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Waters Corporation (NYSE:WAT)
Q1 2021 Earnings Call
May 5, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to the Waters Corporation First Quarter 2021 Financial Results Conference Call. [Operator Instructions].

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

Bryan Brokmeier -- Senior Director, Investor Relations

Thank you, operator. Good morning everyone, and welcome to the Waters Corporation first quarter earnings conference call. Before we begin, I will cover the cautionary language.

During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the Company. In particular, we will provide guidance regarding possible future results of the Company and commentary on potential market and business conditions that may impact Waters Corporation over the second quarter and full year 2021. We caution you that any and all such statements are only our present expectations that actual events or results may differ materially from those indicated in the forward-looking statements.

For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31st, 2020 in Part 1 under the caption Risk Factors and the cautionary language included in this morning's press release included with respect -- including with respect to risks and related to the effects of COVID-19 pandemic on our business. We further caution you that the Company does not intend to update any of its predictions or projections except during our regularly scheduled quarterly earnings release conference calls and webcast or as otherwise required by law. The next earnings release call and webcast is currently planned for August 3rd, 2021.

During today's call, we will be referring to certain non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and available on the Company's website. In our discussions of the results of operations, we may refer to non-GAAP results, which exclude the impact of items such as those outlined in our schedule titled Reconciliation of GAAP to Adjusted Non-GAAP Financials included in this morning's press release. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2020. In addition, unless stated otherwise, all year-over-year revenue growth rates including revenue growth rate -- ranges given on today's call are given on a comparable constant currency basis.

Now, I'd like to turn the call over to Dr. Udit Batra, Waters' President and CEO. Udit?

Udit Batra -- President and Chief Executive Officer

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

I would like to start by expressing how grateful I am to our colleagues for their continued hard work and commitment, especially to those who are continuing to experience the devastating effects of the pandemic. We have not yet seen a uniform recovery as there are still many regions around the world that have been ravaged by the pandemic. As many of you are aware, India is facing a particularly dire situation at the moment. Our colleagues and customers that are very much on our minds and we are working closely with our team in India to ensure safety of our employees and their families, and we're doing all we can to support our customers.

During today's call, I will provide you a brief overview of our first quarter operating results as well as an update on our three phase transformation plan focused on; Number 1, beginning our commercial momentum; Number 2, further strengthening our organization with leadership and performance management; and Number 3, aligning our portfolio with growth areas. Next, I will provide some thoughts on how our business is positioned to drive sustainable growth. Mike will then review our financial results in detail and provide comments on our updated second quarter and full-year financial outlook. We will then open up the phone lines to take your questions.

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

Looking more closely at our top-line results. First, from a customer end market perspective, all our end markets grew double-digits during the first quarter. Our largest market category pharma grew 28% in constant currency, industrial grew 24%, and academic and government grew 29%.

Moving now to our sales performance by geography. On a constant currency basis; sales in Asia grew 41%, with China up 109%; sales in Americas grew 14%, with US growing 13%; and sales in Europe grew 25%. From an operating segment perspective, our Waters division grew 26%, while TA grew by 28% on a constant currency basis. Customer activity continued to improve in the first quarter with pharma leading the way driving better-than-expected trends in recurring revenues and a significant growth in instrument revenue.

Recurring revenues grew 15%, with services growing 14% and chemistry consumables revenue growing 18%, driven by combined pharma strength and improved industrial demand. LC instruments grew across all of our major geographies and market categories with more than 40% growth. It's encouraging to see both HPLC and UPLC instrument units grow double-digits, driven by pent-up demand, integration of the Arc HPLC and strong execution of our LC replacement initiative. The success of the launch of the Arc HPLC in the general purpose HPLC space cannot be understated and the ACQUITY PREMIER has been received very well by customers since its February launch.

Mass spec sales were also strong in the first quarter with growth in excess of 50% as demand in the pharma market remains robust. In addition to rebound, we saw in other markets, including clinical, food and environmental and biomedical research. Demand was solid for our tandem quads in Europe and China, particularly in pharma and in food.

