Q2 2022 Waters Corp Earnings Call
We've seen this commitment across all our teams in regions and it is it truly reflects the indomitable spirit, we have here at waters.
Turning now to slide three we have three messages.
Our strong commercial momentum.
It's driving great results and end markets that remain healthy. This is reflected in the broad sustained growth, we are delivering across our products geographies and end markets.
Customer demand remains robust with orders that again.
Again outpacing sales.
As our strong momentum continued with double digit sales growth again in the second quarter.
Innovation is contributing meaningfully to our growth.
Refreshed product portfolio is highly competitive in providing key benefits to our customers, which is again driving strong adoption of these new products as well as market share gains.
Overtime, we expect that the strong instrument placements and resulting expansion in our installed base will drive growth in recurring revenue tied to these instruments and thirdly, we have a robust business model, serving in attractive and resilient base, what ourselves and markets with sustainable growth drivers that are linked to key.
Areas, such as Perl still count population growth and increasing regulatory requirements around testing.
With our strong business model, we have growth levers.
That exist throughout the market cycle across instruments services Chemistries and informatics.
Growth in one of these areas usually results in volatile performance across our business model and you can see this today with a strong pull through of instrument sales into higher attachment rates, which is again driving.
Driving recurring revenue growth.
Now moving on to slide four.
In the second quarter, our revenue revenue grew 5% as reported and 10% on a constant currency basis with broad strength across our end markets and geographies as well as in both instruments and recurring revenues.
<unk> in the quarter exceeded sales of $714 million as we continued to see very strong demand from our customers.
Our Q2 non-GAAP adjusted earnings per share was $2 75 up 6% year over year, Despite FX headwinds.
The impact of FX headwinds lowered our non-GAAP earnings per share growth by 11% versus the prior quarter I'm also cover the impact of FX in more detail later in the call.
Now looking more closely at our topline results for the quarter on slide five in constant currency.
By operating segment Waters' Division grew 10%, while EBITDA grew 12%.
By end market, our largest market category pharma grew 10% industrial grew 8% in academic and government grew 16%.
In pharma, we saw continued broad based strength across segments geographies and applications with growth in large molecule and small molecule applications.
Growth was led by the U S, which grew mid teens with large molecule applications growing twice the rate of small molecule applications, China, which grew in mid teens, and India, which grew and grew 12%.
Industrial growth was driven by the U S up mid teens Europe up high single digits in India, which grew over 50% are food and environmental business is performing well with DFAST testing also positively impacting growth.
In academic and government after seeing a slower recovery recovery than our other end markets last year customer spending continued to be more active during the quarter with mid teens growth for the quarter led by strength in China, India and the Americas now by geography sales in Asia grew 9% the Americas grew 15% in <unk>.
<unk> grew 7%.
In Asia growth was led by China, where sales grew 9%. Despite the presence of COVID-19 related lockdowns for much of the quarter.
Customer demand in China remains strong and we are observing great activity levels, which rapidly picked up in June relative to April and May when the Lockdowns were in effect. Meanwhile, sales in India grew 24% the.
The Americas was again, our fastest growing region of the U S growing 14%, which was led by strong instrument sales, which grew 20% along with recurring revenues, which grew 11% and Europe . The growth was led by pharma invest in industrial which both grew high single digits.
By products and services instruments grew 12% without LC mass spec and da portfolios each growing double digits recurring revenues grew 8% with chemistry up 9% and service up 8%.
New products again contributed meaningfully to growth in the quarter with unit sales of arc, HPLC and acuity premier more than doubling versus the second quarter of last year.
Unit sales of Mack speak Premier columns also more than doubled and have continued to add strength and incremental growth to our chemistry business driven by in large molecule applications and.
In mass spec, we saw strength across our portfolio, including for our <unk>, TQ Xs and cyclic IMS instruments.
As well as strong traction for our newly launched vivo TQ absolute.
<unk> sold out at launch and has already developed about a backlog.
Estimates are seeing the value that <unk> absolute provides an application areas such as food safety and pharma development at small and large molecules small molecule applications given its dramatic leap in performance and efficiency compared with other instruments in its class here.
Here in New England, One state public Health Laboratory was the first to purchase an installed at EQ absolute for the express purpose of DFAST testing and water and environmental samples.
That customer told us that <unk> absolute is giving them 100 to 404 and increase insensitivity versus the prior instrument wireless being far easier to use in terms of sample prep and quickly giving them highly accurate results.
Meanwhile, at the high end, we're seeing good demand for our cyclic ion mobility technology.
One example, as researchers at MD Anderson Cancer Center at the University of Texas, We are using it for position molecular profiling within Omics research we're.
We're getting feedback that it is enabling significant progress in discovering and validating novel blood and plasma biomarkers for early disease detection in oncology.
