Waters Corporation (NYSE:WAT ) 2022 Investor Day Conference Call May 19, 2022 10:00 AM ET

Caspar Tudor - Head IR

Dr. Udit Batra - President and CEO

Jon Pratt - SVP, Waters Division

Jianqing Bennett - SVP, TA Instruments Division

Amol Chaubal - SVP and CFO

Derik De Bruin - Bank of America

Josh Waldman - Cleveland Research

Puneet Souda - SVB Leerink

Matt Sykes - Goldman Sachs

Hello, everyone. Good morning. Pleasure to be here with you today. Thank you for joining us in person, no less. My name is Caspar Tudor, Head of Investor Relations, and it’s a pleasure to kick off today’s main presentation event.

Before we get started, I just pass your attention to our cautionary statement slide. And now on today’s agenda. So today, we have an excellent presentation where you will hear from our leaders and our scientists about our innovation as a company, our transformation. And really, you’ll hear about all the exciting things that are going on at Waters.

So without any further ado, I’d like to turn the floor over now to Dr. Udit Batra, President and CEO. Udit?

Good morning, everyone. Can you hear me in the back? And if you have trouble seeing the slides, feel free to come to the side. I have the habit of walking left and right. If I block anything, I apologize in advance.

Thank you all for coming today. It’s fantastic to see you in person. Yes, it’s -- everybody looks taller when you see them in person, that’s what I hear. Caspar is actually taller, and he’s happier that we’re having this event in person. But it’s excellent, again, to see you in person. I hope you enjoyed the poster session and you enjoyed it just as much as our teams had putting it together for you.

I’m sure you’ve seen Waters is steeped in technical concepts. It is something that I found when I joined this company about 18 months ago, an organization that was absolutely steeped in technological competence and extremely close to our customers, solving really difficult problems. But what I also found is a company that had lost focus on operational execution, commercial excellence and doing justice to the R&D and innovation that was coming out of our labs.

So we set out on a transformation plan, and what I’m going to convey to you today are three messages. Number one, that we have an attractive and resilient base. Number two, and I shared some facts with you, Waters is very much back on track. And number three, we are laser-focused on growth. You saw some examples. I’ll elaborate on them, and my colleagues will go into a lot more details.

Chances are, if you’ve had a glass of water this morning, if you’re enjoying coffee or you’ve had breakfast this morning, you’ve already benefited from the great products our company makes. We are a leading analytical instruments, software and service company in the world, about $$2.8 billion in revenue, 7,800 of us spread out around the globe, with industry-leading margins that you see on this chart. We have consistently been rewarded for innovation that comes out of our labs and consistently ranked very high in sustainability surveys.

Waters serves large and growing end markets. So what I’ve on this chart is taken the $2.8 billion and divided it across our end markets. Starting with your left-hand, on my right, is 60% of our business, which is in pharma. It is a high single-digit growing market, as most of you know, driven still by increasing consumption of medicines, be it small or large molecules. It is also increasingly benefiting from the arrival of novel modalities, such as mRNAs, cell and gene therapy and the like, and biologicals in general. And finally, there is a trend towards outsourcing that is also benefiting the growth in this market.

You also see the clinical segment, which is growing mid- to high single digits, really driven by the need for early disease detection and the volume of testing that is required. All in all, this is 60% of our overall business growing high single digits.

Moving to the right-hand side is our industrial and applied segment divided 50-50 between food and environmental and materials testing. Food and environmental, driven by the need for clean water, safe food, a clean environment. And the materials segment, a mid-single-digit grower now, driven increasingly by battery testing and needs for testing recyclable polymers. You saw the posters -- you saw in the poster session on -- an elaboration of our opportunity in battery testing. And then finally, the smallest segment, smallest end market is academic and government growing low single digit, about 10% of our business.

So Waters is exposed to large and growing end markets. Quantitatively this is roughly $70 billion, give or take. Growing as a market, weighted average mid-single digits, we have exposure to more attractive segments, as you can see on this chart.

In these large and growing end markets, Waters has built a leadership position across our portfolio segments. On the left-hand side of this chart, you see instruments. And on the right-hand side, you see consumables and recurring revenues.

Starting with the instruments, our founder, Jim Waters, actually created the modern HPLC category. And we have led in that category ever since then, with brand names such as Alliance, Arc HPLC, ACQUITY Premier. By the way, if you’re interested in what the ACUITY looks like, it’s back there. And it’s a real instrument, you can actually open it and you can see the sample manages and the color managers, et cetera.

Moving on to the next column, mass spectrometry. Waters has the widest portfolio of mass specs in the industry, with higher mass specs for applications in discovery and proteomics, and then largely focused with our tandem quads downstream for high-volume applications, especially in food and environmental testing and in clinical testing.

The third column is our TA business, basically a leader in thermal and mechanical analysis. In fact, in my PhD, I used our rheometers and DSCs and TGAs. We have a leadership position in that category.

Moving now on to the consumables side. So if you just look at the ratio of the two -- moving on to the recurring business side, if you look at the ratio of the two businesses, our recurring revenues are over 50% of our total business. The first column is precision chemistry. Waters defines what it means to be a leader in analytical chemistry. We have been solving problems with our customers and defining and customizing chemistry for their separations ever since we started our business. And we continue to do so as the molecules get more and more complex, and we have a leadership position in this space.

Moving on to service. Our service engineers very often are recruited from our customers or our folks who help build these instruments very often with advanced technical degrees. Our service engineers don’t just service the instruments and fix them. They actually help our customers run experiments, as they did when I was in the lab myself. I have seen that personally. We, in any survey, are ranked the highest in service, if you talk to our customers.

And finally, our informatics business. The chromatography data system market was created by Empower. Our customers yearn for a software that you can -- that can allow you to trace a sample’s veracity from the time it enters the instrument till the time the data leaves the instrument, and that’s what Empower provides you. And no wonder, we have a leadership position in this market. About 80% of the drugs are profiled in 2021 were done through the Empower software.

So I think you’ll agree with me that Waters has a leadership position across each of the portfolio segments we play in, in large and growing end markets. We have sustained this leadership position through the application and development of a simple, yet resilient and difficult to copy business model. Let me describe this to you. It’s an important slide, I’ll take a few minutes describing from left to right.

We spend a lot of time trying to understand the unmet needs of our customers, be it in complex molecules, be it in food safety, be it in informatics. And we spend roughly 9% to 10% of our product sales in R&D, taking highly complex instruments from research laboratories, from academic institutions and converting them to ones that you see in the corner of the room, simple to use instruments that people like me can use with 2 presses of a button.

That’s our business model. We take complex instruments, simplify them so that they can be used in high-volume applications where our customers require simple compliant and efficient solutions so they can submit data to regulators. And the way this works is on the right-hand side of the chart. It has 4 pieces, right? And all our portfolio elements that I showed you on the previous chart appear on this wheel.

So our flywheel simply starts with instruments. We take these complex instruments. We simplify them. They start with the CDMS that you saw in the poster with [Colette] and they appear as boxes that you see in the back half of the room. We simplify these instruments about 150,000 -- 150,000 of those are out there with our customers today, replaced on a 5- to 7-year cycle if you are really doing our job in the right way.

Second, as I mentioned earlier, we make sure that the data that is produced from these instruments is ready for submission to regulators with our Empower software or MassLynx software and now with the waters_connect platform. This Empower software is embedded in the top 50 pharma companies.

So simple-to-use instruments with a robust software that gives confidence to regulators and our customers that the data has not been messed with. You would not want that for medicines that you consume as well in QA/QC.

Third, and this is the part of the business that is most dynamic. We move with the complexity of the molecule. We come up with better and better chemistry to separate and purify molecules, starting with very simple chemistry, small molecules to more complex mRNAs. We have a leading position in this market and our consumables are designed in early stages of development with the intent of being able to use them in QA/QC applications.

And finally, our service team makes this wheel turn. Our service engineers are not incentivized only to fix instruments, as I mentioned. They’re incentivized to help our customers run their experiments and make this flywheel work. And I encourage you to talk to any of our customers and some of you probably already have. This is why our service engineering team has the highest reputation in the industry.

So that’s the business model that we perfected to keep our leadership position, sustainable in the market and incidentally, we serve regulated markets, right? So if you serve regulated markets and have a simple, repeatable business model -- by the way, to simplify and to focus is the most difficult thing to do. And it is no wonder that we have commanded some of the highest margins and the return on invested capital in the industry.

On the right-hand side of this chart, and I won’t read those numbers, it’s fairly obvious what the difference is between us and our peer group on ROIC. And you see that also playing out in the margins in the middle of the chart. What is even more endearing now is that we are back to growth and we require we have a position on the podium, which we didn’t in the last -- in the last few years. By that, I mean we are a #1 or 2 player in terms of growth also.

So large and growing end markets, leading portfolio positions sustained by a simple business model in regulated settings allows us to command incredible financials.

So yes, we have an attractive and resilient base. It wasn’t always so. We lost a bit of our focus, as I mentioned, for a few years. We worked extremely hard to bring Waters back on track over the last 18 months. And I will spend a little bit of time here on elaborating this. And then Jon, Jianqing, Amol will elaborate this further.

What we did is we implemented a simple transformation plan along 3 dimensions. Number one, we said we want our commercial momentum back. That was the #1 focus in a high gross margin business. If you get the top line moving, you have freedom to invest. We wanted to make sure we had a team that was able to sustain this growth. And number three, we wanted to then have the freedom to focus on growth. And that’s what we’ve been doing over the last 18 months or so.

The transformation program starts with the commercial initiatives, and I know many of you recognize this, so I’ll keep it very simple and let my colleagues elaborate on it. It starts with making sure that you replace these instruments that are out there every 5 to 7 years. We had a backlog of about 13,000 instruments. We’re doing a great job replacing them, right? Jon will describe that in more detail.

Second, I’ve been raving about our service team, we have about a 45% attachment rate of our service, why not 80%, why not 100%? We have a long way to go that far. By the way, 45% is industry benchmark. It’s actually the best in the industry at this point in time. But we think it can be much better. We’ve already made progress increasing that by 200 basis points over the last 2 years.

Number three, we were not spending enough time going after customer segments that were growing faster than even our based pharmaceutical segment. And this is contract manufacturing and contract research organizations. Again, incredible progress, roughly 25% growth year-on-year and still a long way to go to reach our potential. Customers in that segment recognize the value that Waters can add through our technical excellence.

Number four, we started to digitize our company. I know, I know. I’m an old snicker. Yes, it’s 2022, but we started to digitize only a couple of years ago. We were so focused on the other technologies that we forgot that something else was happening also outside, and it’s great. We’ve -- in a less than a 2-year time frame, we have been able to take our e-commerce presence from less than 20% for our consumables to over 30%, and still a long runway ahead.

And finally, and this is the most endearing for somebody who’s worked in science most of their career, we are finally doing justice to the work that is happening in our labs. And I’m incredibly proud of the team that’s able to do this. Jon, Jianqing, Tim and others that you met today are a huge part of the success that we have here. All told, it’s roughly 100 basis points of incremental growth beyond what we are already commanding with the market and new products.

That’s all well and good. That is qualitative. Just putting the facts on the table now. This chart shows you our sales growth starting in 2017 all the way to the left. And you can see with the arrow that we started slightly ahead of market and then fell below market growth in 2019, and that was also true for the early part of 2020 when we started to implement our transformation program. And I combine 2020, 2021 for obvious reasons. We wanted to be rather fair and not show you incredible growth rates that we saw in 2021 and simply are using a stacked growth rate.

Market during that time was about 4% to 6% for analytical instruments companies or analytical instrument businesses of our large competitors. The range of growth was between -- anywhere between 2% to 3% to about 6% to 7%, and we were around 7%. And then for our full year 2022 guidance, we’ve raised it to 7.5% to 9%.

Now yes, I know, and several of you have questions this, but the market is no longer growing 4% to 6%. It’s faster. Yes, it is faster. Now don’t ask me if it’s 100 basis points or 200 basis points faster, but 7.5% to 9% amongst friends is still ahead of what many of our peers are saying with these businesses.

So I think the commercial excellence program, the commercial execution, the launch excellence is working, and I could not resist. I know I’m repeating myself. I could not resist showing you the Q1 results. I have to tell you, this has been super, super hard work given the geopolitical challenges, given the uncertain macroeconomic environment and given what’s happening still with COVID around us, and especially in China, this is an incredible performance. And I’m really, really, really proud of our teams to be able to do this.

Meaning, overall, 16% top line growth constant currency, so very clean results. No sort of restatement. 16% constant currency organic growth, apples-to-apples. Instruments, 26%. Geography, Americas, 26%; U.S. 29%. Where is Tim? Tim has been leading the Americas. He’s here. You can ask him how he did it. He doesn’t tell me more because the numbers could -- that we could raise the targets for him, so he doesn’t tell me more. But 26%, 29% in the U.S. is incredible. China, despite the close down towards the end of the quarter, 17% growth. And then our largest end markets, pharma and industrial growing in high teens. This is an incredible report card. So yes, Waters is back on track.

How do we keep it on track? This is the most important aspect. If you take nothing away from this day, you should meet our colleagues and make up your own mind as I am convinced that we have built an incredible team. You see, my team, my direct reports, this is the Executive Committee of Waters. 7 out of 9 of us are new in role over the last 18 months.

