributed meaningfully to growth in the quarter. The unit sales of arc, HPLC and acuity premier more than tripling versus the first quarter of <unk>.
Last year.
In mass spec new instruments in our high end tandem quad portfolio, such as our <unk> TQ excess also saw strong growth in both industrial and pharmaceutical applications.
Instruments and there is a positive indicator for future growth of our consumables and service revenues recurring revenues grew 9% for the quarter with chemistry up 8% and services up 9%.
This quarter had one fewer day than the first quarter of 2021, which translates to a headwind of approximately 1% for our recurring revenues without that recurring revenues would have also grown double digits IMAX.
IMAX speak Premier columns have continued to provide strength and incremental growth to our chemistry business given the benefit. This technology provides for novel modality applications and our increased exposure to biologics.
Meanwhile, we're seeing increased service plan attachment rates in our key regions.
At instrument point of sale by.
By geography growth was led by the Americas with the U S up 28% driven by broad performance in each of our end markets in China sales grew 17% with pharma industrial and academic and government all up double digits.
As lockdown lockdowns in certain regions persist, we're beginning to see more of an impact to our business, but we're in close contact with our customers and demand remains robust.
The lockdowns ease, we expect activity levels to catch up that normalize with limited impact to our full year growth expectations for China.
We anticipate some things impact in the second quarter, if customer access continues to be constrained.
Our Q1 non-GAAP adjusted earnings per share was $2 80.
22% year over year, driven by sales growth volume leverage and an ability to manage inflation through pricing.
Given the global nature of our business, we are seeing ongoing supply constraints and inflationary pressures.
Despite this we've been successful in working through these challenges leveraging our global manufacturing footprint and working closely with our customers and suppliers, while delivering good operating results turning now to slide five.
By each of our initiatives continues to progress the two areas I would like to highlight this quarter our contract organizations and launch excellence.
Tract organization, a unique technical abilities and ability to collaborate closely with our customers, resulting in market share gains and strong revenue growth.
Revenues from these customers were up over 25% for this quarter led by over 50% growth in China.
Turning now to launch excellence, a revitalized portfolio is contributing to growth with demand ramping for Archeage, VNC acuity Premier and Max Premier columns.
Acuity Premier at Max Premier was specifically designed to solve challenges that are particularly relevant for large complex molecules are customers are using the technology for oligonucleotide analysis as well as separation and purification of novel modalities, such as mrna peptides and <unk> just to name a few examples.
Meanwhile, small molecule small molecule growth remained solid with customers continuing to purchase new capital equipment, including arc HPLC.
Now on slide six.
Recently launched the <unk> TQ absolute which is up to 15 times more sensitive than analyzing negatively ionized compounds compared to other tandem quads currently on the market.
While also using less sample. It is designed to help pharmaceutical food and environmental labs meet regulations, requiring trace level quantitative muscle mass spec analysis for a broad set of applications.
Food testing the instrument takes detection of anionic pesticides, and then metabolites to a new level of quantitation and pharma. It could provide highly sensitive analysis for oligonucleotides and peptide bio analysis as well as quantification of estrogen and clinical research users for which high resolution mass spec have typically been rigged.
Wired.
The instrument is highly efficient using approximately 50% less electricity and gas and also producing 50% less heat.
Other high performance kind of what's on the market both of which reduce the carbon footprint of analytical labs. It is also a 50% smaller than other instrument in its class, which also adds value to our customers at space and analytical labs is limited and costly.
Our tandem quad portfolio is stronger than ever and together with what is connected we are able to make customers' workflows easier faster and more efficient without compromising performance.
Now on slide seven.
Delaware, Our second innovation and research lab would be opening tomorrow part of a multi year collaboration with the University of Delaware.
Its purpose is to develop analytical solutions to better characterize the manufacturing process for biologicals and novel modalities, which will support our BOP into bioprocess characterization.
Researchers from both waters and the University of Delaware will develop solutions, including center, an instrument improvements data analytics and process control. This partnership will help us expand our capabilities to drive improvement in quality yield and efficiency as well as characterized critical quality attributes that will be.
A key step towards separating the process from the product and biologics on.
On slide eight.
We are delivering sustainable value to our shareholders and stakeholders to our ESG activities, which continue to be recognized in a number of areas.
Earlier this year.
<unk> this quarter of 100 on the 2022 corporate equality index, earning waters. It designation as one of the best places to work for LGBTQ plus equality.
In addition, barron's ranked waters number six on its 100, most sustainable U S companies list for 2020 do based on a set of 230 performance indicators.
