Earnings Call Transcript - WAT Q3 2021

Operator, Operator

Good morning, and welcome to the Waters Corporation Third Quarter 2021 financial results conference call. All participants will be on a listen-only mode until the question-and-answer session of the conference call. The conference call is being recorded, and if you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Manager of Investor Relations. Please go ahead, sir.

Caspar Tudor, Manager of Investor Relations

Thank you, Operator. Good morning, everyone, and welcome to the Waters Corporation Third Quarter Earnings Conference Call. Before we begin, I will cover the cautionary language. During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the Company. In particular, we will provide guidance regarding possible future results of the Company and commentary on potential market and business conditions that may impact Waters Corporation over the fourth quarter, full-year 2021 and 2022. We caution you that any and all such statements are only our present expectations and that actual events or results may differ materially from those indicated in the forward-looking statements. For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, please refer to the risk factors included in our annual reports on Form 10-K for the fiscal year ended December 31st, 2020, in Part 1 under the caption Risk Factors. And in our most recent quarterly reports on Form 10-Q for the quarter ended July 1, 2021 in Part 1A under the caption Risk Factors. Both of which are on file with the SEC, as well as the cautionary language included in this morning's press release, including with respect to the risks related to the effects of the COVID-19 pandemic on our business. We further caution you that the Company does not intend to update any of these predictions or projections, except during our regularly scheduled quarterly earnings release conference calls and webcast, or as otherwise required by law. The next earnings release call and webcast is currently planned for February 1st, 2022. During today's call, we will be referring to certain non-GAAP financial measures, reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures, are attached to our earnings release issued this morning, and in the appendix of our presentation, which are available on the Company's website. And our discussions of the results of operations we may refer to non-GAAP results which exclude the impact of items such as those outlined in our schedule titled 'Reconciliation of GAAP to Adjusted non-GAAP Financials' included in this morning's press release and in the appendix of our presentation. Unless stated otherwise, references to quarterly results, increasing or decreasing, are in comparison to the third quarter of fiscal year 2020. In addition, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis. Now, I would like to turn the call over to Dr. Udit Batra, Waters President and CEO, Udit.

Udit Batra, CEO

Thank you, Caspar. And good morning, everyone. Along with Caspar, joining me on this morning's call is Amol Chaubal, Waters' Senior Vice President and Chief Financial Officer. We have reported another quarter of strong, broad-based momentum across our portfolio and geographies. We first thank our over 7,000 colleagues around the globe who represent the indomitable spirit of Waters. Our teams have remained focused on supporting our customers and developing and delivering exciting new products, despite the continuing impact of the pandemic. September 1st marked one year since I joined the Company, and what a year it has been. I'm often asked what is different. I would first like to talk about what is the same, because that is what is giving us the ability to compete more effectively. Our brand stands for scientific expertise, a clear understanding of our customers' challenges, and courage to invest in game-changing innovation. This remains the same. What we have injected with our new leadership team is a stronger focus on execution, a sense of urgency, and accountability. We are a work in progress, but the trend is positive. Now moving to Slide 3, which summarizes where we are on our journey. Firstly, we're sustaining our commercial momentum with another strong quarter, delivering SPAC sales growth of 6%, showing solid business performance with minimum COVID impact. Meanwhile, our commercial initiatives and strong traction of new products like Premier Columns and instruments and Arc HPLC are well-positioned to deliver market-plus growth through 2022. Finally, we're building on this momentum by taking decisive steps in solving key problems that are present in higher growth adjacencies, like Biologics Manufacturing. I will now provide a brief overview of our third quarter operating results, as well as commentary on our end markets, geographies, and technologies. Amol will then review our financial results and provide comments on our updated financial outlook. We will then open up the phone lines to take your questions. Moving now to slide 4, in the third quarter, our revenue grew 11% as reported and, on a constant currency basis, reflects the continued strength in our pharma and industrial end markets. That is demand for our instruments and recurring revenue products. This translates to a 6% stacked CAGR for the quarter versus 2019 on a constant-currency basis. Year-to-date, revenue has increased 21%, with the constant currency stacked CAGR versus 2019 also about 6%. Our top-line growth resulted in Q3 non-GAAP adjusted earnings per share of $2.66, growing 23% year-over-year. Year-to-date, non-GAAP adjusted earnings per share have grown 39% to $7.54. Looking more closely at our top-line results for the quarter on Slide 5 in constant currency. First, by operating segment, the Waters division grew 9%, while TA grew by 27%. By end-market, our largest market category, Pharma, grew 16%, industrial grew 9%, while academic and government declined by 11%. In Pharma, we saw broad-based continued strength in sales across customer segments, geographies, and applications. Spend was both in small molecule and large molecule applications, which both grew in the mid-teens for the quarter. Industrial growth was reasonably broad. And next, our beauty business, which saw strong growth globally in external micro Calvin imagery and Realogy. Turning to academic and government, which is about 10% of our business, continued strength in Europe was offset by softer performance in China and other regions. Moving off last year's performance by geography on a constant currency basis, sales in the Americas grew 16%, with the U.S. growing 13%, sales in Europe grew 8%, sales in Asia grew 8%, with India over 40%, and China sales were down 3%. Now to provide some clarification on China. Demand remains very healthy, as does the execution of our initiatives. A shipment of approximately $12 million got delayed at an airport in the last few days of the quarter due to a third-party shipping issue and has been delivered in the first few days of the fourth quarter. Looking, therefore, at China orders for the quarter, this was up in the mid-teens year-over-year. So, really no challenges from a demand perspective. In the U.S., growth was led by continued strength across our pharma and industrial end markets. In pharma, we saw strength across our instrument and Galaxy portfolios. In industrial, our Waters and TA businesses both saw strong growth. In Europe, demand remains robust across all end markets with continued strength in pharma, industrial, and academic and government. For the quarter, India was our fastest-growing market, driven by very strong growth in instrument sales to our common customers.

