Waters Corporation's (WAT) CEO Udit Batra on Q1 2021 Results - Earnings Call Transcript

Waters Corporation (NYSE:WAT) Q1 2021 Earnings Conference Call May 5, 2021 8:00 AM ET

Company Participants

Bryan Brokmeier - Senior Director, Investor Relations

Udit Batra - President and Chief Executive Officer

Michael Silveira - Vice President and Interim Chief Financial Officer

Conference Call Participants

Daniel Brennan - UBS

Tycho Peterson - JPMorgan

Vijay Kumar - Evercore ISI

Douglas Schenkel - Cowen and Company

Brandon Couillard - Jefferies

Patrick Donnelly - Citi

Joshua Waldman - Cleveland Research

Catherine Schulte - Baird

Operator

Good morning. Welcome to the Waters Corporation First Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the conference call. This conference call is being recorded. If anyone has any objections, you may disconnect at this time.

It is now my pleasure to turn the call over to Mr. Bryan Brokmeier, Head of Investor Relations. Please go ahead, Sir.

Bryan Brokmeier

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 and full year 2021.

We caution you that any and all such statements are only our present expectations, 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, 2020 in Part I under the caption Risk Factors, and the cautionary language included in this morning's press release, including with respect to risks and related to the effects of 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. The next earnings release call and webcast is currently planned for August 3, 2021.

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 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.

Unless stated otherwise, references to quarterly results increasing or decreasing, are in comparison to the first 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?

Udit Batra

Thank you, Bryan, and good morning, everyone. Along with Bryan joining me on this morning's call is Mike Silveira, Water's Vice President, Corporate Controller and Interim CFO.

I would like to start by expressing how grateful I am to our colleagues for their continued hard work and commitment especially to those who are continuing to experience the devastating effects of the pandemic. We have not yet seen a uniformed recovery as there are still many regions around the world that are being ravaged by the pandemic.

As many of you are aware, India is facing a particularly dire situation at the moment. Our colleagues and customers there are very much on our minds and we are working closely with our team in India to ensure safety of our employees and their families and we're doing all we can to support our customers.

During today's call I will provide you a brief overview of our first quarter operating results as well as an update on our three-phase transformation plan focused on number one, beginning our commercial momentum; number two, further strengthening on organization with leadership and performance management; and number three, aligning our portfolio with growth areas.

Next I will provide some thoughts on how our business is positioned to drive sustainable growth. Mike will then review our financial results in detail and provide comments on our updated second quarter and full-year financial outlook. We will then open up the phone lines to take your questions.

Briefly reviewing our operating results for the first quarter, revenue grew 31% as reported, 27% on a constant currency basis and non-GAAP adjusted earnings per share grew 99% year-over-year. This strong start to the year was driven by growth across all end markets as we saw continued strength in pharma and earlier than expected recovery in non-pharma spending by our customers, new product traction and s strong commercial execution by our team.

Looking more closely at our topline results, first from a customer end market perspective, all our end markets grew double-digits during the first quarter. Our largest market category Pharma grew 28% in constant currency. Industrial grew 24% and Academic and Government grew 29%.

Moving now to our sales performance by geography. On a constant currency basis, sales in Asia grew 41% with China up 109%. Sales in Americas grew 14% with the U.S. growing 13% and sales in Europe grew 25%. From an operating segment perspective, our Waters division grew 26% while DA grew by 28% on a constant currency basis.

Customer activity continued to improve in the first quarter with pharma leading the way, driving better than expected trends in recurring revenues and a significant growth in instrument revenue. Recurring revenue grew 15% with Services growing 14% and Chemistry Consumables revenue growing 18%, driven by combined pharma strength and improved industrial demand.

LC instruments grew across all of our major geographies and market categories with more than 40% growth. It is encouraging to see both HPLC and UPLC instrument units growth double-digits driven by pent up demand, integration of the Arc HPLC and strong execution of our LC replacement initiative. The success of the launch of the Arc HPLC in the general purpose HPLC space cannot be understated and the ACQUITY Premier has been received very well by customers since its February launch.

Mass spec sales were also strong in the first quarter with growth in excess of 50% as demand in the Pharma market remained robust in addition to rebounds we saw in other markets including clinical food and environmental and biomedical research. Demand was solid for our Tandem Quads in Europe and China, particularly in Pharma and in food.

Finally, to TA, revenue grew 28% as demand rebounded in the core industrial business and strength continued in pharma, medical devices and semiconductors. Growth was robust across all major geographies and product lines with particular strength in thermal and electrophoresis. Looking deeper at our sales performance by geography, all major regions grew double-digits. China built further on last quarter strength more than doubling sales year-over-year. Results were strong across all end markets as China continued its recovery from last year's COVID disruptions.

Pharma was particularly strong in China driven by triple digits growth in both contract labs and traditional Chinese medicine. Our food business in China also saw meaningful growth driven by significant rebound in contract testing organizations to the level that we're above those we saw in 2018 and in 2019. This is just one quarter and not indicative of a trend, but it demonstrates that the market is recovering and our execution has improved.

India sales grew double-digits for the third consecutive quarter despite worsening conditions and continued pandemic challenges throughout the country. Europe experienced broad-based strength across all customer end markets including meaningful sequential improvements in both industrial and Academic and Government markets. In the U.S., both pharma and industrial markets had strong growth in the quarter, while demand in our Academic and Government market remained soft as it lagged behind other markets and reopened.