And reflects our efforts of continuous improvement in social and environmental responsibility on the list. We were the highest placed company in the healthcare sector and in the life Science tools segment.
Recently within our diversity and inclusion and stem education efforts waters has partnered with three historically black colleges and universities to create stem opportunities for students to funding instrument donations mentoring and the awarding of scholarships to students exploring the analytical sciences in summary, we are.
With our strong start to the year and our results.
And that results in revenue growth and operational performance, which are demonstrating.
Demonstrating our continued success in our focus areas of execution innovation and growth with that I'd like to pass the call over to AMOLED for a deeper review of the first quarter financials as well as our outlook for the remainder of the year.
Well.
Thank you Luke and good morning, everyone.
As we've outlined we recorded net sales of $691 million in the first quarter, an increase of 16% in constant currency.
An increase of 13% as reported.
Looking more closely at our topline results for the quarter on slide nine in constant currency once by operating segment.
This division grew 16% like Ta grew by 18%.
By end market, our largest market category pharma grew 19% industrial.
Industrial grew 17% in academic and government grew 4%.
In pharma, we saw broad based strength across segments geographies and applications and in both large molecule and small molecule.
Growth was led by the U S, which was up over 35%.
India, just under 30% in China, which grew mid teens.
In industrial outperformance was also strong across all major geographies U S Europe , and China, all growing 20% or above.
Turning to academic and government we saw.
A similar trend to last quarter.
Mid single digit growth as customer spending has become more active led by China and the U S.
Now by geography sales in Asia were up 14% with China up 17%.
<unk> grew 26% with the U S up 28%.
And Europe grew 9%.
In China, we saw broad performance across.
All of our end markets, which grew each up double digits.
In the U S growth two was broad based led by pharma, which was up almost 40%.
And industrial which grew over 20%.
Growth was really strong in both instrument sales, which grew almost 60% and recurring revenues, which grew in the mid teens.
In Europe growth was led by industrial which grew 20% driven by strong growth in food and enrollment.
We also see an MSP instruments to pharma customers grew high teens, a strong capital purchasing patterns continue on from last year.
We've already covered a lot of growth by products and services, where instruments grew 26% for the quarter chemistry grew 8% and service grew 9% driven by our commercial execution and new product contribution.
Finally, ta had another great quarter with sales up 18%.
Strong growth in thermal analysis micro color O'malley and rheology.
<unk> for our Ta products continued to be strong in all regions with growth driven by advanced materials, and chemicals, including Barclays and sustainable polymers.
Now I would like to comment on our first quarter non-GAAP financial performance once the supplier.
Gross margin for the quarter increased by 40 basis points to 58, 6%, despite higher instrument mix inflation pressures and stronger U S. Dollar this was driven by volume leverage and pricing.
Operating margin for the quarter increased by 170 basis points with 33% driven by volume leverage on operating expenses.
In the quarter, our effective operating tax rate was 14, 8%.
Average share count came in at 61 million shares.
Which is about 1.7 million less than the first quarter of last year.
Our non-GAAP earnings per fully diluted share for the first quarter increased 22% to $2 80.
In comparison Q2 dollars 29 since last year.
On a GAAP basis, our earnings per fully diluted share increased to $2 62 things compared to $2 37.
Last year.
A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning and in the appendix of this presentation.
Turning to free cash flow capital deployment, and our balance sheet.
We define free cash flow as cash from operations less capital expenditures and excludes special items.
In the fourth quarter of 2022 free cash flow was about 25% of sales at $176 million after funding $28 million of capital expenditures.
Excluded from free cash flow was $6 million relating enrichment.
Precision chemistry operation.
In the fourth quarter accounts receivable DSO came in at 81 days down three days compared to fourth quarter of last year.
Given higher sales volume and proactive measures to secure supply, including building some electronic components safety stock inventory increased by approximately $54 million in comparison to the prior year.
We maintain a strong balance sheet access to liquidity and well structured debt maturity profile.
Allows us the ability to prioritize investing in growth, including M&A and returning capital to shareholders.
Continue to evaluate M&A opportunities that will meaningfully accelerate value creation in will pop out attractive high market.
High growth projects and opportunities.
In Q1, we repurchased approximately 493000 shares of our common stock.
$160 million.
At the end of the call about net debt position was 941 million with a net debt to EBITDA ratio of about 0.9.
Now as we look ahead for the remainder of the year I would like to provide some updated context on our parts for 2022 which is on slide 10.
<unk> had a strong start to the year driven by a robust end market demand and strong commercial execution across our geographies.