Caspar Tudor, Manager of Investor Relations

As you know, India is primarily a small molecule and generic market for export, and this is indicative of continued strength in global pharmaceutical demand for small molecule drugs. In products and services, customer demand for our instruments remained strong after an invested first half of the year, when recurring revenues also continued to see sustained growth. Overall, instrument sales grew 10% for the quarter, driven by robust demand on improved commercial execution, new product contributions, and instruments replacement. In LC, the newly released Arc HPLC continued to see strong growth, and uptake of our Premier instruments, both Arc and the ACQUITY, especially for applications in novel modalities like mRNA and Biologics remains solid.

Udit Batra, CEO

The strength we're seeing in our LC instrument portfolio remains a positive indicator for sustainable future growth in consumables and service. In mass spec, demand strength from pharma customers continued with a strong demand for our single-quads, led by users for Oligo and Biologics purification, as well as strength in our Tandem-quads used in late-stage drug development. We're also encouraged by early interest in our SELECT SERIES MRT Time-of-flight platform, which delivered the highest quality resolution at fast speeds. Now for recurring revenues, Chemistry sales grew 13% driven by an increase in utilization of our pharma customers, as well as strength in our industrial end markets. Demand for our new Premier Columns remains strong, while our e-commerce initiative is progressing and making it easier for our customers to do business with us. So far this year, our chemistry consumables have grown almost double digits compared to 2019. We're pleased that our Premier Technology is continuing to provide important benefits in the separation and certification of mRNA and oligonucleotide molecules, given its unique ability to reduce selective binding of plasmids and mRNA to various surfaces. Service also grew double digits again this quarter, even as last year's comps have become tougher. On a two-year stack basis, service grew 7% in constant currency for the quarter and 6% year-to-date. By focusing on our value proposition and commercial execution, we have seen an increase in service fan attachment rates and revenues. Finally, DA had a great quarter with sales up almost 30% as demand has rebounded with strong growth across all regions. DA instrument sales have grown at 8% on a two-year stack basis so far this year, driven by strong demand for our common instruments used in the analysis of advanced materials, as well as microperimetry instrument demand for our pharma and academic customers. Moving now to slide 6, let me now focus on why we believe that we will continue to deliver market-plus growth. I think you're used to seeing these initiatives, so let me use the same frame, starting from the left-hand side of the slide. In 2021, we expect our instruments investment initiatives to become over $40 million, which means an incremental $10 million over 2021. The Fusion is positively impacting our service business with land companies. Having increased by 2% so far this year, compared to the first three quarters of 2019. In 2022, we think a further 100 basis points of expansion in service plan adoption is available. Growth and e-commerce adoption also remains strong, with chemistry sales to our e-commerce channels approaching roughly 30% versus the 21% we saw in 2019. We expect this to continue reaching over 35% by the end of next year. So far this year, revenue from contract organizations has grown over 40% versus the comparable period in 2019. Next year, we expect us to grow that low double digits for the year versus 2021. And new products continue to do well. We're just taking the example of Arc HPLC and Premier to illustrate the point here. Both Arc HPLC and Premier continue to be strong drivers with over $45 million in revenue expected from these sources for this year in total, separate and unspecific to the replacement initiative. In 2022, we are expecting this number to be over $60 million. So in all these initiatives