Earnings Call
Waters Corp /De/ (WAT)
Earnings Call Transcript - WAT Q1 2023
Operator, Operator
Good morning. Welcome to the Waters Corporation First Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session of today’s call. This conference is being recorded. If anyone has any objections, please disconnect at this time. It is now my pleasure to turn the call over to Caspar Tudor, Head of Investor Relations. Sir, please go ahead.
Caspar Tudor, Head of Investor Relations
Thank you, Brad. Good morning, everyone and welcome to the Waters Corporation first quarter earnings call. Today, I am joined by Dr. Udit Batra, Waters' President and Chief Executive Officer; and Amol Chaubal, Waters' Senior Vice President and Chief Financial Officer. Before we begin, I will cover the cautionary language. In this conference call, we will make various forward-looking statements regarding future events or future financial performance of the company. In particular, we will provide guidance regarding possible future results and commentary on potential market and business conditions, including with respect to the close of the Wyatt transaction, that impacts Waters Corporation over the second quarter of 2023 and full-year 2023. These statements are only our present expectations and actual events or results may differ materially. For more details, please see the risk factors included in our most recent annual report on Form 10-K, our Form 10-Qs, and the cautionary language included in this morning's earnings release. During today's call, we will refer to certain non-GAAP financial measures, including in our discussions of the results of operations. 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 were available on the company's website. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2022. In addition, unless stated otherwise, all the year-over-year revenue growth rates and ranges given on today's call are given on a comparable constant currency basis. Finally, we do not intend to update our predictions or projections except as part of a regularly scheduled quarterly earnings release or as otherwise required by law. Now, I'd like to turn the call over to our Udit, to deliver our key messages for the quarter and then Amol will provide a more detailed look at our financial results. After, we'll open up the phone lines to take questions.
Udit Batra, CEO
Thank you, Caspar, and good morning, everyone. For this morning, I'll start by giving you an overview of our first quarter results, as well as our updated guidance. Then I will cover some of our recent product launches, including the Alliance iS, and I will also provide an update on Wyatt. Our first quarter results were below our expectations with revenue growth of 3% on a constant currency basis, versus our expected 4% to 6% growth. This was largely driven by weaker-than-expected demand for instruments in biotech and pharma, which I will cover in a moment. As you know, we had an extraordinary Q1 last year with 16% constant currency growth. Even though our first quarter this year was slower than expected, it still represents a very healthy two-year stack growth of approximately 9.4%. We also saw good overall strength in our recurring revenues, which continued to grow in the high single digits, as well as mass spec and DA, both of which grew double digits. Our end markets remain resilient, and our leadership team continues to drive strong commercial execution. We have further strengthened our revitalized portfolio with a steady stream of innovative new products. Finally, we've added M&A to our growth strategy with our pending acquisition of Wyatt. And we continue to invest organically in our high growth adjacencies, which are also on track and gaining momentum. Reviewing our first quarter results in more detail; our performance was impacted by a combination of three factors. First, China was weaker than anticipated as pharma customers scaled back purchases. Second, while we have limited exposure to pre-commercial biotech, we have seen a pronounced scale back in demand from these customers as they have significantly reduced spending to conserve capital. Third, several of our large to medium-sized pharma customers delayed the timing of instrument orders due to macroeconomic caution. Each of these dynamics occurred late in the quarter and led to instruments declining 3% after they grew over 25% in the first quarter of last year. By end market, the impact was on our pharma business, which declined 4% overall. This was offset by strength in the academic and government segment, which grew 45%, and industrial, which grew 3%, while our recurring revenues remained strong across service and chemistry. As a result of this lower-than-expected volume, our non-GAAP earnings per fully diluted share also came below our expectations at $2.49 for the first quarter. On a GAAP basis, our earnings per fully diluted share was $2.38. As we look ahead, we are assuming that spending among pharma customers in China will remain scaled back for the balance of the year and while our exposure to pre-commercial biotech is low, we also believe that the slowdown in this space is likely to persist for the remainder of the year. As a result, we're lowering our 2023 guidance due to these two factors. We now expect our fully organic constant currency growth to be in the range of 3% to 5%. We believe that large-to-medium pharma-sized