In summary, we had a great start to the year with strong year-on-year growth that was broad-based than last quarter, with impressive performance across all our regions, end markets, and product categories. Pharma demand has not subsided and many of our non-pharma markets are now in the process of recovering, which gives us greater confidence as we look to the remainder of the year.

Now, I would like to talk more broadly about our business and its overall direction moving forward, including the strength of the company, the effectiveness of the markets that we serve and our deep commitment to innovation as we look beyond this quarter into the longer term. Our three-phased transformation plan is; number one, beginning our commercial momentum; number two, strengthening our organization with leadership and performance management; and number three, aligning our portfolio with growth areas.

Looking at our first priority of regaining our commercial momentum, let me review some initiatives I mentioned previously. First, instrument replacements initiatives, we delivered a significant acceleration in instrument revenue growth to 45%. In February, we launched the ACQUITY Premier system augmenting the already solid placement Arc HPLC launched in June of 2020 creating new opportunities for instrument replacements.

Additionally, we have gained traction with customers to replace aging Tandem Quad mass spec instruments with newer instruments. Second, as part of our CRO's CDMO expansion initiative, we've seen revenue growth accelerate to strong double-digits in both these customer segments. Customers continue to perceive us as a strong technical partner as they transfer methods from originators and they see us as a strong collaborator rather than a competitor.

Third, our e-commerce initiative has begun to deliver tangible results, search engine optimization and page search have led to first impressions that are up more than 40% year-on-year. While not every click translates to immediate revenue, increasing traffic is an important first step in our e-commerce efforts.

Fourth, driving launch excellence, let me start with liquid chromatography. While the Arc HPLC is a leader in general purpose HPLC space, I want to focus on the ACQUITY Premier. Last year we launched the ACQUITY Premier columns and followed that up with the ACQUITY Premier system last quarter. Though we are still in the early stages of the revenue ramp up for both, the columns and the systems saved the ACQUITY Premier columns as significantly outpacing the prior successful chemistry launches, including the original ACQUITY columns.

Turning to mass spec, in 2019 we launched the BioAccord Cyclic IMS, SYNAPT XS, TQ-S cronos and a next generation version of our TQ-S micro. Pairing our Tandem Quads with ACQUITY Premier creates industry leading reproducibility and sensitivity for challenging assays. With expanding applications of the BioAccord we've maintained our focus on bringing a versatile easy to use and robust LC-MS system to the QA-QC space.

During Q1 we launched workflow for peptide multi-attribute method on the new Waters connect platform to enable the monitoring of quality attributes at the peptide level. This adds to already existing simple to use applications of peptide mapping, intact subunit mass analysis, released glycan profiling and oligonucleotide mass confirmation.

Over the last year we established the BioAccord into the workflows for characterizing mRNA molecules that have since become vaccines. In fact, BioNTech recognized Waters for our support of its COVID-19 vaccine development and relief efforts.

Lastly, Cyclic was launched in September 2019 and is targeted at the most advanced high-resolution mass spec users. Augmenting traditional LCMS with high-resolution ion mobility allows us to separate molecules with additional, but identical molecular weight, based on their different shapes. This is now especially relevant for monitoring structural changes in the sugar pattern of the spike protein of the SARS-CoV-2 virus.

We do recognize that we still have a bit of work to do on our mass spec informatics applications and we're addressing this through the development and rollout of our Waters connect software platform across our full mass spec portfolio. Today, Waters connect support biopharma characterization and monitoring blood flows with a range of capabilities on the BioAccord Xevo QTof and [indiscernible]. And with the launch of our RDa Benchtop -- Benchtop Tof in Q1 Waters Connect also enabled small molecular flows.

We are grateful to have earned the trust and partnership with our customers as we develop further applications and beta test upcoming products and software.

Next on our TA Instruments division, last year we launched the X3 DSC which offers unique advantages for routine high throughput labs and R&D especially in pharma, electronics and advanced materials. The ability of the X3 DSC to deliver high sensitivity measurements of physical properties more quickly than comparable products is enabling these measurements to be more broadly deployed in manufacturing processes, where scientists can evaluate multiple combinations in parallel reducing time to market. The more time I spend with my R&D colleagues together with our customers, the more impressed I am with the strength of our deeply technical culture.

Moving on to our second priority. You've already seen the planned leadership transitions we announced last month. Amol Chaubal will join us as CFO on May 12. Amol has deep experience in pharma and diagnostics and has led many transformations in his prior roles, through both organic and inorganic growth. I would like to sincerely thank Michael Silveira for his four months of service as Interim CFO. Mike will continue to serve as our corporate controller and I am pleased to add that Mike will also assume the role of chief accounting officer.

Secondly, we've established a dedicated Innovation Board which I will share, that includes leaders from R&D, business development and marketing. The Innovation Board will review unmet needs in markets we serve, assess technology proof-of-concept and monitor the execution of top R&D programs.

Thirdly, I'd like to thank Mike Harrington and Ian King, our SVPs of Global Markets and Global Products respectively for their decades of dedication to Waters. Though their retirements are effective July 2, they have graciously offered to serve as consultants for a period of time to ensure a smooth transition.

Finally, we welcome our own Jon Pratt as the leader of the Waters division, while Jianqing Bennett will succeed Jon at the DA Division. Both Jon and Jianqing have brief commercial and transformation experience and global leadership roles in fast growing markets such as molecular diagnostics and bioprocessing. I am really pleased with our new team and I look forward to introducing them to you in the coming months.