Finally, <unk> had another great quarter with sales up 12% led by strong growth in thermal analysis micro calorimetry and rheology.
Demand for <unk> products continues to be strong across all regions led by electronics and batteries.
I'm moving to slide six I would like to reflect on the excellent strength and momentum we have sustained in the first half of the year driven by our commercial execution product innovation and pricing offsetting inflation, leading to these great results.
So far this year instruments have grown almost 20%.
Recurring revenue up just under 10% against strong.
Stacked comps last year.
In the U S instruments have grown over 35% year to date.
All of our regions have seen growth led by Americas, which has grown 20 years, 20% year to date.
Meanwhile, China has grown low teens, despite the COVID-19 related lockdowns, which which we were able to successfully navigate through in both the first and second quarters of 2022.
Each of our end markets have seen double digit growth, which speaks to our broad execution across regions and segments.
Meanwhile, we continue to observe strong demand from our customers and are seeing ongoing positive impacts from our market growth initiatives.
Turning to slide seven.
By each of these initiatives continue to progress.
Areas I would like to highlight this quarter, our service attachment E Commerce adoption and launch excellence first with service attachment, we're seeing strong pull through of our instrument sales into service plan coverage, which has driven our attachment rates over 100 basis points higher so far this year, which is ahead of our.
Patients and builds on excellent results last year.
The progress, we're making with service underscores the opportunity ahead to grow our recurring revenues, which layers on top of our instrument growth.
Second also part of our recurring revenues E. Commerce adoption of chemistry has continued to move higher which is having a positive effect positive effect on sales by making it easier for our customers to do business with us and driving incremental growth opportunities.
1% of our chemistry is now sold through digital channels, which is a 10 point increase compared to 2019, when the initiative began and we see further runway to over 50% in the long term.
Since we started the initiative in 2019 revenue from digital sales has more than doubled and in the first half of this year. It grew over 30% versus the first half of 2021.
Third our revitalized portfolio is contributing to growth as demand has scaled up for arc, HPLC, but acuity premier and Max peak Premier columns, our product vitality index has grown 300 basis points versus the second quarter of last year to 15% as sales of these products have quickly.
Armed with launch excellence and impact of innovation driving strong market uptake as I've shared before acuity premiered on Max week premiere was specifically designed to solve.
Challenges that are particularly relevant for large molecules. This technology is capturing growth opportunities as pharma customers seek to expand their capacity and build capabilities for biologics and novel modalities, such as oligonucleotides mrna and peptides.
Meanwhile, small molecule growth remained solid with customers continuing to refresh and expand their capital equipment with Archeage plc.
Now on slide eight in June at SMS, We announced our new <unk> high resolution mass spec the.
<unk> is our latest generation bench top to tops.
And it provides increased sensitivity and range for large molecule analysis over its predecessor, the <unk>, which is one of our best selling high res mass spec products. This instrument. This instrument as described by our customers as an analytical workhorse given that it offers to power and range needed to characterize complex bioterror.
Felix while also providing the reliability robustness and reproducibility needed in late stage development.
As biologics and novel modalities increasingly move into later stages. This instrument supports associated workflows by allowing more detailed characterization of these molecules and product and process development.
First before they moved downstream into higher volume manufacturing QA QC routine analysis will then be performed on instruments, such as bio CT.
A further key piece of innovation is the software we've developed on waters connect which allows the compliant workflows developed on the G. III to seamlessly transition to bio CT with just a few mouse clicks.
This ease of transfer had been unheard of before now and it allows our customers to transfer data between instruments and global locations within their enterprise network, all while remaining in an industry compliant setting.
On waters connect our latest stops are enabling exciting new analytical areas for the <unk> and bio cohort, including cell culture media analysis.
And peptide analysis with in depth protein and black and profiling.
Most recently, we've added the ability to characterize oligonucleotides and conduct impurity analysis as well as perform lipid nanoparticle compositional analysis and stability testing, which is highly relevant for mrna molecules.
These are all new analytical areas in large molecule characterization, where there is a lot of long term potential as the market looks for more advanced characterization capabilities for biologics and novel modalities as.
As they continue to innovate and expand our offering we are increasingly well positioned to support biologics and novel modalities as they move downstream into routine analysis.
Now I'd like to pass the call over to them all to continue covering our second quarter financial performance and provide our guidance for the remainder of 2022.
Thank you and good morning, everyone.
<unk> already covered the breakdown of our sales growth for the quarter. So I will now cover the remaining elements of our non-GAAP financial performance, what's the supplier.
Gross margin for the quarter was 57% compared to 58, 9% in the second quarter of 'twenty or 'twenty one.
Driven primarily by foreign exchange headwinds from the strong U S dollar as well as higher instrument mix.
Pricing for the quarter was over 300 basis points.