alone should give us approximately 1% over our base business growth for 2022, which we upon our beliefs in market-fast growth rates. Moving now to Slide 7, we operate a strong core business in healthy and growing end markets. This strong foundation provides us a platform for solving critical problems facing our industry where we can bring our scientific expertise and product portfolio capabilities. I would like to say that our three years of focus, which also happened to be in high-growth end markets, both in the Biologics arena on the reagent side and bio separations. We believe there are significant problems to solve in separating and purifying these newer modalities. Having a deeper understanding of reagents, coupled with our chemistry expertise, will allow us to solve these problems. Second, in bioprocessing, the largest challenge I cited as an engineer in bioprocessing versus small molecule processing, was that once you defined the process, you got stuck with it, because it wasn't in a drug master file. We have to decouple the process from the product. Separately, the process development timescale, our number was small molecule, given the sheer complexity of attributes you need to measure. A simple and robust tool that can measure multiple parameters is a potential solution. We believe that the BioAccord is the right LC-MS tool that can begin to address this challenge. The third area is diagnostics, where we need a fast, unbiased detection of multiple biomarkers to enable early disease detection. We believe, again, mass spec has a significant role to play here. Moving now onto slide 8, let me illustrate what I mean by sharing what we're doing to solve some of the key problems in bioprocessing. Last week, we announced a partnership with Cytori, a leader in bioprocessing. If we could combine our waters BIO4 system as a bioprocess analyzer with Cytori's bioreactors, giving scientists both faster and at-line direct access to our launch quantity characterization information. Scientists across Cytori's, Waters, and some of our customers have already shown that the combined offering will shorten product development timelines considerably, making what currently takes six weeks to analyze down to only two days. It also lays the foundation for using the BioAccord as a bioprocess analyzer for process control and quality testing in the future. BioAccord is both versatile and easy to use, and we expect that most engineers will be able to master its operation within one to two weeks. In fact, one of our customers had a summer intern use the BioAccord and gave raving reviews on how simple it is to use. I'm also an engineer who has been out of the lab for many years, and I was able to learn quickly. Resulting configuration with our direct analysis addresses rough substances, not just cell culture media, while targeting over 250 cell culture media analyzed. Separately, we also announced a multi-year collaboration with the University of Delaware to develop technology for analytical characterization of manufacturing processes for Biologics and Novel modalities. Through this partnership, researchers from both Waters and the University of Delaware would identify and develop solutions that can provide better aseptic sampling, make sensor and analytical instrument improvements, and develop data analytics and process control. This partnership will help us expand our capabilities to characterize biological manufacturing processes in order to drive improvements in quality, deals, efficiency, and process control. In summary, 2021, so far, has been a very successful year for Waters. We are laser-focused on our commercial execution. The markets we serve are in a healthy state and our geographic regions have rebounded solidly from dynamic loss. Meanwhile, I'm convinced of the great opportunity that lies ahead of us in higher growth adjacencies to impact and deliver value by extending our scientific expertise and product portfolio towards helping customers solve the most complex problems in our industry. With that, I'd like to pass the call to Amol for a deeper review of third quarter financials and our outlook for the remainder of 2021. Amol?

