Please ensure Javascript is enabled for purposes of website accessibility

Waters Corporation (WAT) Q3 2021 Earnings Call Transcript

By Motley Fool Transcribers – Nov 2, 2021 at 1:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

WAT earnings call for the period ending September 30, 2021.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Waters Corporation (WAT 1.31%)
Q3 2021 Earnings Call
Nov 2, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to the Waters Corporation Third Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the conference call. [Operator Instructions] The conference call is being recorded, if you have any objections you may disconnect at this time.

It is now my pleasure to turn the call over to Mr. Caspar Tudor, Manager of Investor Relations. Please go ahead, sir.

10 stocks we like better than Waters
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* 

They just revealed what they believe are the ten best stocks for investors to buy right now... and Waters wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of October 20, 2021

Caspar Tudor -- Manager of Investor Relations

Thank you, operator. Good morning, everyone and welcome to the Waters Corporation Third Quarter Earnings Conference Call. Before we begin, I will cover the cautionary language. During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the company. In particular, we will provide guidance regarding possible future results of the company and commentary on potential market and business conditions that may impact Waters Corporation over the fourth quarter, full year 2021 and 2022. We caution you that any and all such statements are only our present expectations and that actual events or results may differ materially from those indicated in the forward-looking statements.

For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see the risk factors included in our annual report on Form 10-K for the fiscal year ended December 31, 2020 in Part one under the caption Risk Factors and in our most recent quarterly report on Form 10-Q for the quarter ended July 3, 2021 in Part 1A under the caption Risk Factors, both of which are on file with the SEC, as well as the cautionary language included in this morning's press release, including with respect to risks related to the effects of the COVID-19 pandemic on our business. We further caution you that the company does not intend to update any of it's predictions or projection, except during our regularly scheduled quarterly earnings release conference calls and webcasts or as otherwise required by law.

The next earnings release call and webcast is currently planned for February 1, 2022. During today's call, we will be referring to certain non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and in the appendix of our presentation which are available on the company's website.

In our discussions of the results of operations, we may refer to non-GAAP results which exclude the impact of items such as those outlined in our schedule titled Reconciliation of GAAP to adjusted non-GAAP financials included in this morning's press release and in the appendix of our presentation. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2020. In addition, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, given on a comparable constant currency basis.

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

Udit Batra -- President, Chief Executive Officer & Director

Thank you, Caspar and good morning, everyone. Along with Caspar joining me on this morning's call is Amol Chaubal, Waters Senior Vice President and Chief Financial Officer.

We have reported another quarter of strong broad-based momentum across our portfolio and geographies. We first thank our over 7,000 colleagues around the globe, who represent the indomitable spirit of Waters. Our teams have remained focused on supporting our customers and developing and delivering exciting new products despite the continuing impact of the pandemic. September 1 marked one year since I joined the company and what a year it has been. I'm often asked what is different. I would first like to talk about what is the same because that is what is giving us the ability to compete more effectively. Our brand stands for deep scientific expertise, a clear understanding of our customers' challenges and courage to invest in game-changing innovation; this remains the same. What we have injected with our new leadership team is a stronger focus on execution, a sense of urgency and accountability. We are a work in progress but the trend is positive.

Now moving to Slide 3 which summarizes where we are on our journey. Firstly, we're sustaining our commercial momentum with another strong quarter delivering flat sales growth of 6%, showing solid business performance with minimal COVID tailwinds. Meanwhile, our commercial initiatives and strong traction of new products like premier columns and instruments and Arc HPLC were well-positioned to deliver market cost growth through 2022. Finally, preparing on this momentum by taking decisive steps and solving key problems that are present in higher growth adjacencies like biologics manufacturing.

I will now provide a brief overview of our third quarter operating results, as well as commentary on our end markets, geographies and technologies. Amol will then review our financial results in detail and provide comments on our updated financial outlook. We will then open up the phone lines to take your questions.

Moving now to Slide 4. In the third quarter, our revenue grew 11% as reported and on a constant currency basis, reflecting continued strength in our pharma and industrial end markets, with balanced demand for our instruments and recurring revenue products. This translates to a 6% stack CAGR for the quarter versus 2019 on a constant currency basis. Year-to-date, revenue has increased 21% with a constant currency tax CAGR versus 2019 also above 6%. Our top line growth resulted in Q3 non-GAAP adjusted earnings per share of $2.66, growing 23% year-over-year. Year-to-date, non-GAAP adjusted earnings per share have grown 39% to $7.54.

Looking more closely at our top-line results for the quarter on Slide 5 in constant currency, first, by operating segment. The Water division grew 9% while DA grew by 27%. By end market, our largest market category, pharma, grew 16%, industrial grew 9%, while academic and government declined by 11%. In Pharma, we saw a broad-based continued strength in sales across customer segments, geographies and applications. Specced [Phonetic] was both in small molecule and large molecule applications which both grew in mid-teens for the quarter. Industrial growth was regionally broad and led by our TA business which saw strong growth globally in thermal, microcalorimetry and theology.