Fully offsetting the impact of material and freight inflation.
Operating margin for the quarter was 28, 4% compared to 29, 2% in the second quarter of 2021.
This represents 70 basis points of margin expansion in constant currency before 150 basis points of foreign exchange headwind.
For the first half of the year operating margins have expanded 120 basis points before 80 basis points of foreign exchange headwind.
Our effective operating tax rate for the quarter was 14, 1%.
Average share count came in at 65 million shares, which is about $1 6 million less than the second quarter of last year.
Our non-GAAP earnings per fully diluted share for the second quarter increased 6% to $2 75.
In comparison to $2 60 last year.
The foreign exchange headwinds lowered our EPS growth by 11%.
On a GAAP basis.
Earnings per fully diluted share was $2.72 compared to $2 69 since last year.
A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning.
In the appendix of our earnings call presentation.
Turning to free cash flow capital deployment, and our balance sheet, we define free cash flow as cash from operations less capital expenditures and excludes special items.
In the second quarter of 2022 free cash flow of 67 million after funding $39 million of capital expenditures.
Excluded from free cash flow was $11 million related to the investment.
<unk> precision chemistry operations, and a $38 million tax reform payment.
Our free cash during the quarter was impacted by a proactive measures to secure supply and rebuild safety stock, resulting in a $40 million increase in inventory before the exchange rates.
Additionally by.
Aiming of shipments and installations, particularly in China resulted in an eight day increase of DSO to 81 days and an increase in accounts receivable of approximately $60 million before FX.
We expect this dynamic to correct in the second half of the year as we have already absorbed an increase in collections in July .
For the full year, we anticipate being close to our historical free cash flow conversion levels.
We maintain a strong balance sheet access to liquidity and a well structured debt maturity profile.
This strength allows us the ability to prioritize investing in growth, including M&A and returning capital to shareholders.
We continue to evaluate M&A opportunities that will meaningfully accelerate value creation in rail taught out attractive high growth adjacent markets.
In Q2.
We repurchased approximately 479000 shares of our common stock for $152 million.
At the end of report net debt position was approximately $1 1 billion with a net debt to EBITDA ratio of about one one.
Now as we look ahead for the remainder of the year I would like to provide some updated context on our thoughts for 2022 which is on slide 10.
We've seen continued strong performance this year.
We win by robust market demand and strong commercial execution across all our geographies.
As we look ahead, we expect a solid momentum to continue and that our near term growth initiatives.
<unk> will provide a lasting contribution to our performance.
We also expect to continue to successfully address supply chain constraints and inflationary pressures assuming these challenges do not worsen over the remainder of the year.
These dynamics support increasing the full year 2022 guidance to nine 5% to 10.5% constant currency sales growth up from our prior guidance of seven 5% to 9%.
At current rates of negative currency translation is expected to subtract approximately five percentage points, resulting in full year reported sales growth guidance of four 5% to five 5%.
Gross margin for the full year is expected to be about 58% and operating margin is expected to be approximately 35%.
Resilient business momentum to be able to mitigate the impact from exchange rates.
We expect our full year net interest expense to be approximately $35 million and full year tax rate to be approximately 15, 5%.
Average diluted 2022 share count is expected to be approximately $64 million.
Our share repurchase program will continue into the year and we'll provide quarterly updates as appropriate.
Now rolling all this together and on a non-GAAP basis full year 22 earnings per fully diluted share are now projected in the range of $11 95.
$12, five which includes a negative currency impact of approximately nine percentage points.
Currency impact.
<unk> incrementally more worse than our previous guide Hollywood, our stronger than expected results for Q2, and our increased full year growth outlook are expected to offset the currency headwind.
Looking to the third quarter of 2022 we expect constant currency sales growth to be 8% to 10%.
At today's rates currency translation is expected to subtract approximately six percentage points, resulting in third quarter, the bulk sales growth guidance of 2% to 4%.
Third quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $2 <unk> to $2.60. This includes a negative currency impact of approximately 10 percentage points.
Now I would like to turn it back to the fore.
Some summary comments.
Thank you Rommel.
Summary, we are pleased with our sustained broad strength for the quarter.
Which was driven by a strong commercial execution and the impact of innovation and a highly competitive refreshed product portfolio.
<unk> has remained strong across our end markets as we've continued to capture growth opportunities in both large and small molecule applications food and environmental testing and battery materials analysis, which each have long term durable growth opportunities that we are well positioned for that.
Our strength, we're raising our full year constant currency sales growth from sales growth guidance from seven 5% to 9% to nine and a half to 10, 5%.
Meanwhile.
We have delivered great operating results, despite the challenging macroeconomic environment and for EPS. Our strong results for Q2, and our increased full year growth outlook I expect it to offset the impact of foreign exchange headwinds with that now.