Amol Chaubal, CFO

Thank you, Udit. And good morning, everyone. As Udit outlined, we recorded net sales of $659 million in the Third Quarter, an increase of 11% in constant currency. Reported sales growth was also 11%. Looking at product line growth, our recurring revenue, which represents the combination of chemistry and service revenue, increased by 11% for the quarter. While instrument sales increased 10%. Our recurring revenues were up 13% and service revenues were up 10%. As we noted in our last earnings call, recurring revenues were not impacted by a difference in calendar days this quarter. Looking ahead, there are six fewer days in the fourth quarter of this year compared to 2020. Now, I would like to comment on our third quarter non-GAAP financial performance versus the prior year. Gross margin for the quarter was 58.9% compared to 55.8% in the third quarter of 2020. Improvement was driven primarily by leverage on revenues. Acquired exchange benefit in the quarter was about 1%. More inbound to P&L, operating expenses increased by approximately 17% on a constant-currency basis and on a reported basis. The increase was primarily attributable to higher labor costs due to the normalization of prior-year cost actions, as well as higher variable compensation on the higher sales volume. In the quarter, our effective operating tax rate was 11.7%, a decrease from last year due to some inevitable or specific discrete items. Excluding the impact of these discrete items, our year-to-date tax rate is consistent with the prior year. Our average share count came in at 61.9 million shares or about 400 thousand less than the third quarter of last year due to our share repurchase program. Our non-GAAP earnings per fully diluted share for the third quarter increased 23% to $2.66 in comparison to $2.16 last year. On a GAAP basis, our earnings per fully-diluted share increased to $2.60, compared to $2.03 last year. A reconciliation of our GAAP to non-GAAP earnings is attached in the press release issued this morning and the appendix of this presentation. Turning to free cash flow, capital deployment, and our balance sheet. We define free cash flow as cash from operations, less capital expenditures, and exclude special items. In the third quarter of 2021, free cash flow was $140 million after funding $40 million of capital expenditures. Excluded from the free cash flow was $12 million relating to investment in our content precision chemistry operations. Year-to-date, free cash flow has increased to $295 million, and approximately $0.25 of each dollar of sales converted into free cash flow. In the third quarter, accounts receivable DSO came in at 71 days, down 5 days compared to the third quarter of last year and down 2 days compared to the last quarter. DIO decreased by 13 days compared to the third quarter of last year. Given the higher sales volume our proactive measures to secure a supply increased by $62 million in comparison to the prior year. We maintain a strong balance sheet, access to liquidity, and a well-structured debt maturity profile. In terms of returning capital to shareholders, we repurchased approximately 369,000 shares of our common stock for $151 million in Q3. At the end of the quarter, our net debt position was $958 million, with a net debt to EBITDA ratio of about one. Our capital deployment priority is to invest in growth, maintain balance sheet strength and flexibility, return capital to shareholders, and to deploy capital to well thought out, attractive and adjacent growth opportunities. As we look forward to the remainder of the year, I would like to provide you with some updates on our outlook for 2021 on slide 11. Throughout this year, we've seen good momentum driven by robust end-market demand and strong commercial execution. We believe that this momentum will continue and expect our near-term growth initiatives to continue to contribute meaningfully to our performance. Looking at the fourth quarter, the comparison is more challenging as it was the first quarter in our transformation journey and was further favorably impacted by forced lockdown and elevated year-end budget spending. In addition, we have six fewer calendar days in the fourth quarter of this year. These dynamics support updated full-year 2021 guidance of 15% to 16% constant currency sales growth. At current exchange rates, the positive currency translation is expected to add approximately 1% decline, resulting in full-year reported sales growth guidance of 16% to 17%. Gross margin for the full year is expected to be approximately 58% to 59%, and operating margin is expected to be approximately 29% to 30%. We expect our full-year net interest expense to be $34 million, and full-year net rate to be 14% to 15%. Average diluted 2021 share count is expected to be approximately 62 million. Our share repurchase program will also continue into Q4 and we will provide quarterly updates as appropriate. Our 2021 earnings per fully diluted share are now projected in the range of $10.94 to $11.04. This includes a positive currency impact of approximately 2% points at today's rate and assumes no material adverse supply impact from COVID. Looking at the fourth quarter of 2021, we expect constant currency sales growth to be 5% to 7%. At today's rates, currency translation is expected to subtract approximately 2% decline, resulting in a fourth quarter reported sales growth guidance of 3% to 5%. Fourth quarter non-GAAP earnings for fully diluted shares are estimated to be in the range of $3.40 to $3.50. This includes a negative currency impact of approximately 3% points at today's rate and assumes no material adverse supply impact from COVID. Now, I would like to turn it back to Udit for summary comments.