As we look ahead, we expect solid momentum to continue and that our near term growth initiatives will continue to contribute to our performance.
We also expect but we will be able to continue to address supply chain constraints and inflationary pressures and these challenges do not worsen over the remainder of the year.
These dynamics support increasing the full year 2022 guidance to seven 5% to 9% constant currency sales growth.
Up from our initial guidance the ability of 5% to 7%.
At current rates of negative currency translation is expected to subtract approximately three percentage points, resulting in full year reported sales growth guidance of four 5% to 6%.
Gross margin for the full year is expected to be approximately 58, 5% and operating margin is expected to be approximately 35%.
We expect our full year net interest expense to be approximately 35 million and full year tax rate to be approximately 15, 5%.
Average diluted 2022 share count is expected to be approximately $66 million.
Our share repurchase program will continue in 2022, and we'll provide quarterly updates as appropriate.
Rolling all this together and on a non-GAAP basis.
We're raising our full year 2022 earnings per fully diluted share guidance to the range of $11 90.
$12 and this includes negative currency impact of approximately four percentage points or 45.
Current rates.
Looking at the second quarter of <unk>.
Constant currency sales growth to be 6% to 8%.
At current rates currency translation is expected to subtract approximately four percentage points, resulting in second quarter reported sales growth guidance of 2% to 4%.
Given the ongoing Lockdowns in China, we anticipate a headwind of approximately 100 to 200 basis points to our growth for the second quarter, assuming lockdowns do not worsen reduce blackbird in our second quarter guidance.
Second quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $2 55.
To $2 65.
This includes a negative currency impact of approximately five percentage points.
<unk> got to fix.
Now I would like to turn it back.
Some summary comments.
So in summary, our teams continue to deliver excellent results. Despite the.
The challenging environment with strong instrument growth and great traction for our new new instrument products.
We are laser focused on execution innovation and growth, we continue to make progress executing against our enterprise priorities with our core initiatives delivering positively and contributing positively to our results with that we will now begin the Q&A session operator.
If you would like to ask your questions at this time please.
Please on mute your phone press star one on your telephone keypad only record your first and last name to withdraw. Your question you May Press Star Q.
And our first question comes from Vijay Kumar of Evercore ISI.
Your line is open.
Hey, guys. Thanks for taking my question and congrats a really strong Q1 per share.
Maybe.
Diving into the performance within the Q.
You noted.
New products.
Yes.
Maybe.
I guess, what the market is trying to debate is there any pull forward of demand can you talk about your order books in.
When you say new products. It feels like this is incremental demand coming in and perhaps not a pull forward.
A man.
So if you could just.
Talk to the drivers here in Q1.
How the order book is shaping up that would be.
Fantastic.
Thank you Vijay really really proud of what the team's been able to accomplish in the quarter.
The simple answer to your question is no orders keep outpacing sales and Thats happened this quarter as well. So we have a healthy healthy backlog now turning to the overall growth.
You can just look at the overall market and us in particular I think some of our peers have reported analytical instrument.
Sales and they're in their segments.
Last week.
And they are in the low double digits. So there were a bit higher than that and that.
Delta is largely attributed to of course, the operational excellence the five initiatives that I mentioned in the past and really significant traction for our new products in fact arc HPLC and acuity Premier have had.
Really outsized performance in fact, the number of units two and three times as what we sold in the us.
In the same quarter last year.
And we continue to see very good traction for IMAX premiere columns, really, especially designed for large molecules and biologics.
The tailwind is very good for for biologics so overall.
Non pulling forward of demand and new products substantially.
Substantially well really meeting a significant need in the market.
That's helpful.
Maybe one for a moment that the guidance here.
Al.
Revenues you beat the Q by.
800 basis points versus your.
Prior guidance for.
For Q1.
Annualized this to 200 basis points.
You look at the annual guide ways suites by 200 basis points.
I'm curious.
Would it just said order book is.
Well above revenues, so is that perhaps conservatism.
China, Lockdowns or perhaps some macro maybe just talk about.
What the guide is assuming here.
For the year.
Yes so.
Thanks, a lot for the question.
So look I mean, we are raising our full year guide by approximately 2% constant currency.
What is sort of driving it down is how do you installed on his move between our last guidance. These type of April when we guided masked in February there was close to 25 million FX headwind on the full year revenue now makes up 85 million, so almost $60 million headwind coming in on.
Topline and likewise on EPS that is a 25 cent incremental headwind versus what we guided before because now the EPS at $1 45.
So that's all factored into our guidance. Despite some of these challenging macroeconomic conditions and beyond raising both our revenue guidance and our EPS guidance.