That brings us to our third priority, aligning our portfolio with high growth areas. While we won't take our IR commercial execution which remains our top priority we have recently started our strategic planning process. Now I'd like to share with you some high level thoughts on where we are today.

Our number one priority is to continue strengthening the core, meaning LC-MS and materials characterization instruments, informatics, service and consumables. Second, we're starting into faster growing adjacencies where we can bring our strength of managing compliant data without competing directly with our customers. These adjacencies include opportunities to increase our exposure to biologics, be it in reagents, other instrument technologies, or bioprocessing, all in accelerating LC-MS into diagnostics or other high growth markets.

Lastly, we will maintain our long-standing disciplined approach to financial management, capital structure, and capital deployment as we are focused on maintaining a top tier ROIC. Over the coming year, I look forward to sharing more with you on our strategy as well as the data points that give us confidence that we have the foundation in place to sustainability grow in this attractive market.

With that, I'd like to pass the call over to Mike Silveira for a deeper review of the first quarter financials and our outlook for the remainder of 2021. Mike?

Michael Silveira

Thank you, Udit. Good morning everyone. In the first quarter, we recorded net sales of $609 million, an increase of approximately 27% in constant currency. Currency translation increased sales growth by approximately 4% resulting in sales growth of 31% as reported. Looking at product line growth, our revenue -- our recurring revenue which represents a combination of precision chemistry products and service revenue, increased by 15% for the quarter, while instrument sales increased 45%. Chemistry revenues were up 18% for the quarter driven by strong pharma market growth and improving industrial demand.

On the service side of our business revenues were up 14%. As customers continued to reopen labs and catch up on performance maintenance professional services and repair visits. As we noted on our last earnings call, reoccurring sales are impacted by five additional calendar days in the quarter, which primarily impacted service revenues. Looking ahead, compared to 2020, there is no year-over-year difference in the number of calendar days for this year's second or third quarter. However, there are six fewer calendar days in the fourth quarter of this year.

Breaking first quarter operating segment sales down further, sales related to Waters Division sales grew 26%, while TA Instrument sales grew 28%. Combined LC and LC-MS instrument sales were up 47%, while TA system sales grew 34%.

Now I'd like to comment on our first quarter non-GAAP financial performance versus the prior year. Gross margin for the quarter was 58.2%, a 350 basis point increase compared to 54.7% in the first quarter of 2020, primarily due to an increase in sales volume and favorable FX.

Moving down, the first quarter P&L, operating expenses increased by approximately 9% on a constant currency basis and 11% on a reported basis. The increase was primarily attributed to higher labor incentive compensation cost and higher depreciation from IT investments we made over the last few years. In the first quarter our effective operating tax rate was 14%, an increase from last year as compared to the comparable period included some favorable discreet items in the prior year.

Net interest expense was $7 million for the quarter, a decrease of about $3 million as anticipated on lower average outstanding debt balances. Our average share count came in at 62.6 million shares, flat with the first quarter of last year. Our non-GAAP earnings per fully diluted share for the first quarter increased 99% to $2.29 in comparison to the $1.15 last year. On a GAAP basis, our earnings per fully diluted share increased to $2.37 compared to $0.86 last year. The reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning.

Turning to free cash flow, capital deployment in our balance sheet, I would like to summarize our first quarter results and activities. We define free cash flow as cash flow from operations, less capital expenditures and excluding certain special items. In the first quarter of 2021 free cash flow grew 60% year-over-year to a $193 million after funding $40 million of capital expenditures.

Excluded from free cash flow was $14 million related to the investment in our Taunton precision chemistry operation. In the first quarter this resulted in $0.32 of each dollar of sales converted into free cash flow. Our increased free cash flow was primarily a result of sales growth and bettered operating margins compared to the prior year.

In the quarter accounts receivable days sale outstanding came in at 84 days, down 15 days compared to the first quarter of last year. Inventory decreased by $16 million in comparison to the prior year quarter on higher sales volumes. Waters maintained a strong balance sheet, access to liquidity, and a well structured debt maturity profile.

In terms of returning capital to shareholders, we repurchased approximately 600,000 shares of common stock for $173 million in the first quarter. These capital allocation activities along with our free cash flow results in cash and short-term investments of $810 million and debt of $1.7 billion on our balance sheet at the end of the quarter. This resulted in a net debt position of $893 million and a net debt-to-EBITDA ratio of about one time at the end of the first quarter.

Our capital deployment priorities remain consistent; investor growth, maintain balance sheet strength and flexibility, and return capital to shareholders. We remain committed to deploying capital against these priorities and as Udit commented earlier, we have begun a new strategic planning process. As we continue to execute against our priorities, we will evaluate deploying capital to open up attractive and adjacent markets.

As we look forward to the remainder of the year ahead, I would like to provide some updated context on our thoughts for 2021. One, while the business environment remains subject to volatility, we are seeing good momentum in our market segment which will help us exceed the 2019 levels.

Two, we believe this momentum will continue until the second quarter, but that a strong double-digit growth will mostly occur in the first half of the year due to more challenging comparisons in the second half of the year and the six fewer calendar days that we will have in the fourth quarter.

Three, we continue to expect that all major geographies will perform better this year than they did in 2020, led by growth in China. Four, our near-term growth initiatives are expected to continue to ramp, led by our LC replacement initiative, which we expect to contribute increasingly through our performance. These dynamics support updated full-year 2021 guidance for cost and currency sales growth of 8% to 11%. At current rates, the positive currency translation to 2021 sales growth is expected to be approximately 1 to 2 percentage points.