Finally, to TA. Revenue grew 28% as demand rebounded in the core industrial business and strength continued in pharma medical devices and semiconductors. Growth was robust across all major geographies and product lines with particular strength in thermal and electrophoresis.

Looking deeper at our sales performance by geography. All major regions grew double-digits. China built further on last quarter's strength, more than doubling sales year-over-year, results were strong across all end markets as China continued its recovery from last year's COVID disruptions. Pharma was particularly strong in China, driven by triple-digit growth in both contract labs and traditional Chinese medicine. Our food business in China also saw meaningful growth, driven by a significant rebound in contract testing organizations to the level that were above those we saw in 2018 and in 2019. This is just one quarter and not indicative of a trend, but it demonstrates that the market is recovering and our execution has improved.

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

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

Now I would like to talk more broadly about our business and its overall direction moving forward, including the strength of the Company, the effectiveness of the markets that we serve, and our deep commitment to innovation as we look beyond this quarter into the longer term.

Our three-phase transformation plan is; Number 1, beginning our commercial momentum; Number 2, strengthening our organization with leadership and performance management; and Number 3, aligning our portfolio with growth areas.

Looking at our first priority of beginning our commercial momentum, let me review some initiatives I mentioned previously. First, our instrument replacement initiative. We delivered a significant acceleration in instrument revenue growth to 45%. In February, we launched the ACQUITY PREMIER system augmenting the already solid placement of Arc HPLC launched in June of 2020, creating new opportunities for instrument replacements. Additionally, we have gained traction with customers to replace aging tandem quad mass spec instruments with newer instruments.

Second, as part of our CROs CDMO expansion initiative, we've seen revenue growth accelerate to strong double digits in both these customer segments. Customers continue to perceive us as a strong technical partner as they transfer methods from originators and they see us as a strong collaborator rather than a competitor.

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

Fourth, driving launch excellence. Let me start with liquid chromatography. While the Arc HPLC is a leader in general purpose HPLC space, I want to focus on the ACQUITY PREMIER. Last year we launched the ACQUITY PREMIER Columns and follow that up with the ACQUITY PREMIER System last quarter. Though, we are still in the early stages of the revenue ramp up for both the Columns and the System sales of ACQUITY PREMIER Columns are significantly outpacing prior successful chemistry launches, including the original ACQUITY Columns.

Turning to mass spec. In 2019, we launched the BioAccord, Cyclic IMS, SYNAPT XS, TQ-S cronos and a next generation version of our TQ-S micro. Pairing our tandem quad with ACQUITY PREMIER creates industry-leading reproducibility and sensitivity for challenging assays. With expanding applications of the BioAccord, we've maintained our focus on bringing a versatile, easy to use and robust LCMs system to the QA-QC space. During Q1, we launched a full workflow for peptide multi-attribute method on the new Waters Connect platform to enable the monitoring of quality attributes at the peptide level. This adds to already existing simple use applications of peptide mapping impacts of unit mass analysis, released glycan profiling and oligonucleotide mass confirmation.

Over the last year, we established the BioAccord into the workflows for characterizing mRNA molecules that have since become vaccines. In fact, BioNTech recognized Waters for our support of its COVID-19 vaccine development and relief efforts. Lastly, Cyclic was launched in September of 2019 and is targeted at the most advanced high resolution mass spec users. Augmenting traditional LCMs with high-resolution ion mobility allows us to separate molecules with additional -- with identical molecular weight based on their different shapes. This is now especially relevant from one of the structural changes in the sugar pattern of the spike protein of the SARS-CoV-2 virus.

We do recognize that we still have a bit of work to do on our mass spec informatics applications and we are addressing this through the development and rollout of our Waters Connect software platform across our full mass spec portfolio. Today, Waters Connect support biopharma characterization and monitoring workflows with a range of capabilities on the BioAccord, Xevo QTof and [Indecipherable]. And with the launch of our RDa Benchtop -- Benchtop Tof in Q1, Waters Connect also enables small molecule workflows. We're grateful that we've earned the trust and partnership with our customers as we develop further applications and beta test upcoming products and software.

