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..

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 [Indiscernible] 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'd like to turn the call over to Dr. Udit Batra, Waters President and CEO, Udit..

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 these 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 ailment.

Meanwhile, our commercial initiatives and strong traction of new products by Premier Columns and instruments and Arc HPLC were Venn 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 in did you guys 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 second continued strength in our pharma and industrial end markets. That is demand for our instruments and regarding revenue products.

This translates to a 6% stacked cater for the quarter versus 2019 on a constant-currency basis. Year-to-date, revenue has increased 21% with the constant currency stack 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 a 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 mid-teens for the quarter. industrial, growth was reasonably broad. And next our beauty business, which saw strong growth globally internal 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 the bit of 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 mid-teens, year-over-year. So, really no challenge from a demand perspective.

In the U.S., growth was led by a broad-based continued strength in our pharma and industrial-end markets. In pharma, we saw strength across our instrument and Galaxy portfolios. In Industrial, our Waters and [Indiscernible] 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..

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.

At products and services, customer demand for our instruments, remained strong, after an invested first half of the year, when recurring dividends also continued to see sustained growth. Overall, instrument sales grew 10% for the quarter, driven by robust demand on improved commercial execution, new product contribution, 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..

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 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 remain 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 when compared to the -- compared to our 2019 [Indiscernible] We're pleased that our Premier Technology is continuing to provide important benefits in separation and certification of mRNA and oligonucleotide molecules, given its unique ability to reduce selected 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 its -- 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 2-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, expect us to grow that low double-digits for the year versus 2021. And new products continue to do well. We are 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 revenue expected from these sources for this year in total in separate and unseparate to the replacement initiative. 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 -- we operate a strong core business in healthy and [Indiscernible] 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 3 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 a small molecule, given the sheer complexity of attributes you need to measure. A simple and robust tool that can measure multiple absolutes is a potential solution. We believe that the BioAccord is the right LC-MS tool that can begin to address this challenge.

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's, a leader in bioprocessing. If you could combine our waters BIO4 system as a bioprocess analyzer with Cytori's and their bioreactors, giving scientist 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 6 weeks to analyze down to only 2 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 of engineers will be able to master its operation within 1 to 2 weeks.

In fact, one of our customers had 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 of rough substance, 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. [Indiscernible] partnerships, researchers from both Waters and the university of Delaware would identify and develop solutions.

That can provide better aseptic sampling, makes center 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 Operator Amol for a deeper review of third quarter financials and our outlook for the remainder of 2021.

Amol?.

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%. [Indiscernible] revenues were up 13% and service revenues were up 10%. As we noted in our last earnings call, that recurring revenues were not impacted by a difference in calendar days this quarter. Looking ahead, that are 6 fewer days in 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 one leverage and 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 on 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 coming in at 61.9 million shares or about 400 thousand less than the third quarter of last year. As a result of 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 [Indiscernible] 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 [Indiscernible] 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 in monthly increased by $62 million in comparison to the prior year.

We maintain a strong balance sheet, access to liquidity, and 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 net debt to EBITDA ratio about one.

Our capital deployment priority [Indiscernible] 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 update on our parts 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, elevated year-end budget plus spending. In addition, we have six fewer calendar days in the fourth quarter of this year. These dynamics supports updated full-year 2021 guidance and 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 [Indiscernible] purchase program will also continue into Q4 and will provide quarterly updates as appropriate [Indiscernible] August together on a non-GAAP basis [Indiscernible] 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 at worse 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 look 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 had worse supply impact from COVID. Now, I would like to turn it back to Udit for summary comments.

Udit?.

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 pack. 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. They're continuing to crack 6% on a two-year CAGR tax 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 reaching these higher growth rate area in adjacent markets. With that, we will now begin the Q&A session. Thank you.

Operator?.

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

Great. Thanks, guys. Thanks for the call, Thanks for the questions here.

Maybe first off, Udit, just on 2022, you had provided some early look here with some of the drivers, come to how they're going to impact -- and just wondering if we think ahead, given the comp becoming off of for 2021, what's the right way to think about the in the early look for 2022 here? Consensus had you growing organically about 5%, which would imply a pretty nice acceleration on a 2-year stack basis..

Thanks for the question [Indiscernible] Look for us just to -- just to this year. I mean, we're [Indiscernible] at 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 strike. 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 [Indiscernible] the initiatives that we've outlined, including the replacement, including additional penetration in different channels, and better launch of new products. So wherever the market is, we expect them 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 four, we should be for Black diversified, we should be fighting, and at 6, we should be 6 plus. And there's no reason to believe that the market should slowdown.