Gross margin for the full year is expected to be between 57.5% and 58%. Every year we look to balance growth, investment and profitability. Accordingly, we expect 2021 operating margins of between 28% to 29%, based on a combination of investments, the normalization of COVID related cost and disciplined expense controls.

Moving now, below the operating income line, other key assumptions for the full year guidance are as follows. Net interest expense of $35 million to $38 million, a full-year tax rate in the range of 14.5% to 15.5%, the net impact of our share repurchase program 2021 that will result in an average diluted 2021 share count of 61.5 million to 62 million shares outstanding. Over the course of the year, we will evaluate our share repurchase program and provide quarterly update as appropriate.

Drilling all this together and on a non-GAAP basis, full-year 2021 earnings per fully diluted share are now projected in the range of $9.85 to $10.05 which assumes a positive currency impact on full-year earnings per share growth of approximately 3 percentage points.

Looking at the second quarter of 2021, we expect constant currency sales growth to be 14% to 16%. At today's rates currency translation is expected to increase second quarter sales growth by approximately 3 percentage points. Second quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $2.15 to $2.25 as the significant prior year COVID cost savings actions start to normalize. At current rates the positive currency impact on second quarter earnings per share growth is expected to be approximately 1 percentage point.

Now I'd like to turn it back to Udit for some summary comments. Udit?

Udit Batra

Thank you, Mike. In summary, there is much to be pleased about with our first quarter results driven by strong growth across each of the major end markets with Pharma leading the way. Thanks to solid execution and double-digit growth in instrument sales, we saw broad-based revenue growth across every region, with China sales more than doubling. Our transformation plan is well underway with commercial momentum and a strong leadership team in place. We now turn towards developing a new strategy as we work more closely to align our portfolio with higher growth areas of the market.

With that, we will now begin the Q&A session. Operator?

Question-and-Answer Session

Operator

And our first question comes from Dan Brennan, UBS. Sir, your line is open, you may go ahead.

Daniel Brennan

Great, thank you, thanks for the question and congrats obviously on the strong start to the year. Maybe just looking at the guidance, Udit, if you don't mind, I know you talked about six less days in the fourth quarter and tough comps, but nonetheless you had strong start and the good second quarter guidance, your full-year guidance does imply something on the order of 1% growth in the back half of the year. So maybe could you just tease out a little bit, like what's going on with the back half, like how much are you still assuming to obtain that with us, just any further color there, because I would expect that will be a question that we’re going to be getting?

Udit Batra

Firstly, thanks Dan and good morning. Look, we are very pleased with the first quarter, and as we look at the rest of the year, I mean as Mike also mentioned, the pandemic is still ongoing, that's the first consideration. Second we saw pent up demand we released in Q1 which had five extra days, so that grew our base quite nicely.

And the second half has a higher comp which makes us prudent as we guide towards the full year. Now of course, if our initiatives continue to do what they're doing and we see good execution there, and the other end markets continue to improve, we would be on the higher end of that guidance. So I think to me it's a prudent or to use another word, wise guidance, which basically takes these factors into account.

Daniel Brennan

Okay, and then you talked a lot about new product launches, particularly on LC side, is it possible to see that a little bit in terms of what impact these are actually having? Again really strong 27% organic growth, but could you give us a flavor for kind of the impact from these new product launches in the quarter, and kind of what you're assuming for the full year? And then if you could also make any comments on what you are seeing from the relative market share trends across LC and LC-MS?

Udit Batra

Sure. I think first on new products. I'm very excited about our whole portfolio across LC, across mass spec, across informatics. In terms of overall quantitation, I mean I think as we look at the contribution, it's probably 2% to 3%, is it a bit higher or bit lower, I think you would have to do very sophisticated math, but it's 2% to 3% contribution. And that's quite impressive, especially on the LC side given the launch has just took place, right? So for Arc HPLC, it was launched only in June of last year, smack in the middle of the pandemic and that has had great uptake especially in China for general purpose HPLC.

And then that ACQUITY Premier, the columns were launched last year and we saw, I would say absolutely terrific uptake, in fact better than the ACQUITY launched originally. And then finally, as I look at the mass spec growth, I mean our replacement initiative is doing well, especially with the launch of our renewed Tandem Quad portfolio. So, really lot to be excited about on the new products side.

Daniel Brennan

And if I could just one more and this is China obviously you are up against an easy countdown 45 or thereabouts, about 120% growth is certainly significant. Just how do we think about, you know, you were facing some unique challenges in China over the past couple of years in Food and Pharma, how do we think about the door [ph] like what's kind of expected from here as you think about this full 2021 guide for China?

UditBatra

Yes, absolutely, I mean super happy with China, especially given the pandemic is still not over and our colleagues have really done a great job of implementing our initiatives, and some of that is contributing to the growth. I mean it's terrific growth across all segments, especially Pharma which doubled and then you saw Industrial also grew very nicely. And Academic and Government was in the mid 70%. Right?

So, with that said, what I would argue is Pharma is continuing to show strength. Industrial is also starting to get stronger especially in the TA business. Academic and Government on a stack basis still has some work to do. Right? So, we still want to make sure that we focus on it as the market recovers.