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

Moving on to our second priority. You've already seen the plan leadership transitions we announced last month. Amol Chaubal will join as the CFO on May 12th, Amol has deep experience in pharma and diagnostics and has led many transformations in his prior roles through both organic and inorganic growth. I would like to sincerely thank Mike Silveira for his full-month of service as Interim CFO. Mike will continue to serve as our Corporate Controller and I'm pleased to add that Mike will also assume the role of Chief Accounting Officer.

Secondly, we have established a dedicated Innovation Board, which I will share that includes leaders from R&D, Business Development and Marketing. The Innovation Board will review unmet needs in markets we serve, assess technology proof of concepts and monitor the execution of top R&D programs.

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

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

That brings us to our third priority aligning our portfolio with high growth areas. While we won't take our eye off commercial execution, which remains our top priority, we have recently started our strategic planning process. And I'd like to share you -- share with you some high-level thoughts on where we are today. Our number one priority is to continue strengthening the core meaning LCMs, and materials characterization instruments, informatics, service and consumables.

Second, is staffing into faster growing adjacencies where we can bring our strength of managing compliant data without competing directly with our customers. These adjacencies include opportunities to increase our exposure to biologics, be it in reagents, other instrument technologies or bioprocessing, all in accelerating LCMs into diagnostics or other high-growth markets.

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

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

Michael Silveira -- Vice President, Interim Chief Financial Officer

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

On the service side of our business, revenues were up 14% as customers continue to reopen labs and catch up on performance maintenance, professional services and repair visits. As we noted on our last earnings call, reoccurring sales were impacted by five additional calendar days in the quarter, which primarily impacted service revenues. Looking ahead, compared to 2020, there is no year-over-year difference in the number of calendar days for this year's second or third quarter. However, there are six fewer calendar days in the fourth quarter of this year. Breaking first quarter operating segment sales down further, sales related to Waters Division sales grew 26%, while TA Instrument sales grew 28%. Combined LC and LCMs instrument sales were up 47%, while TA system sales grew 34%.

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

Moving down to first quarter P&L. Operating expenses increased by approximately 9% on a constant currency basis and 11% on a reported basis. The increase was primarily attributed to higher labor incentive compensation costs and higher depreciation from IT investments we made over the last few years. In the first quarter, our effective operating tax rate was 14% an increase from last year, as compared to the comparable period included some favorable discrete items in the prior year. Net interest expense was $7 million for the quarter, a decrease of about $3 million, as anticipated on lower average outstanding debt balances.

Our average share count came in at 62.6 million shares, flat with the first quarter of last year. Our non-GAAP earnings per fully diluted share for the first quarter increased 99% to $2.29 in comparison to the $1.15 last year. On a GAAP basis, our earnings per fully diluted share increased to $2.37 compared to $0.86 last year. A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning.

Turning to free cash flow, capital deployment and our balance sheet, I would like to summarize our first quarter results and activities. We define free cash flow as cash flow from operations less capital expenditures and excluding certain special items. In the first quarter of 2021, free cash flow grew 60% year-over-year to $193 million, after funding $40 million of capital expenditures. Excluded from free cash flow was $14 million related to the investment in our Taunton precision chemistry operation. In the first quarter, this resulted in $0.32 of each dollar of sales converted into free cash flow. Our increased free cash flow was primarily a result of sales growth and better operating margins compared to the prior year.

