Earnings Call Transcript - WAT Q1 2022

Operator, Operator

Good morning and welcome to the Waters Corporation First Quarter 2022 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 call is being recorded. If anyone has objections, please disconnect at this time. Now, it is my pleasure to turn the call over to Mr. Caspar Tudor, Director of Investor Relations. Please go ahead, sir.

Caspar Tudor, Director of Investor Relations

Thank you, operator. Good morning, everyone and welcome to the Waters Corporation first 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 second quarter of 2022 and full year 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, see the risk factors included in our annual report on Form 10-K for the fiscal year ended December 31, 2021, in Part 1 under the caption Risk Factors and the cautionary language included in this morning's press release, including with respect to risks related to the effects of the COVID-19 pandemic on our business. We further caution you that the company does not intend to update any of its predictions or projections, except during our regularly scheduled quarterly earnings release conference calls and webcasts or as otherwise required by law. During today's call, we will be referring to certain non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and in the appendix of our presentation which are available on the company's website. In our discussions of the results of operations, we may refer to non-GAAP results which exclude the impact of items such as those outlined in our schedule titled reconciliation of GAAP to adjusted non-GAAP financials included in this morning's press release and in the appendix of our presentation. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2021. In addition, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis. Now I'd like to turn the call over to Dr. Udit Batra, Waters' President and CEO. Udit?