Turning to academic and government which is about 10% of our business, continued strength in Europe was offset by softer performance in China and other regions.

Moving now to our sales performance by geography, on a constant currency basis, sales in the Americas grew 16%, with the U.S. growing 13%. Sales in Europe grew 8%. Sales in Asia grew 8%, with India over 40% and China sales were down 3%. Now to a bit of clarification on China; demand remains very healthy as does the execution of our initiatives. A shipment of approximately $12 million got delayed at an airport in the last few days of the quarter due to a third-party shipping issue and has been delivered in the first few days of the fourth quarter. Looking therefore at China orders for the quarter, this was up mid-teens year-over-year. So really no challenge from a demand perspective.

In the U.S., growth was led by a broad-based continued strength in our pharma and industrial end markets. In pharma, we saw strength across our instrument and chemistry portfolios. In Industrial, our Waters and TA businesses both saw strong growth. Europe demand remains robust across all end markets with continued strength in pharma, industrial and academic and government. For the quarter, India was our fastest-growing market, driven by very strong growth in instrument sales to our pharma customers. As you know, India is primarily a small molecule and generic market for export and this is indicative of continued strength in global pharmaceutical demand for small molecule drugs. At products and services, customer demand for our instruments remain strong after an impressive first half of the year, while recurring revenues also continued to see sustained growth.

Overall, instrument sales grew 10% for the quarter, driven by robust demand, our improved commercial execution, new product contribution and instrument replacement. In LC, the newly released Arc HPLC continued to see strong growth and uptake of our premier instruments, both Arc and acuity, especially for applications in novel modalities like mRNA and Biologics remain solid. The strength we are seeing in our LC instrument portfolio remains a positive indicator for sustainable future growth in consumables and service.

In mass spec, demand strength from pharma customers continued with strong demand for our single quad led by users for oligo and biologics purification as well as strength in our tandem quad used in late-stage product development. We're also encouraged by early interest in our Select Series MRT Time-of-Flight platform which delivered highest quality resolution at fast speeds.

Now for our recurring revenues, chemistry sales grew 13%, driven by an increase in utilization of our pharma customers, as well as strength in our industrial end markets. Demand for our new premier columns remains strong, while our e-commerce initiative is progressing and making it easier for our customers to do business with us. So far this year, our chemistry consumables have grown almost double digits when compared to our 2019 base. We're pleased that our premier technology is continuing to provide important benefits in separation and purification of mRNA and oligonucleotide molecules, given it's unique ability to reduce selective binding of plasmids and mRNA to various services. Service also grew double digits again this quarter even as last year's comps have become tougher. On a two year stack basis, service grew 7% in constant currency for the quarter and 6% year-to-date. By focusing on our value proposition and commercial execution, we have seen an increase in service plan attachment rates and plan renewals.

Finally, TA had a great quarter, with sales up almost 30% as demand has rebounded with strong growth across all regions. TA instrument sales have grown at 8% on a two year stack basis so far this year driven by strong demand for our thermal instruments used in the analysis of advanced materials, as well as microcalorimetry instrument demand for our pharma and academic customers.

Moving now to Slide 6. Let me now focus on why we believe that we will continue to deliver market class growth. I think you're used to seeing these initiatives, so let me use the same trend starting from the left-hand side of the slide. In 2021, we expect our instrument replacement initiative to deliver over $30 million in revenue. In 2022, we expect this to become over $40 million which means an incremental $10 million over 2021. Our focus on commercial execution is positively impacting our service business with planned coverage rates having increased by 2% so far this year compared to the first three quarters of 2019. In 2022, we think a further 100 basis points of expansion in service plan adoption is attainable.

Growth in e-commerce adoption also remains strong with chemistry sales through our e-commerce channels approaching roughly 30% versus the 21% we saw in 2019. We expect this to continue reaching over 35% by the end of next year. So far, this year, revenue from contract organizations has grown over 40% versus the comparable period in 2019. Next year, we expect the expect this to grow low double digits for the year versus 2021. And new products continue to do well. We are just taking the example of Arc HPLC and Premier to illustrate the point here. Both Arc HPLC and Premier continue to be strong drivers with over $45 million revenue expected from these sources of this year in and separate to the replacement initiative.

In 2022, we are expecting this number to be over $60 million. So in all, these initiatives alone should give us approximately 1% over our base business growth for 2022 which reaffirm our belief in market plus growth rates.

Moving now to Slide 7, we operate a strong core business in healthy and durable end markets. This strong foundation provides us a platform for solving critical problems facing our industry, where we can bring our scientific expertise and product portfolio capabilities.