Those assume use of 6% to eight Q2 and sort of a five to seven in second half of the year and again there we are.
Putting on our guide prudently given the macroeconomic conditions and we continue to monitor.
So I think just maybe one other comment to build on this look.
Super Super pleased with what's happened in Q1, I think there can be no doubt about that it's a broad broad.
Totally good performance across instruments across consumables across all geographies and end markets.
That said I mean, there are some of the geopolitical issues that are still macroeconomic concerns and there are still supply chain challenges out there.
And we feel that it's prudent to guide the way we have.
And I think that's really what's going on into our in our.
At this point, but it's still it's still a raise even despite all those challenges accelerates from what we had said in the past.
The next question is coming from Richard that installed with Jpmorgan. Your line is open.
Hi, Thanks for taking my questions. So first can you just walk us through your latest thoughts around pricing for the year. You previously think about 150 thats been placed and continues to be.
No.
Beyond that this year at all and then have you faced any pushback from your customers on price increases in all right.
Good morning, and thank you for your question.
Let's take a step back and I would just not think about pricing.
Pricing alone.
We have a gross margin has gone up in the quarter by about 40 basis points and the operating margin about 170 basis points right.
So that is a result of three things one of course pricing, which I'll get into in a minute, but also.
Productivity improvements and productivity due to a higher higher volume and thirdly, new products like <unk>.
Giving us, giving us even more even more leverage.
If I if I know just comment a bit more on the on the pricing.
This quarter has seen about 200 basis points and I'll also remind you that during this quarter a lot.
A fraction of the sales have come due to orders that were placed in Q3 and Q4 last year.
The pricing had not fully taken taken hold so we feel very comfortable with where we are largely because we are collaborating very closely with our customers I mean, theres a lot of conversation on.
On pricing then.
The increase prices there is a lot of discussion with our customers on why and what and where and when and so we feel reasonably comfortable that as long as our customers are aware of why we're doing what we're doing and we're communicating transparently, we should be able to sustain sustain the price increases.
Great.
Just another question on China here, So you plan going into 200 basis points of headwinds in China.
Great Lockdown.
And so can you just talk about what youre getting here.
China can return to growth post lockdown.
For China.
And over 50%.
Growth year over year.
Can you just spend a minute.
Hey, Joe.
Okay great.
Yes.
Thanks, H O I mean, China look.
Despite the rolling Lockdowns has been one of the brightest stars in our in our overall geographic performance.
Rod based Broadbase growth again pharma and industrial both growing 17% growth for the quarter for China.
Led by pharma and industrial both in the mid teens, even academic and government was in the low teens. This particular quarter, so and the underlying underlying underlying demand is based on a lot of the lot of the what lot of what we see globally, so great execution of our initiatives, including instrument replacement, including.
The attraction of our new products, <unk> and acuity Premier in particular and really great demand for.
For our products in the <unk> segment, where we grew over 50% and I'll remind you the value proposition. We offer is not just the products is really training CMO customers on meta transfer and meta development for complex molecules. So overall the quarter has been great for China. Despite the fact that for the last week, we saw some headroom.
For our recurring revenues when the access was limited so really pleased with what in what we've been able to do now going forward.
We anticipate 100 to 200 basis points of headwind in the second quarter, largely because of the lockdowns are still sporadic and theyre not theyre not over we're starting to see them ease.
But it's very difficult to predict.
How open open the market is going to be and how open the access is going to be so while we are optimistic overall on China and we think.
Within the year with low double digit mid double digit growth.
Our mid teen growth for the full year and we have we're really optimistic about the trends that we see in China I think.
It's just prudent to sort of manage Q2 with 100 or 200 basis points of a headwind versus what we've already seen in Q1. So I think I hope that gives you enough context again very optimistic about the market really happy with the execution, both on new products and customer.
Customer traction and in the long term long term super optimistic, but in the short term a little bit a little bit careful about how we how we think about the market.
The next question is coming from Dan Brennan of Cowen and company. Your line is open.
Great. Thanks for thanks for taking the questions. Congrats on obviously, a very strong quarter maybe.
Maybe can you walk us through a little bit on.
On the instrument side I don't know if you quantified what the new instrument. The pack was in the quarter. I know you spoke about year over year growth, but could you back up a little bit and just give us a sense of what the impact was and also if you could remind us as we think about the new instruments and the opportunity kind of what's baked in for 2022.
And then kind of related to that could you discuss I know you've alluded to it earlier, but can you discuss what youre seeing from a end market growth basis in the Cherokee basin.
Okay. So I think it take it one step at a diamond if I if I could.