Udit Batra, President and 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 had a record start to the year with first quarter sales led by instruments which grew over 25% with a broad-based strong performance across all our end markets and geographies. Before summarizing the quarter, let me start by saying how extremely proud I am of our teams who've worked tirelessly to manage our supply chain, delivering operational excellence and exceptional support for our customers through the ongoing challenges of the pandemic. It is a result of the indomitable spirit of all my colleagues at Waters. I will now provide a brief overview of our first quarter operating results and deliver our key messages. Amol will then review our financial results in detail and provide comments on our financial outlook. We will then open up the phone lines to take your questions. Turning now to Slide 3. We have three key messages. First, we had a very good start to 2022 with great traction for our new instrument products, strong operational performance and sustained commercial momentum. Demand has remained robust across all our end markets. Second, we're laser focused on execution, innovation and growth. We continue to make great progress in executing against our enterprise priorities with our core initiatives positively impacting our results. We have a revitalized portfolio with innovation that is answering the needs of our customers in both large and small molecule workflows as well as in our non-pharma markets such as food testing, environmental, and material science. And thirdly, Waters has a firm commitment to leave the world better than we found it. We are delivering sustainable value to our shareholders and stakeholders through our ESG programs. Now moving to Slide 4. In the first quarter, our revenue grew 13% as reported and 16% on a constant currency basis, reflecting broad growth across all our end markets and geographies. Orders in the quarter exceeded our sales of $691 million, reflecting a very strong demand. Instruments grew at 26% in constant currency, with strong growth across our LC mass spec and TA portfolios. New products contributed meaningfully to growth in the quarter, with unit sales of Arc, HPLC and Acuity Premier more than tripling versus the first quarter of last year. In mass spec new instruments in our high-end tandem quad portfolio, such as our Xevo TQ-XS also saw strong growth in both industrial and pharmaceutical applications. Instrument strength is a positive indicator for future growth of our consumables and service revenues. Recurring revenues grew 9% for the quarter with chemistry up 8% and service up 9%. This quarter had one fewer day than the first quarter of 2021 which translates to a headwind of approximately 1% for our recurring revenues. Without that, recurring revenues would have also grown double digits. Our MAX peak premier columns have continued to strengthen and contribute to our chemistry business, given the benefit this technology provides for novel modality applications and our increased exposure to biologics. Meanwhile, we're seeing increased service plan attachment rates in our key regions at instrument point of sale. By geography, growth was led by the Americas, with the U.S. up 28%, driven by broad performance in each of our end markets. In China, sales grew 17% with pharma, industrial, academic, and government all up double digits. As lockdowns in certain regions persist, we're beginning to see more of an impact to our business but we're in close contact with our customers and demand remains robust. Once the lockdowns ease, we expect activity levels to normalize with limited impact to our full year growth expectations for China. However, we anticipate some sales impact in the second quarter if customer access continues to be constrained. Our Q1 non-GAAP adjusted earnings per share was $2.80, up 22% year-over-year, driven by sales growth, volume leverage, and an ability to manage inflation through pricing. Given the global nature of our business, we're seeing ongoing supply constraints and inflationary pressures. Despite this, we have been successful in working through these challenges, leveraging our global manufacturing footprint and working closely with our customers and suppliers while delivering good operating results. Turning now to Slide 5. While each of our initiatives continues to progress, the two areas I would like to highlight this quarter are contract organizations and launch excellence. For contract organizations, our unique technical abilities and ability to collaborate closely with our customers are resulting in market share gains and strong revenue growth. Revenues from these customers were up over 25% for this quarter led by over 50% growth in China. Turning now to launch excellence. Our revitalized portfolio is contributing to growth with demand ramping for Arc HPLC, ACQUITY Premier and MAX premier columns. ACQUITY Premier and MAX Premier were specifically designed to solve challenges particularly relevant for large, complex molecules. Our customers are using the technology for oligonucleotide analysis as well as separation and purification of novel modalities such as mRNA, peptides, and glycans, just to name a few examples. Meanwhile, small molecule growth remains solid with customers continuing to purchase new capital equipment, including Arc HPLC. Now on Slide 6. We recently launched the Xevo TQ Absolute, which is up to 15 times more sensitive when analyzing negatively ionized compounds compared to other tandem quads currently on the market, while also using less sample. It is designed to help pharmaceutical, food and environmental labs, meet regulations requiring trace-level quantitative mass spec analysis for a broad set of applications. In food testing, the instrument takes detection of anionic pesticides and their metabolites to a new level of quantitation. In pharma, it can provide highly sensitive analysis for oligonucleotides and peptide bioanalysis as well as quantification of estrogens in clinical research, uses for which high-resolution mass spec have typically been required. The instrument is highly efficient, using approximately 50% less electricity and gas and also producing 50% less heat than other high-performance standard quads in the market, both of which reduce the carbon footprint of analytical labs. It is also 50% smaller than other instruments in its class which adds value to our customers as space in analytical labs is limited and costly. Our tandem quad portfolio was stronger than ever and together with Waters Connect, we're able to make customers' workflows easier, faster, and more efficient without compromising performance. Now on Slide 7. Immerse Delaware, our second innovation and research lab will be opening tomorrow part of a multiyear collaboration with the University of Delaware. Its purpose is to develop analytical solutions to better characterize the manufacturing process for biologicals and novel modalities which will support our path into bioprocess characterization. Researchers from both Waters and the University of Delaware will develop solutions, including sensor and instrument improvements, data analytics, and process control. This partnership will help us expand our capabilities to drive improvements in quality, yield, and efficiency as well as characterize critical quality attributes that will be a key step towards separating the process from the product and biologics. On Slide 8, we are delivering sustainable value to our shareholders and stakeholders through our ESG activities which continue to be recognized in several areas. Earlier this year, we achieved a score of 100 on the 2022 Corporate Equality Index earning Waters designation as one of the best places to work for LGBTQ+ equality. In addition, Barron's ranked Waters number 6 on its 100 most sustainable U.S. companies list for 2022 based on a set of 230 performance indicators and reflects our efforts of continuous improvement in social and environmental responsibility. On the list, we were the highest placed company in the healthcare sector and in the Life Science tools segment. Recently, within our diversity and inclusion and STEM education efforts, Waters has partnered with three historically black colleges and universities to create STEM opportunities for students through funding, instrument donations, mentoring, and the awarding of scholarships to students exploring the analytical sciences. In summary, we are pleased with our strong start to the year and the results in revenue growth and operational performance which are demonstrating our continued success in our focus areas of execution, innovation, and growth. With that, I'd like to pass the call over to Amol for a deeper review of the first quarter financials as well as our outlook for the remainder of the year. Amol?