And we especially look for people who love science. We look for people who had a track record and focus on execution. And finally, because we have ambitions to grow organically and inorganically, we wanted to make sure we have colleagues who have been through transformation programs, which don’t always go as you plan. You want people who have a resilient backbone, are able to take you through difficult times. And this team has not disappointed at all so far, and you’ll hear from them.

So commercial turnaround in progress, Waters is back on track, a leadership team here to sustain the growth. Growth starts with our own labs. It starts with organic growth, and I want to show you a couple of examples of new products. Again, my colleagues have elaborated already in the poster session, and others will elaborate a lot more. But let me tell you that I’m incredibly proud of what we’re doing in the LC segment.

Who says the LC segment for small molecules, for QA/QC is not an attractive place to be? The introduction of Arc HPLC tells you that this market responds to strong innovation. This product was launched in June 2020. And people said, another LC in a crowded segment. It has done incredibly well because it meets the needs of our customers, and it’s the most rugged and robust instrument in the category now.

Second is Acuity Premier. It’s in the back of the room. Custom designed for large molecule applications for biologics. I combine these 2 products, have had 3x the number of units sold versus last year. So really, really strong, out of the gate.

The right-hand side is the MaxPeak Premier column. You probably heard Erin Chambers, and Tim describing to you the value of this product. Basically, simply said, we’ve designed a column that allows you to process large molecules that have propensity to stick to metal surfaces. Now this might seems very simple. It takes a lot of chemical expertise that I don’t -- chemistry expertise that I don’t have.

I can describe it simply, but I don’t have that expertise. Erin does and her team does, and they have done an incredible job to make sure that this is the best launch that Waters has had in its history of launching columns, and we have launched columns. We started this category. We have launched columns, right? So this is the best launch because it meets an incredible unmet need in the market.

Moving on into the informatics space. We already know our presence -- know of our presence with Empower. But on the mass spec side, for many, many years, we were suffering from not having the best software available. We have just launched the waters_connect platform for our tandem quads with the MS Quan application. A mouthful, simply said, it is a software that allows you to process complex food safety, environmental safety, drug metabolism testing 50% faster than the leader in the industry. I won’t name the leader, but the leader in the industry, 50% faster.

And then lastly is the newest kid on the block. This is the Xevo TQ Absolute, 15% more sensitive for separating anionic molecules. Why is that relevant? Anionic molecules negatively charged molecules are present, especially in larger novel modalities. It has a 50% lower environmental footprint, and it is 50% smaller in size.

Smaller, less environmental footprint works better. No wonder, our beta instruments have already been sold. We’re already on back order. We haven’t even launched it with full steam. This is an incredible product. So this market responds to organic innovation that meets specific customer needs, and we have just revitalized our innovation engine, and it is contributing handsomely to our top line. So Waters, commercial execution and innovation is back on track.

So now I was talking to one of you in the room, and I won’t name who. I was talking to one of you in the room a few days ago. And I was describing the story. And I said, "Look, this is what we did over the last 18 months, blah, blah, blah." And we went on, and I was losing my breath and the person said, "Oh, you must be tired. This is a lot and it is looking fine." And I was about to acknowledge and say, yes, but we still have a lot more.

Before I could say anything, he said, it was a -- and only he’s had this sort of lack of reflection between the brain and the tongue. He’s a friend of mine. I can make fun of him. He said, "What’s next?" I mean, you just told me I should be tired and you’re asking me what’s next. Well, let me answer the question.

We imagine at Waters where we are solving these difficult problems. Biology is getting more complex. Waters wants to solve complex problems. We want to have teams that we like, we trust and we respect. And each one of us wants to be proud of the contribution that we uniquely make. We do the dilution experiment at Waters. If you did not exist, what would be different, right? That’s the Waters that we want in the future.

So then let me double-click on problems that matter. We -- as in any strategic process, we spent a lot of time listening, talking to customers, to experts, talking to own R&D folks, reading a lot of papers, and we looked at over 50 different trends and ideas and problems to solve.

And this is in our core, in bioprocessing, in contract manufacturing, you name it, right, anything and everything that is being written about. We read it. We thought about it. And then we prioritized it using really 3 simple criteria, and this is incredibly important.

I already talked to you about meeting an unmet need. Once you meet the unmet -- meet’s an unmet need in this market, the products pick up dramatically. And we said, "Where is the unmet need highest and very difficult to meet? Where does it deserve the focus that we have?"

Second, and most importantly, we wanted to have -- we wanted to go into areas where the proof of concept for our business model already existed, that the proof of concept of taking a complex instrument and translating into a simple workflow had already existed.

And third, of course, you do the business analysis, right? And after a lot of iteration, we came up with these 5 that you’ve seen before, right? We want to solve problem in bioseparations. We have the world’s best physical and organic chemists, and we want to turn them loose on difficult problems with mRNA.

I recently made the R&D head for one of the leading mRNA companies. And he said, "Look, we’re producing incredible volumes of mRNA. We have great ambition to take it into other therapeutic areas, but none of that can happen if we cannot get better at purifying the plasmids, the mRNA molecule and the lipid nanoparticles that would be required to serve even higher volumes." We want to solve that problem. I’ll come back to bioprocess characterization. You’ve heard from my colleagues as well on CDMS and on BioAccord, I’ll come back to that in a minute.

Number three, LC-MS in Diagnostics. Jianqing will talk to you about it. I know several of you are skeptical about what Waters can do in that space. Jianqing will walk you through what our plan is. It’s very tactical. We have a proof of concept, and we believe we can make a huge difference in making this complex technology simple for high-volume use, so that it can support all the biomarkers that are being discovered in upstage -- in upstream proteomics.

Number four and five are relevant for our TA business. We already see customers using our DSCs, our TGAs, our thermal and mechanical analyzers to test batteries for electric vehicles. And I know many of you, maybe your kids, will surely be using electric vehicles. Electric vehicles are powered by lithium-ion batteries.

Our tools are already used to ensure that these batteries don’t have runaway reactions and are physically and mechanically strong. The proof of concept already exists. And Chris Bedi would have taken you through some of that already.

And then finally, people are reformulating polymers, but they want to make sure that while these polymers are recyclable, we don’t lose any mechanical and physical strength. So our tools are being already used for it. And all told, this would expose us to $7-plus billion more as market. Don’t ask me the exact number or back of the envelope calculation says $7 billion, okay? Is it $7 billion? Is it $10 billion? Is it $5 billion? I don’t know, it’s a big number.

But definitely, we’re convinced that this is growing at least double the rate at where we are present today. So we want to take our ability to simplify complex instruments and workflows and turn them to high-volume applications that are relevant for all five of these applications. And I encourage you to talk to my colleagues offline, at lunch exactly about this.

Let me come back to bioprocessing, an area where I’ve spent significant time in my career. What do you think I’m going to say now? There’s an egg on this slide. My exposure to bioprocessing started back in 1996. After finishing my PhD, my first assignment in industry at Merck was to go and improve the process for manufacturing the measles vaccine. I think most of you, actually all of you in the room, would have taken the measles vaccine. I have, my kids have.

I was asked to optimize the process. So as a freshly minted engineer, I gowned up. That’s what you have to do to get into a sterile suite, wore safety goggles, walked into the sterile suite fully expecting as an idealist to see stainless steel bioreactor systems. We didn’t have single use at the time. Stainless steel bioreactor systems, process control, front ends, heat exchangers, something that I had studied in engineering. I said, "That’s what I should be seeing."

Instead, I was ushered to a fume hood with a table, and there was an egg in front of me that looked exactly like this. And for the next 8 hours, I was opening these eggs up, taking chick embryos out, putting them in a blender. And I won’t describe to you the next few steps that we took to isolate the cells that I used to manufacture the measles vaccine. That was 25 years ago. It’s still the same process, and it was the same process 25 years prior to that.

I said after 8 hours, "Stupid me, resilient me." i said, "This is great." Why is it great? Because my first assignment is super easy. I went to my boss and he said, "Look, we can do better than this. We can make these products in bioreactors and Millipore. And these other people make these other things." This is a piece of cake. It takes us 2 years, and we have a new process.

I was soon to realize not only can you not change a process however inefficient it is. You can’t even change the process parameters outside a narrow processing range. What is the processing range of cutting an egg and opening it and putting it into a blender? It’s the blending speed. So I won’t take you through the details there, but you simply can’t change the process. And this is because for biologics, you get approval in your BLA, biologic licensing application, to manufacture a product with a certain -- using a certain manufacturing process.

Unlike in small molecules where you get approval to produce a product with specific chemical and physical properties, big difference. In one case, you get approval for a manufacturing process. In another case, you get approval for a product. Product is way better because then you can optimize the manufacturing process.

Now it’s -- the way it is, not because the regulators are conservative. It’s not because the regulators are conservative. It is due to two reasons. Number one, we simply had not applied the Waters flywheel. We had not taken complex measurements and taken them into high-volume QA/QC segments, so that you could use them to release these processes and release the product.

And number two, the economic incentive is simply not there for many of these biologics until now. The economic incentive is not there because the manufacturing cost is roughly 5% of sales for leading blockbusters biologics. I think most of you know this, right? So the economic incentive is not there, and the technology did not exist.

Now how the world has changed in 25 years, especially with the arrival of cell and gene therapy, therapy that works like magic. The challenge is it costs a lot to make it. The manufacturing cost is roughly 50% to 70% for $1 million per dose of these products on average, $1 million per dose. So I’m talking $500,000 to $700,000 for a manufacturing process for a single patient. And the #1 bottleneck to providing these therapies to many, many patients is the manufacturing process.

Now that’s a problem worth solving. That’s a problem we want to solve. The proof of concept already exists. The technology has been developed to the point where we have BioAccord. We now need to make sure that we understand the process train of these complex biologics and take simple measurements downstream. That’s the ambition.

We know these problems are not easy to solve alone, right? And all five of those problems that I showed you on the previous chart, we are going to collaborate with someone. We’re going to buy a company or 2 to advance the technologies. That’s the [stalwart] on this chart. And of course, we’re going to work on it organically.

So last week, we cut the ribbon on our second Immerse lab. Immerse Labs are collaboration labs, where we work with other folks to tackle these very difficult problems. And this one is at the University of Delaware. Why University of Delaware? The University of Delaware is the best funding biomanufacturing department in the United States with over $0.5 billion of funding already from the U.S. government and many manufacturers.

They have regulators, pharmaceutical manufacturers, tools players and academic staff on the campus. We opened our Immerse Lab, and the President of the university in the middle, the Dean of the engineering school is on the right. I’m somewhere there. And the head of NIIMBL, which is the biomanufacturing center is all the way to the left.

So we have collaborated to solve difficult problems in bioprocessing. And if you’re successful, which I know we will be, we will have the chance to change the industry. And there are many implications if you’re able to come up with better analytical techniques to release these processes.

So I’m extremely excited about these adjacencies. We will work very hard organically through partnerships and inorganically to advance the agenda there.

All that is great, but in order to sustain our presence in the ecosystem, we want to make sure that we leave every place that we enter better than we found it, and that’s the ethos in our ESG program. I won’t belabor everything that you can read in our sustainability report. I just have 3 examples on the chart.

We will continue to work with suppliers who share our convictions for improving the environment. From a social perspective, we are already partnering with leading historically Black colleges and universities to redouble the effort in opening up internships, opening up hiring, opening up training. And we want to recruit Black young men and women into stem fields, but also, more importantly, at Waters.

And from a governance perspective, 50% of my direct reports are women. About 1/3 of us are considered ethnically diverse, and our Board has a similar sort of setup. So we want to lead from the front on that.

And that has been noticed by people who rank such things. Barron’s ranks us #6 on their 100 most sustainable companies. By the way, this is the highest ranking for a life science tools or health care company in that index. And we were voted as one of the best places to work for LGBTQ folks.

So I wanted to close off by reminding you that we have an attractive and resilient base playing in large markets. Number two, Waters is absolutely back on track. And now we’re laser-focused on growth, being helped by the adjacencies that we’ve identified.

At this point, I want to ask my friend and colleague, Jon Pratt, to give you a lot more detail on the Waters Division. Jon? Thank you.

Well, thank you, Udit, and good morning, everyone. Real pleasure to meet you. I hope I have a chance to chat with you over lunch as well.

It’s almost a year to the day since we formed the Waters Division. I was appointed to lead the group, and it’s been a very solid year of growth, as you’ve seen. But more importantly, I think we’ve really built a foundation that I’ll talk about in a moment.

Oh, that’s me. Briefly, two slides to frame the business. We apply this business model, this sophisticated instrumentation simplified, backed by three forms of recurring revenue. Informatics, chemistry and service makes our product really sticky in the customer base. The markets we serve are really driven by the macro growth drivers, you’re very familiar with, longevity, population expansion, health care expectation improvements. Two primary markets, pharma, biopharma as well as food and environmental, and we got smaller markets in the Waters Division that serve academic, government and some materials businesses.

Very importantly, the types of applications we serve are typically regulated, and they are typically high volume. The classic example that Udit talked about was QA/QC in the pharma manufacturing processes. Lots and lots of repeat business there, standard validated work. We feed that with a lot of work in research and development in late-stage drug discovery. You build through the chain and ultimately become a QA/QC tool with a simplified instrument.