Udit Batra, CEO

Thank you, Amol. Before I wrap things up, I would like to make a few comments on our ESG efforts and our core principles to fuel innovation and make a positive impact. This includes doing our part to reduce our environmental footprint and leave the world better than we found it. Being representative of a diverse society we live in and providing effective governance that enhances long-term shareholder value. You will see more of our progress in each of these areas in our 2021 sustainability report coming out later this month. Turning to Slide 10, I was particularly moved recently by the new internship program we developed with Team New England, designed to increase access to STEM education for students of all backgrounds. Over the course of six weeks, we give high school students a hands-on learning experience with a mix of science, business, and soft skills. Over 70 Waters employees were involved who gave practical exposure and mentorship. We look forward to continuing these efforts in the future. In summary, we continue to be pleased with our performance this year. We're sustaining our commercial momentum with our initiatives, which continue to perform well and should provide a multi-year benefit as we continue to strengthen our core. We're continuing to track 6% on a two-year CAGR for our revenue in constant currency, showing that our core is strong. Our focus on accelerating innovation to our portfolio and targeting these higher growth areas in adjacent markets. With that, we will now begin the Q&A session. Thank you. Operator?

Operator, Operator

Thank you. Our first question is from Dan Brennan Alan. Your line is open.

Dan Brennan Alan, Analyst

Thank you, everyone, for the call and the questions. Udit, to start with 2022, you shared some insights on the key drivers and their potential impact. Looking ahead, especially considering the shift from 2021, what’s the best way to approach the initial outlook for 2022? The consensus suggests an organic growth of about 5%, indicating a significant acceleration based on a two-year comparison.

Udit Batra, CEO

Thanks for the question, Dan. To look for us, we're tracking at a 6% plus sort of stack growth rate. So really the base business is doing rather nicely and we would seem that the transformation is now hitting its stride. So the base business should continue to track along those lines. Now, we've always had market plus and what gives us conviction that it's going to be market plus are the initiatives that we've outlined, including replacement, including additional penetration in different channels, and better launches of new products. So wherever the market is, we expect to be market plus, given the initiatives. And in terms of what you should expect for next year, again, the same logic applies, right? As the market has fueled growth, we should be working to achieve 6 plus. And there's no reason to believe that the market should slow down. All our end markets are doing well. You've seen that year-to-date both pharma and industrial are tracking close to 20% on a two-year basis, which is well ahead of what we've seen over the history of Waters. So we're feeling good going into next year, and we have concrete initiatives that make us believe that we should be delivering market-plus growth.

Dan Brennan Alan, Analyst

Great. And then, just maybe as a follow-up, you've been at the helm about a year plus right now. You've done, obviously, you've outlined some areas for improvement which you've executed on in terms of new product, commercial execution, customer identification, where you were lagging, how do you think about the evolution of your impact on the business? Should we expect at some point here, as we enter 2022, that there's going to be possibly a new wave of initiatives? Just thinking through what the next leg is for Waters. And related to that, just wondering how M&A fits into that? Thank you.

Udit Batra, CEO

Dan, thanks. First, we have to make sure we do more of the same, right? And that I feel really good about, especially with the leadership of John Pratt and Jianqing, who are executing further on our initiatives. Second, feel very good about our ability to bring in new products to the market. They have tremendous traction, especially for the products that we launched recently, Arc HPLC, the Premier Columns, both adding significantly to the top line. The SELECT SERIES MRT has a lot of interest from our customers across proteomics, imaging, and many different segments. We're feeling very good about what our pipeline is contributing, and there is more to come there. And finally, to your question on M&A, we've outlined the areas of growth we're interested in. What you will see is that we're not just interested in entering these areas. We are really thinking hard about what are the other key problems to solve. For example, with bioprocessing, I believe that our collaboration with the University of Delaware will help us make strides in that direction. We are excited about what we've just announced with Sartorius, as Sartorius is a leader in bioprocessing and has deep penetration of small early-stage bioreactors used for clone selection. That collaboration has two benefits. One, we're able to take the BioAccord and improve a process that takes about six weeks down to two days, which has been demonstrated in collaboration with Sartorius scientists and our customers. There are several areas where we would not otherwise have entered, but we want to enter with the capabilities that people feel confident about. So in summary, we will continue focusing on commercial momentum, recharging innovation, and looking to enter faster growth areas through partnerships, while being open to M&A if it makes sense. But I remind you that for M&A, we are a financially disciplined Company.