Amol Chaubal, CFO

Thank you, Udit and good morning, everyone. As Udit outlined, we recorded net sales of $691 million in the first quarter, an increase of 16% in constant currency and an increase of 13% as reported. Looking more closely at our top line results for the quarter on Slide 9, in constant currency, first by operating segment. Waters Division grew 16%, while TA grew by 18%. By end market, our largest market category, pharma, grew 19%. Industrial grew 17% and academic and government grew 4%. In Pharma, we saw broad-based strength across segments, geographies, and applications in both large molecule and small molecule. Growth was led by the U.S. which was up over 35%. India, was up just under 30% and China grew mid-teens. In Industrial, our performance was also strong across all major geographies, with U.S., Europe, and China all growing 20% or above. Turning to academic and government. We saw a similar trend to last quarter with mid-single-digit growth as customer spending has become more active, led by China and the U.S. Now by geography, sales in Asia were up 14%, with China up 17%. The Americas grew 26% with the U.S. up 28%. And Europe grew 9%. In China, we saw broad performance across all our end markets which grew each up double digits. In the U.S., growth was broadly led by Pharma which was up almost 40% and industrial which grew over 20%. Growth was very strong in both instrument sales which grew almost 60% and recurring revenues which grew in the mid-teens. In Europe, growth was led by Industrial which grew 20% driven by strong growth in food and environmental. Sales of LC and MS instruments to pharma customers grew high teens as strong capital purchasing patterns continued on from last year. Udit already covered our growth by products and services, where instruments grew 26% for the quarter, chemistry grew 8%, and service grew 9%, driven by our commercial execution and new product contribution. Finally, TA had another great quarter with sales up 18%, led by strong growth in thermal analysis, microcalorimetry, and rheology. Demand for our TA products continues to be strong in all regions, with growth driven by advanced materials and chemicals, including batteries and sustainable polymers. Now, I would like to comment on our first quarter non-GAAP financial performance versus the prior year. Gross margin for the quarter increased by 40 basis points to 58.6% despite higher instrument mix, inflation pressures, and stronger U.S. dollar. This was driven by volume leverage and pricing. Operating margin for the quarter increased by 170 basis points to 30.3%, driven by volume leverage on operating expenses. In the quarter, our effective operating tax rate was 14.8%. Our average share count came in at 61 million shares which is about 1.7 million less than the first quarter of last year. Our non-GAAP earnings per fully diluted share for the first quarter increased 22% to $2.80 in comparison to $2.29 last year. On a GAAP basis, our earnings per fully diluted share increased to $2.62 compared to $2.37 last year. A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning and in the appendix of this presentation. Turning to free cash flow, capital deployment, and our balance sheet. We define free cash flow as cash from operations, less capital expenditures, and excludes special items. In the first quarter of 2022, free cash flow was about 25% of sales at $176 million after funding $28 million of capital expenditures. Excluded from free cash flow was $6 million relating to investment in our Taunton precision chemistry operations. In the first quarter, accounts receivable DSO came in at 81 days, down three days compared to first quarter of last year. Given higher sales volume and our proactive measures to secure supply, including building some electronic component safety stock, inventory increased by approximately $54 million in comparison to the prior year. 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 well-thought-out attractive, high-market, high-growth adjusting opportunity. In Q1, we repurchased approximately 493,000 shares of our common stock for $160 million. At the end of the quarter, our net debt position was $941 million with a net debt-to-EBITDA ratio of about 0.9%. Now as we look ahead for the remainder of the year, I would like to provide some updated context on our thoughts for 2022 which is on Slide 10. We've had a strong start to the year, driven by robust end market demand and strong commercial execution across our geographies. As we look ahead, we expect solid momentum to continue and that our near-term growth initiatives will continue to contribute to our performance. We also expect that we will be able to continue to address supply chain constraints and inflationary pressures and these challenges do not worsen over the remainder of the year. These dynamics support increasing the full year 2022 guidance to 7.5% to 9% constant currency sales growth, up from our initial guide in February of 5% to 7%. At current rates, a negative currency translation is expected to subtract approximately 3 percentage points, resulting in full year reported sales growth guidance of 4.5% to 6%. Gross margin for the full year is expected to be approximately 58.5% and operating margin is expected to be approximately 30.5%. We expect our full year net interest expense to be approximately $35 million and full year tax rate to be approximately 15.5%. Average diluted 2022 share count is expected to be approximately 60.6 million. Our share repurchase program will continue into 2022 and we'll provide quarterly updates as appropriate. Rolling all this together and on a non-GAAP basis, we are raising our full year 2022 earnings per fully diluted share guidance to the range of $11.90 to $12.10. This includes a negative currency impact of approximately 4 percentage points or $0.45 at current rates. Looking at the second quarter of 2022, we expect constant currency sales growth to be 6% to 8%. At current rates, currency translation is expected to subtract approximately 4 percentage points, resulting in second quarter reported sales growth guidance of 2% to 4%. Given the ongoing lockdowns in China, we anticipate a headwind of approximately 100 to 200 basis points to our growth for the second quarter, assuming lockdowns do not worsen which is factored in our second quarter guidance. Second quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $2.55 to $2.65. This includes a negative currency impact of approximately 5 percentage points or $0.13 at current rates.