In the quarter, accounts receivable days sales outstanding came in at 84 days, down 15 days compared to the first quarter of last year. Inventory decreased by $16 million in comparison to the prior year quarter on higher sales volumes. Waters maintains a strong balance sheet, access to liquidity and a well-structured debt maturity profile. In terms of returning capital to shareholders, we repurchased approximately 600,000 shares of common stock for $173 million in the first quarter. These capital allocation activities along with our free cash flow results in cash and short-term investments of $810 million in debt of $1.7 billion on our balance sheet at the end of the quarter. This resulted in a net debt position of $893 million and a net debt to EBITDA ratio of about 1 times at the end of the first quarter.

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

As we look forward to the remainder of the year ahead, I would like to provide some updated context on our thoughts for 2021. One, while the business environment remains subject to volatility, we are seeing good momentum in our market segments, which will help us exceed the 2019 levels. Two, we believe this momentum will continue into the second quarter, but that the strong double-digit growth will mostly occur in the first half of the year due to more challenging comparisons in the second half of the year and the six fewer calendar days that we will have in the fourth quarter. Three, we continue to expect that all major geographies will perform better this year than they did in 2020 led by growth in China. Four, our near-term growth initiatives are expected to continue to ramp, led by our LC replacement initiative, which we expect to contribute increasingly to our performance.

These dynamics support updated full-year 2021 guidance for constant currency sales growth up 8% to 11%. At current rates, the positive currency translation to 2021 sales growth is expected to be approximately 1 percentage points to 2 percentage points. Gross margin for the full year is expected to be between 57.5% and 58%. Every year we look to balance growth, investment and profitability. Accordingly, we expect 2021 operating margins of between 28% and 29% based on a combination of investments, the normalization of COVID-related cost, and disciplined expense controls.

Moving now below the operating income line, other key assumptions for the full year guidance are as follows; net interest expense of $35 million to $38 million; a full year tax rate in the range of 14.5% to 15.5%; the net impact of our share repurchase program in 2021 that will result in an average diluted 2021 share count of 61.5 million to 62.0 million shares outstanding. Over the course of the year, we will evaluate our share repurchase program and provide quarterly update as appropriate. Rolling all this together, and on a non-GAAP basis, full-year 2021 earnings per fully diluted share are now projected in the range of $9.85 to $10.05, which assumes a positive currency impact on full year earnings-per-share growth of approximately 3 percentage points.

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

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

Udit Batra -- President and Chief Executive Officer

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

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

Questions and Answers:

Operator

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

Dan Brennan -- UBS -- Analyst

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

Udit Batra -- President and Chief Executive Officer

Firstly, thanks, Dan, and good morning. Look, we are very pleased with the first quarter. And as we look at the rest of the year, I mean, as Mike also mentioned, the pandemic is still ongoing. That's the first consideration. Second, we saw pent-up demand we released in Q1, which had five extra days, so that grew our base quite nicely. And the second half has higher comps, which makes us prudent as we guide toward the full year. Now of course, if our initiatives continue to do what they're doing and we see good execution there, and the other end markets continue to improve, we would be on the higher end of that guide. So I think, to me it's a prudent or to use another word, wise guidance which basically takes these factors into account.

Dan Brennan -- UBS -- Analyst

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

Udit Batra -- President and Chief Executive Officer

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

And then the ACQUITY PREMIER, the Columns were launched last year and we saw -- I would say, absolutely terrific uptick. In fact, better than the ACQUITY launch originally. And then finally, as I look at the mass spec growth. I mean, our replacement initiative is doing well, especially with the launch of a renewed tandem quad portfolio. So really lot to be excited about on the new product side.

Dan Brennan -- UBS -- Analyst

And maybe if I could sneak one more in. In China, obviously, Europe against an easy comp down 45% or thereabouts 120% growth is certainly significant. Just how do we think about -- you were facing some unique challenges in China over the past couple of years in food and pharma. How do we think about the -- like, what's kind of expected from here as you think about the full 2021 guide for China?