Forget anything I'm sure Daniel remind me that I won't answer the question fully so overall instrument growth at 26%, we don't usually breakdown the contribution of new products to that I mean, you can imagine in EMEA I would just back out that number.
Back out new products and execution by just comparing it to the overall market I think it <unk> mean that 6% number really.
Already reflects a very very strong performance versus what we're seeing from our peer group and that is to contributions one is the operational excellence instrument replacement.
Increase in England and increase in the traction of new products and our new products.
Broad based right, it's not just out of season its ultimate aspects now right. So from an LTE perspective arc and acuity.
Premier in acuity Premier in particular.
Any targeting biologics and novel modalities applications now you're darn under the mass spec portfolio, where we of course launched MRM feedbacks on really great feedback from customers. That's a high resolution mass spec, but then.
<unk> TQ Xs absolute <unk> absolute that we've just launched and that has incredible traction and not surprisingly added 15 times more sensitive than the leading mass spec on the market for add on of compounds and anionic compounds are ones that are that are ubiquitous in biopharma mrna.
Oligonucleotides, but also pesticides in food and environmental testing, so really a strong introduction and what I'm. Most proud of is it's not just performance, but it has a lower footprint and lower environmental footprint, 50% less consumption of electricity, 50% less generation of heat.
Versus versus the versus the top <unk> in the market. So super optimistic about it and in addition, it's not just the instrument that you said you also sell a phone system with software and we introduced our new waters connect quantity Moscow Autonation software in the last few months that has incredible interactions so not only.
Our customers getting.
Mahler box.
We then lower environmental footprint, they're getting better hardware performance and 50% more sensitivity for without with our software. So it's an incredible.
Incredible new product in a space, where remember we said.
They were about 800, or so tandem quads or do we wanted to place some feel very good about what we see is demand there and I don't want to leave out.
Again outperformed.
Waters Division and they are not competitive and done anything with each other but just to remind you Diego, 18% orders grew 16% with broad based.
Demand from for our terminal instruments for a rheology instruments, but what im most in most excited about is what the <unk> team is doing of course operationally, but also attacking new segments like battery testing and we have incredible demand for our products on that front.
Have a small base so I won't give you a number but it's off a small base, but growing very rapidly. So many excited about new products.
Very good feedback overall in the 26% number sees that and one other number that we cited in the Boston is a new.
Instrument vitality index, which is basically taking the last three to four years of sales and saying how much contribute three to four years of launches and calculating how much contribution that has to our overall sales and that number is at an all time high at 15%.
These new products are meeting a need but we also have a new process for launching the product.
You've seen how we've repositioned the bio board so.
So I think that was one part of your question. The second part I think you referred to.
From an end market perspective.
No real weakness this quarter right, so youll see pharma.
Again doing extremely well with high teens growth industrial also high teens growth in academic and government coming in at 4% So really feel good about.
All end markets across different geographies, and I think from a geographic standpoint.
I would point out that that of.
Of course, China is doing well despite difficult conditions, India is still in the mid Twenty's in terms of growth and we saw that all through last year. What I'm. Most excited about is what we see in the U S and.
When was the last time, you saw a 29% growth for waters in the United States and as the U S goes so does our gross margin because of the pricing in the U S is a bit better as you can imagine so feel extremely good about the quarter and I hope I addressed your.
Your questions.
The next question is coming from Josh Goldman Cleveland Research. Your line is open.
Good morning, guys. Thanks for taking my questions one for a mall and then one for <unk>.
Im wondering if you could provide a bit more color on the moving pieces in the updated EPS guide maybe a full bridge.
Just trying to get a better sense on how variables beyond FX.
Longer revenue improved margin outlook factored into the guide maybe.
There are other offsets going on beyond FX.
Sure. Thanks, Josh.
Look at it from two vantage points.
On a full year basis.
Raising our EPS guidance, but that does include a 25 cent incremental headwind versus the guidance that we provided in February .
And so in a way if you say.
We beat consensus in Q1 by about 45 cents.
25 Central Bank is lasting.
No.
You sort of FX and the rest easy.
Our guide on EPS Russell minus a little below.
Pending timing switching between Q1 to Q2, so it's largely consistent with how we are guiding full year revenue increase and most of the gap is largely driven by change in FX assumptions.
Okay, and then maybe a follow up on Bjs question can you talk a bit about pacing in the first quarter and maybe how sales track versus order intake rate is it fair to assume that we have with 16% organic growth you saw some relief on the supply chain side, and we're able to work down backlog or orders.
Orders remained such that backlog continues to be in front of us.