budgets remain in place. We expect spending among these customers to catch up and be stronger in the second half of the year after delayed spending in the first half. Despite our revised revenue guide, our full year EPS guidance and free cash flow generation expectations remain unchanged. We intend to proactively manage our spending and working capital, and Amol will cover this in more detail. Even with short-term market challenges, our sources for growth remain intact. Our end markets are robust, with almost 80% of our business exposed to durable growth areas. This includes demand for QA/QC testing of commercialized medicines, increased scrutiny of PFAs in food and water, and the testing of batteries used in applications such as electric vehicles. Our team has developed a strong commercial discipline that is supported by best-in-class innovative new products that address evolving customer unmet needs. We're also seeing high single-digit growth in our recurring revenues, which are over 50% of our annual sales. Chemistry growth is supported by strong end-market activity, growth in biologic applications with our MAX peak premier columns, and our e-commerce initiative. For service, we're seeing strong pull-through from our instrument sales, and increased service plan attachment is supporting the growth. We expect service plan attachment for our instruments to increase by another 100 basis points this year, building on the 350 basis point expansions in 2019. Our revitalized portfolio has been further strengthened with a recent launch of Alliance iS, which is our next-generation intelligent HPLC system. We believe it is the most significant innovation to hit pharma QA/QC in the past decade, and it provides a major leap forward in lab productivity. Not only is the instrument easy to use with its large touchscreen interface, but it can eliminate common user errors by up to 40%. It does this by guiding users between steps with a highly intuitive interface. It intelligently conducts a number of real-time system checks before a sample is run. This helps ensure that the instrument is configured correctly for the method that is being tested. Before now, errors such as incorrect solvent or the wrong column being used are usually discovered after the sample has been run, which results in wasted time and a wasted sample. Given the strength of the Alliance brand and the significant new features that this instrument offers, we had a strong reception at its launch. Since quality testing is such a critical component of pharmaceutical manufacturing, customer interest has been strong, including from Janssen Pharmaceuticals, who noted that Alliance iS feels like the future is here and has already made plans to replace a large number of its LCs with this instrument. We now have not one, but two new industry-leading platforms for QA/QC applications in pharma, Arc HPLC and its biocompatible equivalent Arc Premier, and now the higher-end Alliance iS, which sits at the top of the range. Last month, we also launched our Xevo TQ Absolute mass spec into clinical applications. Not only is this the most sensitive triple-quad on the market for PFAs detection, where it has seen strong traction in food and environmental testing, but now, within clinical, it is up to five times more sensitive than other competing instruments in the segment. This sensitivity enables clinical labs to detect and measure trace-level analytes at lower detection levels than was previously possible. It also enables clinical labs to expand their test menu to include multiplex panels. Meanwhile, our TA Instruments business launched a new microcalorimeter for battery testing essential for electric vehicles, energy storage, and electronics applications. This provides customers with a significant upgrade as it accelerates validation of battery safety, quality, and performance testing by up to 75%, while collecting up to six times more data than other calorimeters. Lastly, we also recently launched a new system monitoring software product on Waters Connect, the first-use and unique to the industry. Developed in consultation with QA/QC scientists, it enables real-time monitoring of all chromatography instruments controlled by our Empower software. It helps increase productivity of QA/QC labs by allowing customers to analyze their instrument fleets at any time from anywhere to monitor uptime, usage levels, and real-time system availability. Each of these new products has been developed in close collaboration with our customers to address their most pressing unmet needs. They further support the strength of our revitalized portfolio. Earlier this year, we announced our intent to acquire Wyatt Technology, the recognized leader in light scattering. With more than 80% of its revenues tied to large molecule applications, Wyatt expands Waters' portfolio and increases our exposure to faster growth areas within biologics. It also increases our ability to build a business in bioanalytical characterization, which is a $1.8 billion total addressable market with a 10% to 12% projected annual growth rate. We remain on track to close in the second quarter of this year. We also expect the transition to deliver immediate growth and adjusted operating margin accretion. Now I will pass the call over to Amol to continue covering our first quarter financial results and give additional commentary on our guidance.