All our end markets are doing super well, I mean, you saw that year-to-date both pharma and industrial are tracking close to 20% on a two-year basis. They're well ahead of what we've seen over the history of Waters. So we really good going into the next year and we have concrete initiatives that make us believe that we should be [Indiscernible].

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..

Dan, thanks. Thanks for the question. But first, we have to make sure we do more of the same, right? I mean, and that's -- that I feel really good about, especially with the leadership of John Pratt and [Indiscernible], really executing even further on our initiatives. Second, feel very good about our ability to bring in new products to the market.

They have tremendous, tremendous traction, right, especially the products that we launched recently, Arc HPLC, the Premier Columns, both adding significantly to the top line. and the MRT. The SELECT SERIES MRT has a lot of interest from our customers across proteomics, across imaging, and across 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, look, we've outlined the areas of growth we're interested in. And I think what you will see is that we're not just interested in entering these areas.

Really meaning we are really thinking hard about what are the other key problems to solve. So as an example, with bioprocessing, as an engineer and freshly [Indiscernible] after finishing my PhD days into my new job, I was actually doing manufacturing plant where we were still I manufacturing vaccines using chicken embryo eggs.

So a fact with eggs, opening them up, and I will tell you the rest of the process. The process was designing many, many years ago, probably decades ago.

And the reason that you were -- that is -- and that's how MMR vaccines are [Indiscernible] manufacturer today, why we much better technology in some culture to be able to manufacture the same type of vaccine.

And the reason for that sort of conservatism is that the process and the products are indistinguishable in the drug master file that you filed of to Biologics. And that's something that we really want to work on. We believe that our collaboration with the University of Delaware will help us make strides in that direction.

And I'm super excited about what we've just announced with Sartorius. I mean Sartorius is a leader in bioprocessing and they have probably the deepest penetration of small early-stage bioreactors that are used for clone selection. And that collaboration has two benefits.

One we're able to take the BioAccord and improve a process that takes about six weeks to down to two days. And that's been shown by -- in collaboration with Sartorius scientists and our scientists, as well as customers, so very excited about that. There are several 100 Amber [Indiscernible] area where we would have not otherwise entered.

I mean, in this case, we want to enter with the capabilities that people feel extremely good about the initiatives. So in summary, continuing the commercial momentum, second, recharging innovation, and third, looking to enter these faster growth areas through partnerships, and increasing the open to M&A, if it makes sense.

But I remind you that for M&A, we are a financially disciplined Company, so you won't see us jumping in [Indiscernible] into something that [Indiscernible].

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

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?.

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. And unfortunately, the shipment got stuck in the last few days of the quarter, which made it to our customers now.

And if you included that into the Q3 numbers, it will be high single-digits to low-teens for China growth. So really, nothing to flat from a China perspective. In fact, I would say very happy with our new leader in China who's been implementing initiatives really really well, Arc HPLC has great traction.

We have built really strong commercial momentum even in our food and environmental markets [Indiscernible]. we are extremely good about where we are in China, so nothing is really to flag from a demand perspective.

And on your question on supply chain, look, like everybody else in fact -- like everybody else, we are seeing constraints in shipping in different boards that appear sporadically, right? We don't think it's a systemic issue. It's a sporadic issue, and we're not unique in experiencing those challenges.

In fact, I was with a few colleagues from different industries last week, and virtually, everyone is experiencing sort of a little bit of unpredictable changes in supply chains. So we're not immune to that, and I think if somebody tells you that they are -- that's why we're not shipping as much.

And then the other two pieces are of the supply chain s that are being talked a lot are are inflation; 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 to China.

Really nothing to flag, no problem at all from a demand perspective, and from a supply chain perspective. Feeling what everybody else feels, really happy with the way our teams are working through some of these issues and starting on prices where it makes sense to our customers..

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 this fourth quarter with the budget flush?.

And then Tycho, for AMG, I mean, we do year-to-date growing up 36%. And if you look at the consumables revenue, that's tracking nicely. So there's activity across our customers. So tracking in double-digits, so the recurring revenues are still growing double-digit with other end-market.

So nothing to point out systemically overall, if you look at the market. Now, the performance is a bit different by region. Europe is doing extremely well. But as China and the U.S.

are bit slower, and that has to do with [Indiscernible] One, I do have pointed out, academic endowment is a small portion of our business and historically has not been a huge focus for Waters. We have, with John 's arrival, we had started to increase our focus on that segment, as well.

And if you think about the instruments part of the business, that really depends on the [Indiscernible] relationships and customer relationships. And this over time -- and pharma slowed down in many markets. And in Europe, we've come out of the gates very well.