And elevated level entering <unk>, maybe similar to where it was as you entered the first quarter.
In fact.
Josh. Thank you for the question, but in fact, the orders outpaced sales yet again right. So the backlog continues to build for that we did not have to draw on the backlog to achieve the incredible results that you that you saw in.
In the quarter, if anything I would attribute of closer to the operation to the operational performance in the quarter and really the strong dedication of our teams and this question keeps coming up how do you deal with the supply chain issues. So I will not sit here and tell you that that it's all over.
And that we are after three quarters of dealing with the supply chain challenges, we know exactly what to do but we have an algorithm and I'm knocking on wood when I say this that seems to work.
Number one.
We have really spent a lot of time studying the supply chain of <unk>, including semiconductors and what additional materials that are based on the on the on the on the chips industry that go into our go into other instruments.
So you have a deeper understanding of the supply chain to produce these semiconductors the tier two tier three tier four supplier suppliers second we've invested a ton of time on collaboration.
I have personally met the top seven suppliers off.
<unk> chips that go into our instruments.
Have incredible collaboration across borders.
Capex I mean, I like to call it as a.
Like to Coldwater than the large startup where we have deep relationships that have been built over many many years and they help us in times of games that are difficult and we have a collaboration with our customers. So often.
We will have a conversation with our customers is something that is short on supply we will basically try to substitute or is it something else.
And then finally.
The third piece is collaborative problem solving when you build these relationships.
It's easier to solve problems with folks when you when you get into trouble right. So and it's not just within the organization, we're sitting down with customers asking what should be replaced with what.
Rebuilding some of the chips moving Ethernet ports from.
One location to the other I won't get into more details.
And all of US are on the ground floor. This is not expected to sport light oil in the lot of our senior leaders across the board. We are on the ground floor talking to our customers. So.
<unk>.
It's really I would say operational excellence deep collaboration and an understanding and a deeper understanding of the full supply chain.
Really not didn't have to tap into into the backlog to achieve these results.
That gives you more color.
The next question is coming from Puneet Sudan.
BB Securities Your line is open.
Yes, hi.
Thanks for taking the question.
Really impressive.
Growth here in instruments, Indeed, maybe.
And maybe just pulling back to a higher level. When you look at the pharma and the 29% growth number that you mentioned.
Yes.
Yes.
What is driving this demand when you talk to the customers modalities. This maybe more importantly.
Are you seeing this demand come from new facilities expansion among <unk> worst of the demand from the existing facilities.
Because obviously, you're outpacing what the demand.
The strength, we're seeing from peers as well as the peers are growing but you guys are obviously ahead of that so just trying to understand at a high level.
Does that sort of the dynamic across pharma and given the.
Backdrop up these macroeconomic environment right now.
Thanks for the question Puneet, it's really broad based but again starts with operational excellence I mean, the five initiatives that we mentioned earlier.
We have a.
Newish leader in in the United States.
Our sales has had has a long tenure in waters, but he was newly appointed right before I got here.
And he has just been incredible with his team right. We've put more feet on the street we have.
When using our CRM system really religiously to get an understanding of where the demand is.
And there wasn't that there was a.
<unk> backlog buildup in the U S instruments, the new products have done extremely well.
E Commerce is doing better in the U S than anywhere else and the CMO traction.
Very very good in the U S. Turning then to new products. I mean, you are well aware of these new products have been designed.
Cyclically for our biologics customers right and we start with the bio card, which I know you know extremely well, we repositioned the product to go upstream into in deploying selection and thats, gaining a ton of traction downstream and <unk> can see the work that we started about three years ago with several large pharma players.
Who have significant monoclonal antibody pipelines, we're seeing them gain track same theme the processing the product gain traction in <unk> and that bodes well for the future.
Max peak columns and acuity Premier as a technology was custom designed for biologics that have affinity to metal surfaces and that product has that set of products has gained a ton of traction and most recently.
<unk> absolute I mean, it has terrific.
Terrific performance as hardware and.
Lower lower environmental footprint, so all of that combined meaning operational excellence new products.
Leader, who really sort of embraced collaboration and embraced the operational excellence.
Really what's behind the U S doing as well as it does and that of course has an impact on the gross margin as well.
That's great and then.
A brief follow up on the.
The Bayou Corne actually.
We recognize that the field team was doing a number of demos throughout the quarter in the last couple of months.
<unk> bio processing applications and Youre, obviously, highlighting the university of Delaware.
Work that you're doing here with the New center, maybe just help us understand when should we start to think about meaningful contribution from some of the new bio separations initiatives.