Amol Chaubal, CFO
Thank you, Udit, and good morning, everyone. In the first quarter, sales grew 3% in constant currency. This came below our expectations due to the demand dynamics in our pharma business, which Udit outlined earlier. Waters' division grew 2% and TA grew 10%. By end market, pharma declined 4%, industrial grew 3%, and academic and government was very strong at 45% growth. In pharma, weakness was led by China and the US. In China, we saw customers recalibrate their spending plans, and in the US, our large to medium pharma customers delayed spending due to macroeconomic caution. Our small biotech customers, which is a small portion of our business, scaled back spending to conserve capital in light of more pronounced funding concerns. In industrial, growth was led by Asia, which grew 6%, and the Americas, which grew 2%. In our Waters' business, we saw continued strong growth in PFAs testing applications. In TA, growth was led by thermal analysis and rheology. We have seen continued strong demand in secular growth drivers such as batteries and electronic testing. Academic and government had a great start to the year as elevated funding resulted in strong demand for our refreshed mass spec portfolio. Strength was brought across all our geographies. By product, strength was broad across our high-res mass specs such as Cyclic IMS and our tandem cards such as TQ Absolute. Now by geography, sales in Asia grew 6%, the Americas declined 1%, and Europe grew 3%. In Asia, China declined mid-single digits for the quarter. Excluding China, Asia grew mid-teens with broad strength across our end markets. In the Americas, pharma declined mid-single digits given delayed spending against a tough comp of over 30%. Industrial grew 2%, and academic and government grew over 25%. Europe grew 3% in the quarter with strength also led by academic and government, which grew over 40%. By products and services, instruments declined 3% overall, but both our mass spec and TA instrument systems grew double digits. Recurring revenues grew 8% with chemistry up 10% and service up 8%. This quarter had one fewer day than the first quarter of 2022, which translates to a headwind of approximately 1% for our recurring revenues. Gross margin for the quarter was 58.5% compared to 58.6% in the first quarter of 2022 in line with our expectations. Operating margin for the quarter was approximately 26.8% compared to 30.3% in the first quarter of 2022, driven by sales mix and 120 basis points of unfavorable FX. Our effective operating tax rate for the quarter was 15.4%. Average share count came in at 59.3 million shares, which is about 1.6 million less than the first quarter of last year. Our non-GAAP earnings per fully diluted share for the first quarter was $2.49 in comparison to $2.80 last year. Foreign exchange headwind lowered our non-GAAP EPS growth by 8%. On a GAAP basis, our earnings per fully diluted share was $2.38. A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning and 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 first quarter of 2023, free cash flow was $166 million after funding $34 million of capital expenditures, which represents approximately 24% of our sales. 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 wealth on attractive adjacent markets. In Q1, we repurchased approximately 173,000 shares of our common stock for $58 million early in the quarter. As we previously disclosed, we have since temporarily suspended our share buyback program for the remainder of the year, so that we can use our free cash flow to fund the Wyatt acquisition. At the end of the quarter, our net debt position was approximately $990 million, which is a net debt-to-EBITDA ratio of about 1. Now, I would like to provide our updated thoughts for 2023. Our end markets remain resilient, and we expect our refreshed portfolio and growth initiatives to enhance our performance. However, as Udit covered earlier, we are revising our growth to account for the scale-back of purchases from our customers in China and the slowdown in small biotech. As a result, we are updating our full-year 2023 organic, constant currency sales growth guidance to 3% to 5% excluding Wyatt. At current rates, currency translation is expected to have a minimal impact on full-year sales, resulting in full-year reported organic sales growth guidance of 3% to 5%. Consistent with our prior expectations, we expect the Wyatt transaction to add approximately 2.5% to our full-year 2023 revenue growth. Therefore, our total reported sales growth guidance is now 5.5% to 7.5% versus 2022, including Wyatt. We expect organic growth margins to be approximately 58.5% for the year, and organic operating margins to be approximately 30.5%. This is higher than our previous guide due to anticipated cost savings in our core business and an improvement in FX. This now translates to 50 basis points of margin expansion, net of investment in adjacencies, partially offset by an FX headwind of 20 basis points. As we previously mentioned, we anticipate the expected addition of Wyatt in Q2 of this year will be accretive to our full-year 2023 adjusted operating margin by approximately 25 basis points. Including the Wyatt transaction, we expect our full year net interest expense to be approximately $40 million. Consistent with our prior expectations, the transaction is expected to add $40 million of additional interest expense for a total of $80 million interest expense. The full-year tax rate is expected to remain at approximately 15.5%. Our average diluted 2023 share count is expected to be approximately $59.3 million given the temporary suspension of our share repurchase program. Rolling all this together, on a non-GAAP basis, our full-year 2023 earnings per fully diluted share guidance, excluding the Wyatt transaction, is projected in the range of $12.70 to $12.90, which is unchanged from our previous guide, and includes a negative currency impact of approximately one percentage point at current rates. Including Wyatt, non-GAAP full-year 2023 earnings per fully diluted share is also unchanged projected in the range of $12.55 to $12.75. Looking to the second quarter of 2023, we expect the current market dynamics to persist in China, along with the slowdown in pre-commercial biotech. We also expect cautious spending levels from our large pharma customers to continue until the end of the second quarter before catching up in the second half of the year. Hence, we expect second quarter organic constant currency sales growth of 1% to 3%. At today's rates, currency translation is expected to subtract approximately one percentage point resulting in second quarter reported organic sales growth guidance of 0% to 2%. Assuming a mid-May close, we expect the Wyatt transaction to add approximately 1.5% to our second quarter revenue growth. Therefore, our total second quarter reported sales growth guidance is 1.5% to 3.5%, including Wyatt. Excluding the Wyatt transaction, second quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $2.60 to $2.70, with a negative currency impact of approximately three percentage points, including Wyatt, which is expected to result in an EPS headwind of $0.08, second quarter non-GAAP earnings per fully diluted share is projected in the range of $2.52 to $2.62. Now, I would like to turn it back to Udit for some summary comments.