Udit Batra, President and CEO

Thank you, Amol. So in summary, our teams continue to deliver excellent results despite the challenging environment with strong instrument growth and great traction for our new instrument products. We are laser-focused on execution, innovation, and growth. We continue to make progress executing against our enterprise priorities with our core initiatives delivering positively and contributing positively to our results. With that, we will now begin the Q&A session. Operator?

Operator, Operator

And our first question comes from Vijay Kumar of Evercore ISI.

Vijay Kumar, Analyst

Congratulations on an impressive Q1 performance. Udit, could you elaborate on the performance during the quarter? You mentioned new products in CROs. It seems like there's some debate in the market about whether there has been any pull forward in demand. Can you provide insights into your order books and clarify what you mean by new products? It appears that this reflects incremental demand rather than a pull forward. If you could discuss the factors driving performance in Q1 and how the order book is looking, that would be great.

Udit Batra, President and CEO

Thank you, Vijay. I’m very proud of what the team has achieved this quarter. To answer your question directly, no, orders are continuing to outpace sales, and that trend has continued this quarter as well, resulting in a healthy backlog. When looking at our overall growth compared to the market, some of our competitors recently reported low double-digit growth in their analytical instrument sales, while we are performing slightly better. This difference is mainly due to our operational excellence initiatives and the strong performance of our new products. Specifically, the Arc HPLC and Acuity Premier have exceeded expectations, with unit sales tripling compared to the same quarter last year. We are also seeing strong demand for our MAX premier columns, which are tailored for large molecules and biologics, benefiting from a favorable market for biologics. Overall, there has been no pull-forward of demand, and our new products are addressing significant market needs effectively.

Vijay Kumar, Analyst

That's helpful, Udit. Maybe one for Amol on the guidance here, Amol. Revenues, you beat the quarter by 800 basis points versus your prior guidance, right, $68 million for Q1 that annualizes to 200 basis points. You look at the annual guide raise, it was raised by 200 basis points. So I'm curious, Udit just mentioned that the order book is trending well above revenue. Is that perhaps due to conservatism related to a lockdown in China or some macro factors? Can you talk about what the guidance is assuming for the year?

Amol Chaubal, CFO

Yes. So thanks a lot, Vijay, for the question. So look, I mean, we are raising our full year guide by approximately 2% at constant currency. What is sort of dragging it down is how the U.S. dollar has moved between our last guide and this guide, right? So when we guided last in February, there was close to $25 million FX headwind on the full year revenue. Now it's at $85 million. So almost $60 million headwind coming in on top line. And likewise, on EPS, that is a $0.25 incremental headwind versus what we guided before because now the EPS headwind is at $0.45. So that's all factored into our guidance. Despite some of these challenging macroeconomic conditions, we are raising both our revenue guide and our EPS guide. What that does assume is 6% to 8% Q2 and sort of a 5% to 7% second half of the year. And again there, we are putting our guide prudently given the macroeconomic conditions and we continue to monitor that.

Udit Batra, President and CEO

Yes. So Vijay, I think just maybe one other comment to build on this. Look, we're super, super pleased with what's happened in Q1. I think there will be no doubt about that. It's a broadly good performance across instruments, across consumables, across all geographies and end markets. That said, I mean, there are still geopolitical issues. There are still macroeconomic concerns and there are still supply chain challenges out there. And we feel that it's prudent to guide the way we have. And I think that's really what's going on in our mindset at this point. But it's still a raise even despite all those challenges, it's still a raise from what we have said in the past.

Operator, Operator

The next question is coming from Rachel Vatnsdal of JPMorgan.

Rachel Vatnsdal, Analyst

Could you walk us through your latest pricing for the year? You previously mentioned about 150 basis points, but inflation remains a concern. Can you provide any updates on that this year? Additionally, have you encountered any resistance from your customers regarding price increases thus far?