Udit Batra -- President and Chief Executive Officer

Yes. I'm mean, super happy with China, especially given the pandemic is still not over and our colleagues have really done a great job of implementing our initiatives and some of that is contributing to the growth. I mean, it's terrific growth across all segments especially, pharma, which doubled. And then you saw industrial also grew very nicely. And academic and government was in the mid 70 percentages. With that said, what I would argue is, pharma is continuing to show strength, industrial is also starting to get stronger, especially in the TA business. Academic and government on a stack basis still has some work to do, right? So we still want to make sure that we focus on it as the market recovers.

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

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

Dan Brennan -- UBS -- Analyst

Great. Thanks a lot.

Udit Batra -- President and Chief Executive Officer

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

Dan Brennan -- UBS -- Analyst

Excellent. Thank you.

Operator

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

Tycho Peterson -- JPMorgan -- Analyst

Hey, thanks. Udit, I want to follow up on the instrument growth, 45% on a 90% comp is pretty impressive. I'm just curious how much in your view was market pent-up demand versus some of the stuff you're potentially driving like the replacement cycle initiatives you might get 2% to 3% from the products, so I get that. But how much came from new customer penetration in CRO, CDMOs? The main question, we're all going to get us kind the sustainability of what you're seeing right now?

Udit Batra -- President and Chief Executive Officer

Yes. So Tycho, excellent point. I mean, I think there are many things to be happy about on the instrument side, right? I mean, if you place more instruments, we get more consumables, built-in more service down the line and we saw a very nice recovery. It is a mix of everything, right? So saw recovery -- we've seen continued strength in pharma. But we also saw a nice recovery in industrials and also in academia.

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

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

And then finally, on the CRO, CDMO area, I mean we have had incredible. In fact, last friday, I was with incredible conversations with CDMOs especially, last Friday, I was with the CEO of one of the leading CDMOs. And they perceive us as very strong partners to help them transfer methods for complex molecules. And this is something that has come more and more to the front and center globally as we talked in many of these customers. Of course, I mean they're focused on costs, but even more importantly they are focused on transferring these methods from originator.

So I think the initiatives are doing well, but there is a lot more to do there. We've just -- I would say, in terms of penetration of our instruments space, we're 30% along the way on mass spec, I would say we're about slightly more than that on the LC side. So we still have fertile down there to see more growth.

Tycho Peterson -- JPMorgan -- Analyst

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

Udit Batra -- President and Chief Executive Officer

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

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

Tycho Peterson -- JPMorgan -- Analyst

Okay. Yes it is. And then just lastly on the model. I'm curious five extra days could you quantify what that added in the quarter was that around 300 basis points. And then as we look ahead to the second quarter given the tragedy or problem, just curious how you're thinking about your exposure there for the second quarter?

Udit Batra -- President and Chief Executive Officer

Let me comment on India and then I'll let Mike comment on the contribution of the extra days. Look, I mean our heart goes out to everybody who's going through the pandemic in India. We are still seeing our customers, as you can imagine, continue to produce more molecules and large molecules to address the challenges of the pandemic. And so our sales are tracking back. And we're heavily focused on the LC market in India, which is still the method of choice to release small molecules that India continues to produce. So we're seeing very good growth, very good access for our service engineers, despite the pandemic. I do expect, it to be bumpy, but the underlying demand as we look at the full year, I would expect it to continue to rise.

Mike, on the extra days?

Michael Silveira -- Vice President, Interim Chief Financial Officer

Yes. On the five additional days. It added about 3% of growth to our reoccurring revenues in the quarter.

Operator

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

Vijay Kumar -- Evercore -- Analyst

Hey guys, congrats on a really strong fin this morning. Two for me. Maybe on the first one, I look at the guidance for 2Q21, a 14% to 16% constant currency, comps actually get easier for 2Q. If I look at the 27% you guys did in Q1, six days, it was about 24%. So can you maybe just walk us through the 24% perhaps 15% and 16% for 2Q? Was there any timing element, which had been pulled forward from Q2 or is this perhaps, like you said prudent guidance?