Now begin the Q&A session.
Operator.
As a reminder, if you'd like to ask a question. Please press Star then one remember to record your name and company clearly when prompted if you'd like to withdraw. Your question you May press star two and.
The first question comes from Vijay Kumar with Evercore. Your line is open.
Hey, guys congrats on the quarter and thanks for taking my question.
Maybe my first one for you you did mentioned orders.
We're about <unk> of revenues in the quarter.
Can you give a little bit color on where the order strength is coming from which customer segment with car class and any comment on order growth rates. If you will I think in the past call. There has been some debate on instrument pull forward to color on older orders would be helpful.
Sure. So firstly, thank you VJ really it's been another fantastic fantastic quarter.
And.
The growth has again been driven by instrument instruments really leading leading the charge orders came in ahead of ahead of sales again, which increases our backlog from a demand perspective, it's really very much broad based I mean pharma grew 10% industrial 8% and you also saw ACA.
EMEA rose, 16% and for the first half of the year all three of our end market segments are now in the double digit range types of pharma is 14, industrial and applied as well in academic and government at 10%. So we see really broad based demand across our end markets and from a geographic perspective.
Again nice momentum across the board in the U S and India sort of leading the charge the U S at 14%, India at 24% and a very nice to see China really in the high single digits at 9% and again first half of the year.
Because at plus 20%, China mid teens, India again in the <unk>, so really broad based strength across.
Customers and geography, and we see really no no sign of any sort of any sort of slowdown.
That's helpful and maybe one for Omar.
I think FX mortgages said incremental 50, plus and so what is the total impact now.
Close to a dollar.
Your guide implies back half gross margin step up.
Why would gross margin step up if you have this FX dynamic and I think youre also assuming taxes steps up in the back half.
First half has been sub 15% so.
Any color will be helpful.
Yes, So let me take those three one by one so on exchange rate for the full year guidance last time was about 45.
Now, it's 9% did worse or dollars and one cent. So incrementally 56 sensors and that plays out across Q2, Q3 and Q4.
And so if you see we are covering that 55 things, we can better business performance.
33, 31 off that already came in Q2, because Q2 versus our previous guide the exchange rates were worse off roughly by 18.
And we delivered 15 cents.
Higher than our guidance midpoint. So a total of 31 and then in Q3 when we.
Guided last time, there was embedded assumption of eight cents ethics and now its 26 cents.
Without sort of create so.
18 headwind on Q3, which is reflected in our guide for Q3.
So that's the story on FX.
Turning to gross margin. So look I mean typically in the second half of the year, we have more sales in that producers volume leverage both in terms of.
Our operations in absorption and also in the first half of the year two things happened right. One there was more activity around spot buys and that flowed through the P&L, we expect that activity to somewhat slowdown I mean, the whole supply chain situation is improving but improving in baby steps.
Clearly not out of the woods, but it feels a little better than before and the second piece is the exchange rate moved so quickly that you have transaction and translation gains and losses that also flowed through our cost of goods, which is reflected in the gross margin.
Net of those things we think in the second half you will see a better impact on the gross margin side.
And then the third question on the tax yes, the tax rate for the first half of the year is lower than $15, five, but thats driven by one off discrete items, which we don't think will repeat in the second half and there'll be some catch up Q1 sort of how our phasing of the properties across the year. So at this point 15, 5%.
As a prudent guidance for tax rate.
So maybe just one sort of summary comment on on really the very precise a nice description that I'm all has given.
Our top line continues to do extremely well.
And we've just guided to a double digit growth for the full year after funding of 6% and 16% growth for the for last year, and then 16% in Q1 first half of the year in the teens. So topline momentum continues this flows very nicely through the P&L.
And the EPS on an organic basis is in the high teens.
Even for the full year and the guide right on an organic basis, it's in the high teens, which basically sets us up really well as we go into next year.
In our trends in our sort of results.
There is no benefit of covered or M&A embedded right. So it's a very clean number that you can build off for the next year and shows the strength of our business provided we continue to deliver on the topline and with resilient end markets with great innovation in such a such a good team executing we feel very good about where we stand exactly I mean.
To build on our 55 sticks with us in the baseline and 55% of adverse effects.
Once the currencies the correct it will come back.
Yes.
Thank you and our next question comes from Luca <unk> with Barclays. Your line is open.
Alright. Thanks for the question guys. So I want to follow up what you were just talking about with the kind of the jump off point you guys are doing like high teens right now from instrument perspective, and then.
How should we think about that being able to continue to run here you gave some backlog commentary.
Youre starting to build on the high end mass spec in on from a new upgrade cycles. So just give us how give us a sense of how you guys think that that continues to progress throughout the rest of the year and even early into 'twenty, three and a potential recessionary environment.