We've started to reestablish those relationships and you'll see the impact on the results year-to-date. In U.S. and China, that's work in progress and we'll give you updates as we go along. I'm optimistic with the activity I see, especially on the e-commerce and in procurement. And you see the results in our consumables business.

And on the instruments side, we're improving [Indiscernible] relationships. I expect that to return, as well..

Thank you.

Our next question is Vijay Kumar, Evercore?.

Hey guys, good morning and thanks for taking my question. Udit, that one for you. The $12 million shipping delay in 2Q. What segment did that impact? Was the instrument impact or government, academia. I'm curious how do you risk as Q4 from any supply chain disruption, I'm a bit curious which visibility you have..

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, that the $12 million have made it to the customers. And it is a bit spread, that it's -- what it's basically all instruments. It's not any consumables, so it's all instruments and it's made it to the customers.

A bit spread across the different customer segments online, industrial, as well as academic and government. So nothing one segment, feeling more pain. And in terms of how we're dealing with these issues, look and, have a superb supply chain department. We have extreme transparency on the shipments and the timing of the shipments.

And we started to build inventory where we see order spikes in the different regions. And so we feel that we should be able to manage through the volatility that you are seeing in different [Indiscernible]..

That's helpful, Udit. I did have one on gross margins. 3Q gross margin is very consistent with 2Q, but if we recall, FX has an impact on you guys, at the gross margin line.

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?.

So we tell you -- we do expect our gross margins in Q4 to be about 58% to 59%, right? And we've seen so far in Q3, as we said, 1% tailwind onto cross margin. Looking ahead, I mean, the dollar has strengthened and we do have -- most currencies we are operationally has to accept bound and that's the currency where we are exposed.

But other than that, we've sort of included that in our guide, and that's where you see BDO close to $0.10 headwind on EPS versus the last earnings call in our Q4 EPS guidance..

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

Thank you. Good morning. I'm wondering that -- just get a little bit more color on the shipment you flagged in China, the 12 million. So that was delivered in October. Obviously, the supply chain dynamic seems to be getting incrementally more challenging each week.

So was just curious what you'd -- how things are going there, and do you think -- does your guidance contemplate any orders could slip from 4Q and 2022 as well?.

Morning, Jack. Look, nothing that we have visibility on that will go from Q4 to Q1. As I said, there is increased inventory in the different regions where we are seeing the demand going extremely, extremely well.

And from an overall perspective, the $12 million was shipped rather promptly in Q4, right? It's just unfortunate that hinge on the days of Doug and the shipping throughout that Doug do it at the end of the quarter. So I don't see anything that gives us visibility at this point that would tell us that they would be an impact in Q4.

And in terms of what is within our hands or you heard me talk about earlier, the extreme transparency that we have on supply chain, the processes that are much, much improved over the last year, and then finally, the increased inventory is a different reason.

So feel reasonably comfortable that we should be able to manage a rather ambitious end of the year..

Great. And then, was just curious about labor trends. You called out the fact that you are now above -- recovering from the pre -pandemic levels.

Was just curious if you felt like there was more spend coming in 4Q and just maybe overall competition for labor, how you think your managing, in terms of retention?.

Yeah, look, U.S. labor continues to be a place where we're seeing inflationary pressures, right? I think with a strong HR function, we've put a lot of measures in place to reduce attrition and sustained talent, right? However, that doesn't play out so much in terms of cost and operating expenses into Q4.

What -- as you model Q4, what you have to keep in mind is Q4 is a heavy revenue partner for us. And that results in commission payment accrued heavily in Q4, which is why it's typically seen as historically operating expenses especially as G&A on every other Q4. And that's reflected in archives..

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

Thanks, guys. Udit. maybe one on the '22 commentary. You said you appreciate you're expecting to continue to grow above market.

When we look at 2021, it feels like one of the accelerants for you guys with the replacement cycle, I think last quarter you talked about maybe setting up as an opportunity for you guys to continue on that front or was that mainly condensed into 2021 when we think about what the growth rate could look like there?.

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. Brad remarks. Look [Indiscernible] off what save 1% to 1.5% extra [Indiscernible] on a stack basis.

Due to the initiatives and the initiatives we're not just the instruments that basement. We saw solid attachment increase of aftermarket. We saw e-commerce adoption growth from 20-27-28%. Contact of [Indiscernible] grew, which was a new channel for us, grew roughly 40% on a two-year basis. And new product contribution also did extreme good.

So across-the-board 1% to 1.5%, sort of benefits, or what I would say the base growth and robust end markets. Next year, we think that's roughly 1% versus a base market growth of whatever the base market goes with lease. So for instrument replacement, this year, we had roughly 30 million or so of benefit.