Udit Batra -- President and Chief Executive Officer

And I think, Vijay, you answered your own question. It's actually prudent guidance. I mean given that the pandemic is still not over there was a bit of pent-up demand that came also from last year into Q1, not a pull-forward from Q2. And then finally, I mean our initiatives are ongoing. They've shown incredible traction. We're very happy with what's happening. However, I think they still are getting traction, right? I mean despite the pandemic, we've seen good traction for our LC initiative, we've seen good traction for e-commerce where the base views have increased quite dramatically. We're seeing good traction in reaching out to new customers. But two data points don't make a full plan. So we're just being wise to use another word. I think that would be the answer.

Vijay Kumar -- Evercore -- Analyst

Understood. And then another guidance questions. I guess, simplistically you guys beat Q1 EPS by about $0.70, right? And the annual guidance was raised by about $0.50? Is there a -- I guess, from an expense standpoint is this also perhaps prudence from an opex perspective? Or is there something else going on the spend perspective?

And Mike, on the Q1, 300 basis points contribution from extra days should we assume a 300 basis headwind in Q4 given the fewer selling days? Thank you.

Udit Batra -- President and Chief Executive Officer

Mike. Go ahead on the EPS.

Michael Silveira -- Vice President, Interim Chief Financial Officer

Yes. So from an EPS perspective, one thing to remember here is last year with the pandemic, we put in place many cost actions. For example, salaries were reduced, furloughs were put in place, spending was reduced significantly throughout the corporation, we're going to experience a huge normalization for rest of this year that will mitigate the growth of the EPS. I guess, said another way, the kind of normalization that needs to happen this year. As far as the gross margins. This margin there was so much volume that led to a ton of operating leverage. So that will mitigate itself through rest of the year because of that normalization that I mentioned. So I would expect for the full year, we're going to get back to the 57.5% to 58%, but I don't expect it to be inconsistent with the past.

Vijay Kumar -- Evercore -- Analyst

Got you. Sorry, on the days. Is that a 300 basis points headwind in Q4?

Michael Silveira -- Vice President, Interim Chief Financial Officer

Headwinds, that would be about 3%.

Vijay Kumar -- Evercore -- Analyst

Understood. Thanks, guys.

Operator

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

Mike Ryskin -- Bank of America -- Analyst

Hey, thanks. This is Mike Ryskin on for Derik. Appreciate for taking the question. I want to follow up on some of your comments earlier, Udit on sort of the instrument growth you saw in the quarter. You gave a lot of prepared remarks on, how you were able to drive some of the upgrades in replacement. I'm just wondering if you could comment, how many of those were competitive or replacing existing products? And you have the discount to drive upgrade there? Is there any bundling across the portfolio, sort of what are the puts and takes in that program that's helping you in those games, besides the easy comps?

Udit Batra -- President and Chief Executive Officer

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

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

For mass spec, we're also -- we've also launched a similar program. And there the success rates are absolutely terrific we're going after our own installed base from a tandem quad perspective and replacing the older instruments with the newer generation of tandem quads that was introduced in 2019. So nice progress. Some of it is the market, but I think a significant amount is our renewed focus on the replacement cycle of older instruments helped by new products and a broader value proposition. As far as pricing and bundling except the pricing is concerned, we have not had to use heck of a lot of pricing to make this happen. People trust the quality that Waters brings and the innovation that we're bringing to them to solve these problems.

Mike Ryskin -- Bank of America -- Analyst

Got it. I appreciate all the color. And then, as a follow-up. On -- you mentioned the strategic review process, one of the areas -- you're thinking about some of these faster growth adjacencies. Are there any opportunities here that you see organically, or is this sort of part of the -- part of the strategic view that's only going to be handled through M&A? Obviously, recognizing again the really good leverage position there?

Udit Batra -- President and Chief Executive Officer

All of the above, right? So we will have organic initiatives. We will have partnership opportunities, and we will look at inorganic options as well, right? So all of the above.