Contract organizations, as pharma is exported, it’s exported its demand for services to contract organizations. Our value proposition is very well resonating with the contract organizations. We derisk it by applying the same process as the pharma companies use, so their business model is derisked.

And food environment and safety testing, regulations increase all the time about contamination, purity. Those regulations are not going -- getting less. There’s going to be more and more of them in food and the environment as we go forward. So they’re really well protected markets for us that we serve.

Udit talked about our portfolio. I’ll just add a little bit more color. On the left here -- sorry, yes, on the left here, you see our liquid chromatography, the heart of our instrumentation business. These are typically serving routine applications in quality assurance, drug manufacturing, food, quality assurance applications typically. They also serve as a pre-separation system for other analytical technologies, most notably mass spec. You use an LC prior to MS for cleanup and sample preparation. So a pretty robust business there we have in LC, and we lead the way in that.

It’s really driven by speed, sensitivity, reliability, repeatability. The instrument you use today will give you the same result that the instrument you used a year ago. It’s really, really driven by that.

Mass spec, this is about mass detection, and we’re on a journey here. Mass detection has typically been applied to small molecules. But our portfolio has expanded into higher-resolution applications in things like proteomics. We’re now able to look at viruses intact, which are very, very large molecules, and I’ll talk about some of the spaces we’ve expanded into in mass spec.

Chemistry, precision chemistry, application-specific columns, and we don’t talk about it much, but sample preparation for the column feed. So we clean up samples with consumables prior to injection into the instrument as well.

Increasingly, I’m talking about it today, you heard about it in the poster room, we’re looking at precision services. We’re making the surfaces as clean as possible, so the reproducibility of our experiment is identical because you don’t have any binding to metal services. I’ll talk a little bit about that in a moment, how that’s changing the industry.

Service, Udit talked about it. We’ve got over 2,000 people in our customers, in service with knowledge of their applications. It’s a real Waters differentiator. They’re not just fixing. They’re helping guide the experiment. And so a real high Net Promoter Score in our service group and a real valuable asset to Waters. It’s close to $1 billion. That business is approaching $1 billion in service revenue for Waters Corporation.

Enterprise Informatics. We have the Empower castle that we’ve talked a lot about that’s deeply embedded in pharma. But perhaps, more importantly, now our waters_connect backbone, our software backbone, we’re applying applications onto that waters_connect platform that add value to the data.

We don’t just measure and report the data. Now we analyze the data. We seek errors in the data. We offer opportunities for data analysis that were never before possible on Empower and on our instrumentation like mass spec. So really, a highly consumable business on the right driven by our instrumentation on the left.

So having framed the business, I want to talk about the last year. I want to talk about our execution journey, and I’m going to get quite tactical as to what we’ve done, the impact that’s having, how we’ve built the foundations to enable the next stage of our growth. Then I’ll talk a bit more about portfolio and innovation. I’ll talk about four examples that are really meeting unmet needs in the market and are exceeding our expectations. And then I’ll talk about are solving problems that matter in high-growth adjacencies.

This is the work Udit talked about that really is setting the stage for the future growth and our -- increasingly accessing the underlying markets that are growing faster than where we are. So three quick things that I’ll talk about.

I’ll start with number one. A year ago, we formed the Waters Division. Now Waters Division is essentially over 80% of the company. It is essentially the heart of the Waters company. Prior to forming the Waters Division, the Executive Committee was functional. You had an R&D lead. You had an engineering lead. You had a product management lead. You had a sales lead. Very, very functional structure.

Some of the challenges with our structure were prioritization. Everybody was involved in every project. Everybody wanted a project. It was a very collaborative approach. We had too many projects, R&D developments, and we suffered from a bit of speed.

Perhaps the most important thing about bringing the groups together and bringing the R&D and the commercial groups together was the deep commercial insights we brought into the development processes. That may seem quite basic. But in essence, our development processes are operating in isolation from the commercial groups. They were really looking in the mirror at our existing opportunities, our existing products and how we improve them.

We’ve now brought the VOC deep into the process, the customers deep into the process, and now we’re looking out the window more. We’re fundamentally looking at the competitor set, the PS set, the problems that matter and looking at leapfrog opportunities in the market.

It sounds basic, but all of our alignment has really been driven around increasing focus and prioritization of things that matter and really getting that deep-out-the-window look to leapfrog the competition, and it’s really working very well. That was very important.

Also a massive opportunity for Waters was on commercial execution is the reason we’ve talked about it a lot. Waters is a team of scientists. We’re all scientists. The scientific depth of Waters is really quite incredible. Having worked in a lot of life science tools companies, I’ve really been impressed with the way the quantity and quality of scientists we have in Waters.

The challenge on the commercial side was really quite simple. Our commercial muscles were quite weak. We’ve agreed at supporting our customers, being with them on the bench top. Even our salespeople, deep science knowledge. But we weren’t so good at getting customers. Our customers really loved us, and the problem with that is probably our competitors probably did, too, because we really weren’t hunting.

So we had to employ some basics and really basic deployment of things like CRM, funnel management, forward-looking indicators to the business, train and coach our sales force in the use of those tools, the basics. Our demand generation was virtually nonexistent, digital. Udit joked about it. We are 3x less than industry standard when it came to digital degeneration. We just weren’t hunting into non-Waters accounts.

The other thing we had to do was that our sales territories are really large. We’re taking care of our customers, but we weren’t providing the time in the field for us to speak to competitive customers and prospects. We really reduced the sales size -- the sales territory sizes. We delayed it a little bit. We brought some talent that was in overlay roles into direct selling roles, and we’ve really built a much more effective sales force now.

We’ve adapted our sales model. I’ll give you the example of chemistry. Prior to a year ago, chemistry was almost a support business. It was a lot of folks that were technically supporting our customers with the applications of columns. What we’ve done now is turn that into -- keep that presence in our scientific -- in our scientific operations, but also have a team that’s actually selling chemistry, actually searching for new opportunities that’s measured on new account penetration. We’ve treated chemistry now as a global business, and we’ve adapted really well to that.

Inside sales, it sounds really tactical to be talking about inside sales, but everything was -- we had large sales territories, and everything was on the salesperson to grow it. There was very little feed support system, very little nurturing system for the salespeople.

So it really was a case of building a foundation of commercial execution, building that muscle, and it’s a journey that continues. I’m a Brit, so don’t ask me which inning we’re in because I won’t talk baseball with you. But we’re really continuing on that muscle building journey.

So the right side of the column -- right side of the page was about building the foundation of the ability to hunt. The left side of the page is really about establishing the prioritization and the leapfrog opportunities we have out of the window rather than in the mirror. Really great journey. It’s been an exceptional year already, and it’s -- we will continue.

The results are encouraging, and I’m tempted to linger on this a little bit whenever we have a great quarter. But I like two things, and Udit talked about them. First of all, talent. Three of these leaders are new to role. And within their teams, we’ve had some talent upgrades and improvements as well. So the three leaders are new to role. Two of those new to role, I mean, 24 months. By new to role -- without new to role leaders, I’ll give you an example of China.

Rebecca Lui and her team in China have done an exceptional job repositioning, gaining share in CDMOs in China, building a strong commercial operation there. But perhaps more importantly, whatever is thrown at them, they’re resilient. They’ve dealt with the back end of Q1 with the supply chain challenge. Our entire facility in Shanghai was shut down. They’ve pivoted. They’ve opened another warehouse within weeks and were shipping from that warehouse outside of Shanghai. Real spirit in the team in China that bodes well for the future.

Americas was one of our more underperforming regions. You guys will know that. Over the last few years, Tim and his team have done an exceptional job rebuilding that commercial muscle, prioritizing on the important, really focusing on our markets where we’re under represented, like CDMO, et cetera.

But also I’d mentioned in the Americas, it’s a natural phenomenon. We tend to execute first and change our model in the Americas and roll it out elsewhere. So Tim’s team is a bit ahead of the curve when it comes to inside selling, digital demand generation improvements, sales force structuring. So Tim is ahead of the curve a little. So the other teams are executing, but Tim is a little ahead of the curve there. So there’s some good promise as we go forward.

These are the five initiatives that are really fueling the quality of the growth. Growth matters, of course, but it’s the quality of the growth that’s really building our future that really, really matters. And these five initiatives, and we have others, of course, but these five initiatives are really driving the strength of our business in the long run.

Instrument replacement, we literally -- it’s who we are now. So we take our digital tools, and every quarter, every year, every salesperson in the company gets an aging list of their installed base, and we act on that with technology upgrades, and we’re really running as one. And it’s really become a quarterly and an annual cycle for us, and it’s everybody’s responsibility. If you’ve got 1,500 salespeople, every single one of them will have a KPI related to instrument upgrade replacement on time, on schedule, generating about $40 million of revenue impact in ‘22.

Service attachment, our attachment -- our service business is approaching $1 billion, as I told you, but our service attachment rates have a lot of runway ahead of them. We’re about 40%, and it varies dramatically by geography. And at each page show the selling cycle, we’ve improved our game. So whether it’s a point of sale, where we were only quoting service with about 30% of our instruments, we’re now quoting it with 80% of our instruments at point of sale.

We’ve also built an inside sales team that’s responsible for warranty conversions. That’s a kind of complicated process. When you’re finding the right person in an aging warranty, we’ve got a great inside sales team now that’s driving the percentage of warranty conversions. And we’re seeing over 100 bps of improvement in our attachment rate that builds out for the future. There’s runway ahead there to take that way beyond the 40%.

Contract logs. I mentioned we were good at serving our customer base. When pharma outsource to contract orgs, Waters was a little slow to react, despite the fact that our value prop is completely derisked. We’re addressing that. We’ve got a dedicated team. Our contract org business is growing 25% a year at the moment, as Udit mentioned. And we’re still a little under what we feel is the fair share there. So there’s a lot of work to do there. We’ve got great success in the Americas and China.

E-commerce adoption, yes, it is late to be talking about e-commerce adoption. But we really didn’t have an e-commerce business. We really were selling consumables direct. Gradually, we’re improving that. We’re bringing new customers on board that want to buy through e-commerce. We’ve got 1,000 new customers in the last year. And very importantly, as we’re transferring customers to e-commerce, we’re finding the Amazon effect works really well.

You’re on Amazon, you’re going to buy some other things while you’re there. And frankly, for every $5 or $10 we bring over of revenue, we see an increase per dollar. People are buying more when they buy online. So it’s really driving some growth in the business.

And then launch excellence, I’m passionate about this as much as Udit is. I really am delighted now that we are aligned as a business. We’re not developing a project and a product, and the sales team put it in your bag. We are going forward as one and truly launching with ambition, with rigor, with true, true customer value props instantly at launch as opposed to a dribble out. And we’ve done a great amount of work on our launch excellence.

The $60 million of new product contribution from Arc HPLC and the Premier version of the same in ‘22, I’ll talk a little bit about that in a moment.

We see this driving over 100 bps above market growth. There’s many more execution initiatives to come. And we take a process of we walk, we embed, we walk, we embed. We don’t try and boil the ocean, and there’s more to come from our execution.

So I have the opportunity to talk about some innovation topics. Now the guys who are doing the posters are far more knowledgeable and better at me describing this, but I want to focus on the things I think that matter from our innovation journey.

First of all, our entire LC portfolio has been refreshed in the last 24 months. We haven’t always talked about it, but it’s been a total refresh. The example I’ll give you here is the Arc HPLC. This is the workhorse instrument. This is targeted at those routine-repeat applications.

We improved the instrument. We improved the robustness of the instrument. The call and back pressure, capability was dramatically improved. We improved the precision. Even though there’s a miniscule carryover from result to result, we’ve reduced that 5x. There is negligible carryover from column to column.

We really improved the precision and robustness. The injection precision was doubled. So we had a lot of value adds to the instrument. Very importantly, we made it very simple to transfer methods, simple to take our instrument, another LC and transfer a method to this. Huge barrier reduction there.

We’ve talked about $60 million of revenue, but the point I’d highlight on this page is about $40 million of that is the tech upgrade, the refresh we talk about, the cycle, the 5% to 7%. And if you’re pretty good at math, you can work out the $20 million of that is either expansions or competitor displacements. And it’s that part of the business as well as the replacement cycle that’s driving our growth.

We talked a little bit about our exposure increasing in large molecule, in biologics, in new therapies. The journey has been ongoing. Four years ago, Waters total pharma business was about 20% in large mol. And whilst the small mol has been growing well, we’re now around 30% in large mol, and we’ve deliberately made our development priority around large molecule for our innovation.

A fabulous example that’s really changing the way things are done is our Premier technology. Erin would have talked very well about this in the poster session, but I think the chart on the right is very interesting. These large molecule biologics tend to bind -- nonspecifically bind to metals.

Here’s an oligo example. The blue line, very simply, is the Premier Column. You can see the recovery there. The small green line that the guys in the back probably can’t see, which is 12x smaller, is a traditional column without this Premier surface. If you run the oligo through it, you basically lose a lot of the oligo on to the metal surface.

It’s kind of fundamental. Now we’ve also incorporated that technology to the liquid flow path of our instruments. So your entire liquid flow path now sees inert metal, okay, as opposed to this nonspecific metal binding.

Labs have always had a way around this. Particularly in small mol, you could condition the column. You’re basically washing the column a few times before you use it. It’s called conditioning. In large mol, that becomes even more challenging because you product is more expensive, and it takes longer to condition the column. So the workarounds are now not needed, and we’re having a fabulous response from our customers. This is the strongest growth we’ve ever seen in column.