Yes.
Look firstly, thank you for the thank you for the question I mean, we're very pleased with our with our performance I'll start with the back end of your question and answer your instrument question as I go through the go to the growth of the answer.
Relatively speaking when we look at our competitive environment I mean, we're performing extremely well right and instrument has been a big instruments have been a big part of big part of the story there in the first half as you mentioned instruments are growing close to 20%.
And overall.
Overall, 13% or so growth in orders again being higher than sales.
Yes, we read a lot about the macro challenges, but if you look at what we've been through from an execution perspective, and now less than two years I joined I think less than two years ago.
We've gained a leading position.
During a pandemic.
Innovation is starting to contribute meaningfully to growth.
So I have a lot of faith in the team that has been able to pull this off so if at all there is a downturn, which.
Which we don't see you see from what.
What we have is the ability to our end markets and across our end markets, we're extremely well positioned even back in 2009.
Waters was one of the fewer come few companies that showed a positive EPS growth and today, we are even better positioned right. So if you just look at our portfolio.
At that point, we had 40% recurring revenues today, it's over 55% our end markets.
Where we're seeing incredible strength, especially with large molecules in pharma.
End markets were over 60% levered towards pharma and that too.
In late stages of final, which is super resilient in applied industrial and applied over 50% is in food and environmental and in the <unk> segment, more and more levered towards higher growth segments like batteries. So feel extremely good about how we're positioned towards the in the end market end market as well.
And with such.
Traction, even with such heavy headwinds from FX, we're able to deliver.
Deliver and commit to the EPS that we signed up four signed up for before so I feel extremely good about where we are now to your instrument question look historically instruments. If you just look at waters is to you over the last 15 years, our 3% to 4% growers.
Clark, 19% so it.
It's naive to think that we will.
We will.
We will continue to be at 19% or so an instrument growth. So I'm sure. It will slow down, but we have a lot left.
<unk>.
From the initiatives that we started early in the replacement cycle is still ongoing we expect this to continue to grow for the next two to three years.
Better and better attachment rates as a consequence.
Spanning into new segments.
With <unk> and <unk>, so feel very good about where we are in the implementation of our initiatives and that continues to benefit the instrument growth rate. So in summary to your instrument question.
No don't expect 19% growth forever, but do we expect our initiatives to help us continue to drive higher then.
The 3% to 4% that we've seen historically I hope that gives you more color.
Does it does.
And then on China can you talk about I mean, you guys are guiding to two to 300 basis points in the quarter came in at 9%.
So talk about how that kind of paced out versus your expectations.
And then the low to mid teens guide is essentially there already within the first half performance. So how should we think about China in the back half.
Yeah.
Firstly incredibly proud of the team I mean, if you'd asked me in April and May where we were going to land I mean, it was that it was the headwinds that we talked about.
In June incredible incredible performance.
The teams to.
To be able to ship the products that we did and get them to our customers. So feel very good about what we achieved and for the back half of the year I mean, the full year, we think we'll be in the mid teens for China.
No real slowdown again strength across all end markets.
And also in the Ta business sites, so strength across pharma, especially where we see our instrument replacement cycle doing very well Ark HPLC doing very well increasingly the biopharmaceutical applications from our Premier technology acuity Premier.
Doing very well so across the board in China feel extremely good from a demand perspective, so mid teens for the full year barring any significant shutdowns in that geography, just one thing to add last year, we had.
Shipment issue in Q3 and.
And so close to $12 million of sales moved from Q3 to Q4.
The baseline for Q3 somewhat lower and so you will see a more pronounced growth in China in Q3, but a more subdued growth in Q4 because of last year's shipment dynamics.
It's a lumpy sort of environment as you can see quarter to quarter, but I mean overall.
16% growth last year mid teens already.
At the Middle point of this year.
We feel very good where we where we sit today.
Thank you and our next question comes from Dan Brennan with Cowen Your line is open.
Great. Thank you thanks for taking the questions guys. Congrats on the quarter maybe just.
First question just coming back to the answer that you just provided in terms of the macro you guys sound very confident which is great.
The perspective that we have is like I guess, an OE you guys were up four 5% in Illinois, you contracted around around the same amount to a nine point swing and as you mentioned the business dramatically different.
Plus all of the commercial initiatives that you guys are executing so well I don't think hopefully most of US don't expect another recession like we had back then but net net to the extent that the economy does continue to slow presumably borders won't be immune from that so could you just give a little more color about like the sensitivity or lack thereof across your different businesses.
What what might be a decent starting point to think about if in fact, the economy does worsen how you would react in that in 'twenty three.
I mean, especially Don Thank you for the question.
It's similar to what I, what I just mentioned I mean, let's just take each of the end markets in turn.
And the composition in each of the end market side, so in pharma in particular.