Operator, Operator

And thank you. Our next question is from Tycho Peterson, JPMorgan.

Tycho Peterson, Analyst

Thanks. Udit, maybe I'll start with China. You noted the $12 million shipment delay, it doesn't sound like you're flagging any demand issues, but I'm just curious if you could elaborate a little bit on what you're seeing in that market and then any comments on supply?

Udit Batra, CEO

China year-to-date is over 30% growth, only second to India in organic growth. From a demand perspective, for the quarter, we were up mid-teens. Unfortunately, the shipment got stuck in the last few days of the quarter, which made it to our customers now. If you included that into the Q3 numbers, it will be high single-digits to low-teens for China growth. So really, nothing to flag from a China perspective. In fact, I would say I'm very happy with our new leader in China, who's been implementing initiatives excellently. Arc HPLC has great traction, and we have built really strong commercial momentum even in our food and environmental markets. We're feeling very good about where we are in China, so nothing really to flag from a demand perspective. As for your question on the supply chain, like everybody else, we are seeing constraints in shipping at different ports that appear sporadically. However, we do not think it's a systemic issue. It's a sporadic issue, and we're not unique in experiencing those challenges. I was recently with colleagues from different industries and everyone is experiencing unpredictable changes in supply chains. We do see inflation specifically in U.S. labor, but nothing we haven't been able to offset by price increases with our customers. So, hopefully, that gives you enough color on how we feel about China. We see no demand problems at all, and our teams are effectively working through some of these issues.

Tycho Peterson, Analyst

Okay. And then for the follow-up, academic government is only 10%, but it was down 11%. Can you touch on what you're seeing there and do you expect that to turn in this fourth quarter with the budget flush?

Udit Batra, CEO

For academic and government, we do year-to-date growth of 36%. And if you look at the consumables revenue, that's tracking nicely. So there's activity across our customers tracking in double digits, with other end markets. So nothing to point out systemically overall if you look at the market. The performance is a bit different by region. Europe is doing extremely well, but China and the U.S. are a bit slower due to academic endowment being a small portion of our business and historically has not been a huge focus for Waters. We have started to increase our focus on that segment, especially with John's arrival. The instruments part of the business largely depends on customer relationships, and this is work in progress. I'm optimistic with the activity I see, especially on the e-commerce side and procurement. I expect that segment to return well over time.

Operator, Operator

Thank you. Our next question is Vijay Kumar, Evercore?

Vijay Kumar, Analyst

Hey guys, good morning and thanks for taking my question. Udit, that one for you. The $12 million shipping delay in Q3, what segment did that impact? Was the instrument impact or government, academia? I'm curious how do you risk Q4 from any supply chain disruption, I'm a bit curious about which visibility you have.

Udit Batra, CEO

First, Vijay, good morning, and similar to what I just said to Tycho, really nothing to be concerned about from a demand perspective in China. The $12 million have made it to the customers, and it is spread across different customer segments online, industrial, as well as academic and government. Nothing in particular is feeling more pain. In terms of how we're dealing with these issues, we have a superb supply chain department. We have extreme transparency on shipments and timing. We've started to build inventory where we see order spikes in different regions. We feel that we should be able to manage through the volatility that you are seeing in different situations.

Vijay Kumar, Analyst

That's helpful, Udit. I did have one on gross margins. Q3 gross margin is very consistent with Q2, but if we recall, FX has an impact on you guys. Given the 200 basis points headwind in Q4, any comments on FX impact on gross margins either in Q4 or as we look through fiscal '22?

Amol Chaubal, CFO

We expect our gross margins in Q4 to be about 58% to 59%, right? We've seen so far in Q3, a 1% tailwind onto gross margin. Looking ahead, the dollar has strengthened, and we do have most currencies we operate in have currency exposure. Other than that, we've sort of included that in our guidance, and that's where you see a close to $0.10 headwind on EPS versus the last earnings call in our Q4 EPS guidance.

Operator, Operator

Thank you. Our next question is from Jack Meehan with Nephron Research.

Jack Meehan, Analyst

Thank you. Good morning. I'm interested in hearing more about the $12 million shipment you mentioned in China that was delivered in October. It seems that the supply chain situation is becoming increasingly challenging each week. I'm curious about how things are progressing there and whether your guidance takes into account the possibility of any orders slipping from Q4 into 2022.