Broadly bio processing customers.
Taking on bio CT thank you.
Tony.
What I've said also.
In the last quarter I mean, we basically said look.
In the short term you should expect us to grow 5% to 7%.
A 1% impact of our of our five initiatives and in the midterm 2024 onwards, you should see more does go into the 6% to 8% sort of range where.
You should start to see an impact of these new initiatives right.
And is it a bit sooner or is it a bit later can be more precise all I can tell you is there's a ton of traction and just staying with the bio separations area Im saying with the bio CT in particular, there's a ton of traction for what we're doing with sartorius Prochloron selection for balloon selection.
<unk> card just as it was initially designed has sort of too early.
Large applications. The first is on spend media, where we can analyze close to 200.
200, analytes, so our customers in that category.
Our interest in a simple instrument, but they don't want to give up any of the sophistication. They don't want to look at five compounds and 15 compounds I just didn't want to look at the 100 compounds because they are still trying to ascertain at that point.
Each of these.
What race quantities of materials are going to impact us agriculture, So bio cohort is.
It's simple to use but a highly sophisticated instrument and I think that's really important to keep in mind. When you think about spent media and then and then the other application is on peptide mapping in the in the drug substance itself the whole drug substance and then again the applications are very wide.
And here, where waters has an advantage is with our ability to develop simple workflows right. So our customers again are not willing to give up the sophistication. They want to know each amino acid in the sequence of the peptides that one of them of the confirmations. They want to know the size of the molecule.
They won't don't want to give up any information they wanted to instrument to be simple to use the workflow to be simple to use and we're developing a whole bunch of workflows on that front and again feel extremely good about it.
As I said mid <unk>.
In the midterm you should expect a 100 basis points of growth impact.
Based on all of the sort of August .
All of the sort of.
Adjacencies and I've talked about in the past.
I can't be more precise than that but I can tell you. There is a lot of excitement amongst our team and the customers.
In applications of bio separations has been as bio processing.
The next question is coming from Matt <unk> of Goldman Sachs. Your line is open.
Hi, good morning, congrats on the quarter.
Maybe just big picture first question I mean, one of the things that you did earlier tenure was trying to bring the R&D and commercial functions closer together and then noticing how the new instrument demand has really picked up and pretty successful launches how much do you attribute to the success of those new products to some of the reorganization you did within the <unk>.
R&D commercial teams and how much more is there to go for and bringing those two closer together like should we look for increased momentum with our new products because of the changes that you've made.
That's a great question and thanks for asking a more sort of qualitative question look I mean.
It's a question of collaboration right I mean, what is known for its technical excellence and closeness to customers, but I think by bringing the commercial teams closer to our development colleagues. We're now as we think through our launch process and John <unk> will talk to you a bit more about it.
Our Investor day in a few weeks.
As we brought these two teams together, we're able to bring the commercial input.
Much sooner into development number one number two there's a lot more ownership from our commercial teams not just the understanding but also a lot more ownership from our commercial teams as we launch the new products and without a doubt that has a lot to do with the traction we've seen with the Max the premier columns. The sales team are super excited.
The acuity Premier the Ark, HPLC, which one is the demand or a request from our customers through our sales team and the R&D Deans responded to it and now as they are closer together, they sit and operational reviews together.
<unk>, an innovation board, where we have both commercial as well as R&D input and I can tell you that has a significant amount to do with how we are seeing new products pick up in the market and the feedback neitzel.
In this space you don't expect to hit a home run in the first day that you go out to that so you basically have to get feedback from our from the customers and those that feedback was back into R&D seamlessly right and the Best example of that is our.
Software launch <unk> launched our mask one application for liquid water connect basically a compliant ready.
<unk> software.
And some of the customers wanted enterprise enterprise capabilities with that software. So our development team got that feedback very early on and has developed the solution same same is true with <unk>.
Early on we win headfirst into Q eight Youll see that was a few years ago now with closer collaboration between commercial and R&D sitting at the same table as the customers come back and say Hey, you know.
Wanted to simpler workflow for Alagoas, because thats my pipeline or I want a simpler workflow for spent media that's what the R&D team focuses on optimizing so.
I could go on and on I mean, it's incredibly exciting.
Former research on myself.
I find the discussions very pragmatic.
Usually collaborative and learning experience of wound bodies, both commercial as well as R&D great. Thanks for that and then just quickly just to maybe on the academic end market just talk about trends you're seeing there you had some pretty strong growth in China, but maybe ex China, what you're seeing in the academic end market in this quarter and what Youre looking for for this year.