Next year to be $40 million, which is 10 million incremental, right. So that's how I would think about it, right. So for service, 200 basis points, another 100 basis points on top. So the 200 basis points already benefits us next year. And then e-commerce goes, and anything we can read the charts.

So I think that for me is how I would think about 2022 and beyond, right? And as you think about what's happening beyond, this is now part of our CRM system. This is part of our execution that John Pratt and Jianqing are implementing, right.

So we now have the full list of HPLC, UPLC, as well as the Tandem-quads in the CRM system that our reps are going through step-by-step and replacing. And this will continue next year, and will go on into the year after. Same thing is true for our service attachment rates. We know where the attachment rates are.

We're using that database to now go after it. So it has become part of the DNA of the organization, and I think that gives me confidence that we will be able to accelerate also next year. And then finally, new products, as I mentioned are doing very well.

MRT has just started to pick up a lot of interest, we've talked about Arc HPLC and Premier doing very well. So we feel really good about that 1% incremental over what would be any sort of market growth..

That's helpful. Appreciate that. And then maybe just a quick one on the industrial market [Indiscernible] a pretty good results there.

It's has been a little more mixed across the sector, you could fuse talk about what you're seeing there and expectations going forward?.

I mean, across all end markets, right? I mean, you look at pharma and all you'd look at Industrial. Industrial, it's roughly 6% to 6.5% stack growth, right? Historically, that's been 4% to 5%. So we're [Indiscernible] even bigger acceleration, relatively speaking in Industrial versus you seeing [Indiscernible] pharma.

And I must say, we're seeing extremely, extremely good performance out of the TA business. So it's nice performance across the different customer segments, be it in advance materials, be it batteries, where we test studies for renewable batteries. And I don't need to tell you why that's important these days.

Electronics that's going in the high teens, double-digits, the Life Science part of our TA business is also growing nicely. So in TA, we're seeing really, really good momentum, and again on a stack basis, even outpacing the overall business of the 8% or so growth.

So I think industrial, we feel that our customers have found a way to work despite the pandemic. Our service engineers and our sales teams have access to many of these customers, initially virtually, but in many regions, increasingly also, physically, our service engineers both across Waters and TA are actually more welcome at our customer side.

And many of our -- many of their own employees. So industrial is -- has picked up nice, strengthened. It's true across all geographies. China is doing well. U.S., Europe, the rest of Asia also doing really quite well. That's the real area of strength, and we're lucky to have a business like TA that's pointed in that direction..

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

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 SPAC. 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 SPAC side of me, sort of how do you see some of those new product introductions playing out this quarter and going forward?.

Actually, overall -- and again, I talked more in terms of stack growth, the estimated growth for the year is roughly 30% and mass SPAC doing extremely well as even higher than 30% mass spect psyche Shiloh's 30%. So nothing that you will between the two sort of product platforms. But I think it makes more sense to talk about it on a stack basis.

And historically, Waters have seen instrument growth between 3% and 4%. We've sort of steadily now year-to-date stack fuel is steadily on 5%. So really nice momentum. And this is through both of course, as well as mass specs and nothing really can sort of differentiate the two. Now, you asked about mass spec in particular.

In mass spec, the demand is driven by across all our portfolios for us, I mean, across users in IVAS mass spec across our Tandem-quads, which are both used -- with the single quarter used for intact masks and also our Tandem-quads that are used in development, as well as food and environmental.

And then of course, as I mentioned, the bioprocessing yields momentum and a lot of interest in the bioprocessing arena. So mass spec is going from strength to strength. Coming to the second part of your question on new products, as I pointed out on the -- in the prepared remarks right on -- just focusing on HPLC for a minute.

Arc HPLC, as well as the premier technology, which includes columns, as well as the application of this unique technology to our instruments as that to roughly $45 million in sales in 2021, we expect that to go up to $60 plus million, sort of $15 million or so incremental. That's in the anticipate on March SPAC.

New applications from BioAccord, I already mentioned that in the prepared remarks. And the MRT has a lot of interest from many of our customers, especially ones who want to use it in the proteomics space and for imaging with our DESI technology, which can be used under ambient conditions which is quite unique.

Again, new products, what is that? How HQ, introducing game-changing new products. I think what we're doing differently is just making sure that there is a lot of collection once we launch these products. And they're not just [Indiscernible]..

Quick follow-up on the OpEx side of [Indiscernible] both came in a little better than we expected our model. I was just wondering if there's any onetime 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 the weight of 4Q in China, how should that flow through the model? Is that about a $0.05 to $0.10 benefit to 4Q EPS?.