And then I look at the portfolio side, Instruments grew very nicely, as you again saw from the prepared remarks. And the consumables portion of the business was in the mid-40s in terms of percentage growth. Look, as I look at our -- the implementation of our initiatives that I mentioned earlier, they are contributing nicely. We singled out the Food market in the past for commentary when we talked about transformations, so let me just comment on that. We saw incredible growth in the contract testing market for Food both in the Government segment and with new customers. Right? Remember I spoke about that when we talked about the transformation plan. And with the CDMO segment some of our best performance is in China.

And then finally I have a lot to thank in terms of our leadership in China. We have a new leader in China and really has renewed focus on growth. That said, I would caution against taking two data points of recovery and saying that we have completely turned the business. We still remained focused, but I'm very happy with the start.

Daniel Brennan

Great. Thanks a lot.

Michael Silveira

Thank you for your questions.

UditBatra

I didn't answer your question for the full year, full year I think no reason to expect anything less than high-teens in China and that would be a very good stacked growth as well versus last year.

Daniel Brennan

Excellent. Thank you.

Operator

And thank you. Our next question is from Tycho Peterson, JP Morgan. Your line is open.

Tycho Peterson

Hey thanks. I want to follow-up on the Instrument growth. You know 45% on a 90% comp is just pretty impressive. I'm just curious how much in your view was market pent up demand versus some of the stuff you are intentionally driving out your replacement cycle initiatives. You mentioned 2% to 3% from the products, so I get that. But how much came from new customer penetration, CROs, CDMOs? You know the main question we are going to get is kind of the sustainability of what you are seeing right now?

UditBatra

Yes, yes, so Tycho, excellent point. I mean and then I think there are many things to be happy about on the Instrument side, right? I mean if we place more Instruments, we get more consumables and more service down the line and we saw a very nice recovery. It is a mix of everything. Right? So, we saw a recovery front, seeing continued strength in Pharma, but we also saw a nice recovery in Industrials and also in Academia.

In terms of the contribution, our initiatives have been doing extremely well. Our LC replacement initiative and now we have added the mass spec initiative as well, is doing super well. And that is now being helped by the launch of Arc HPLC and ACQUITY Premier which are allowing us to focus both on the general purpose segment, but also on the UPLC segment. So, it's very difficult to extract how much is coming from -- going and finding only replacement and then how much is coming from the new products that are actually helping that conversation.

So, really added together it's a very good performance. And then also from a stacked comp basis it's looking very good as you've already commented. I mean LC is doing very nicely on a -- from a 29 basis -- from a 2019 basis and mass spec is almost double digits on that front. So, really very happy with what we've been able to do on -- do with our initiatives.

And then finally on the CRO, CDMO area, I mean we have had incredible impact. Last Friday I was with -- incredible conversations with CDMOs, especially last Friday I was with the CEO of one of the leading CDMOs and they perceive us as very strong partners to help them transfer methods for complex molecules. And this is something that has come more and more to the front and center globally as we talk to many of these customers.

Of course, I mean they are focused on cost, but even more importantly they are focused on transferring these methods from originators. So, I think the initiatives are doing well, but there's a lot more to do there. We've just, I mean I would say in terms of penetration of our Instrument space, we are 30% along the way on mass spec. I would say we are about slightly more than that on the LC side. So we still have fertile ground there to see more growth.

Tycho Peterson

That's helpful. And then you mentioned the Innovation Board, I am just curious, there are implications here in terms of how you are approaching R&D and what you want to spend in R&D, should we assume kind of 6%-6.5% you know if sales are still the bogey or how you think about that?

UditBatra

Yes, I think Tycho that question came up last time as well. We don’t think of R&D in percentage terms and being an engineer myself and now surrounded by people in the Innovation Board we really look at the quality of the ideas. And if the quality of the ideas are good and we see a market opportunity, we will invest behind it. So, let me give you an example. As LC-MS or Diagnostics, right, so we work very closely with the UK Government on the COVID Moonshot program and we were able to develop LC-MS for as a diagnostic tool for detecting pathogens. This is now going to be submitted as an RUO later, mid this year or later this year for research is only, at least initially, but we see incredible traction in that area and we are investing behind it.

So, those are the kinds of examples that come to the Innovation Board and if we see room to invest, we will. Second type of ideas where we invest our platforms, right? So, I already mentioned from a commercial perspective e-Commerce, but also taking the disparate data that exists in the organization and putting them into a data lake. Right? So, I would be loathed to tell you hey, you know, this is the ratio that we're trying to manage. Of course it's a cost conscious organization as you know from the past. We will not do silly things. At the same time if we see good ideas that have good basis, we will invest behind them. So, I hope that's satisfactory.

Tycho Peterson

Okay. And then just lastly on the model, I am curious, the five extra days could you quantify was that added in the quarter, was that around 300 basis points? And then as we look ahead to the second quarter, given the tragedy unfolding in India, just curious how you are thinking about your exposure there in the second quarter?

UditBatra

Let me comment on India and then I let Mike comment on the contribution of the extra days. Look, I mean our heart goes out to everybody who is going through the pandemic in India. We have still seen our customers as you can imagine continue to produce small molecules and large molecules to address the challenges of the pandemic. And so our sales are tracking that and we are very heavily focused on the LC market in India, which is still the method of choice to release small molecules that India continues to produce.

So, we're seeing very good growth, very good access for our service engineers despite the pandemic. I do expect it to be bumpy, but the underlying demand as we look at the full year I would expect to continue to rise. Mike, on the extra days?