And for me, and the background to this, is the quality of the growth. Again, we are seeing a dramatic increase in the method validation kits we sell. And the method validation kit is a column from three different batches that you use to prove that, that column is going to work on your application. So that’s a leading indicator that the growth we’ve seen is just the start for this column.

And once you have a nonbinding column, the industry is moving more to that as the standard as opposed to the fact that I’ll only use it for my particularly difficult samples. In the scheme of things, this is not much of an upside on cost to have an inert column. So we’re excited. More launches to come with MaxPeak Premier technology.

Mass spec, portfolio has been refreshed. Udit talked quite a bit about the latest, which is the Absolute, the highest end mass spec we produce. Here’s a graphical representation of that improvement in sensitivity. The negative ions, very important in biologics. You can see, the gray was the prior Waters instrument. The blue was a leading competitor. And the green now, the leapfrog is how much recovery we’re seeing in negative ions and the mass spec ratification in the new TQ Absolute.

This is a game changer in terms of sensitivity. And vitally, this is half the size and half the energy consumption. And Udit stole my thunder a little bit with the fact that all of our beta sites were very, very impressed, and we had a lot of prelaunch orders. And we’ve only recently launched this product. It’s been very, very, very well received.

Also importantly, just a third bullet there. This was launched in conjunction with our software upgrade on mass spec, the MS Quan application, which makes it easier to use, basically. So I’m really, really delighted with this launch. It’s here and now, and it’s just another step on our journey.

Our informatics position, you all know our Empower business very well. It’s deeply embedded. It’s a castle for our business. Around 80% of the molecule submissions the FDA last year were run in Empower software. We’re building on it. We have this waters_connect platform that we’re adding applications to and we call them as apps. And they are, again, adding value, additional optionality, additional data analysis for customers, not just in the Empower space, but all of our customers. So we’re building out informatics footprint.

The other thing about Empower that we’ve also addressed is we see the market. If all the farmers are using Empower peer systems, whatever their systems, we have an LC seal attached to Empower. Now there’s value share in there. There’s a fee to Waters for that attachment, but it also gives us great visibility as to where the market is moving. So it’s a real -- very real power in Empower. Now more to come as we introduce more analytics to our software.

So talking a little bit -- just a little bit about to here and now opportunities, but they’re really building the future. And again, on this one, David would have done a great job in the poster room. The unmet need here was process control in biologic production. Udit and his egg, I don’t have an egg, but that story of how it’s -- the availability of good analytics is limiting the way drugs can be registered.

So I won’t be able to do the job that David did. In very simple terms, we’ve taken the model -- the borders model, which is sophisticated instrumentation made as simple as possible. And now you can take a bioreactor where you’re doing clonal selection, clone development work. You can analyze the antibodies you’re producing. You can analyze the cell media at line simply with speed versus taking those samples, centralized lab, complex MS, send back.

What this is doing is basically improving the speed of clone selection and, importantly, avoiding runaway reactions and losing your batch. You can do it at line right now.

In terms of the opportunity, we’re kind of in the bench top moving into pilot plant. This instrumentation is simple enough to become a QA/QC tool, which is how the typical progression goes from development through pilot to QA/QC.

Mass spec can now intact detect very, very large molecules. Our technology has evolved from the small-end protein and small mol size, the megadome size, about 10 to the 6 Dalton, right up now to viruses and large molecules. Why is that important? Well, cell and gene therapy tends to use viruses as a vector to bring the transgene into the body to effect the change.

So there’s a little diagram at the bottom that’s really quite simple. It’s a representation of that virus. We call that capsid, an encapsulated form of the virus. And your payload, your transgene, your active component is encapsulated and delivered to the body. These viruses infect, but they’re not pathogenic. So it’s a very good way to get the transgene into the body. That’s why they’re used.

The challenge with it is detecting in these very large viruses, microscopic differences, minute differences in weight. And our new CDMS technology enables you to see the difference between -- in the chart bottom right, a difference between an empty capsid, or encapsulated form and a full. That’s vitally important for efficacy.

Efficacy really matters because this is a biologic process. Sometimes, the efficacy, the efficiency, the amount of full capsids you have is maybe 45%. And this is a very expensive process. The cell and gene therapy per site on a single eye could be $1 million per eye, the cost of cell and gene therapy. And many cell and gene therapies are over $500,000. You have to drive that cost down if it’s going to become widespread. And one way of driving that cost down is having more impactful drug substance. So moving from a 45% efficacy kind of full capsid to 100% or close to 100% full capsid by analysis by mass spec.

There are other ways of doing this, but they’re long and cumbersome, something like an analyst or ultracentrifuge can give you some of this work but the charge detection mass spec can you that unique profile. So that’s building the future.

So in short, I look forward to talking with you over lunch, but it’s been a great journey in the last year. I’ll leave you with these three points. The execution, we’re building that foundation. You’re seeing some of the results. There’s more to come. It is a journey. It’s better every day. I’m really, really pleased the way the team has embraced it.

The new products, it was -- the innovation is fundamentally looking out the window and leapfrogging the technologies we see in unmet needs in the market. It was very important to build the execution foundation to receive that new product, which is why we prioritize those things together.

And then our new customers, we’ve turned the enterprise to looking out the window, to hunting. We enable our sales force and giving them the tools from an innovation perspective and a territory size perspective to hunt and not just take care of our existing customers.

It’s been a fabulous journey, and thank you very much. I look forward to talking with you at lunch.

Thank you, Jon. Good morning, everyone. It’s a really pleasure to meet you all today, and I also enjoy the conversations on batteries with some of you.

I’m Jianqing Bennett. I lead our TA Instruments division and also our clinical business. So we’ll first cover our TA business and then followed by our clinical business.

Our TA business also has a very similar simple, repeatable business model. And we have a broader portfolio of innovative products and reliable products to serve in very attractive markets with sustainable growth. We help scientists, engineers and technicians, both in their R&D development -- department and manufacturing QA/QC lines to capitalize the materials they are working on.

And we have more than 30,000 installed base globally. And we are still helping customers, for example, characterize advanced materials. And we also help customers to evaluate the shelf stability of the active pharmaceutical ingredients in the pharma space.

So with those 30,000 instruments, we are globally -- we are very proud of the premium performance our instrumentation brings to the customers. But we are more proud about the scientific expertise and also the application knowledge that our team serves our customers. And that’s actually the hallmark of Waters TA division. And with this, our customers really love our products and love our technical support to help them on massive development in all the materials they are making. And with that, we see repeat business from our customers.

So now, with that brief introduction of TA business, I wanted to share with you a little bit more details of the four leading product lines TA has. The first leading product line is our thermal analysis product line. I use an example here what a thermal analysis does. For example, we help the customers in batteries markets to optimize the energy density, the capacity and also to help them to manage the safety of the batteries.

Then our rheology product line, we help our customers, for example, the polymers customers to help them determine the processability of their sustainable polymers that they are developing now. And we also then transition to the said product line our microcalorimetry product line. This is a product line, for example, in the pharmaceutical company, with our pharmaceutical customers, we help them to characterize protein-to-protein activities during the drug delivery.

We also have another product line that’s the ElectroForce mechanical testing. We help our customers in the medical device industry to help them to do the accelerated durability design of their medical device or the novel tissues they have been working on.

So these are the four major leading product lines TA has, and it gives us great exposure in the end markets that I just use as an example with a high sustainable growth here.

So with this context, now I’m going to share with you two elements of the growth strategy that we have developed and we have been implementing. The first element of our growth strategy is end market focused strategy.

If you look back at TA, the end market exposure historically have been serving the markets with low to mid-single-digit growth in the areas, for example, the consumer staples or the food agriculture science or the industry like a cyclical industry like energies. Now we have a very strong presence in those end markets. And we continue to serve our very close customer relationships in those markets.

But our growth strategy is to focus on the high-growth market segments. I will start from the top with the batteries markets, how we have been developing strategies and getting more and more exposures in batteries, renewable energy. And moving down, we also have a sustainable polymer market focus as well as the life science, the biopharmaceutical market focus. So that’s the first element of our end market focus strategy.

Our portfolio that I shared with you just briefly earlier fits right into those spaces to address the unmet customer needs in those high-growth markets where the customers are experiencing more innovations and running into new discoveries. That’s where our portfolio help them with massive development. So that’s the first element of TA growth strategy.

Now I’m going to share with you the second element of our growth strategy, which is the commercial transformation. We have been going on the -- so you know what? I’m too excited. We talked about the batteries market earlier. So now I’m actually going to use this opportunity again to share with you, to zoom in into the batteries market.

So batteries market is very exciting, as all of you know, driven by the electrical vehicles, consumable electronics. The market itself is experiencing the exponential growth, and we see innovations happening, tons of innovations happening in this space. And our customers are coming to us to ask for support, how to help them in their innovation journey.

As such, the battery testing market is -- that’s where we play is also experiencing a double-digit, significant growth. And as we shared earlier during the poster session, our portfolio covers the entire value chain of the batteries market here, starting from the raw material of batteries and also the battery components like anodes, cathodes to the battery cell production as well as the end users by, for example, the automotive vehicle companies and the recycling of the batteries as well.

So I’m going to share with you some specific customer examples how our TA portfolio has been working with the customers, helping them in their innovations and address their challenges in production.

So the first example is we have been working with a global-leading car manufacturer using our thermal analysis instruments to help them to improve the battery electrolytes, the chemistry of the electrolytes. So then we can help them to improve the safety of the batteries that they are manufacturing.

The second example I wanted to share with you is we also have been working with a leading European lithium ion gigawatts manufacturers. We use our rheology to help them to determine the best mix of the coating material for the electrodes, so then they can significantly improve the manufacturing processability and also reduce the manufacturing scrap there.

Another example I wanted to share with you is we have been working with Asian larger precursor battery manufacturer. So we use our system to help them to determine the purity of the materials, so then they can increase the density of the energies to improve the performance of the battery.

So these are the examples that we have been actively working on with the batteries industry. It’s very exciting, as I mentioned, a lot of innovations going on. And we are working very closely with our customers on both the innovation side and the manufacturing side. This also gives us the opportunity, visibility for our continuous product innovation.

So I know I got very excited when we talk about batteries. Now let me share -- transition to share the second element as part of our growth strategy. That’s the transformation journey that we have been going -- have been having in our sales and marketing, demand generation and the sales are targeting.

In the past, particularly before pandemic, at TA, we do marketing during the trade shows. In the last couple of years throughout the pandemic, we changed our strategy to digital marketing, and that’s backed up by the data-driven digital insights we have through the CRM system that we have implemented. So now when we do digital marketing, we know exactly where to target our customers, leading with what type of applications that they are interested in, in the materials they are working on. And we have been able to more effectively and efficiently doing marketing targeting.

As a result, in last year alone, our marketing activities have increased significantly the number of qualified opportunities to feed into our sales funnel. So we have -- we will be seeing the results of it. But more importantly, that’s the foundation, that’s the capabilities that we have developed, and we’ll continue to improve upon it to give us a sustainable sales visibility to the market and the sales discipline, how we’re looking at insight for KPIs to guide our sales behaviors, so we can drive more results. So that’s the second element of the TA growth strategy I wanted to share with you.

So then the numbers speak for itself that with this strong portfolio, focused market approach and commercial excellence, TA has been the growth driver in 2021 for Waters Corporation and also continues to be the growth drivers in Q1. So in addition, we see the broader geographical growth. We also see significant growth from our high-growth geographical countries, for example, China, Korea and APAC.

So with all these I shared with you, in summary, TA, we have a broad portfolio, with our high-growth adjacent market focused approach with our continuous improvement in our commercial excellence, we’re not only going to strengthen our position in our core business, core markets. We are accelerating our penetration in the high-growth markets I shared in batteries, in sustainable polymers. So these together will enable us to drive above-market growth.

So that’s for the TA business. Now I will transition to talk about the clinical business. First of all, Waters has established a clinical business. Even though I’m new to Waters as one of the new leaders who joined the Waters just about a year ago, but I’m not new to the diagnostic market, and the Waters is not new either.

So we have an established clinical business. We have a global revenue around $200 million in 2021, serving over 4,000 clinical accounts globally in multiple disease therapeutic areas.

So here I’m going to highlight one of those therapeutic areas, the clinical -- the newborn screening program, the newborn screening business for two reasons. First one, we are very proud that Waters actually has been the earlier pioneers in the industry to bring mass spectrometry to the newborn screening testing.

Secondly, this is -- newborn screening is a great example of how mass spectrometry technology as a diagnostic tool, we leveraged the use in high-volume, multiplexing clinical testing environment.

So as you guys -- many of you are probably aware, it takes a very small sample, 3 millimeter dry spot -- dry blood spot, and it can analyze up to 36 analyze for inborn metabolic disorders and then just within 2 minutes, with high complexity there. And once -- with this technology being used in newborn screening, then you can have a really early detection. And we can treat -- we have been able to treat the newborn baby -- countless newborn babies and also enable them to have a quality of life. So that’s the example of newborn screening.

So now I wanted to ask. With the success of mass spectrometry in newborn screening, why mass spectrometry becoming a gold standard or standard of care in newborn screening? And why mass spectrometry should be a standard of care for routine clinical diagnosis?