Udit Batra, CEO
Thank you, Amol. So to summarize, despite a slower than expected start to the year, our end markets are resilient and we expect to see increased strength in the second half of the year. While we have revised our revenue guide, we're maintaining our full year EPS guide due to our robust financial model and the acceleration of our growth strategy remains on track, with continued progress on all of our high growth adjacencies, and with our pending acquisition of Wyatt Technology. I would like to take this opportunity to thank our colleagues around the world who've continued to demonstrate the indomitable spirit of Waters with their focus on strong commercial execution and revitalized innovation. We also look forward to welcoming our future Wyatt colleagues. Finally, I'm proud to share that Waters continues to be globally recognized for its strong ESG profile, placing at number five on the Barron's 100 Most Sustainable Companies list for 2023. This is the second year that we've been placed in the top 10 after receiving more than 20 awards in 2022, recognizing the company for excellence in product innovation, leadership strength, and commitment to social and environmental responsibility. We look forward to continuing to demonstrate our commitment to leave the world better than we found it. So with that, I'll turn the call back to Caspar.
Caspar Tudor, Head of Investor Relations
Thanks, Udit. That concludes our formal comments, and we are now ready to open the phone lines for questions.
Operator, Operator
Thank you. We will now begin the question-and-answer session. Our first question today will come from Luke Sergott of Barclays. Your line is open, sir.
Luke Sergott, Analyst
Great, thanks. Good morning, everyone. I want to start by discussing the strong performance in the academic and government sectors this quarter, especially in China. You mentioned that it was robust across all regions. Did you experience any delays from the fourth quarter? Please share what you are observing as we move forward. This seems to be a consistent trend rather than a one-time occurrence.
Udit Batra, CEO
Sure. Thanks, Luke, and good morning. Look, it's a great start to the year with about 45% growth, and this is largely due to the elevated global funding that we're seeing across the globe and the strong demand for our high res mass spec portfolio. This growth was, of course, led by China, which grew over 80% versus the previous year. And of course, we saw the same thing happening not to that same extent in magnitude but in the U.S., in India, and in Europe, all had nice growth well into the double-digit territory. So Academic and Government, as you know, is a segment that's rather lumpy. So I would rather not extrapolate Q1 to the rest of the year. So we assume that we will see the second half that will become more normalized and the full year will be more in the low double-digit to teens range given such a strong start to the year.
Luke Sergott, Analyst
Can you provide more details on how much the biotech customers and large pharma delays impacted the guidance reduction for the year?
Udit Batra, CEO
To provide some context, for our full-year guidance, we are anticipating a growth rate of 3% to 5% in constant currency. When we look at a two-year stacked basis, this still represents high single-digit growth. We believe that similar to the first quarter, spending from Chinese CDMO customers and pre-commercial biotech customers will remain limited for the remainder of the year. Over the past two years, we have significantly expanded our presence in the CDMO market in China, tripling that business. Therefore, we expect the spending in these areas to stay subdued, like in the first quarter. Conversely, we expect that large pharmaceutical customers who have postponed orders for instruments will place those orders in the second half of the year. In the last couple of weeks, I have personally engaged with several large customers in both the U.S. and Europe to gauge their situation. Their funding is still secure, and the purchase orders have merely been delayed, so we anticipate a sizeable influx of orders in the latter half of the year. This leads us to believe that the 3% to 5% growth forecast indicates that China will see low single-digit growth this year, down from our earlier estimate of high single digits. The pharmaceutical sector will also likely remain in the low single-digit range, affected by the combined challenges from the Chinese CDMO and pre-commercial biotech sectors. Instrument sales are expected to show flat to low single-digit growth, while recurring revenues should increase in the high single digits. I hope this gives you a better understanding of the factors influencing our full-year guidance and the downward adjustments we have made. Amol, would you like to add anything regarding the quantitative details?
Amol Chaubal, CFO
No, I think you got it, right. Yes.
Operator, Operator
The next question will come from Vijay Kumar of Evercore ISI. Your line is open.
Vijay Kumar, Analyst
Udit, regarding some of your comments, what is Waters' exposure to the emerging biopharma sector? Was it down by 50%? Can you give any insights into how the business performed? Also, I understand that Wyatt has exposure to large pharma. Is there any risk associated with Wyatt's exposure to the emerging biopharma market?
Udit Batra, CEO
Thank you for the question, Vijay. First, regarding our biotech exposure, our biotech customers make up about 10% to 15% of our pharmaceutical business, with a significant presence in the U.S. and China, where the biotech sector is more advanced. Pre-commercial biotech, which is experiencing a slowdown, accounts for approximately half of this segment, translating to about 5% to 7% of our pharma business, primarily concentrated in the U.S. and China. In Q1, pre-commercial biotech companies became very cautious and significantly reduced their instrument purchases, particularly towards the end of March. Although we are noticing some easing, we anticipate that this trend will continue for the remainder of the year. Looking ahead, it's important to note that the biotech industry is crucial for innovation in healthcare, and they are still very valuable customers of ours. Regarding Wyatt, around 80% of their business focuses on biologics applications. Wyatt has traditionally excelled in academic and government sectors, particularly for biologics applications where we analyze large molecules such as cell and gene therapies, proteins, and monoclonal antibodies. We expect this segment to remain in the low double-digit growth range for the rest of the year after the deal is finalized. This will contribute about 25% to our incremental revenue for Waters in the upcoming months, and we anticipate it will continue to be very strong for the remainder of the year.