Michael Silveira

Yes, on the five additional days, it added about 3% of growth to our recurring revenues in the quarter.

Operator

And thank you. Our next question is from Vijay Kumar, Evercore. Your line is open.

Vijay Kumar

Hey guys. Congrats on a really strong fin this morning. I proved from the, and may be on the first one. I look at the guidance to 2Q, 14% to 16% constant currency. I mean, your comps actually get easier for 2Q. If I look at the 27% you guys did in Q1, x days it was about 24. So, can you maybe just walk us through the 24 to perhaps 15, 16 for 2Q? Was there any timing element which pulled forward from Q2 or is this perhaps like you said prudent guidance?

UditBatra

Yes, I think Vijay you answered your own question. It's actually prudent guidance. I mean given that the pandemic is still not over, there was a bit of pent up demand that came also from last year into Q1, not a pull forward from Q2. And then finally, I mean our initiatives are ongoing. They have shown incredible traction.

We're very happy with what's happening. However, I think they still are getting traction. Right? I mean despite the pandemic we have seen good traction for our LC initiative. We are seeing good traction for e-Commerce where the page views have increased quite dramatically. We have seen good traction in reaching out to new customers. But two data points don’t make a full trend. So, we're just being wise to use another word. I think that would be the answer.

Vijay Kumar

I understood. And then another guidance question. I guess simplistically you guys beat Q1 EPS by about $0.70 and the annual guidance raised by about $0.50. Is there I guess from an expense standpoint, is this also perhaps prudence from an OpEx perspective or is there something else going on, on the spend perspective? And Mike on the Q1, 300 basis points contribution from extra days should be a zero, a 300 basis headwind in Q4, given the fewer selling days? Thank you.

UditBatra

Mike, go ahead on the EPS.

Michael Silveira

So from an EPS perspective, one thing to remember here is, last year with the pandemic we put in place many cost actions. For example, salaries were reduced, furloughs were put in place, spending was reduced significantly throughout the corporation. We are going to experience a huge normalization for rest of this year that will mitigate the growth of the EPS.

I guess, said it another way, the kind of normalization that needs to happen this year. As far as the gross margins, this margin there was so much volume that lead to a kind of operating leverage. So that will mitigate itself the rest of the year because of that normalization that I mentioned. So, I would expect for the full year, we're going to get back for the 57.5% to 58%, but I don't expect it to be inconsistent with the past.

Vijay Kumar

Go it, yes, sorry on the days, is that a 300 basis point headwind in Q4?

Michael Silveira

Headwinds, that would be about a 3%.

Vijay Kumar

Understood. Thanks guys.

Operator

Thank you. Our next question is from Derik De Bruin with Bank of America.

Unidentified Analyst

Hey thanks. This is Mark Ruskin on for Derik, first he is taking a question. I want to follow up on some of your comments earlier on sort of the Instrument growth you saw in the quarter and you gave a lot of prepared remarks on. Have you been able to drive some of the upgrades and replacements? I am just wondering if you could comment, how many of those were competitive or you are replacing existing product, and you know you are having to discount to drive upgrades there, is there any bundling across the portfolio, sort of what are the puts and takes in that program that's helping you make those gains besides the comps.

UditBatra

Sure. I think look it's virtually all of the above, but that said, but let's start with especially for LC, I mean we have the focus on solutions for our customers, and as we go in the new products definitely helps. Arc HPLC and ACQUITY Premiere, especially help in having the conversation. Anything when we started the program first with our own installed base, then looking at the competitor installed base and the third step would be to look at everybody and anybody who is using Empower. Right? So, it's a pretty large pool and we have just, I would say one-third of the way with our own instruments in terms of getting that replacement cycle done. So, there's a lot of room there.

That said, the conversation is more straightforward if you have new products, especially the Arc HPLC, as well the ACQUITY Premier. And then finally, given our reputation as a solid service company and our service engineers absolutely help. So, I think the answer is and your question, it's all of the above.

For mass spec also, we've also launched a similar program and there the success rates are absolutely terrific. We're going after our own installed base from a Tandem Quad perspective and replacing the older instruments with the newer generation of Tandem Quads that were introduced in 2019. So nice progress. Some of it is the market, but I think a significant amount is renewed focus on the replacement cycle of older instruments and finding [ph] products and a broader value proposition.

As far as pricing and bundling, except the pricing is concerned, we have not had to use heck of a lot of pricing to make this happen. People trust the quality that Waters brings and the innovation that we're bringing to them to solve these problems.

Unidentified Analyst

Got it. I appreciate all that color. And then a followup on the on the -- you mentioned the strategic review process one of the areas you are thinking about, some of these faster growth adjacencies, are there any opportunities here that you see organically or is this sort of part of the strategic review that the following can be handled through M&A, obviously recognizing again the really good leverage position here?

UditBatra

All of the above. Right? So, we will have organic initiatives. We will have partnership opportunities and we will look at inorganic options as well. Right? so, all of the above. From an organic standpoint, I can give you examples. We think the electrodiagnostics space is interesting and LC-MS is ripe to get into that space. We have made really serious progress in working closely with many academics in the UK and the NHS, to take LC-MS into their diagnostics space for pathogens with COVID-19.

We also worked with folks in Sweden on the same topic and we will introduce LC-MS as a research use only technique rather in the near future. So, organically we see tremendous opportunity as well. And another example would be entering bioprocessing. We are looking at partnerships with the leading academic institutions and many of our partners to take LC-MS into the bioprocessing suite and not just leave it in the QA-QC space where we still have room to grow.