From an organic standpoint, I can give you examples. We think the molecular diagnostic space is interesting and LC-MS is right to get into that space. We've made really serious progress in working closely with many academics in the U.K. and the NHS to take LC-MS into the diagnostic space for pathogens with COVID-19. We've also worked with folks in Sweden, on the same topic, and we will introduce LC-MS as a research, it was the only technique rather in the near-future. So organically, we see tremendous opportunity as well.

And another example would be entering bioprocessing. We're looking at partnerships with leading academic institutions, and many of our partners, to take LC-MS into the bioprocessing suite and not just leave it in the QA-QC space where we still have room to grow.

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

Operator

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

Doug Schenkel -- Cowen -- Analyst

Hi. Hey. God morning everybody and thank you for taking my questions. I want to ask one end market question, and then one guidance question. On the end markets, specifically industrial cyclical. Recognizing all end markets were pretty solid. I'd love to hear more about what you're seeing in terms of the pickup in cyclical demand? How does that evolve over the course of Q1? And are there signs that demand is picking up in a sustainable way that -- meaning, that's just isn't the catch-up, it is actually a function of global economic improvement. And if you're seeing signs of that as exemplified for thing -- things like backlog. Are there certain geographies where this is more or less notable? So that's the first topic.

The second topic is just again, sorry, to go back to guidance, but specifically below the top line as we think about operating spend. When I look at our model for Q1 R&D and SG&A together were about $10 million below our forecast. And I think we were the high on the Street for revenue and you came in $50 million above our forecast, so that was really nice leverage in the model. I'm just wondering was there any hold back on investment in the early part of the year just given all the uncertainty, because it doesn't seem like you're looking at this as the new normal. I say that because it seems like guidance assumes there is going to be an increase in operating investment moving forward over the balance of the year, which I think makes sense given the strength in your business in some of the initiatives you talked about in your prepared remarks, Udit. So I guess, I'm just hoping you could provide some clarity there, it seems like Q1 operating leverage is at the new normal just because we want to invest. I just want to make sure we got that right? Thank you.

Udit Batra -- President and Chief Executive Officer

Excellent questions, Doug. First on the other two end markets, industrial and academic and government. I think you rightly note that it is one quarter and we are seeing a nice rebound, and cautious here, right. So, we're seeing good conversations with our customers. But the industrial end markets are desperate, right. I mean, they go from polymers to semiconductors and other areas, which inherently are cyclical. We're seeing good demand for hardware, especially on the TA side. But that said, I would say it's one quarter, we're seeing good conversations, I would not start to immediately extrapolate and this is why we have been cautious on prudent on the guidance.

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

Now on academic and government, which is also cyclical. I know you were not asking in particular, but I'll take the opportunity to comment on this already. We saw very good growth. I mean 29% growth overall, largely driven by what we saw in China and Europe continued its trend, closer to 70% growth. The US is still spotty and recovering. On a stacked basis, there's still work to do on China and the U.S.. I mean, both are still not positive versus 2019, Europe is. So I think industrial, a little bit more confidence in the overall trend, but academic and government, we're seeing slow return back into the different labs more so in Europe, definitely in China, but still a bit of hill to climb when Europe is 40 across -- and U.S. is 40 across the country.

If I move to your guidance question, I would firstly give a qualitative remark and then Mike can comment on the numbers as well. We're not holding back any investment, Doug. I mean, in fact, if you look at how much we have approved in terms of operating investment, it's fairly significant in Q1 to start to support our initiatives that we already mentioned. So expanding our field force and contract testing having more informatics folks to build up Waters Connect even further. And to invest behind our R&D programs, I mentioned LC-MS already and there are several others. It's just a question of the recruiting cycle taking a bit of time and people finding the right people and getting them into the system. So it's really not holding back at all.

Mike, do you want to comment on the numbers?

Michael Silveira -- Vice President, Interim Chief Financial Officer

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

Udit Batra -- President and Chief Executive Officer

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

Operator

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

Brandon Couillard -- Jefferies -- Analyst

Hi. Thanks. Good morning. Udit, in terms of some of your e-commerce initiatives, are you starting to see any incremental pull through in terms of consumables revenue that did you quantified? And kind of what's next in terms of the e-commerce strategy and some of those initiatives over the balance of the year?