Udit Batra, President and CEO

Thank you for your question, Rachel. Let’s take a moment to focus on pricing. Our gross margin increased by about 40 basis points this quarter, and our operating margin rose by approximately 170 basis points. This improvement is attributed to three factors. First, pricing, which I'll elaborate on shortly; second, productivity improvements driven by higher volume; and third, the introduction of new products that provide us with additional leverage. Regarding pricing, we have seen an increase of around 200 basis points this quarter. It's important to note that part of our sales this quarter resulted from orders placed in the third and fourth quarters of the previous year, when our pricing had not yet been fully implemented. We are comfortable with our position because we are working closely with our customers. There are extensive discussions about pricing, and whenever we implement price increases, we engage in detailed conversations with our customers about the reasons behind these changes. As long as we communicate transparently and ensure our customers understand our rationale, we believe we can maintain these price increases.

Rachel Vatnsdal, Analyst

Great. And then just another question on China here. So you flagged the 100 to 200 basis points of headwind in China during 2Q stemming from the current lockdown. So can you just talk about what you're seeing in that market or confidence and how quickly China can return to growth post-lockdown? And then for China, you also flagged that CROs had over 50% growth year-over-year. So can you just spend a minute talking about what specifically drove that outpaced growth in the China CRO segment.

Udit Batra, President and CEO

Thanks, Rachel. Despite the ongoing lockdowns, China has been one of our strongest performers geographically. We experienced broad-based growth, particularly in the pharmaceutical and industrial sectors, achieving 17% growth for the quarter. Both pharma and industrial segments saw growth in the mid-teens, while academic and government segments were in the low teens this quarter. The underlying demand reflects global trends, and we've executed well on our initiatives, including instrument replacements and the successful rollout of our new products, Arc HPLC and Acuity Premier. Additionally, we saw significant demand for our products in the CDMO segment, where we grew over 50%. The value we provide extends beyond our products to include training our CDMO customers on method transfer and development for complex molecules. Overall, the quarter has been strong for China, although there were some challenges to our recurring revenues due to limited access in the last week. Looking ahead, we expect a 100 to 200 basis point headwind in the second quarter because the lockdowns are still inconsistent. While we are seeing signs of easing, it's hard to predict the extent of market openness going forward. We remain optimistic about China and anticipate finishing the year with low double-digit to mid-double-digit growth, with mid-teen growth for the full year. However, it's wise to approach Q2 with the expectation of a 100 to 200 basis point headwind compared to Q1. Overall, we're hopeful about the market, pleased with our execution on new products and customer engagement, and while we are very optimistic in the long term, we are also being cautious in the short term regarding market conditions.

Operator, Operator

The next question is coming from Dan Brennan of Cowen & Company.

Dan Brennan, Analyst

Great. Congratulations on a very strong quarter. Udit, could you walk us through the impact of the new instruments this quarter? I know you mentioned year-over-year growth, but could you clarify the specific impact? Also, as we consider the new instruments and opportunities, what should we expect for 2022? Additionally, could you elaborate on the end market growth and share gain that you've mentioned earlier?

Udit Batra, President and CEO

Okay. I'll take this step by step. Overall, we saw instrument growth of 26%. We don’t typically detail the contribution from new products, but comparing this to the overall market shows that this growth represents a strong performance relative to our peers. This growth has two key drivers: operational excellence, an increase in instrument replacement, and the traction of new products. Our new product offerings are diverse; they include not just liquid chromatography systems but also mass spectrometry products. For liquid chromatography, we have Arc and Acuity Premier, with Acuity Premier specifically focusing on biologics and novel modalities applications. In mass spectrometry, we launched our MRT platform, receiving positive feedback from customers, and our newly released Xevo TQ-XS Absolute mass spectrometer, which is 15 times more sensitive than the leading competitor for anionic compounds. These compounds are commonly found in mRNA, oligonucleotides, and pesticides in various testing environments. I’m proud that this new system not only performs well but is also environmentally friendly, using 50% less electricity and generating 50% less heat compared to top competitors. Alongside the hardware, we also provide a complete system with software, having introduced our new Waters connect mass quantitation software recently, which has garnered strong interest. Customers benefit from a compact system with improved performance and sensitivity. We see strong demand as we aim to replace around 800 tandem quadrupoles. Additionally, TA has shown strong performance, growing 18% while Waters grew 16%, driven by demand for thermal and rheology instruments. The TA team is targeting new markets like battery testing, which is gaining traction albeit from a smaller base. The 26% growth reflects strong feedback on our new products. Furthermore, our new instrument Vitality Index, which assesses sales contributions from launches over the last few years, has reached an all-time high of 15%. Our new products are meeting market needs, and we have refined our launch processes, including the repositioning of the BioAccord. Regarding market trends, there was no weakness this quarter. Pharmaceuticals showed high-teens growth, industrials also grew in the high teens, and academic and government sectors were at 4%. We’re optimistic about all end markets and regions. China is performing well despite challenges, and India continues to grow in the mid-20s. Notably, the U.S. experienced 29% growth from Waters, which positively impacts our gross margins due to better pricing here. Overall, we are very satisfied with this quarter and I hope I covered your questions.