Udit Batra, CEO

Morning, Jack. Look, nothing that we have visibility on that would go from Q4 to Q1. As I said, there is increased inventory in the different regions where we see demand going extremely well. From an overall perspective, the $12 million was shipped promptly in Q4. It's just unfortunate that it got caught up in the shipping delays at the end of the quarter. I don't see anything that gives us visibility at this point that would indicate an impact in Q4. Regarding what is within our control, the extreme transparency we have on the supply chain processes has improved greatly. The increased inventory strategy gives us reasonable comfort that we should be able to manage an ambitious end of the year.

Jack Meehan, Analyst

Great. I was curious about labor trends. You mentioned that you are now recovering from pre-pandemic levels. Do you anticipate more spending in Q4 and how do you view the overall competition for labor? How do you think you are managing retention?

Amol Chaubal, CFO

U.S. labor continues to be a place where we're seeing inflationary pressures. I think with a strong HR function, we've put a lot of measures in place to reduce attrition and sustain talent. However, that doesn't play out so much in terms of cost and operating expenses into Q4. What you have to keep in mind is Q4 is a heavy revenue quarter for us. And that results in commission payments being accrued heavily in Q4, which is why we typically see higher operating expenses, especially in G&A in other quarters.

Operator, Operator

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

Patrick Donnelly, Analyst

Thanks, guys. Udit, maybe one on the 2022 commentary. You mentioned you're expecting to continue to grow above market. When we look at 2021, it feels like one of the accelerants for you guys was the replacement cycle; I think last quarter you talked about maybe setting up as an opportunity for you to continue on that front or was that mainly condensed into 2021 when we think about what the growth rate could look like there?

Udit Batra, CEO

Patrick, thanks for the question. Unfortunately, I was learning baseball, like if using a baseball analogy, and people have talked sense into me to start talking in revenue numbers. So that's why we put that slide together to slide 6. Look, we see 1% to 1.5% extra growth on a stack basis due to the initiatives, and the initiatives are not just around instruments that are replacement. We saw solid attachment increases in aftermarkets. We saw e-commerce adoption growth from 20% to 27-28%. Our contract revenue grew roughly 40% on a two-year basis. New product contributions also did extremely well, so across the board, 1% to 1.5% benefits will form the base growth and robust end markets. Next year, we think that's roughly 1% versus a base market growth of whatever the market grows. For instrument replacement, this year, we had roughly $30 million or so of benefit, and next year it will be around $40 million, which is a $10 million incremental increase. Regarding service, there are 200 basis points, another 100 basis points on top of that. The new product initiatives we're seeing are doing exceptionally well, and I think that with our CRM system implementation, we are actively targeting those replacements going forward. So we've embedded the systems into our operations, and we're feeling confident that we can keep accelerating.

Patrick Donnelly, Analyst

That's helpful. Appreciate that. And then maybe just a quick one on the industrial market. It's had pretty good results there. It has been a little more mixed across the sector, could you just talk about what you're seeing there and expectations going forward?

Udit Batra, CEO

Across all end markets, we're seeing good performance out of the TA business. Industrial is roughly 6% to 6.5% stack growth. Historically, that's been 4% to 5%. So we're seeing a bigger acceleration, relatively speaking, in industrial versus what we're seeing out of pharma. We are seeing extremely good performance out of the TA business across various customer segments, including advanced materials, batteries, and electronics, which is going in the high teens. The life science part of our TA business is also growing nicely. So, in TA, we see really good momentum; our service engineers have access to many customers, and many of their employees. So overall, industrial is experiencing a strong uplift.

Operator, Operator

And thank you. Our next question is from Derik De Bruin from Bank of America.

Michael Ryskin, Analyst

Thanks for taking my question. This is my question on for Derik. I want to follow up a little bit on the instrument performance you saw in the quarter. I was wondering if you could break out anything you saw different in terms of the LC versus mass spec. And it's generally sort of tying it back to the academic and government question. I'm wondering if that was more on the mass spec side of me, sort of how do you see some of those new product introductions playing out this quarter and going forward?