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

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

Yeah, hi. Thanks for taking my question. So first one is just I wanted to clarify. Obviously, it's instrumentation was strong last quarter.

And if you pull in this $12 million order back into 3Q, that would be strong this quarter as well, since -- just wanted to understand if there is sort of application-wise, what is driving the instrumentation sale? And maybe just if you could elaborate a little bit, if there was any in terms of QA/QC of vaccines, maybe the analysis of mRNA cap structure, there were some applications, notes published by Waters teams around that.

So I just wanted to understand if you're working on QA/QC side of the proteins or mRNA Vaccines, or what does the applications that are driving the instrumentation growth that we've seen here over the last few quarters?.

Look, the instrument growth is driven by strong, robust end markets at our commercial execution. Again, it's our initiatives, the age replacement via your products and your question is, what is increased applications. And I would break it into two parts. One, we had indeed seen increased application of our technology in oligonucleotide mRNA.

So claims to sign that somebody from the leading mRNA companies, Cambridge recently and they basically said, look, huge aggregation problems with plasmics with us, help them solve these problems by using Premier and to [Indiscernible] by using LC-MS to elucidate the [Indiscernible] of the molecules themselves. So good application there.

And a lot of them being in development, in discovery. And hopefully increasingly in QA/QC.

Second area that I would comment on is the wider application of the BioAccord if you'll recall, product was initially launched, really focused on LC-MS, which we still – in QA/QC, we still believe that LC-MS has a strong place in QA/QC provided, the instrument that you have is simple, robust, and fast, and give you faster results.

But, that same value proposition is equally relevant in early stage development of complex Biologics. And we're seeing really good application there. We demonstrated with Sartorius that some experiments that take 6 weeks can now be turned around within two days. And this has been replicated in Sartorius ' labs, our labs and in several customer labs.

As you can imagine, there's a ton of excitement on that front. And the BioAccord is rather unique here, the results are fast. It's a simple-to-use instrument, even somebody like me can use it.

And it provides you a wide range of results, not just on cell-culture media applications, where it is much wider than any sort of application used today, but also on the drug substance.

So seeing wider application of our technologies, I'm really excited about where LC-MS is going -- especially the BioAccord with its simplicity and robustness, [Indiscernible] early stage development of [Indiscernible]..

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

Good morning and thanks for taking my questions. Wondering 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.

I mean, any additional color you can provide on maybe what drove this would be helpful was it largely timing-related or is it more reflection of possibly a normalization in orders?.

The second question, on a year-to-date instrument growth is roughly 30%, quite good about that -- I don't know [Indiscernible] In Q3, we saw nice growth, double-digit again on instruments with [Indiscernible] comps in Q3 for last year already. So double-digit growth across the 2 pieces of -- 2 lines of instruments as we [Indiscernible].

As I mentioned earlier, on a year-to-date basis and the quarter is the same, LC grew an excess of 30% mass spec in the mid 20s. So really nothing to choose between the 2 instrument backlogs, makes less sense to look at it quarter-by-quarter, given the instrument trajectory.

But again, nothing to choose between the two field, that both LC and Mass Spec have significant momentum in Q3 and year-to-date. So, and also going into Q4, we're really feeling very good about where we are..

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

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 of the makeup, or do you think there's some that is just revenue that won't be recaptured.

Will just be curious how you would allocate across those three buckets..

Good afternoon. Thanks for the question. I think on the instrument side, we really feel that we're on a very, very good track. I mean, if you just look at historical averages, right, I mean, 2020 can confound they've given all the multiple impact on a stack basis.

So mostly nicely in excess of 5%, close to 6% in some cases, for our instrument business, and historically that average for Waters and across the industries between 4%. So really nicely year of the historical averages.

And in terms of how much have they floored back, when you think that -- just looking at three sort of data points, one, comparing our stacks growth rates, move instrument and consumables with the rest of the industry where they were comparable products, we feel very good that we are operating well in -- well ahead of the market, that's market plus performance on -- that's the first data point that makes us fee that we're clawing back rather nicely.

Second, we have the loss ratio that we measure internally. Those have been tracking ahead of historical averages for the last 4 quarters. And finally, there are public reports that are available which are either lot of idiosyncratic because they change the definitions [Indiscernible] also are doing pretty well as on our market share.

So we [Indiscernible] very good about how we're reversing rates [Indiscernible] our footage?. And we are a work in progress, there's a lot more to do, a lot more opportunity as well. A lot of applications for our instruments, a lot of -- lot more penetration to be [Indiscernible] but we're really good so far, better that we had..

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

Thank you very much for your participation and questions and 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, 2021. Thank you..

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