Vijay Kumar, Analyst
Understood. Then Amol, one for you. The second quarter EPS guidance implies, I think the operating margins in Q2 to be roughly similar to Q1. Given you really trace the annual EPS guidance, it looks like back half has to be like low 30s operating margins, that's a massive step up, I think, 500 basis points or 600 basis points from doing the math correctly. What is driving the second half margin expansion versus first half? Is there any synergies being baked in from the Spire transaction? Or perhaps is Waters contemplating any restructuring actions?
Amol Chaubal, CFO
So there are a couple of things that play into the second half of the year, right? One is the volume in the second half is typically higher than the first half, and that produces some degree of volume leverage and our gross margin profile in the second half is slightly better than that in the first half. Two, we also benefit from exchange rates in the second half. Remember, in the first half, is still a headwind in the second half, FX is a tailwind. And three, given the revised sort of the demand outlook, we plan to proactively manage our costs and intend to keep our operating expenses relatively flat in the second half versus the first half. And if you are able to do that, then it allows us to produce the kind of margin expansion and EPS that we've guided for the second half.
Operator, Operator
The next question will come from Dan Brennan of TD Cowen.
Dan Brennan, Analyst
Maybe the first one just on the guide. Just wondering, was there a discussion maybe to cut beyond the 3 to 5, just wondering your kind of ripping the mandate of here given some of the factors you pointed to. But do you feel that guide still provides a healthy cushion given all the uncertainties you are flagging? It's still, as you pointed out, Udit, it's still kind of in high single-digit to your stack, which is above your long-term LRP, and you do have these factors and you're banking on a recovery in the back half of the year for large pharma.
Udit Batra, CEO
Thank you for the question, Dan. We spent significant time analyzing what occurred in the first quarter and why growth was lower than expected at about 3%. The slowdown in purchasing from Chinese CDMO customers, who primarily serve US and European pharmaceutical companies, is one reason we believe will continue for the rest of the year. We expect biotech spending on pre-commercial efforts to remain subdued, although we do see some signs of improvement. Additionally, we anticipate a deferral in large pharma instrument purchases, which we've examined closely. I've spoken directly with some large pharma clients who have the budget and funding but have chosen to delay their purchases out of caution. With our revitalized portfolio, we feel confident in competing for orders across our instrument offerings. All these factors lead us to predict that instrument growth will be flat or have low single-digit increases for the year. Recurring revenues have been strong, comprising over 50% of our business, and we expect that to reach the high single-digit category. Pharma, which has historically been a strong segment for us, is also projected to be flat to low single digits overall. Similarly, China, a significant growth driver, is expected to end up in the flat to low single digits range as well. We are cautious with our guidance, considering all these factors while also recognizing the solid outlook for the full year, given our commercial strength and innovative portfolio. The closing of the Wyatt deal should provide additional momentum.
Dan Brennan, Analyst
Great. And maybe just a follow-up, just on instruments, so flat to low single that's kind of a high single-digit stack against what you guys did. You've obviously had tremendous growth there. Can you just unpack that a little bit? It sounds like mass spec doing terrific. Could you just give us a flavor for the relative contribution between mass spec and LC and if you want to give us any regional, I don't know how far down the whole you want to go. But just give us a sense of what's incorporated into that low single.
Udit Batra, CEO
The instrument sales for this quarter decreased by about 4%. As you mentioned, this follows a strong 26% growth in Q1 2022, making for a challenging comparison. Mass spectrometry experienced high teens growth, showing solid performance. Over multiple years, mass spec has consistently shown high-teen growth. The TA segment saw double-digit growth, while LC experienced a decline in the teens. Regarding LC, sales were notably affected by reduced purchases from pharmaceutical customers, particularly Chinese CDMOs catering to U.S. and European clients, along with delayed orders from large pharma. This disproportionately affected LC. To provide some perspective, fluctuations in the instrument business are common. However, it's essential to note that over the long term, our instrument business has seen growth in the 4% to 5% range with a gross margin of about 60%. We analyzed our instrument growth rates from the past 20 years, starting in 2004, and found two key insights: first, average growth typically sits around 4% to 5%, and second, fluctuations tend to be more pronounced during economic downturns, such as in 2008-09 and 2011-12, though volumes generally bounce back within 1 to 2 quarters. Particularly for LC, which constitutes over 70% of our replacement business, we expect any fluctuations to settle back to the average of 4% to 5%. We are optimistic about the return of deferred business, especially given our strong commercial execution and updated portfolio, particularly in the small molecule LC segment, where the Arc HPLC is now enhanced by Alliance IS. For the full year, we still anticipate flat to low single-digit growth for instruments overall, with recurring revenues in the high single-digit range. In the latter half of the year, we expect trends to begin reflecting more pre-COVID patterns. I hope this clarifies our outlook and assumptions.