Operator, Operator

The next question is coming from Josh Waldman, Cleveland Research.

Josh Waldman, Analyst

One for Amol and then one for Udit. Amol, I wondered if you could provide a bit more color on the moving pieces in the updated EPS guide, there may be a full bridge. I mean just trying to get a better sense on how variables beyond FX, like the stronger revenue, improved margin outlook were factored into the guide and maybe if there are other offsets going on beyond FX?

Amol Chaubal, CFO

Sure. Thanks, Josh. So look at it from two vantage points, right? So on a full-year basis, we are raising our EPS guidance but that does include a $0.25 incremental headwind versus the guide that we provided in February. And so in a way, if you say, look, we beat consensus in Q1 by about $0.45, $0.25 of that is lost in year to go sort in FX and the rest of it, we are increasing our guide on EPS, plus or minus a little bit of spending timing switching between Q1 to Q2. So it's largely consistent with how we are guiding full-year revenue increase and most of the gap is largely driven by change in FX assumptions.

Udit Batra, President and CEO

Thank you for the question, Josh. The orders have once again exceeded sales, resulting in a growing backlog. We did not need to reduce the backlog to achieve the impressive results seen this quarter, which I believe is due to our strong operational performance and the commitment of our teams. The recurring question about how we managed the supply chain challenges is valid. While I can't say the issues are completely resolved after three quarters of dealing with them, we do have a strategy that seems effective. We've invested significant time understanding the supply chains for key materials like semiconductors and the various suppliers involved. This has given us a better grasp of how to source these essential components. Additionally, we have fostered strong collaborations with our top chip suppliers, which has been invaluable, especially in tough times. We regularly communicate with our customers about supply shortages and often find substitutes for them. Furthermore, our collaborative approach to problem-solving has made it easier to resolve issues. Our senior leadership team, including Amol and myself, is actively engaging with customers on the ground, which reinforces our operational excellence and deep collaborative efforts. We have successfully navigated the supply chain challenges without tapping into the backlog to attain these results. I hope this provides you with a clearer understanding.

Operator, Operator

The next question is coming from Puneet Souda, SVB Securities.

Puneet Souda, Analyst

There's been remarkable growth in instruments. Udit, if we take a step back to examine the 29% growth in the U.S. pharmaceutical sector that you mentioned, what factors are driving this demand based on your discussions with customers? Specifically, are we seeing this demand arising from the expansion of new facilities among CDMOs or is it more from the existing facilities? It's clear that your growth is surpassing what we observe with peers, who are also seeing growth but not to the same extent. I'm trying to grasp the overall dynamics in the pharmaceutical sector, particularly against the current macroeconomic backdrop.