Amongst our peer group, we probably have the highest.
Higher exposure to late stage pharma, QA, QC, which is which is more proportionate to pill count and recession or no recession people don't stop taking medicines and they don't stop.
Pharma companies don't stop manufacturing.
Manufacturing there their medicines, if anything the R&D funding starts to slow down right, so being levered more to QA QC and pharma is very helpful. Both in small and large molecules second.
If you look at our industrial and applied segment over half of it is now food and food and environmental again food safety, especially in our food DFAST testing with our with our renewed portfolio is a strong strong growth driver both in food and environmental.
Testing and then in the Ta business that starts to look quite different right. When the batteries testing segment, becoming larger and larger so we're looking at more secular drivers across.
The end markets and the growth is broad based I mean, the businesses geographically quite disparate right. So we have significant presence ex U S. I mean, which of course.
When the U S dollar strengthens we have to offset quite a significant.
Difficult FX impact.
But it's much more diversified and it's much more helpful than when you see changes across different geographies happening are different and different base. So feel.
Really good about where we stand in terms of in terms of our end market exposure.
This market response to innovation and you've seen that already right. So back when I joined less than two years ago.
People were telling me hey, the waters is levered towards the small molecule <unk> segment and this is commoditized.
Well we've.
We've just shown quite the opposite with arc HPLC coming in.
Better performance without having our customers re file their processes and reevaluate.
Testing and we've shown that segment growth. So this market response innovation and we are in a very very good place from an innovation standpoint, and finally and most importantly, we have a team here with us that has navigated through the pandemic through macroeconomic challenges.
While eight out of nine of US now new in our seats right. So I'm very very confident that whatever the economy throws at us we will be able to deal with it and we are in a very good position versus what you saw back in 2008 and 2009, even than what is was able to navigate pretty pretty effectively.
So I hope that gives you more color.
Thank you and our next question comes from Matt <unk> with Goldman Sachs. Your line is open.
Yes, hi, thanks for taking my questions and congrats on the quarter, maybe the first question.
I know you've talked in the past about the academic government market and that was an area of focus for you going forward clearly some of the initiatives that you did there paid off with the growth you saw this quarter can you just maybe talk about what was the inflection for that end market. This quarter was at waters specific initiatives or is there something going on in that particular end market that.
And that growth and how sustainable is that in your mind.
Matt. Thank you for the question.
Very very happy with where we are with academic and government I mean, the first half of the year double digit growth this quarter, 16% or so growth, but I'll remind you that this is a lumpy market and we have a low base from last year I'd say, if you look at a three year stacked growth rate were roughly four ish percent inorganic.
Inorganic growth rate in that segment.
Very heavily levered towards Ottawa.
Towards instruments and instrument is doing extremely well this quarter and last quarter. So.
Still rather volatile segment, because our lumpy segment because of the heavy instrument portfolio that we have in that segment that said we are.
Have initiated or our focus on our turnaround in that segment, but we are far from done right. So we still have work to do on increasing our E. Commerce presence any procurement presence I mean, that's going well, but not but not yet done.
From a commercial standpoint.
Initiating and.
Initiating our kols contacts, which help and help with without high resolution mass spec portfolio, even though the portfolio has renewed from a commercial standpoint, we still feel we have work to do so while we are happy with the results I would not declare victory yet.
Thank you and our next question comes from Josh Waldron with Cleveland Research. Your line is open.
Good morning, Thanks for taking my questions just one for rooted in one for a more muted.
Routed orders again outpaced sales.
Can you provide more context on the backlog at this point I guess, the magnitude of the backlog and the level.
Visibility you think that provides into the second half.
And maybe even into 'twenty three.
You had previously commented you didn't think orders are benefiting from pull forward is that still your sense.
Yes, so Josh Thanks for the question no pull forward orders are still higher than sales all end markets. As I said before are doing doing doing well so feel good about where we set where we stand on stand from a demand perspective.
And it's too early to talk about 2023, right. So there's the balance of the year to navigate in.
In a dividend environment.
That said the demand drivers are still there innovation is doing very well.
We view that.
<unk> presence is.
Commercial execution is helping us grab opportunities differentially, so and versus versus our competition.
Thank you for the question, but I know Paul forward feel very good about where we stand from a demand perspective.
Got it.
All I guess in light of that and in light of the stronger than guided Q2, the backlog build.
Half guide organic guidance seems a bit conservative.
Can you comment on the considerations that went into the updated organic growth guide, maybe where there might be opportunities for upside maybe risk to the downside and then the guidance seems to assume.
A lighter Q4.
I mean is there concern around budget flushing or anything like that that's being reflected in the guide.
Yes, we look at it.
Q3 guidance.
Adjusted for the shipment of shoes like 6% to 8%.