Udit Batra -- President and Chief Executive Officer

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

Now in terms of the overall plan for e-commerce, I mean this is just the start, right? So remember I said early on that we want to take the hand we have and do the best we can with it at the beginning as we make our plans to revitalize our platforms. And I mentioned a couple of those investments in the previous question as well. So we do believe that investing in a data lake that takes all unstructured and structured data from different parts of the organization and putting that into an easily accessible middle there, will help us service our e-commerce customers better. We do believe investing in content even more is going to lead to better conversion on the e-commerce channel. We do believe investing in mobile is going to lead to a better conversion. So you can see that there are some infrastructural investments that we have started to look at. And as the organization become stronger and stronger, we will start to invest -- you'll start to see us invest in those.

So the e-commerce plan has a few phases, the first one was just to get the quick wins and we're not done with that yet that shift to start. And there is a long-term plan that will build a world-class e-commerce platform for Waters. Hope that helps?

Operator

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

Patrick Donnelly -- Citi -- Analyst

Great, thanks. Udit, just wanted to follow up on one of the earlier questions on the capital deployment side. Seems you are a bit more open about pursuing some inorganic opportunities. Can you just talk about the size that we should be thinking about how large you guys are going, and then again what verticals make the most sense for you guys to pursue inorganically versus the organic investments you referenced?

Udit Batra -- President and Chief Executive Officer

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

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

Operator

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

Josh Waldman -- Cleveland Research -- Analyst

Hey, guys, wondering if you could provide more color on the replacement initiative. I guess, what inning do you think we're in here? And I think, I remember you previously saying there were about 8,000 systems that you were targeting. Is this still how you're thinking about the opportunity or is that number gone up? And then I guess lastly, do you think its driving replacement of only your systems or at this point, are you seeing it replace maybe competitor systems? It just seems like growth of 40% in the LC business is probably representing share gains?

Udit Batra -- President and Chief Executive Officer

Yes. Thanks for picking that up Josh. Look, LC -- the 8,000 number was HPLC and UPLC only and especially only Waters instrument. And when you talk about innings, if you are talking about baseball, probably we in the third innings. There is a lot more work to do and lot more to pick up there. And we haven't done that in the past, we haven't replaced our own instruments. So we are going in and it's working out super well, especially with the new products being available as well and both on the HPLC side, and the UPLC side. So we're very happy with where we are there.

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

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

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

Operator

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

Catherine Schulte -- Baird -- Analyst

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

Udit Batra -- President and Chief Executive Officer

Yes. I mean, we are definitely hearing that. I mentioned conversations I've had with heads of CDMO organizations. This is front-end center. I mean, they view us as a collaborator, who they can trust with their methods, with their ideas. And I think this is something that we're definitely hearing. And we intend to take -- we intend to service our customers accordingly, right? So I think you heard right.

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

At this point, I want to thank you for your participation and questions. And on behalf of our full management team, I'd like to thank you for your continued support and interest in Waters. We look forward to updating you on our progress during our Q2 2021 call, which we currently anticipate to hold on August 3rd, 2021. Thank you all.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Bryan Brokmeier -- Senior Director, Investor Relations

Udit Batra -- President and Chief Executive Officer

Michael Silveira -- Vice President, Interim Chief Financial Officer

Dan Brennan -- UBS -- Analyst

Tycho Peterson -- JPMorgan -- Analyst

Vijay Kumar -- Evercore -- Analyst

Mike Ryskin -- Bank of America -- Analyst

Doug Schenkel -- Cowen -- Analyst

Brandon Couillard -- Jefferies -- Analyst

Patrick Donnelly -- Citi -- Analyst

Josh Waldman -- Cleveland Research -- Analyst

Catherine Schulte -- Baird -- Analyst

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