Udit Batra, President and CEO

Thank you for the question, Puneet. It's quite comprehensive. It begins with our focus on operational excellence. We've shared five initiatives, and we have a new leader in the United States who was appointed just before I joined the company. He has been outstanding with his team. We've increased our on-the-ground presence and are utilizing our CRM system diligently to better understand demand. There was a buildup of a replacement backlog in the U.S. for our instruments, and our new products are performing exceptionally well. E-commerce in the U.S. is outpacing other regions, and we are seeing very positive traction from our Chief Marketing Officer efforts there. Regarding our new products, which are specifically tailored for our biologics customers, we have the BioAccord, which has been repositioned to focus on upstream clone selection and has gained significant interest. In the downstream QA/QC space, the work we began around two years ago with major pharmaceutical companies that have large monoclonal antibody pipelines is showing positive results, which is promising for the future. Additionally, the MAX Peak columns and Acuity Premier technology were custom-designed for biologics that have an affinity for metal surfaces, and these have also gained a lot of traction. Most recently, the Xevo TQ Absolute has showcased excellent performance as hardware while minimizing environmental impact. All of these factors—operational excellence, innovative products, and strong leadership that fosters collaboration—are contributing to the strong performance in the U.S., which in turn positively influences our gross margin. That's great. And then a brief follow-up on the BioAccord actually. We recognize that the field team was doing a number of demos throughout the quarter in the last couple of months for BioAccord and bioprocessing applications and you're obviously highlighting the University of Delaware work that you're doing here with the new center. Maybe just help us understand when should we start to think about meaningful contribution from some of the new bioseparations initiatives and broadly bioprocessing customers, taking on BioAccord? Puneet, I'll reiterate what I mentioned last quarter. In the short term, you can expect our growth to be around 5% to 7%, with approximately a 1% impact from our five initiatives. Starting in the midterm, around 2024, you should begin to see Waters entering a range where the effects of these new initiatives become noticeable. While I can't provide a precise timeline, I can assure you that we are gaining significant traction, especially in the bioseparations sector and specifically with the BioAccord. The BioAccord, as originally designed, has two major applications. The first involves analyzing spent medium, where we can evaluate nearly 200 analytes. Our customers in this area prefer a straightforward instrument that maintains sophistication, as they need to assess which compounds might affect their cell culture without limiting their analysis to just a few compounds. The BioAccord offers ease of use while being a highly advanced instrument, which is crucial when considering spent media. The second application pertains to peptide mapping and overall drug substances, with a broad range of applications. Waters has an edge here because we can create simple workflows. Our customers do not want to sacrifice sophistication; they wish to identify each amino acid in the peptide sequence, understand the confirmation, and determine the molecule's size. They want both the instrument and workflow to be user-friendly, and we are developing various workflows to achieve that. I feel very optimistic about this. As I mentioned, you should anticipate about 100 basis points of growth impact in the midterm stemming from the adjacencies we've discussed previously. While I can't be exact about that, I'm pleased to report there's a lot of enthusiasm among our team and customers regarding applications in bioseparations and bioprocessing.

Operator, Operator

The next question is coming from Matt Sykes of Goldman Sachs.

Matt Sykes, Analyst

Congrats on the quarter. Udit, maybe just big picture first question. I mean one of the things that you did earlier in 10 year was to try to bring the R&D and commercial functions closer together? And then noticing how the new instrument demand has really picked up and pretty successful launches. How much do you attribute to the success of these new products to some of the reorganization you did within the R&D commercial teams? And how much more there to go for in bringing those two close together? Like should we look for increased momentum with the new products because of the changes that you made?

Udit Batra, President and CEO

It's a great question and I appreciate you asking about the qualitative aspects. Essentially, it boils down to collaboration. Waters is recognized for its technical excellence and strong customer connections. By aligning our commercial team more closely with our development colleagues, we can incorporate commercial insights into our development process much earlier. This has fostered greater ownership from our commercial teams, not only in understanding the products but also in driving their launches. This collaboration has contributed significantly to the success we've seen with the MAX peak premier columns. The sales team is enthusiastic about Acuity Premier and the Arc HPLC, which were developed in response to customer requests relayed by our sales team. With both teams working together, sitting in operational reviews, and participating in Innovation Board discussions, we are noticing improved market reception for new products based on the feedback we receive. It's important to understand that results won’t be immediate, and we must gather customer feedback which is then seamlessly communicated back to R&D. A prime example of this is our recent software launch with Waters Connect, which began as a compliant-ready application. Customers expressed a need for enterprise capabilities, and our development team quickly acted on that feedback. The same goes for BioAccord, where we initially focused on QA/QC. Now, with enhanced collaboration, we can respond to customer requests for simpler workflows for oligonucleotides or spend media, guiding our R&D efforts. I could elaborate further; it's genuinely exciting. As a former researcher, I find our discussions to be pragmatic, highly collaborative, and a valuable learning opportunity for both the commercial and R&D teams.

Matt Sykes, Analyst

Great. And then just quickly, just to maybe on the academic end market. Just talk about trends you're seeing there. You had some pretty strong growth in China. But maybe ex-China, what you're seeing in the academic end market in this quarter? And what you're looking for for this year?