Operator, Operator
The next question will come from Matt Sykes of Goldman Sachs.
Matt Sykes, Analyst
Maybe just to dig a little bit more on the large pharma side. It's quite clear your expectations for the second half recovery, and this is a delay I'm just wondering, just given some of the news we've seen from some of the larger pharma about rationalizing their R&D spend. Has there been any kind of reprioritizing of those R&D budgets, whether it's inflation Reduction Act, prompting them to move into a large molecule or anything like that? Or do you truly see this as sort of a temporary delay in terms of ordering?
Udit Batra, CEO
So Matt, that's a great question. I reached out to several large pharmaceutical customers in the U.S. and Europe, and our findings indicate that their budgets remain stable, similar to our situation. They are exercising more caution with capital expenditures and taking longer to approve spending, which reflects the current environment in large pharma as well. There hasn’t been any discussion about halting replacements or eliminating planned instrument expansions. Additionally, I want to emphasize that our business is predominantly focused on the QA/QC segment, which aligns closely with manufacturing volumes. Thus, any pressure on R&D spending does not particularly affect our liquid chromatography business, especially since it is more concentrated in the third quarter and on the small molecule front. We don’t see any signs indicating a slowdown in this area. Lastly, I feel very confident about our commercial execution over the past two to two and a half years, where we've seen substantial growth driven by instrument replacements and strong demand for consumables. Keep in mind that consumables are a key indicator of pharmaceutical activity. With growth in that area at high single digits, it suggests considerable ongoing activity among our pharmaceutical customers. We believe that the instrument orders delayed in large pharma will eventually return, and we have ample supporting evidence indicating this is on the horizon. While we've noticed some early signs of recovery, we are being cautious in assuming that most spending will materialize in the second half of the year.
Matt Sykes, Analyst
Great. That's very helpful color. And then just my follow-up would just be on the industrial end market. You've done a really good job in the past of kind of decomposing the subsegments there, and you talked about strength in batteries and PFAS. But maybe could you talk a little bit more about the subsegments where you're seeing some maybe softness and where you're seeing continued strength.
Udit Batra, CEO
Taking a step back, the industrial segment of Waters has undergone significant change over the past 15 years. It is now primarily focused on food, environmental applications, and the thermal analysis business. About 40% of this segment is in the more stable areas such as batteries, which also connects to some life sciences applications. To break down the quarterly results, the industrial business grew approximately 3%, primarily driven by thermal analysis, which saw almost a 10% increase. The demand for PFAS testing, which has been a recurring topic, continues to rise rapidly. In thermal analysis, around 40% of the business consists of these more stable segments with battery applications performing well. Focusing specifically on thermal analysis, it exhibits similar dynamics to the overall Waters division, emphasizing our commitment to commercial execution and introducing new products, particularly those aimed at high-growth fields in thermal analysis and geology. Recently, we launched a new battery calorimeter that establishes a new benchmark in testing battery efficiency and effectiveness. We are optimistic about the future of the thermal analysis business. Overall, for the full year, we project mid-single-digit growth in our industrial business, driven by the ongoing strength in thermal analysis and PFAS testing.
Operator, Operator
The next question will come from Derik De Bruin of Bank of America Merrill Lynch.
Derik De Bruin, Analyst
I have a question for you. I've been following Waters for a long time, and I've noticed some spending patterns in the past. Historically, pharmaceutical companies have postponed their budget releases in the first quarter, with spending typically increasing in the second quarter. However, looking back at historical trends, the third quarter has always been unpredictable in terms of spending since we don’t get clear visibility until September. I'm curious why we aren't seeing a return to these seasonal patterns. It seems like everything relies heavily on the fourth quarter. Is there something different happening here beyond just a return to normal seasonality?