Academic and government did especially well both in the U S and in China and.
I would separate the two things I mean.
Again, I mean, we are while we have performed in line with.
Many of the peers, who have already reported with academic and government I don't want you to assume that our turnaround in academic and government is finished we have just begun re mapping the kols. We started to work much harder on the procurement e-commerce.
Availability for academic institutions, so theres a lot more to go but the U S and China did super rather in the first quarter in the U S. In particular had a lot of traction again.
By putting more feet on the street by talking to customers more directly China benefited from the VAT.
<unk>.
Expense.
The VAT.
Regulation being being relieved a little bit step by step flight to the customers are purchasing.
Using from what they had what they had in the past I would not assume that we've already done to point out that while we have good results. This quarter, we are still working on it and so I expect more from that from that segment.
The next question is coming from Jack Meehan of Nephron Research. Your line is open.
Thank you and good morning.
Wanted to ask about recurring sales just given the instrument upside in the first quarter.
What does guidance now assumed for chemistry sales for the remainder of the year was curious whether you think some of this.
Bolus of upside here could have some carry through on the recurring growth expectation.
Yes, so Jack.
Good morning, and great question.
The instrument growth really continued to drive recurring revenue growth, both chemistry and service at this point of our guidance sort of assumes of service and chemistry would be around high single digits low double digits for the second half of the year.
But again I mean this thing is not just here in mountain view.
We will continue to produce revenues over the next seven eight years.
The way we are performing on instrument placement. We also think our extra lengths on recurring revenue because you've now muscle strength and systems and processes. So that the entire organization looks on instruments or the recurring revenue.
And then look I mean, there too.
Historically.
We've seen recurring revenues slightly higher than mid single digits and the best years of waters and we've now for few quarters running.
Double digits or low double digit type so even this quarter. If you were gone for the one fewer than the previous year.
Recurring revenues would be would be almost 10% right. So feel extremely good about it in particular.
The new product contribution and what we're seeing from our service team.
New product contribution being Maxine Premier and.
A very rich pipeline that is specifically targeted towards large molecules.
As the world leader in separations.
And we are really turning our attention to complex large molecule collaborating with our customers and on the service side.
Remember, we talked about increased attachment rate that is also countries that is continuing to contribute.
And our attachment rates for our service service are increasing so it's not just.
The.
Translation of instruments to.
<unk> consumables and services.
Also unique contributions of new products and interesting innovation on the service side.
So really excited I mean, as I said, when we brought the team across the board there has been great performance.
E Commerce is accretive.
<unk> more than a high volume, so theyre, all adding up to sort of cutting revenue.
And our last question is coming from Dan Arias of Stifel. Your line is open.
Hey, good morning, guys. Thanks for the question Mark just as a follow up to the things that you've done on the supply chain, how much inventory safety stock on critical components would you say you have at this point.
It's a good question and a tough one.
Yes.
Try to build safety stock, we can buy Midland Lee.
The situation on electronic components.
Sure.
Any worse since Q4 or Q1.
<unk> been in payout.
So.
Part of that is in the $54 million or so that the inventory has gone up when there are components.
Production plan in Q2 likely more of a demand lever.
We may be missing components.
And we continue to try to solve these problems either with their suppliers automobile market Oct, we would normally do engineering.
So.
If you wanted to assume everything is solid I mean in the MP, we are far from it.
Not custodian.
What life science tools buys from electronics.
<unk> supplied us with less than probably single digit percentage of their annual production. So.
Everybody's in the same queue behind.
All of our networks in Europe .
Vehicles right.
Life is on and we are continuing to navigate it.
And then it's an excellent question.
As im all that summarize.
A deeper understanding of the supply chain not just ours, but also the chips and who else is getting them that gained a lot of discussions across tier one tier two tier three.
Many top to top organizations and then finally collaboration and creative problem solving I mean, that's what's gotten us this far.
And our teams are continuing to do it the fight is far from over right I mean, we see it still out there.
But I think if there is an algorithm.
Again, as I said earlier and knock on wood as I say, we seem to have something in our hands and our teams are dedicated to solving these problems.
Let me now thank you for your participation and on behalf of waters as management team I'd like to thank you for your continued support and your interest I would also like to make you aware that they're hosting our <unk>.
<unk> 22 Investor day in just over two weeks on May 19th in New York City at the New York Stock Exchange starting at 830 am Eastern time. The main presentation from the event at any M will be broadcast will be webcast live on our Investor Relations Web site. If you would like to join US in person for the event. Please reach out.
Through our IR team via the contact details on slide 13, Thank you very much and have a wonderful day.