So I don’t need to probably go into detail to share with you the analytical power of mass spectrometry, identifying, qualifying proteins, peptides, metabolized. And many of you guys already know that mass spectrometry, first, it has high -- it’s highly specific. It doesn’t have very low cross reactivity compared with other technology, analytical tools.

And then two, it’s highly sensitive. You can detect at parts per billion level. I know you guys also probably know this analogy, which is equivalent to half teaspoon of sugar in an Olympic size of swimming pool. That’s the sensitivity. That’s mass spectrometry can detect.

But more importantly, mass spectrometry can actually detect a wider range of concentration levels. So you can accurately determine multiple analyses in one patient sample at wider concentration level. It could be 1,000 molecules in 1 sample up to 1 billion molecules in 1 sample. So that’s the beauty of massive spectrometry. It’s -- we’re positioned to be able to handle multiple analyses simultaneously for complex detection.

So I know I’m probably preaching to the choir to all of you here. So then the question is with such a powerful analytical power, why is mass spectrometry not adopted -- widely adopted for routine clinical diagnostics?

So we summarized -- from the customers, we summarized, there are three major challenges to address. It’s all around the workflow, clinical workflow. So the first challenge we need to address is to make it easier to use because mass spec is complex. It takes a lot of many high skilled resources to develop the [test] to run it. So that’s the first challenge we want to address.

The second is the total turnaround time is too long from patient sample to clinical reports. Sometimes, it takes several hours. So we need to figure out a way how to address that in a clinical environment.

The third challenge is around workflow is we need to have end-to-end robust, reliable systems, so it can support high-volume patient test in the real clinical environment, so it can minimize the disruptions to patient care.

So these are the 3, we call it, brand challenges around the workflow in order to take the mass spec broadly into the clinical space. And we believe Waters is uniquely positioned to address those challenges. Just as we shared, Waters has a track record of taking complex technology into easy-to-use workflow for our customers.

So we at Waters have deep understanding of clinical workflow and the pain points. We break down those clinical workflow, which covers somewhere from 50 to 60 steps where you do 1 batch test, it takes to 6 to 8 hours. So we have a deep understanding of this workflow, and we break down those workflow into 4 major areas, so then we can apply our expertise to address each one of them to simplify it.

So I’m going to share with you the two simultaneous approach we are taking as part of our plan. We start with sample preparation and back-end informatics. We leverage Waters’ expertise in chemistries, in sample preparations. We also leverage Waters’ expertise in informatics. So we address -- leveraging those to address the most pain points of customers, which is the front end -- I listed on the left, the front-end sample preparation and the back-end data processing, data review and the clinical reporting.

So by taking the expertise we have to apply in those two areas first, we could reduce the sample prep time by up to 20% to 30%. We can also reduce their data processing and the clinical reporting time up to 50%.

So I’m going to give you one recently release that we just launched as an example. This is the very first launch after we started our focus efforts on LC-MS in diagnostics. So we just released a reagent set with the categories and the controls to enable the customers to test 12 steroid hormones. And we also coupled it with workflow solutions improvement there.

And this is not only going to enable the customers to be able to manage a really sensitive analysis, but also enable them to have a lots and lots of consistency, which is -- and a reporting accuracy, which is very important in a clinical environment. And it can save up to three months for the skilled users to develop maintaining tests. So that’s just one of the very first release after we started the efforts in our LC-MS for diagnostics.

Ultimately, we would like -- we are planning to pick the best technologies available in all those four areas, whether be it the sample preparation or analytes enrichment. There are emerging technologies in analyte enrichment, in separation and also the emerging compact mass spec detection technologies like, for example, the BioAccord we introduced, much smaller, much compact and also the TQ Xevo Absolute that we just have introduced.

So we’re leveraging the best compact mass spec detection and also the most advanced data management. What we will be doing is we pick up the best technology to go for a fit-for-purpose, integrated mass spec solution. It could be for cancer early detection or for precise diagnosis in very difficult endocrine disorders that the clinicians are challenged with.

So I want to share with you the two approaches that we are taking to address the customers’ pain points and ultimately towards a fit-for-purpose mass spec integrated workflow solutions for our customers. We believe that in the next decade, mass spec will be playing a very critical pivot role in the early disease detection where the treatments are available and the disease can be most treated.

And we also believe that this is going to be a journey. It takes a lot of innovations and it takes also the whole industry to work on it. But we believe that Waters has the unique track record as we demonstrated in newborn screening. And we are also very focused, committed to go on this journey to really make the mass spectrometry solution to be able to take the proteomics test into the real clinical environment to help with precise -- precision patient management.

So with this, I want -- that’s what I would wanted to share with you for LC-MS in diagnostics, the approach we are taking, both at the short term and also the long term.

So with this, thank you very much, and I look forward to discussing with you during the lunch time. And now I’m going to turn it over to our CFO, Amol. Thank you.

Good morning, everyone. Are you able to hear me back there? Okay. Great. I mean it’s a great pleasure to meet all of you in person, shake hands. It’s been a lot of Zoom calls, but this is a unique opportunity. And really excited to share with you the financial future that lies ahead for us at Waters.

As Udit outlined, we operate in large, attractive markets, with strong sustainable growth drivers. And within these markets, we have a really well-established repeatable business model. That over years has allowed us to deliver end-to-end solutions for our customers. And then as you see, that has translated into industry-leading margins, industry-leading free cash flow as a percentage of sales. And that over time has resulted in a deep, rooted presence of Waters in this market.

We have regained our commercial momentum, as you heard from Jon and Jianqing, and the teams are now laser focused on delivering market plus growth. We’ve revitalized our organization. And that organization now is focused on innovation so that we can truly address customers’ unmet need.

And then through the poster sessions as well as some of the presentations here you saw, we are focused on problems that matter in our industry. These problems happen to be adjacent to our technology in high-growth areas. And so we are very happy about the progress that we’ve made in such a short time and really excited about the future that lies ahead.

And so when you heard all of that, the question becomes, okay, what does that translate from a financial point of view, right? And that’s what I’ll bring home today. So I’ll connect the dots and see what that means for growth, margin, capital deployment on our mix. So before we begin, let me quickly frame the central themes that you’ll hear from me during this presentation.

You’ll hear me talk about growth and connecting the dots on what you heard so far today. I’ll talk about our industry-leading margin, but more critically, you also talk about the broad margin opportunities that lie ahead of us. And then I’ll talk about what does that all translate to in terms of our capital deployment and eventually our earnings per share.

So starting with growth. Let me start by emphasizing, I mean, we have regained our commercial momentum. And to do this rapid turnaround in a normal year would have been a great achievement. But to do that in the middle of a pandemic with all the ups and downs and despite sort of all sorts of supply chain challenges is truly remarkable. And a lot of the credit goes to my colleagues around the world who sort of exemplify the indomitable spirit at Waters. All of our teams are laser-focused on serving our customers and delivering new products that create a difference.

This has translated to a very strong growth in ‘21 and also a very strong start to 2022. And you’ve heard a lot of that. So I won’t go into the detail because Udit, Jon and Jianqing have already covered this. We had 18% reported growth or 16% constant currency growth in 2021, but anything looks really great versus 2020.

So right throughout the year, we were very transparent. We always compare our performance on a 2-year stack basis versus 2019. And there, what you see is we grew 7%. Recurring revenues grew 7%. Instruments grew 6%. Pharma grew 10% on a 2-year constant currency stack paces. And that momentum, if you see has only become stronger as we’ve come into 2022. 16% constant currency growth, 26% instrument growth, 28% growth in the U.S., 17% growth in China.

And that’s despite all sorts of supply chain issues, right? And supply chain is not over yet. I mean the electronic component situation is essentially the same. But our teams have found a way to rally, found a way to find solutions. And what is even more compelling here is despite the fact that we are higher instrument mix, despite the fact that U.S. dollar was very strong. And despite the fact that we had inflationary pressures, we still delivered gross margin expansion and operating margin expansion. So our progress on pricing and volume is working. And that gives us a great confidence of how we are executing at this point of time.

One other way to look at this is to be fair to ourselves and to measure us accurately, we constantly compare our performance versus analytical instrument business units of our peer group. Because in this market, everybody claims we are gaining share. But we have to be honest to ourselves. So what we’ve done is we looked at constant currency reported growth rates of our peers. And what we find there is on a 2-year stack basis, we are growing faster than our peers. Even in the first quarter, we are growing faster than our peers. So that gives us a lot of confidence that our market plus focus is working.

And it’s even more remarkable because if you just look at 2, 3 years ago, we were bottom of the league tables. So that gives us enough comfort that the plan that we’ve put in place, the focus that we’ve put in place is starting to produce results. You saw this with Udit. You heard Jon walk through the 5 commercial initiatives in detail. So I won’t spend a lot of time on it.

But 3 things to remember here. These were the initiatives we communicated when we started our journey. And on each of those initiatives, we are performing ahead of expectations.

Two, each of these initiatives is adding incremental, accretive growth to the market. And three, each of these initiatives have a significant runway well beyond 2022 to produce this accretive growth to market growth.

And then on a similar note, you heard a lot about this through the poster presentations as well as presentations from Jon and Jianqing. Three things to note here again. One, we are focused on problems that matter. Two, these problems are in higher growth adjacencies and our technology is the critical piece of the puzzle to solve these problems. And three, while our technology is the critical piece, there are other capabilities that we need, that we don’t have today to solve these problems, and we continue to build them organically and we may use inorganic options to accelerate building those capabilities.

So what does all of this translate into our growth outlook? If you look at it, this market that we operate in historically has grown somewhere between 4% to 6%. With the commercial initiatives that we’ve outlined, we think all together, they will add 100 basis points of accretive incremental growth to the market. And so in the near term, we think we will be able to grow 5% to 7%.

Our outlook or our guidance for 2022 is already higher. Our guide for 2022 is 7.5% to 9%, which includes market being at the higher end of the range. Our commercial initiatives and newer products delivering ahead of expectations. And then we are able to offset the impact of inflation with pricing. Typically, we do 50 to 75 basis of net price increase in a year. This year, as we said in our earnings call, we’ll do over 200 basis points of net price increase to offset the impact of inflation. So that’s aggregating into the 2022 guidance.

As we now look at midterm, our market plus momentum in the core will continue. But what we also expect is some of these higher growth adjacencies that we are nurturing will start to produce incremental accretive growth as we enter midterm into 2024, 2025. And that should allow us to increase our growth profile from 5% to 7% in the near term. As we get into midterm.

So now switching gears to margin. So let’s first start with something that’s well understood. Waters has the industry-leading margin in the sector. And there are a lot of attributes that drive this, right? Our customer proximity, our well-established business model, our brand equity and premium positioning, they all go hand-in-hand to drive us into a high-margin business. What’s more critical is our business model invariably takes us into high-volume applications that are usually in a regulated settings. And so that does 2 things. It brings a lot of repeatability to the business.

Sometimes people say, but only 55% of your revenue is recurring. I’m like, no, 100% of my revenue is recurring because all these instruments come for replacement every 5 to 7 years, and we have more than 85% chance of getting that order because the customer is already using our instrument. You further fortify that with Empower, gives us even better chance of replacing those instruments.

And when you have a business like that, that naturally progresses you to a higher margin outcome. Then you couple that with a long-standing financial discipline of the organization allows us to consistently deliver this industry-leading margin.

So from here, let’s go to something that’s not that well understood, which is everybody says, hey, Waters has such a high margin, you have no room for margin expansion. And that’s not really the case. I mean, we have a broad set of margin expansion opportunities ahead of us. And it starts with pricing. Historically, we’ve done 50 to 75 basis points of price increase. As we are going through an inflationary environment, our commercial teams are taking the pain of understanding what’s happening in operations, what’s happening on electronic components. And that’s allowing them to have a very transparent dialogue with the customers, which is enabling us to deliver 200 basis points of price increases this year.

What that also has done critically is put in place systems and processes that will continue to leverage when we are beyond the current situation. So that gives us confidence that we’ll have a better accretive effect from pricing.

We’ve had a very strong instrument year last year. We’ve started this year also with very strong instruments. And strong instruments translates to future strong chemistry, service and informatics. So our recurring revenue is going to increase and recurring revenue is more profitable. And so that’s going to bring benefit to our mix. But then also with e-commerce, we are seeing accretive chemistry revenue. And chemistry is by far our highest margin product line. So between the 2, we’ll see a benefit of the mix moving more and more to recurring revenue, that is higher margin.

Three, I mean, as an organization, we have substantial fixed costs in manufacturing and supply chain. Our sales organizations, our G&A organizations do not scale at the same rate of sales growth. Typically, if we grow 5%, we produced 50 basis points of margin leverage because of this fixed cost structure.

Now we haven’t grown at 5% for the last few years, and that hasn’t allowed us to deliver that. But if you do the math, we should be able to deliver 50 basis points every year that we grow 5%. And so there is a substantial volume leverage in this business.

And then productivity. I mean we are laser focused on this. We started on this journey a couple of years ago. We’ve identified specific projects that we think will create as much impact as some of the others in years to come. And it starts with operational excellence in our manufacturing and supply chain. We are on that journey for a little over a year now. Direct and indirect procurement programs, again, second year in that journey now starting to produce roots.

Value engineering. I mean we have a long history of value engineering. I mean, Alliance is still one of our highest-margin instruments. And as more and more new products come into play, that skill of value engineering will play a big role in improving the gross margins of these newer products.