Udit Batra, CEO
That's a fantastic question, Derik, and I expected you to ask something that relates to the history of Waters in general. Look, you're totally right. We think the second half of the year will start to approximate what we've seen in the past, right? That's why if you just look at the growth rate of the second half of the year, it's between 4% and 7%. Instruments now starting to traverse into the low to mid-single digits and consumables well above our historical averages reversing at the high single digit, right? So it does start to look like historical patterns. And if you just now look at the specifics, right, as I said, we basically said, look, the CDMO spending in China, the pre-commercial biotech is not coming back. Now you can call that super conservative or not up to you, but we just said, look, that's not coming back for the balance of the year. That's what we want to assume for now. With pharma, we've said, based on the visibility we have with those customers, and I've personally spoken to several of them as well to just gain confidence, we're already starting to see the orders released now. It's anyone's guess if it comes in Q2, Q3, or Q4. But again, we've been cautious and said, look, it will come in Q3 and Q4 rather than in Q2, right? So I think that's the dynamics. But it does return the second half of the year starts looking awfully like pre-COVID times. And then when you do the full year math, right, you look at Waters, I mean, you see us on a stacked two-year, four-year stack basis, reversing high single digits. And Amol already talked to you about the margins. The margins are 30.5%. I mean that's a pretty good business, right? High single-digit, 30.5% margin. So we expect to be able to overcome these challenges for the balance of the year. I mean, this is the best visibility that we had at this point given the conditions.
Derik De Bruin, Analyst
Yes, absolutely. Looking at the historical trends, the business has experienced a couple of years of double-digit growth, then dipped to mid-single digits, and then returned to double digits before going through cycles. It appears that as we leave 2023, the instrumentation business is likely to grow at a rate of 3% to 5%, and we expect the consumables business to increase by around 7% to 8%. This is probably the most accurate way to view the upcoming year.
Udit Batra, CEO
Yes, I can't provide specific guidance for next year, but generally speaking, our instrument business is performing very well. While I can't pinpoint whether growth will be 3% or 5%, it's a solid foundation to build on. Our consumables business has shown improvement, indicating growth in high single digits on both a two- and four-year stacked basis, which appears to be higher than previous rates. Additionally, our acquisition of Wyatt is expected to contribute positively to our growth, as it is projected to grow in the low double digits and is more aligned with biologics. Overall, our instruments are likely to grow in the mid-single digits, and recurring revenues are expected to be in the high single digits, leading to a weighted average growth rate in the mid- to high single digits. We're aiming for 5% to 7% growth in the midterm, and with our focus on high-growth areas, this could increase. We are also managing to maintain our margins, which are around 30% to 30.5%. The strategy we've implemented commercially has strengthened our position, particularly with consumable placements through e-commerce, historically high service attachment rates, and a revitalized product portfolio. We expect growth to be slightly better than previous estimates due to commercial success and innovation, alongside the faster growth contributions from Wyatt.
Operator, Operator
The next question will come from Josh Waldman of Cleveland Research.
Josh Waldman, Analyst
Udit, I just wanted to follow up on your comments regarding large pharmaceutical companies. You mentioned you have orders or quotes at this time. Can you share more about the size of these orders? Additionally, what feedback are you getting from customers about year-over-year growth in their budgets? Regarding your full-year guidance, if these opportunities materialize as you seem to be indicating, do you believe there may be an increase to the guidance? Conversely, if they don’t materialize, do you think you will need to adjust your guidance as the year progresses?
Udit Batra, CEO
I'll start by discussing the end of the conversation regarding our pharma customers. We've conducted a thorough analysis of what occurred in Q1 and have been clear about the sources of these changes, specifically the Chinese CDMOs and the emerging pre-commercial biotech. We do not anticipate these areas to recover for the remainder of the year, even if there are signs of improvement later on. Concerning pharma spending, we have substantial evidence from the field, informed by my discussions and the data we’ve reviewed, particularly from a commercial perspective. It’s important to note that we remain focused on quality assurance and quality control. As commercial volumes in pharma continue to increase and new products are introduced, we expect spending to persist in the current trend. We are reasonably optimistic that spending will rebound for the rest of the year, though the distribution of that spending across Q2, Q3, and Q4 is uncertain. We are projecting that it will be stronger in the latter half of the year, which aligns with our full-year guidance of 3% to 5% growth and a two-year growth rate in the high single digits. I hope this provides clarity on our views for the full year, highlighting areas of strength while acknowledging certain factors we do not expect to change.
Josh Waldman, Analyst
Got it. Then Unit or Amol, I wondered if you could comment on how price is tracking year-to-date versus your expectations. I think you previously said 200 basis points this year. Is that still the right way to think about it? Or does the softer demand environment here in the near-term pressure on that?
Amol Chaubal, CFO
I mean at this point, Josh, price is raising a little about 200 basis points based on the dynamics we are seeing in the market. Our teams are doing an excellent job holding on to that. And that's what we are thinking for the rest of the year.
Udit Batra, CEO
Yes. And Josh, to build on the price comment, we expect that the strength that we've built in execution of implementing pricing changes will stay with us. Second, our portfolio, which is really reinvigorated across the board, right? So we've talked enough about the mass spec business in the past and the Xevo TQ Absolute, the G3 QTOF, which now helps customers transfer their methods much better from development into QA/QC or to the BioAccord. We've talked about the impact of our MaxPeak Premier column. So innovation across the board, and now more recently with LC with the Alliance IS and also DA for battery applications. We see innovation across the board, and these customers do want these products. They meet very significant unmet needs, and they're willing to pay a premium to access these products. So the commercial strength that we've built over the last 2 years plus the revitalized portfolio makes us confident that we can continue to pass on price in a very significant way.