Udit Batra, CEO

Overall, the estimated growth for the year is roughly 30%, with mass spectrometry performing even better, exceeding 30%. It's more effective to evaluate this on a stack basis rather than distinguishing between the two product platforms. Traditionally, Waters has experienced instrument growth ranging from 3% to 4%, but we've consistently seen a year-to-date stack around 5%, indicating strong momentum across both liquid chromatography and mass spectrometry. Regarding mass spectrometry specifically, the demand spans all portfolios, including our Tandem-quads utilized in intact mass analysis as well as those that support development, food, and environmental applications.

Michael Ryskin, Analyst

Quick follow-up on the OpEx side of, both came in a little better than we expected our model. I was just wondering if there's any one-time effect there. I know that probably played a role that as well being less of a tailwind. Just wondering if you could comment on any trends there. And the $12 million shipment that got delayed in Q4 in China, how should that flow through the model? Is that about a $0.05 to $0.10 benefit to Q4 EPS?

Amol Chaubal, CFO

On the two questions, there's no one-time activity in R&D or SG&A. So it's pretty straightforward. Regarding the $12 million shipment that got delayed, you could assume it's largely instruments and modeling that instrument in gross margin.

Operator, Operator

Thank you. Our next question is from Puneet Souda with SVB Leerink, your line is open.

Puneet Souda, Analyst

Thank you for taking my question. First, I wanted to clarify that instrumentation performed well last quarter. If we bring in the $12 million order from the third quarter, it would also indicate strong performance this quarter. I would like to understand what applications are driving the instrumentation sales. Could you elaborate on whether there have been any developments related to QA/QC of vaccines, particularly concerning the analysis of mRNA cap structure? I noticed some application notes published by your teams at Waters. I'm interested in knowing if you're focusing on QA/QC for proteins or mRNA vaccines, and what applications are contributing to the instrumentation growth we've witnessed in recent quarters.

Udit Batra, CEO

The instrument growth is driven by strong, robust end markets and our commercial execution. The increased application of our technology in oligonucleotide mRNA has been beneficial. Many customers have expressed that they faced aggregation problems with plasmids, and we helped them solve those problems by using Premier and LC-MS. Our technologies offer good application potential. The BioAccord was initially focused on LC-MS, but we see it being used effectively in QA/QC as it's simple, robust, and fast, providing results quickly. So, seeing wider application of our technologies is exciting, especially the BioAccord with its simplicity and robustness.

Operator, Operator

Thank you. Our next question is from Josh Waldman with Cleveland Research.

Josh Waldman, Analyst

Good morning and thanks for taking my questions. I wonder if you could provide a breakout of growth in LC and MS separately, here in the quarter? I don't think you provided those numbers. I missed them if you did. And I guess broadly, it seems like the Waters instrument business was a bit lighter than expected, any additional color you can provide on maybe what drove this? Was it largely timing-related or is it more a reflection of possibly a normalization in orders?

Udit Batra, CEO

For Q3, we saw nice growth, double-digit again on instruments with strong comps last year. On a year-to-date basis, LC grew in excess of 30%, while mass spectrometry was in the mid-20s. We’ve had nice momentum, and this gives us confidence going forward. As for your broader question about the Waters instrument business, we feel we are on track. The historical averages make it appear that we have normalized, but overall, we are quite pleased with where we are.

Operator, Operator

Thank you. Our next question is from Catherine Schulte with Baird. Your line is open.

Catherine Schulte, Analyst

Hey guys, thanks for the questions. I guess just first on the instrument side of the business, revenue was down about 8% constant currency last year. Do you think you've largely recaptured that revenue at this point, or is there still some makeup, or do you think there's some that is just revenue that won't be recaptured? I'd be curious how you would allocate those across those three buckets.

Udit Batra, CEO

On the instrument side, we feel we are on a very good track. If we look at historical averages, 2020 was an outlier due to all the multiple impacts on a stacked basis. We're operating well in excess of 5%, close to 6% in some cases. We believe we're clawing back rather nicely considering that we were ahead of the market. We are a work in progress, and there is much more opportunity ahead with a range of applications for our instruments.

Operator, Operator

Thank you. That concludes the questions session of today's call.

Udit Batra, CEO

Thank you very much for your participation and questions. On behalf of our entire management team, I'd like to thank you for your continued support and interest in Waters. We look forward to updating you on our progress during our fourth quarter 2021 call, which is going to be on February 1st, 2022. Thank you.

Operator, Operator

And thank you. This does conclude today's call. You may disconnect your lines, and thank you for your participation.