Udit Batra, President and CEO

Academic and government sectors performed particularly well in both the U.S. and China. However, I want to clarify that our turnaround in these areas is not complete. We have only just started to remap the key opinion leaders and enhance our e-procurement and e-commerce availability for academic institutions. There is still a lot of work ahead. The U.S. had significant traction in the first quarter, largely due to increased direct customer engagement. Meanwhile, China has benefited from gradual relief in VAT regulations, leading to increased customer purchases compared to the past. It's important not to assume we have fully turned the corner just yet; while we achieved good results this quarter, we continue to work on improvements in that segment. I anticipate further advancements moving forward.

Operator, Operator

The next question is coming from Jack Meehan of Nephron Research.

Jack Meehan, Analyst

I wanted to ask about recurring sales. Just given the instrument upside in the first quarter, what does guidance now assume for chemistry sales for the remainder of the year? I was curious whether you think some of this bolus of upside here could have some carry through on the recurring growth expectations?

Udit Batra, President and CEO

Yes. So Jack, great question. I mean the instrument growth will continue to drive recurring revenue growth, both chemistry and service. At this point, our guidance sort of assumes service and chemistry would be around high single digits, low double digits for the second half of the year. But again, I mean, this thing is not just here and now, right? These instruments will continue to produce revenue for the next seven, eight years. And the way we are performing on instrument replacement, we also think our instruments are recurring revenue because we've now built muscle strength and systems and processes so that the entire organization looks at instruments as a recurring revenue.

Amol Chaubal, CFO

Historically, we've seen recurring revenues slightly higher than mid-single digits during Waters' best years. For the past few quarters, we've been achieving double digits or low double digits. If you take into account the one day fewer this quarter compared to last year, recurring revenues would be nearly 10%. We are very optimistic about this, especially with the contributions from new products and our service team. The new product contribution includes MAX Peak Premier and a strong pipeline focused on large molecules, as we are a world leader in separations and are now concentrating on complex large molecules while collaborating with our customers. On the service side, we previously mentioned increased attachment rates, which continue to improve, leading to higher service attachment rates. It's not just the transition from instruments to consumables and services; there are also unique contributions from new products and innovative service offerings. I'm really excited about our progress. I couldn't be prouder of the team for their exceptional performance.

Udit Batra, President and CEO

And plus e-commerce is accretive and CDMOs are high volume. So they are all adding up to recurring revenue.

Operator, Operator

And our last question is coming from Dan Arias of Stifel.

Dan Arias, Analyst

Amol, just as a follow-up to the things that you've done on the supply chain, how much inventory safety stock on critical components would you say you have at this point?

Amol Chaubal, CFO

That's a great question, Dan. We try to build safety stock wherever possible. The situation with electronic components has not improved since Q4 or Q1. It’s an ongoing issue. Part of the increase in inventory is around $54 million. We have a production plan in Q2 that aligns with demand in Q3, though we may still face shortages of certain components. We are continuously working to resolve these issues with our suppliers, the market, or through innovative engineering. If everything were solid and in inventory, it would still not tell the full story. The amount of electronic components that life science tools purchase represents less than a single-digit percentage of their annual production. Essentially, everyone is in a similar situation, lagging behind sectors like cellular networks and vehicles. We are actively managing this situation every day.

Udit Batra, President and CEO

Yes, it's a great question. As Amol summarized, we are gaining a deeper understanding of the supply chain, not just our own but also the chip suppliers and their customers. We've had many discussions with various tiers of our supply chain and engaged in high-level conversations that foster collaboration and innovative problem-solving. That's what has helped us make progress so far. Our teams are still committed to overcoming these challenges, as the situation remains ongoing. If there is a solution, we seem to have a promising approach, and our teams are dedicated to tackling these issues. Thank you for your participation. On behalf of the Waters management team, I appreciate your continued support and interest. I also want to inform you that we will be hosting our 2022 Investor Day in just over two weeks on May 19 in New York City at the New York Stock Exchange, starting at 8:30 a.m. Eastern Time. The main presentation will be webcast live on our Investor Relations website at 10 a.m. If you'd like to attend the event in person, please contact our IR team using the details on Slide 13. Thank you and have a wonderful day.