Operator, Operator
The next question will come from Rachel Vatnsdal of JPMorgan.
Rachel Vatnsdal Olson, Analyst
So one here on instruments. Declined 3% during the quarter, but you made a comment how the dynamics really started late on in the quarter. So can you walk us through what was the exit rate for instruments? And then how have orders looked during April, May time frame? And then as a follow-up, you mentioned that instruments are expected to be flat or low single digits for the year. So what's embedded in that guide for instrument growth during Q2?
Udit Batra, CEO
Sure. Rachel, thanks for your question. Look, instrument sales declined about 4% for this quarter, right, and on the back of the 26% in Q1 2022. Mass spec, as I mentioned earlier, grew high teens and DA grew double digits, while LC is the one that declined in the teens. And to your question, on how these were and where this came from. I mean it's the same drivers that I mentioned earlier, they were impacted disproportionately by the decline in the Chinese CDMO customers who are serving U.S. and European pharma companies, pre-commercial biotech and some delayed orders in large pharma. As we think about the full year, we feel quite confident that the deferred business is going to come back given what I mentioned in response to the previous questions and also the fact that we have an excellent commercial organization and a new portfolio that basically allow us to place these instruments. For the full year, we are assuming a flat to low single-digit growth in instruments and of course, high single digits for consumables. And you'll start to see, to Derik's question earlier, the second half of the year look awfully like pre-COVID times. I hope that gives you clarity.
Rachel Vatnsdal Olson, Analyst
Yes. And then just a follow-up here on biological analytical characterization. Can you just talk about what the adoption of that portfolio is BioAccord and then also how Wyatt adoption rate has trended in recent months? You talked about the opportunity here for bioanalytical characters is that adoption rates will increase over time. But just given that characterization isn't required for bioprocessing right now, is there risk that to be an area where pharma really starts to rationalize spending and that, that could pressure new customer wins? And then ultimately, what could that do for growth rate for BioAccord and Wyatt this year?
Udit Batra, CEO
Thank you for your question, Rachel. Currently, approximately 40% to 50% of the pharmaceutical pipeline consists of biologics, with a significant portion being cell and gene therapy products, which offer cures rather than just treatments. These are remarkable drugs, and we are committed to assisting our customers in bringing them to market. However, the techniques for characterizing these products have not evolved as quickly as they should have in the past. Now, we possess tools such as LCMS, LCU, and light scattering, along with our MaxPeak Premier Columns, that enable our customers to better characterize these molecules, expediting their movement through the pipeline and substantially reducing costs. We anticipate a significant increase in demand. Our analysis shows this is roughly a $1.8 billion market that is experiencing strong growth in the double digits. Following the acquisition of Wyatt, we now have an outstanding portfolio that includes the simplest LCMS instrument in Biocad, which has seen good adoption for raw material testing and in-process characterization of cell lines, now rapidly expanding into QA/QC. I have also provided some examples of this previously. Additionally, LC/UV continues to be a characterization method widely used by our customers for the release of biologics. Furthermore, we plan to integrate Wyatt's multi-angle light scattering with our SEC columns and LCs, which we believe has excellent prospects moving forward. Wyatt has historically grown at around 20%, and as we assess the remainder of the year following the completion of the deal, we expect it to continue growing in the low double-digit range with a 40% margin for the foreseeable future. We have a positive outlook for this sector, biologics in general, and the bioanalytical characterization business we are developing.
Operator, Operator
The next question comes from Patrick Donnelly of Citi.
Unidentified Analyst, Analyst
So I guess, first on pre-commercial biotech. Can you talk a little bit about how that trended throughout the quarter? Did the weakness mostly stem later on in the quarter in February and March? Or was it kind of even throughout? And then I have one follow-up.
Udit Batra, CEO
Certainly. In March, we experienced a significant slowdown in our pre-commercial biotech segment, which represents about 5% to 7% of our overall pharma business, primarily in the U.S. and China. In the U.S., most of these companies are located in the Cambridge, San Diego, and San Francisco areas. In March, we saw their spending nearly come to a standstill due to the financial crisis affecting many of these companies. While there has been some improvement, we anticipate that this slowdown has continued into the second quarter, particularly for that segment.
Operator, Operator
And that was our final question for today. I'll turn it back over to the speakers for closing remarks.
Udit Batra, CEO
Sure. Thank you very much for your participation and questions today. And on behalf of the entire management team at Waters, I would like to thank you for your continued support and interest in the company. Thank you, and have a wonderful day.
Operator, Operator
Thank you all for your participation on today's conference call. At this time, all parties may disconnect.