The implied Q4 guide is sort of five to seven adjusted for the shipment is.
6% to 8%. So again, you know what I mean at this stage, we have visibility in our pipeline for Q3 Q4, we feel good about it.
But at this stage.
Good to be prudent, especially for Q4, so we feel good about where the guide is at this stage.
Beams, continuing to execute flawlessly and continue to beat our expectations.
And then I think I didn't address your backlog your backlog question I mean, the backlog is at healthy levels right waters did not have for a while.
I would say a healthy backlog, we feel more than announcing at least a bit better than we have a reasonable backlog, it's not it's not.
In.
It's not it's not.
It's reasonable and it but it's not super Super substantial rate, it's reasonable and allows us to navigate through any sort of evidence, but a lot of visibility into Q3, and we feel good again about how Hollywood land they will land the year.
Thank you. The next question comes from Rachel <unk> with JP Morgan Your line is open.
Great. Thanks for taking my question. So first off on pharma drug pricing reform continues to be a headline topic can you just walk us through how you see that impacting waters portfolio, especially given your unique exposure in small versus large molecule.
And then have you started to have any conversations with your pharma customers regarding drug pricing reform and do you expect that it could have impact on your pricing power.
Right.
Thank you for the question really no no.
No impact that we've seen no discussions from a customer perspective on on what they are expecting I'll remind you we are again.
Focus more on the late stage.
Late stage part of.
Late stage part of.
Of the pharma value chain site level to QA QC.
And.
Our costs are such a small portion of pharma.
It usually does not impact us right. So we don't expect that to be a discussion on Cogs is such a small portion of most pharma companies sales that it.
Not a place where they look for.
For costs. So we have not seen that in the past when pricing discussions have come up and we don't expect it and we don't see any any signals right now and we don't expect it to be in the future given that we are in the QA QC domain and call because it's such a small portion of their cost base now in the early stages of research, perhaps there could be an impact, but we think as I said, we are very new.
Towards QA QC.
Next question comes from Derik de Bruin with Bank of America. Your line is open.
Okay.
Hi, Good morning. Thank you for taking my question. So I'm, just curious really good growth in India, 24%, but I do recall that.
A few years ago, when the dollar depreciated strongly against the repeat of some of your customers in India.
Didn't have enough money budgeted.
So they didn't have the purchasing power to smoke out and go out and do it and then it sort of delayed orders the combination of FX and price increases are you worried at all about.
And the emerging economies, particularly India to the slowing in demand because it has to be done on.
The budgets.
So I'll start off Delek and I'll, let Tom will comment a little bit on the FX piece as well.
India has been doing extremely well.
Given the demand for small molecule.
Production again reviving some of this has to do with the government initiatives in India that were initiated last year and us being so heavily focused on that part of pharma QA QC for genetic SKU atoc for.
Small molecules in India.
<unk> seen an outsized benefit and Thats continued well into this year. So it's a fundamental demand driver that we can explain based on based on government policy.
And again driven heavily by by instrument growth.
One of those is doing well, but driven heavily by by instrument growth I'm. All you want to comment on the FX piece, you don't know and just to build on what <unk> said right. I mean, we have a fantastic even India and if you go back to the second quarter of last year, when India was going through a very tough COVID-19 environment.
<unk> executed flawlessly and had a great growth in second quarter of last year. So there'll baseline was already high and then again this year do you see 24% growth in the second quarter. So a lot of confidence in that team and then when you couple that with how we have sort of handle pricing through inflation, we've provided excruciating detail.
Transparency to our customers on what's happening on the semiconductor side on the freight side and Thats allowed us to.
Have the customers share the burden of pricing and I think the same processes that we build the same systems that we built are going to start playing a role in explaining the impact of exchange rate and U S dollar and where our cost base lives and I think not just India, but there are other markets that are in <unk>.
Factored by this.
Commercial teams are doing a great job of providing transparency to the customer so that we can work this through and benign.
Thank you and our next question comes from Puneet <unk> with SVP excuse me be securities.
Yes, hi.
Thanks for taking the questions. So first one.
So I'm wondering if there are any changes in the M&A approach.
You talked about a bin Buster.
Just wanted to get any updated thoughts given the valuations you're seeing in the market here.
Thanks for the question look I mean, our capital allocation priorities remain the same I mean growth is still there and we are focused right and it starts with organic growth. So that's where we allocate capital first and that that is going extremely well and the funding internal innovation with funding our high growth.
Adjacencies seeing really nice results I was at ACC last week with the team on as CMS for diagnostics and there is a clear value proposition.
We're.
As customers discover new Biomarkers mass spec has a meaningful role to play and that was reaffirmed we got out of knee deem we took our commercial team and we had many different workshops, there with different customers and so really feel good about what we're doing from an organic perspective and want to fund that set of Adjacencies.