And then finally on inorganic, inorganic areas we are looking at that very, very carefully and they'll be more to say about it as time progresses, so all of the above.

Operator

Thank you. Our next question is from Doug Schenkel with Cowen. Your line is open.

Douglas Schenkel

Hey, good morning everybody and thank you for taking my questions. I wanted to ask one end market question and then one guidance question. The end markets, specifically industrial, cyclical, recognizing all end markets were pretty solid, I'd love to hear more about what you're seeing in terms of the pickup and cyclical demand? And how did that evolve over the course of Q1 and are there signs that demand is picking up in a sustainable way that you know meaning just as in the catch up, it is actually a function of global economic improvement? And if you are seeing signs of that as exemplified for things, I think like backlog? Are there certain geographies where this is more or less notable? So that’s the first topic.

The second topic is just, again sorry to go back to guidance, but specifically below the topline as we think about operating spend, when I look at our model for Q1, R&D and SG&A together were about $10 million below our forecast. And I think we were the high on the Street for revenue and you came in $50 million above our forecast, so that was really nice leverage in the model.

I'm just wondering was there any hold back on investment in the early part of the year, just given all the uncertainty because it doesn't seem like you're looking at this as any normal. I say that because it seems like guidance assumes there's going to be an increase in operating investment moving forward over the balance of the year, which I think makes sense given the strength in your business and some of the initiatives you've talked about in your prepared remarks Udit. So, I guess, I'm just hoping you could provide some clarity there. It seems like Q1 operating leverage is the new normal just because you want to invest, I just want to make sure we got that right, thank you.

Udit Batra

Excellent question Doug. Look first on the other two end markets, Industrial and Academic and Government, I think you rightly note that it is one quarter and we are seeing a nice rebound. And I’m cautious here. Right? So we’re seeing good conversations with our customers about the industrial end markets are disconnect. Right? I mean, they go from polymers to semiconductors and other areas which inherently are cyclical. They are seeing good demand for hardware, especially on the TA side, but that I would say is one quarter, we’re seeing good conversations, I would not start to immediately extrapolate and this is why we are a little cautious on or prudent on the guidance.

On the stack growth basis, when you look at specific regions, I mean China is almost 20%, Europe is in the mid-teens in Industrial and the U.S. is mid-single-digits. So even on a stack basis this is a good performance on the Industrial end market, but largely driven by a lot of hardware spend.

Now on Academic and Government, which is also the cyclical, I know you were not asking in particular, but I will take the opportunity to comment on this. Already, we saw very good growth, I mean, 29% growth overall largely driven by what we saw in China and Europe continued its strength, also 70% growth. The U.S. is still spotting and recovering.

On a stacked basis, there’s still work to do on China and the U.S. I mean both are still not positive versus 2019, Europe is. So I think Industrial, a little bit more confidence in the overall trend, but Academic and Government we're seeing slow return back into the different labs, more so in Europe, definitely in China but still a bit of hill to climb and Europe is 40 up and U.S. is 40 across the country.

If I move to your guidance question, I will firstly give a qualitative remark and then Mike can comment on the numbers as well. We’re not holding back any investment Doug. I mean, in fact, if you look at how much we have approved in terms of operating investment it’s fairly significant in Q1 to start, to support our initiatives that we already mentioned.

So expanding our field force in contract testing, having more informatics folks to build up Waters, Waters Connect even further and to invest behind our R&D programs, I mentioned LC-MS already and there are several others. It’s just a question of the recruiting cycle taking a bit of time and people finding the right people and getting them into the system. So, really not holding back there at all.

Mike, do you want to comment on the numbers?

Michael Silveira

Sure, I will just add, with the strong customer demand that we’re actually seeing, we have started to make the investment into the P&L, but all of our expenses haven’t hit Q1 P&L. So you are going to see some increase in expense as we move to the rest of the year that catches up with these initiatives that Udit was referring to. This is a gated process and we do look at projects, one on, we do look at each of the products initiatives and spending on what it is and we navigated processes and we'll make sure it makes sense before we actually start the process. So it's - it is a gated process and we will expect not the leverage to be not as good as it was in Q1 the rest of this year.

Udit Batra

And then I think one closing remark on that Doug, just reminding you how we talked about the transformations and we said look we want to get our top line growth back first. This is such a gate business and such a good install based, there’s tons of leverage in the P&L that allows us to invest without any dilution. And you’re seeing the sustainability of the business as we recover our topline, and it’s not just towards this last year Q1, it’s also on a stack basis across many different segments and geographies.

Operator

Thank you. Our next question is from Brandon Couillard with Jefferies. Your line is open.

Brandon Couillard

Hi, thanks, good morning. In terms of some of your e-commerce initiatives, are you starting to see any incremental pull-through in terms of consumables, revenue that, did you quantify and kind of what’s next in terms of the e-commerce strategy and some of those initiatives over the balance of the year?

Udit Batra

Brandon, thank you. From an e-commerce, basically just search engine optimization and paid search we saw a 45% increase according to our own numbers and I know you look at it independently as well on the number eye balls coming on to our site. It's very difficult to translate that, as you know, into the exact impact on revenues, so I won't attempt that, but you can imagine the largest impact is on the consumable side. And especially, with newer products it’s worked out extremely well having the ability to drive more people onto the channel and find out more information, leading to purchase and a great uptake for our ACQUITY Premier launch.