Service productivity is a big focus. And as we improve attachment and sort of adopt digitization, it’s going to bring more and more service productivity to that business. And as Jon said, that’s almost a $1 billion business for us. So can contribute very meaningfully. As Udit discussed, we are late to the digitization journey. We started a couple of years ago, starting to produce fruits.

And then as an organization, we really haven’t invested in building centers of excellence where we bring together talent so that the talent is focused on delivering outcomes; performance and productivity. And we are starting to do that. In specific areas, we’re starting to build centers of excellence so that we can gain this productivity, right? So pretty exciting in what lies ahead in terms of margin expansion. But caveated to the fact that we also face fantastic higher-growth adjacencies, and we’ll invest some of this to nurture those adjacencies, right?

So how does this all come together? So in the near term, we think pricing, volume leverage and productivity together will bring about 100 basis points of margin expansion each year. But we will invest about 70 to 80 basis points of that back into higher growth adjacencies. And so net of it, we will see about 20 to 30 basis points of margin expansion.

I mean when we started on this journey of higher-growth adjacencies, a lot of the investors we met were. "My god, Udit and Amol, you’re going to destroy Waters’ margin." And no, we’re going to fund it out of what we get out of our productivity, price, and volume leverage. And then as we go into midterm, a couple of things will change. One, mix will come into play as we will see more and more recurring revenue from the instruments we are placing now. And that will have accretive effect on the margin.

We are still investing in some of the productivity initiatives, like digitization, like centers of excellence. So that’s making productivity net outcome a bit smaller here, but those investments will be behind us. They will start producing benefits here. So we’ll see a more pronounced productivity impact.

And then the reinvestments in higher-growth adjacencies will start to reduce for 2 reasons. One, these projects will be further along. So it will not need as much incremental investments as we are making now. And two, they will start to produce revenue and margin. So their net impact would be smaller.

So the net of the 2, you will see a much more pronounced impact on the margin expansion as we get into midterm. Yes? Now having said that, growth remains our primary focus. So if we see high ROI growth opportunities, we will not hesitate from investing in those because we think that’s the future of Waters and that needs to be funded.

So then what does all of this mean for capital deployment and our earnings? If you look at sort of our recent history and despite the fact that there were years in between, say, ‘17 to early 2020 when growth was not there. We were growing below market. We grew 5% on sales, but we were able to leverage that through margin and buybacks to get to about 11% EPS growth. And during this time, we still maintain industry-leading operating margin and almost $0.26 of every dollar we sold converted into free cash flow.

We lead the pack on our free cash flow conversion and on ROIC, as you heard from Udit. And this cash flow gives us a great flexibility in terms of how we deploy this cash flow. From a capital deployment point of view, we will fund all high ROI, organic growth opportunities and margin expansion opportunities. But our primary focus for capital deployment will be M&A. And it will be M&A in the space where we try to bring assets on board that bring complementary capabilities that will meaningfully accelerate the higher growth adjacencies. And in that, we’ll meaningfully accelerate value creation for our shareholders.

Share buybacks will continue to be the primary form of returning capital back to shareholders. We will adopt a more balanced approach to the mix. And depending on the year, depending on the timing of M&A, the mix between M&A capital deployment versus share buybacks will change, right?

So then what does this mean for EPS outlook? So historically, we’ve delivered market growth, some amount of margin expansion and further leverage through share buybacks. As we look at near term, the growth profile, we think will clearly expand as we aspire to deliver market plus growth. Margin expansion will roughly remain the same because we are investing a big chunk of our margin expansion back into higher growth adjacencies. And we’ll have a more balanced approach to share buybacks as we will conserve some cash to fund accretive M&A. And net of all this, our EPS growth profile would remain somewhat similar to our historical EPS growth profile.

As we then look into midterm, 2 things will change again. The market plus growth will now expand even further as growth comes in from higher growth adjacencies. So we see a benefit there. Margin expansion will expand as we covered before because we are reinvesting less, more elements are starting to produce. And then we’ll see an accretive effect of the M&A transactions that we undertake in the next couple of years to bear fruit as we get into midterm.

So a really, really exciting outlook. The entire team here at Waters is very excited about the future that lies ahead. And we hope and we think this is really encouraging for all of you to be partners for us in this journey in even bigger way, we love your interest in Waters, and we hope this day makes that interest amplify even more.

So thanks a lot for coming with us today. I would now invite Udit to make some summary comments before our Q&A session.

I could listen to these folks for a much longer period of time. And I know you’re getting tired listening to all of us. So we’ll open up to a Q&A.

But let me summarize what you’ve heard through this -- through these presentations, it’s an exciting outlook for our company. I think Amol just summarize with some directional financials. I know you want even more precision and you want exact cents and dollars. We can address that in the Q&A. I’m not leaving any suspense. I’m not going to give you more numbers, Vijay. He’s nodding away.

We have an energized team with an indomitable spirit. If you’re not taking anything away from this presentation, this set of presentations and poster sessions, that’s the #1 thing that you should take away.

Strong core that is increasingly serving these attractive markets with a simple and repeatable business model. Simplicity is super difficult, and it’s a simple business model that we’ve perfected. Innovation and commercial excellence is driving this market plus growth, and we’re entering high-growth adjacencies with organic investments with partnerships and looking at M&A opportunities as well.

So thank you for your attention at this point. I want to bring my colleagues back up to address any questions you have. I know we’ll go into lunch and several of us will disperse across the different tables. You’ll have a chance to ask questions even more deeply, but I thought we would expose these guys a bit to any questions that you have. And I’m sure you’re readying.

A - Dr. Udit Batra

To the first question already in the back. Okay. So why don’t we start with you, Derik, your hand was up first. And you’re up here next and then third one here. Yes, you are, Dan, you’re next. Go ahead, Derik, start. Even before anybody sits down.

Great. It’s Derik De Bruin from Bank of America. So just a couple of questions on the current market that we’ve been getting from investors.

You put up great instrument numbers this year in first quarter ‘21 was great. The industry, in general, has been having great numbers. What’s your confidence that it’s not pull forwards. And I’ve been getting asked from investors, are customers currently worried that they’re ordering earlier because they’re worried about supply chains and sort of long lead times? Basically, are we -- is the entire industry pulling instruments forward right now?

Yes. It’s a good question. The simple answer is no. Jon gets -- Jon and Jianqing get this question from me a lot. Tim does as well, given the wonderful growth that we’re seeing in the U.S.

But the single way, single, single best metric is to look at orders versus sales. Our orders are still exceeding the sales growth that we’re seeing, even with all the supply chain challenges. So the answer is no.

Jon, do you want to?

Yes, we’re not seeing it. I mean people are not buying mass specs to pull on the shelf or to order them. They’re typically they’re too many project driven, right? Nobody is buying it just because.

And there are pockets where you see a little bit more trepidation some doubt around Eastern Europe, for example, obvious reasons there, you see a few projects a little slower, but no massive pull forward of our technologies is what we’re seeing.

I had one follow-up, if I could. In clinical mass spec, I mean, we’ve been talking about this for as long as I’ve been following the industry. I mean -- and I know that you started a collaboration with PerkinElmer back in 2005 on newborn screening. So I’m just sort of curious what gives you the confidence and be able to sort of win and clinical win, when all your other mass spec competitors actually have dedicated diagnostics businesses?

I think let me start, and then I’ll let Jianqing jump in. Look, we’re not newbies to clinical mass spec. We have a $200 million business larger than many start-ups that would be out there, highly profitable, growing very well in new ones screening in therapeutic drug monitoring and other areas. But Jianqing should answer your question. She is super excited about what we’re going to be able to do in this space. Go ahead.

Yes, we -- as I shared earlier, we have a deep -- just because we have been in this business for a while now, we have a deep understanding of the end-to-end workflow. And we take a holistic approach to looking at the pharma clinical environment, what are the real pain points for customers. So that’s the first piece.

And the second piece is we are at today, there are many emerging technologies to come into the market. And also, there are significant needs for proteomic multiplexing-based tests in order to do early diagnosis. So with the technology, with a deeper understanding with our expertise in the different segments of the workflow that we believe that we are really in a unique position to provide that end-to-end solution, both the short term and long.

I mean out of the 5 adjacencies from a technical difficulty standpoint and inertia standpoint, this is the one that’s most difficult. There’s no question about it.

However, with sample prep advancing the way it is, we already showed it with what we did with the COVID testing protocol that we can develop a simple sample prep protocol, we can automate the workflow, we can simplify the mass spec itself. So we have proof of concept already and that gives us the confidence. And we’re not going after each and every application. We’re focused on multi-omic, multiplexing where there is a necessity to look at multiple analytes with one test that is simplified.

And we’re pretty confident that we have a proof of concept but it is going to take some time to get there.

We have the next question over here with Vijay.

Okay. Okay. Vijay, jump in. Sorry. He’s the boss.

Thanks for this is Vijay from Evercore. So one, maybe no numbers question for you. I’ll save it for Amol.

I know numbers too. When I said we don’t -- I won’t answer it, I meant Amol as well. But fine. You can try.

The high-growth adjacencies, do you guys play in those markets right now? Or do you need new products to get into those markets? Like why is high-growth adjacency incremental in ‘24? Why is it not incremental in [‘23]? You guys have done 7% the last 3 years, should next year be like 8%? .

Good try. As I said, when we identified these spaces. We already had proofs of concepts in our hands. For bioseparations, Erin and team can talk to you at length during lunch on what proof of concept you already have for separating oligonucleotides, the application of our MaxPeak Premier Columns. The whole premier technology was designed to separate these molecules. We have proof-of-concept.

But you know what, to make a bigger difference to separate larger and more complex antibody, antibodies, drug conjugates, we need to build the knowledge, not just in Waters, but also in the industry of combining biology and chemistry and marrying it with surface chemistry and surface modification.

For bioprocessing, I already gave you the egg example. This is an old problem and one that -- it’s really a whole bunch of people in the industry are keen to solve. We’re not going to be able to do it alone. We’re going to be working with others, and it requires not just organic investment. It requires partnerships and M&A. So that’s why it’s a slower build, but we are absolutely convinced across the board, including battery testing, right?

I mean all -- actually, majority of the electric vehicle manufacturing companies use our products already for thermal and mechanical testing. So this is not really nearly picked out of the air. These are proof-of-concept that exists. There is sales, be patient. Facts are always in the rear-view mirror. It’s only projections in the future and anyone can project it’s more difficult to deliver facts.

Fantastic. And maybe a couple more one for you. Historically, you guys have done 11% earnings growth, right? So every -- when you look at those drivers, right, revenues, margins, cap deployment, all of them are stepping up.

So I know you didn’t put out an earnings growth number. Are we now looking at like teens earnings growth? Like when you look at that slope or is it 12% or can you fine-tune what the earnings outlook should look like for?

Yes. So look, I mean, historically, depending on which year you look at, we’ve sort of done high single digits to a low double-digit range. I think because we will reinvest a lot of our margin gains into higher-growth adjacencies and also because we will take a more balanced approach to capital deployment near term, our EPS growth near term would remain at a similar level, right, high single digits to low double digits.

Then as you get into midterm, you’re right, some of these things will produce accretive effect like our growth in high-growth adjacencies come in, like margin when the reinvestment reduced. And you will see a much more better EPS growth profile as we go into midterm.

I think I’ll stop at that because we did commit we are not giving numbers.

Dan Brennan from Cowen. Maybe a 2-parter. First one, just on this future kind of midterm outlook. Udit, I think you’ve discussed in the past, this idea of wanting to move methodically and not being fit and start to build this like sustainable, durable kind of track record. So should we take that to mean that you’re going to try to control this kind of growth engine, if you will? Like you’re not going to try to let it out such that say, beyond ‘23, you had one of your large peers, you took their midterm growth rate up by 200 basis points was a pretty big step-up.

So I guess the question would be, should we be thinking like incremental improvements because that’s how you’re going to run the business and kind of build this long pathway? Or if the numbers shake out and suddenly you’re 2 or 3 points higher or 4 points higher that could happen?

I think it’s a great question. Psychologically, when I say systematic, I mean we want proof-of-concept. We want to be sure that we are moving at a certain deliberate pace, but that does not mean if the proof of concept exists that we would shy away from investing. You will not see us, right? And that’s why I don’t give too many projections. We don’t give too many projections in the future.

If we find something that works, you can bet that we will go after it boldly. And I think I can give you examples from the previous time that we’ve worked together in different companies. We are super bold. We invest hundreds of millions in CapEx if we think the opportunity has a proof-of-concept that’s available, in some cases, that’s starting to emerge and others not yet.

I’ll give you a simple example. We saw good growth coming in the U.S. under Tim’s leadership and Jon’s leadership. And we put more feet on the street very quickly, right? And it’s not something that we shy away from. So I would not assume -- I would not conflate the word systematic from not being bold.

Great. And then maybe as a follow-up for Jon. It’s like a lot of the growth initiatives are in your own power, you’re going after new markets. But in many cases, you are just executing better than you’ve done in the past, both from a -- you kind of laid it out here clearly. So I’m just wondering, what about the competitive response? I mean, you’ve got some very strong competitors and maybe water was a bit sleepy here for the past few years and now they’ve been kind of reinvigorated? Are you seeing a competitive response? Is that something you factored in as we look ahead to this growth trajectory?