Separations analytical bio processing as well as.
Batteries, and as CMS and diagnostics and we want to fund that first second from an M&A perspective fairly what you should take away is I mean, we are.
We are of course on the lookout for things that fit into our strategic priorities.
But theres really no rush right I mean, we've announced a few collaborations.
Going extremely well, especially the one little Torres.
On the bio analytical characterization space.
Especially upstream.
But really no rush and from an M&A environment perspective lots of discussions ongoing.
Of course on the.
No doubt.
But again Super Super financially disciplined.
Really nothing has changed from the time we spoke.
And as we have conversations I mean of course people assume that memories of their 52 week highs.
In certain areas, but look.
Our organic business is performing very well and our focus remains on that on partnerships.
And we have a list of.
And a nice pipeline of.
M&A targets that we're looking at now constantly.
Thank you and the next question comes from Brandon <unk> with.
Jefferies. Your line is open.
Hey, good morning.
You launched the need to talk with US a long time since you refreshed that product line.
Talk about the importance of that introduction, whether you think it's a needle mover for the mass spec franchise overall.
The near term.
Absolutely.
Randall Thanks for thanks for following up on that look.
It's still it's a workhorse instrument in that segment.
And now along with the instrument being upgraded you also have the waters connect software.
Which is a compliance software that allows not only for us to introduce new applications, but allows us to transition.
Transition methods from upstream.
Half of Q2.
<unk> bio cord directly downstream.
<unk> benefit.
And that that product has done very well, it's already doing extremely well with our customers I mean, the orders are again outpacing outpacing the sales I mean.
Within the first few days of significant backlog developed right. So we feel very good about what we've what we've done there and as I said, it's not just the instrument being more powerful.
In those segments, but it's also the the launch of the waters connect software informatics software that allows for an easier transition into the bio coordinate stages. So again really consistent with our long term strategy and doing analysis upstream and making it seamless for the customers to transfer that.
<unk> analytical method downstream, especially as you look at.
And larger molecules.
Thank you and our next question comes from Patrick Donnelly with Citi. Your line is open.
Hey, guys. Thanks for taking the questions maybe just to follow up on kind of the M&A one earlier at a different angle.
<unk> talked about the large mall growth kind of outpacing small mall I think even double the rate.
Can you just talk about I guess balancing inorganic versus organic investment and that piece again, obviously, a big growth area. You guys are kind of pouring into so can you talk about again, the internal strategy and then also kind of inorganic opportunities on that front.
Thanks. Thanks for the question Patrick look I mean again it starts with the organic piece right. So let's just take.
The bio separations and the bioanalytical characterization.
High growth Adjacencies right on the bio analytical characterization.
<unk> started with our collaboration with <unk> with our work with the University of Delaware.
Develop a deep understanding of upstream <unk> bio processing downstream bioprocess and the team has taken.
And learned that Andy really well.
And I insist I mean before we make any meaningful moves in that area, we must organically developed that business well and I think very good on what we've been able to do in the last year again learning a lot from what's Idoneous does learning a lot from what what's happening at University of Delaware. So significant resource allocation. There, we're not we're not spending any expense as.
As that business grows we've already developed for workflows for the bio card for upstream characterization and one that that is doing extremely well and cell culture media analysis upstream for bio reactors I'm announcing a four other workflows that have also been implemented that are.
That have been received very well so the organic part of the business is doing very well now if you look at the M&A aspects of it that opens up a whole bunch of M&A ideas right I mean for sampling.
For data analytics.
For other analytical characterization methods in upstream and downstream bio processing and Youll hear more about that as we as we go along and our double clicking on on <unk>.
There, we have world leading capabilities in it.
Separating small molecules, we've already developed some nice applications now the demos.
Max Max speak Premier technology.
With our columns right. So two two separate oligonucleotide separate larger molecules meta.
There's a long runway here organically the teams being built up.
Quite substantially on that front, but it also opens up avenues inorganically as we learn more about that segments. It would be nice to be able to work with somebody who has deep capabilities in reagents that are larger molecules right.
And I think thats the sort of thing we're looking at really carefully so.
The organic piece is first and opens up educate us on what is possible. It opens up many possibilities and and that's the sequence of events and we are as I as I mentioned earlier quite active in that in that area. We have quite a quite a few ideas and they are.
And different stages of pursuit at this stage.
Thank you and now back to you Kasper.
Thank you very much.
Thank you for all your audio questions.
You'll agree would mean that we've again had a tremendous tremendous quarter. The team continues to execute in a in a turbulent environment and thank you for your participation and on behalf of.
Entire management team I'd like to thank you for your continued support and interest in waters. Thank you and have a wonderful day.
Thank you and that concludes today's conference you may all disconnect at this time.