Now, in terms of the overall plan for e-commerce, I mean this is just a start. Right? So, remember I had said early on that we want to take the hand we have and do the best we can with it at the beginning as we make our plans to revitalize our platforms and I mentioned a couple of those investments in the previous question as well. So we do believe that investing in a data lake that takes all unstructured and structured data from different parts of the organization and putting that into an easily accessible middle layer will help us service our e-commerce customers better.

We do believe investing in content even more is going to lead to better conversion on the e-commerce channel. We do believe investing in mobile is going to lead to a better conversion. So, you can see that there are some infrastructural investments that we have started to look at and as the organization becomes stronger and stronger, you’ll start to see us invest in those. So the e-commerce plan as of few phases is the first one was just to get the quick wins and we’re not done with that yet that’s just the start. And there is a long term plan that will build a world class e-commerce platform for Waters. Hope that helped.

Operator

Thank you, our next question is from Patrick Donnelly with Citi. Your line is open.

Patrick Donnelly

Great, thanks. I just wanted to follow up on one of the earlier questions on the capital deployment side, you know, it seems you’re a bit more open about pursuing some inorganic opportunities. Can you just talk about the size that we should be thinking about how large you guys would go and then again what verticals make the most sense for you guys to pursue inorganically versus the organic investments you reckon?

Udit Batra

Patrick, you know that I won’t take that, I won’t talk too much about the size and the exact ideas and the exact domains. I mean in general, you can assume that the part of the market we’re in is a good mid-single-digit grower. I mean we have a bit of catch up to do, so you’ll see us doing better than that in the short to midterm given the initiatives we've put in place, and the market share we’ve had to, we want to climb back and gain. Right? So, I think that will be the first lift.

As you look at the adjacencies there are ones that fundamentally go faster like molecular diagnostics, like bioprocessing and bioreagents and we are looking at each of those categories to see how we can organically enter those, how we can do partnerships and also looking at inorganic ideas. I mean, the process has begun and you’ll hear more about it as we progress further with concrete ideas.

Operator

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

Joshua Waldman

Hi guys, I wondered if you could provide more color on the replacement initiative. I guess, what inning do you think we are in here? And I think I remember you previously saying there were about 8000 systems that you are targeting. Is this still how you’re thinking about the opportunity or has that number gone up?

And then I guess lastly, do you think it is driving replacement of only your systems or at this point are you seeing it replace maybe competitor systems, just thinks like growth of 40% from the LC businesses, it’s probably representing share gains?

Udit Batra

Yes, thanks. I'm sure of picking it up Josh. Look, LC, the 8000 number was HPLC and UPLC only and especially on the Waters Instrument. And when you talk about innings, if you're talking about baseball, probably we are in the third inning. There’s a lot more work to do and lot more to pick up there. And we haven't done that in past. We haven’t replaced our own instruments. So, I mean we are going in and it’s working out super well, especially with the new products being available as well and both on the HPLC side and the UPLC side. So, we’re very happy with where we are there.

To your question on competitor instruments, definitely that’s the second step and then there’s a third step everybody and anybody who is using Empower, that probably also hits the competitor set. So there is a large installed base and anytime somebody is trying to replace an HPLC or UPLC, you should expect Waters to be in that conversation, especially and then this is especially important given that Empower is installed as the most ubiquitous CDS system. So, we are going to leverage the strength of Empower to try and make sure that we have a seat at the table virtually everywhere.

The second thing that I wanted to add is from an instrument perspective. I mean, don't forget mass spec. Mass spec also has an older army of instruments that we've sold over many years, and there too, we completely renewed our Tandem Quad portfolio in 2019 and we're using that to get in and have conversations with our customers. So, that also – that probably is in your baseball analogy in the first innings and that's also started off very well. So, expect to hear more as the year progresses and we do intend to make sure that that continues and gets tracked very carefully.

And the last piece on that that I'll add, this is also to a previous question on the areas we are investing in, we've been invested in basically collecting all the data that we have on the installed base, be it Empower based, be it Instrument based, and of course to automate it and to make it readily usable you have to invest in technology and that's what we're doing. I hope that gives you more color.

Operator

And thank you. And our last question today comes from Catherine Schulte with Baird. Your line is open.

Catherine Schulte

Hey guys, congrats on the quarter and thanks for the questions. I guess first you made a comment in your prepared remarks on the CRO and CDMO side that your customers view you as a collaborator rather than a competitor. And just given some of the M&A we've seen in this space do you think that’s a concern among customers that some of the analytical instrument providers are increasingly becoming customers, and do you see this as a competitive advantage that you can take advantage of?

UditBatra

Yes, I mean we are definitely hearing that. I mentioned the conversations I've had with heads of CDMO organizations, this is front and center. I mean, they view us as a collaborator who they can trust with their methods, with their ideas and I think this is something that we are definitely hearing and we intend to take, we intend to service our customers accordingly.

So I think you've heard right. And I mean especially, I would even argue, especially given Waters, its technical strength and unique focus on science and technology, I mean they view us as people who can help them transfer methods, get deeper into them -- deeper with them into technical conversations and are not worried about us competing or using their technology for our own purposes. So, I would say quite a benefit, but two drivers, one might be what's happening in the competitor's universe, but the other is our own reputation as a strong scientifically based organization.

At this point I want to thank you for your participation and questions and on behalf of our full 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 Q2 2021 call, which we currently anticipate to hold on August 3, 2021.Thank you all.

Operator

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