The short answer to the competitive response is not specific, not programmatic. There’s defense, of course, when the competitor set, but nothing that we’ve seen. And we factored into the growth.

Building on your first question, actually as well, we know with some of these technologies. I think the Premier Column is a great example. Market penetration early is really important. We’re not slowing now. And so it’s -- there’s time -- there can be responses to that, but we’re operating at speed. So I’m factoring it in, of course, but I’m not seeing anything specific or problematic.

Luke Sergott, Barclays. So you guys kept talking about the commercial momentum here, and it’s pretty evident that it’s coming through on the instrument side. But can you talk a little bit about what’s going on from the consumables aspect? And with all the instruments being placed, is it something that we should expect that momentum in the back half of the year and into the next couple of years? Or is that really how the business being driven?

Yes, I’ll go with the first question, a question we get a lot. What do you have to remember growth on instrumentation is a leading indicator, right? So in a given quarter, we’re up 25% instrumentation, your chemistry doesn’t follow because the percentage of instrumentation in the field is a small amount increased in that quarter versus the installed base where your chemistry is.

And what we are seeing, particularly with something like a premier column is the attachment rates at the instrument sales when you attach it to chemistry to that instrument is higher with those new products and historic.

So we’re building the base of chemistry, but you’re not going to see the growth rates reach the instrument levels because in a given quarter, you may add 2% instruments more in the field, 5% instruments more in the field, not the 26% print.

So it’s an equation that grows, and we’re seeing the attachment rate increase as well. And I forgot the second part of the question.

And just to add to that, right, look, I mean, our structure is somewhat different versus when you experience a PCR or immunoassay businesses. In our case, there are 3 different components to recurring revenue, chemistry, service, and informatics.

Chemistry typically kicks in within a quarter, maybe 4, 5 months of a brand-new instrument in its accretive impact. But service and informatics take time, right, because they are first year -- on the first year plan. And so when the plan sort of the basic warranty expires, then the plan kicks in.

So you will see an impact, but it will be like a year out on those aspects.

And just one more embellishment. I mean it’s -- that’s the time the way to think about timing. But then when you think of the overall chemistry growth, it’s not just attachment to instruments. It’s new products, right? And it’s e-commerce. Those 2 are independent drivers that add on to the attachment rates that my colleagues have talked about.

So that would be the math that I would do. And yes, we are excited. We’re growing up almost double digits. And even in Q1, we grew double digits with our recurring revenues despite having one fewer day in the quarter. So get super excited, but it’s not just attachment to the other [2 piece].

As you can see, we’re pretty passionate. The Premier Columns, 50% of the sales are going on to competitor instruments. So it’s not just attachment. It’s driving that displacement as well. So it’s a longer-term model, but doing as well.

And lastly, on M&A. You’re clearly going to be active here, but can you give us a preference for getting into new technologies and new markets versus buying things that simplify the workflow, like an instrument in front of the mass spec? Sample prep and things like that?

I mean I think the thesis is the same as I described in the plenary. We are, of course, going to do small bolt-ons in the core that enhance the workflow, improve LC, improve most spec, improve our consumable offering. But the bigger focus is on getting a real foothold in the adjacencies, accelerating that journey. So whatever accelerates bioseparations, getting more biologics capabilities, getting more reagent capabilities. Whatever accelerates our journey into bioanalytical characterization. We’re not out to buy -- there’s nothing available in bioprocessing anymore, last I checked, right?

But we’re not looking to become a consumables bioprocessing player. We want to be a bioanalytical characterization player, as we described and there’s a lot to do there. It’s a terrific space, highly fragmented, not to do there.

In LC-MS and diagnostics, if we get our hands on somebody who can help us simplify the reagent part of the business or automation. That’s an obvious logical fit to the thesis that Jianqing laid out. In batteries testing, you saw the workflow that Chris laid out. There are, of course, our instruments, but there are ways of enhancing our presence and accelerating the growth.

So the logic is tied to those adjacencies with very specific problems to solve and there are assets out there that could accelerate that journey. But you will again find us super disciplined, but we are not -- be cautious with how I say it. We will be bold when necessary.

Josh from Cleveland Research. I appreciate all the time in detail today.

Guys, I wonder if you could talk about how visibility and forecasting in the business has evolved given some of the moving variables like the commercial initiatives, the recent stronger backlog.

In the past, it seems like there were kind of quarter-to-quarter surprises on instrument installs and revenue recognition. Do you think that’s subsided? And maybe we see...

Two parts to your question. Why don’t you start with the backlog, please? Amol, and Jon, then you talk about the forecast.

Yes. So look, I mean, the different things that we are doing, knowing very well that we’ve had this track record of surprises. It starts with backlog, and I think we’ve had tremendous demand profile over the course of 2021. And despite delivering some amazing numbers, we built backlog so that, that now gives us, I won’t say cushion, but at least ability to maneuver through demand cycles, right?

The backlog is not crazy, large. It’s in line with what most of our peer group companies have, but it provides that cushion that you need to manage through demand cycles.

The thing that we’ve also invested a lot in is systems and processes in our commercial organization, which Jon will walk you through. That gives us even deeper visibility in terms of how and where the demand is maturing.

Yes. It’s a great question. And I try to paint a picture that was Waters from too. I mean, historically, there wasn’t a lot of forward leading indicators in the commercial business. We were projecting, but we weren’t looking out beyond the existing quarter beyond very well.

We deployed a very standard funnel management system. In many ways, it’s table stakes, but for Waters is a huge, huge upgrade. We now know, over the course of last year, we’re getting more data on our velocity, the size of the funnel needed, the conversion rates in the funnel. We’re doing the basics with discipline.

I now know what size of instrument funnel I need for Q3 -- Q2, Q3, Q4, even for 2023. And of course, I build buffers into that as we’ve deployed it so that we get that real leading indicator of volume in our funnel management processes.

It’s been a real upgrade and gives me a lot of confidence to deal with these guys. But it’s changed the way we work, and I say they’re confident that we got the funnel ahead to answer the questions like what are we seeing on pull forward demand or not.

And you can replicate that for TA. Same thing. Exactly the same thing is happening, similar amount of discipline, similar amount of transparency that more than I get when we talk to these guys.

But having said that, I should note one thing, right? It’s a difficult market from a supply chain perspective. It’s a fight every day. And I think our teams have done a great job of navigating this by getting in front of the issues early, escalating all the way off, finding innovative solutions, all sorts of things we’ve done. But the situation hasn’t changed. So we fight it out every day.

No, having the discipline helps. I mean it’s -- I’m not saying we are comfortable. But there are 3 things that we have somehow done in the last 2, 3 quarters to get through this turbulent environment.

Number one, we have our own point of view on specific materials in the supply chain. So we’ve looked at the semiconductor value chain, gone all the way to the producer of fabs with [TSMC]. We have deep relationships now with the top producers of chips. I do personally, right? So I’ve talked to them personally as my colleagues have through the organization.

Second, we have worked highly collaboratively with them once the relationships are built to solve problems, right? So once the problem comes up, we work very, very closely with each of these folks.

And third, there are creative solutions as a consequence that we implement rather rapidly, right? So I think you -- that algorithm once it’s developed, so you form your own point of view and work with these folks with these relationships that you’ve developed and collaboratively problem solving and not alone, we are able to meet some of the needs. And I’m not saying we’re out of the woods by any means. The macroeconomic challenges are significant.

The biggest issue is electronic component. And all sudden on all of life science tools, the amount of chips we buy is less than low single-digit percentage of total chips produced.

So everybody is nobody because they’re all cellulars and wirelesses and electric vehicles ahead of us. So that’s the way to operate and head to head.

And is the $60 million for new product revs in ‘22 only inclusive of Arc and Premier, so everything else is incremental.

SP1 Yes. It’s only the Arc and the Premier version of the same. That’s the $60 million, and I broke the $40 million replacement in the $20 million based on expansions and displacements.

Yes. The other way to look at it is look at our vitality index, and we periodically keep publishing that number. We said about 15.5% of our sales are coming from instruments that were launched in the last 3 years and chemistry that was launched in the last 5 years. So that gives you a good idea of what the new product contribution overall is.

Puneet Souda, SVB Securities. Thanks for doing this, and thanks for all the insights. So two questions, but first one is really on when we look at Waters’ position over the last 2 decades is really has been strong in QA/QC. And when you look at having spent [indiscernible] with plenty of your instruments, I would say, for a mass spectrometry, sometimes everything is an analyte.

So when we look -- when you look at complex instruments and capabilities that you have, you want to solve problems using those instruments, but the world is a lot more complex, as you pointed out through your slides with cell and gene therapy, new modalities and improving those coming.

So as you think about how you’re applying this mass spec and capabilities that you have, clearly, BioAccord, it seems like it has a good position in process development can go more into downstream. But as you think about strengthening that QA/QC strong positions that you have had, how are you thinking about bringing on -- should we think about Waters applying what it has more or thinking about bringing in more capabilities that can enhance your position in that core market?

The answer is both, right? I mean, taking the existing portfolio and simplifying and I’ll give you 2 examples, simplifying it for downstream use is something that we do for a living. It’s damn difficult, as you know. And it takes a lot of time and energy to do it, and that’s why you have the BioAccord in the back of the room, and it looks simple, but it starts of looking like a CDMS.

And somebody was asking me how many can you sell quickly? It’s an instrument that looks like what I used to have in my PhD lab, right, an open instrument with high-voltage signs everywhere, with separators that are a footlong, pumps that are sitting on the ground that are massive and a pump in an HPLC is this big, right?

So that needs to be miniaturized, that needs to be simplified as an instrument, there is incredible demand that, as Jon pointed out, and we are charging for testing because people are coming up in our Immerse Lab, which is where this instrument is sitting. People are coming to our Immerse lab in Cambridge mass with samples. And saying, "Hey, I just need to know how many filled and how many empty capsids are in my sample as I optimize my process down the street." So there’s Biogen. There is Amgen. There’s Merck. Everyone’s there and with their PD labs and they come with these samples, right? So we said there’s a pretty big pull for samples. So we will test. We will charge for those, but that’s not the ultimate value proposition that we have to offer.

So yes, we are going to continue to simplify the existing instruments and we purchase the CDMS technology exactly for that reason. The proof-of-concept exists. It now has to be simplified to be made relevant downstream.

And I’m not saying that the barrier and the burden of proof will be the same as testing thousands, hundreds and thousands of [pills]. We’re looking at 30, 50, 100 tests. So yes, you can tolerate a little bit more complexity in QA/QC than you used in the past. That is different, right?

So we shouldn’t have the same burden of proof for small molecules and large molecules and incredibly large molecules, right? So I think that’s the other thing that you have to keep in mind as you develop these technologies. And it helps to have people who understand the technology and understand the regulations in our teams, right? So you can try to do this outside and without that knowledge, and it doesn’t work.

And to your second question, do we think that we’re going to just take our existing technologies and move them downstream? No, far from it. We think we have to augment it with a whole bunch of different things. The University of Delaware collaboration. I went through it rather quickly, but there are 3 aspects to it, right? And we have expertise in probably one of them to a very large extent.

First one is aseptic sampling. For those of you who are paying attention would have said, "Hey, that’s not something Waters has." Right? We have some aseptic samplers, but not to the point where we would like them. And the state of the art is not great, right?

Second is analytical tests. We have the mass spec, we have the LC, but what if like we used to do or at least I used to do in a previous life as a chemical engineer, be able to get real-time data from a reactor with small sensors. That is possible. Sensors are used in our body to look at conditions of our knee, conditions of our heart. The same technology can be put into a bioreactor. Why the heck not? You need a material scientist to be able to do it. And we have those folks working in that collaboration center.

And third is data analytics. Our industry is woefully behind in that area. But again, I would challenge the notion that the data analytics software has to be exactly and as exacting as Empower is. We’re in a different time. The regulators are highly collaborative. They want complete traceability and we intend to develop a software that can be used in that setting, which is quite different.

So we don’t expect to do this alone. We expect to do it through collaborations and targeting some very thoughtful M&A.

Just to add to that, there are 4 focus areas for us. One is how do you make your instruments intelligent so that you can catch errors early, user errors that you get flawless outcomes? Two, how do you make your results absolutely reproducible? Because that’s the #1 thing that the scientists are looking for. And our MaxPeak column is a great example because that’s starting to do that, right, a very meaningful way.

I mean this -- as Jon was saying, we had a top U.S. CDMO, they only took us about 5% of their volume. When they saw the result, they moved 100% of that business to us, right?

The third thing for us is how do we leverage data that resides in the system for insights and meaningful actions. And then the fourth piece is how do you make it more compact and more sustainable? And you see that happen with TQ Absolute.

So those are the 4 vectors that we think is the next generation of platforms that will come out.

Super helpful. Following up on Udit’s comments on informatics, Empower has been, as you said, an industry standard, it has a sizable share in the market, but [Chameleon and Open Lab] and those platforms have been growing. Obviously, over the last few years, some share shift has happened. And so as you look forward with the capabilities you initially started building with [UniFi], now, waters_connect, help us just understand what role does Empower play longer term in your overall portfolio because that’s been critical to your growth?

I’ll start, and Jon, please jump in. So look, Empower has set the standard. In fact, it did somehow even created the category of making sure that the customers have reliable data from the time a sample enters the instrument or the time it leaves. And that remains the core value proposition.

Make no mistake, it is still the standard in the industry. 80% of all drugs filed last year came through Empower, right? So yes, others have brought in new software for different types of applications.

Now if you segment -- the trick is always to segment the market. I mean generalities can be stated in any way you like. But in QA/QC, Empower still is the strongest offering, especially for the large pharma companies and increasingly for CDMOs where large volume of products are produced.

Our Empower roadmap has 3 parts, and Jon can embellish a little bit more on this. The first is to make sure the thing works. There’s technology, technology coming up for easier deployment of Empower into our customers’ labs. We have employed those over the last 18 months or so, so that they can easily download this the software. That’s the first one. And it is to continue to service Empower in a meaningful way.

The second, from a development perspective, is to try to ask the question and this comes up, this used to come up when I joined the company, people said, "Well, why aren’t you offering your CDS software in the cloud? Why isn’t it cloud deployable?" Have you talked to anybody in the pharmaceutical world in manufacturing? They don’t want things to move out of their desktop, let alone letting data go into a cloud. For them, a cloud is something that is very foreign. In the QA/QC setting, not in discovery, but in the QA/QC setting, right?

In that space, we want to work with our customers to slowly -- and we all understand that there is incredible value in having data stored in the cloud. It’s even more secure, you get access to better analytical tools. However, we want to work with our customers step by step. First, taking it out of the desktop, deploying it with servers in their lab and then eventually getting it into the cloud, but it is far from being cloud deployable today.

And the third is taking maximum value out of what we have already, right? One of the things we did is we examined our commercial arrangements with our competitors, with our customers and I think Jon with his astute mind came up with an idea to charge some of our competitors. Something that we should have done from scratch to access Empower if they’re going to plug in their hardware.

So those are the 3 aspects, far from having a cloud deployable software. So very practical work, and we are, Puneet, very far away from having sort of buy in the sky idea.

Yes, I’m not going to add to that, Udit, I think you covered it pretty well. I mean...

We can further follow-ups on lunch will do it, but -- that was a pretty good summary at.

Patrick Donnelly from Citi. Amol, maybe one for you, understanding you’re not going to give specific numbers, but maybe on the margin outlook, obviously, you showed a nice trajectory I think you talked about approaching maybe 50 bps at 5% growth, obviously accelerating from that 5% growth. If we creep up that growth algorithm, can you talk about how the margins could inflect higher? Obviously, there’s been this peak margin debate about you guys for years. It seems like, obviously, you don’t believe that. Is there a peak close? And then again, I guess, as we climb up that growth algorithm, what do the margin flow-through look like for you guys?

Yes. So look, I mean, we’ll get 100 basis points out of the 4 or 5 things that we said in the near term, right? 70 to 80 will be reinvested. So in the near term, net 20 to 30.

Midterm, we should see more than 100 on the initiatives. We should see lesser level of reinvestment. How much lesser? It’s hard to predict at this stage, right? Because sometimes science can wow us, science can fail us. And these higher growth adjacency have scientific milestones, which will define their destiny. And that will tell us how much lesser or higher reinvestment we would need.

We know for a fact that our base will be inflated because of this reinvestment because we’re doing 2 years of 60 to 70 basis points in the P&L. We’re already coming into 2024 with 140 basis points of reinvestment. So it will only go down from there. How much? We don’t know, which is why we can’t really guide you or give you an outlook of what that will be.

And again, as we said, growth remains our priority. So if you see more, we’ll invest more.

I think I’d add to that, actually, we’ve got a long way to go on a chemistry and consumables revenue. And that margin tends to help the mix. A huge way to go in the total account universe but just our own instruments. That’s driving some of that as well.

Yes. No, that’s helpful. And Udit, maybe one for you. We get an increasing amount of questions about a recessionary environment, what that looks like for all our companies. Some of your peers have said we can grow even in an ‘08, ‘09 environment. I think people view Waters as pretty defensible, given the pharma exposure. Can you just talk about, again, not to be a downer, but if we do enter into a recession, how you think Waters will hold up? And then, Amol, maybe on the back of that, you talked about the fixed cost, but maybe what the margin could look like in a lower growth environment if we do in the end up there?

Yes. I mean it’s difficult to have a crystal ball, but you just look at the stability of the trends that our market is driven by, right? I mean we still need more medicines. I mean there’s a pandemic coming. Nobody is saying doing a recession, "Hey, there’s a pandemic going on. There’s nobody thing during the recession." "Hey, don’t make enough vaccines." The demand for oncology drugs is still pretty high. New modalities are coming through. And nobody saying, "Hey, let’s not do clinical trials and let’s not come up with better drugs to address these problems."

The need for clean air, clean environment, safe food is still very high, right? We all are using much more of the lithium-ion batteries than we’ve ever had ever used in the past.

So the trends that service our business are secular. And they are, if anything, they’re growing faster. So I believe during a recessionary time, in fact, this is a great place to be.

And secondly, our business model is super simple, right? You don’t have to sort of really add this number, subtract this number, do this and come up with a different definition for different types of things. I mean it’s very simple. It is what we stated is, right? And based on that, you can make up your mind what our level of financials are.

So the facts suggest that we should be okay. And that’s what our belief is. I mean you never know the session.

Amol, anything on the margin?

And just to build on what Udit said, right? I mean, even compared to our peer groups, we feel more secure because in pharma, we play in QA/QC and the pill volumes don’t change with recession. And we play in late-stage clinical and people don’t cut late-stage clinical programs. They are sort of at the -- I mean having worked in pharma, we would never touch them until all the other options are exhausted, right?

And our industrial business, TA today is a lot more different than a few years ago because it has a lot more high-growth secular drivers like sustainable polymers and batteries. And on the Waters’ side, even if we call it and report it as industrial, a big part of it is really applied food and environment, right? So that gives us good comfort.

Margin, if -- we don’t think growth will be impacted meaningfully, but if growth is impacted, right? Some of the volume leverage will come down, no doubt, right? But the other vectors are very healthy and those vectors will continue to contribute.

I mean, look at it this, right? At JPMorgan, we said 20 to 30 basis points. Between then and now, world has changed, right? I mean, U.S. dollar is super strong, which has a headwind on our margins. Inflation is very high, which hasn’t -- Yet our guidance is 30.5, which is 30 basis points better than last year. So there is a lot of resilience in our business in how margin is coming through.

It’s Rachel Vatnsdal from JPMorgan. So you guided to the 70 to 80 basis point drag on margins just as you reinvest into the high-growth adjacencies that you’ve highlighted. So how should we be thinking about the prioritization of investments towards each of those 5 high-growth areas? And can you kind of rank for us which ones you’re more likely to do inorganic versus internal R&D to approach the adjacency?

So I would not call the 70 to 80 basis points a drag. It’s terrific. It fuels the innovation for the future ratio, Rachel, right? So we’re excited about it.

And in terms of prioritization, I think the two questions are related, right? Whoever has the proof-of-concept first gets funding, right? And so we’re not stopping any one of them to Dan’s point, are you slowing it down? They’re not slowing anything down, right?

So all 5 are out of the gate. So [Chris Betty] and team had come back and said, look, we have incredible opportunities in investing in batteries and that’s going faster than LC-MS. Yes, we’ll invest in that first. So there is no sense of constraining the investment. We have incredible flexibility.

In terms of timing, some of them are paying off sooner than others, right? So we have a collaboration with Sartorius on deploying the BioAccord in high-volume applications, but upstream for clone selection. And that’s going super well. That’s helping our BioAccord business. And if that goes better, we’ll invest more in that area.

So there’s no sense of no sense of saying, "Hey, you know what, we had this algorithm and this one goes out of the gate faster versus not." I don’t look at it like this. But some have runs on the board sooner than others and are getting more funding as a consequence.

I won’t get into a deeper discussion on that for competitive reasons. I think we’ve already said too much.

Yes. And just to add to that, right? I mean we don’t treat them like there are kids and they need to be treated equally or whatever, right? In fact, it’s the cost like an internal venture capital fund. And we give them seed money and they have to reach their milestones, then we give them the next round of funding, and that’s how it operates.

And the people working in these teams, their incentives are aligned like they are VC-funded company, and they get measured on it and they get compensated on that way. And this allows us to make harsh decisions like...

Just ask Jianqing. I mean we have -- we are super excited about LC-MS. I don’t know who asked the question on, well, what makes you think you’re going to do it now when everybody else is been working on it for a while. We asked those and much tougher questions of our team. And there is funding that is allocated to that business, but they have to come back and deliver on milestones, right? And that’s relevant for our core business as well.

I mean, Jon and Jianqing have been exact thing. We’ve never seen in Waters’ history taking a product that had been developed in the pipeline and it was close enough to launch. And these guys said, not good enough. You said you’re going to deliver x you’re delivering x minus delta x, go back. And we send products back, our product vitality is at the highest level that it’s ever been. John Lynch is our resident historian [indiscernible] He is probably outside the room exactly at the wrong time, but he’s our resident historian as he a long tenure amongst us in the company, and he says, this is the highest vitality seen at Waters in terms of new product innovation, but make no mistake, products have been sent back to scratch.

You think I’m tough, these guys are tougher. I think could [indiscernible] in with these guys.

I’d like to elaborate a little bit because we’re creating the culture and a structure around these project teams, these many CEO type models for small start-up projects, if you like, with the funding. The other great benefit of that was really needed orders was talent development. In a very functional structure, you’re getting functional experts. And this is really enabling our growth by -- [indiscernible] out in the talent that can lead these projects, these programs, and you met some of them that can really, really grow it as a business. And that’s both structurally and intent, the way in running the organization.

So we have time for one final quick question. Matt, please go ahead.

Matt Sykes, Goldman Sachs. I’ll just have one question to save time. But when you look at your market relative growth over the past couple of years, there was a couple of years of underperformance, which you highlighted today, and there’s been some dramatic outperformance recently. When you try to sort of decompose the market share that you’ve looked at. How much of that do you think is recaptured share that you might have lost during those years or reinvigorated client relationships that might have been stagnant versus new opportunities and new competitive displacement, so we can get at sort of the durability of this growth.

And it’s -- the answer is both. Some of it is recapped. Some of it is -- I would not call it just recapture. So for instruments, we were not replacing our instruments. Once in a while, a competitor was coming in under displacing Waters. This is a very resilient industry, right? But when we went back we were able to replace the instruments that we had not replaced over several years and partly because we had new value propositions. This market responds to new innovation.

But the single largest proof point, and Jon mentioned it in his monologue, is if you take the Arc HPLC, right? I mean, what was it, Jon? How much -- what percentage is -- how much is new?

It’s a good proxy. I mean, it’s $60 million of revenue generated from the Arc and the Premier of which $40 million is in what we call tech refresh or upgrades of systems. So you’ve got 1/3 in expansions and very importantly, Waters’ competitive displacement.

So we don’t break it, but that’s an example of a product where it’s driving the both. It is not driving the replacement. It is driving the both, and we measure the teams on both metrics.

But I think the cultural shift is that we have moved the organization from just going in and replacing instruments, that’s the muscle that we needed to revive in any case, but also incentivize the organization as Tim does and Jon does and Jianqing does, as hunters, looking for new opportunities. The CDMO is a case in point, 1 of the largest contract manufacturers in the world is a Chinese one. And it was the account that was owned by one of our competitors. And now it’s almost what, 90%, I won’t say 100%.

Okay. So frankly, less on Waters, right? And this is because our value proposition resonated. Our teams went in, our service engineers went in and said, "Hey, we’ll help you transfer methods from Pfizer for your company, from Merck to your company." And that’s the capability that they really wanted.

I know their CEO very well, and he said, "Look, that’s what we want." Don’t think about just selling us instruments. Can you just help me go in front of these customers and explain to them how we will transfer their methods without losing track of what they’ve developed over many, many years.

I think that’s a pretty important insight, right? So it’s a bit of both, but I would say there is a serious amount of new customers in this growth.

And I mean, look, there’s nothing like IMS in lifescience tools, right? But what gives us a lot of confidence is CDMOs. Critical part of the pharma business, we grew 50%. We know for a fact that CDMOs are not going 50%. So clearly, a compelling reason why we think there is a share gain.

Also, 50% of our MaxPeak Columns are on competitor instruments. We’ve never had columns with that level of placements on competitor instruments, again, gives us a lot of confidence there. And I mean, U.S., 60% instrument growth last quarter also gives us a lot of confidence.

So these outsized numbers underscore what is happening.

Yes. But I mean, also, the competitive space is very competent. I mean I’ve worked with the with the CEOs of these other companies in another setting as well. I mean these are well-run companies. I mean there’s no mystery -- and it’s no coincidence that the tools industry is outperforming a whole bunch of other sectors. These are highly competent teams.

I just feel Waters and somehow hold our own, and we are happy to be considered in the mix. Now in terms of market share, everybody is saying they’re gaining market share. But I would just urge you to look at the facts, right? Just look at the facts, and I don’t know if it’s going to be like this forever. We hope so. We work hard to make it so, but just look at the facts. I think facts are probably more important than projections. Thank you.

So that does conclude Q&A session. Thank you again from all of us for joining us today. Thank you also to everyone joining in online on our webcast. I look forward to connecting with all of you and the rest of today’s event. And yes, we’ll break for lunch something now.