I would like to say, there are three areas of focus which also happen to be in high-growth end markets. First, in the biologics arena on the reagent side and bioseparations. We believe there are significant problems to solve in separating and purifying these newer modalities, having a deeper understanding of reagents coupled with our chemistry expertise will allow us to solve these problems. Second, in bioprocessing, the largest challenge I felt as an engineer in bioprocessing versus small molecule processing was that once you define the process, you got stuck with it because it was in a drug master file. We have to decouple the process from the product. Separately, the process development time scales are longer versus small molecules, given the sheer complexity of attributes you need to measure. A simple and robust tool that can measure multiple attributes as a potential solution. We believe that the bio cohort is the right LCMS tool that can begin to address this challenge. Third area is diagnostics, where we need a fast unbiased detection of multiple biomarkers to enable early disease detection. We believe, again, mass spec has a significant role to play here.

Moving now on to Slide 8. Let me illustrate what I mean by sharing what we are doing to solve some of the key problems in bioprocessing. Last week, we announced a partnership with Sartorius, a leader in bioprocessing. We will combine our water Biocare system as a bioprocess analyzers with Sartorius amber bioreactors, giving scientists both faster and at line direct access to advanced quality characterization information. Scientists across Sartorius, Waters and some of our customers have already shown that the combined offering will shorten product development timelines considerably, taking what currently takes six weeks to analyze down to only two days. It also lays the foundation for using the BioCore as a bioprocess analyzer for process control and quality testing in the future. BioAccord is both versatile and easy to use and we expect that process engineers will be able to master it's operation within one to two weeks. In fact, one of our customers had summer interns use the BioAccord and gave raving reviews on how simple it is to use. I'm also an engineer who have been out of the last for many years and I was able to learn quickly.

Resulting configuration will allow direct analysis of bulk substance not just cell culture media, while targeting over 250 cell culture media analytics. Separately, we also announced a multiyear collaboration with the University of Delaware to develop technology for analytical characterization of manufacturing processes for biologics and normal modality. Through these partnerships, researchers from both Waters and the University of Delaware will identify and develop solutions that can provide better aseptic sampling, make sensor and analytical instrument improvements and develop data analytics and process control. This partnership will help us expand our capabilities to characterize biological manufacturing processes in order to drive improvements in quality, yield, efficiency and process control.

In summary, 2021 so far has been a very successful year for Waters. We are laser focused on our commercial execution. The markets we serve are in a healthy state and our geographic regions have rebounded solidly from pandemic lows. Meanwhile, I'm convinced of the great opportunity that lies ahead of us higher growth adjacencies to impact and deliver value by extending our scientific expertise and product portfolio toward helping customers solve the most complex problems in our industry.

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

Amol Chaubal -- Senior Vice President & Chief Financial Officer

Thank you, Udit and good morning, everyone. As Udit outlined, we recorded net sales of $659 million [Phonetic] in the third quarter, an increase of 11% in constant currency. Reported sales growth was also 11%.

Looking at product line growth, our recurring revenue which represents the combination of chemistry and service revenue increased by 11% for the quarter, while instrument sales increased 10%. Chemistry revenues were up 13% and service revenues were up 10%. As we noted in our last earnings call, recurring revenues were not impacted by a difference in calendar days this quarter. Looking ahead, there are six fewer days in fourth quarter of this year compared to 2020.

Now, I would like to comment on our third quarter non-GAAP financial performance versus the prior year. Gross margin for the quarter was 58.9%, as compared to 55.8% in the third quarter of 2020. Improvement was driven primarily by volume leverage and revenue mix. The foreign exchange benefit in the quarter was about 1%.

Moving down the P&L, operating expenses increased by approximately 17% on a constant currency basis and on a reported basis. The increase was primarily attributable to higher labor cost due to the normalization of prior year cost actions, as well as higher variable compensation on the higher sales volume. In the quarter, our effective operating tax rate was 11.7%, a decrease from last year due to some favorable quarter specific discrete items. Excluding the impact of these discrete items, our year-to-date tax rate is consistent with the prior year. Our average share count came in at 61.9 million shares or about 400,000 less than the third quarter of last year as a result of our share repurchase program.

Our non-GAAP earnings per fully diluted share for the third quarter increased 23% to $2.66 in comparison to $2.16 last year. On a GAAP basis, our earnings per fully diluted share increased to $2.60 compared to $2.03 last year. The reconciliation of our GAAP to non-GAAP earnings is attached in the press release issued this morning and in the appendix of this presentation.

Turning to free cash flow, capital deployment in our balance sheet. We define free cash flow as cash from operations less capital expenditures and exclude special items. In the third quarter of 2021, free cash flow was $140 million after funding $40 million of capital expenditures. Excluded from the free cash flow was $12 million relating to investment in our Taunton precision chemistry. Year-to-date free cash flow has increased to $488 million and at approximately $0.25 of each dollar of sales converted into free cash flow.

In the third quarter, accounts receivable DSO came in at 71 days, down five days compared to the third quarter of last year and down two days compared to the last quarter. Inventory DIO decreased by 13 days compared to the third quarter of last year. Given the higher sales volume and our proactive measures to secure supply, inventory increased by 62 million in comparison to the prior year. We maintain a strong balance sheet, access to liquidity and well-structured debt maturity profile. In terms of returning capital to shareholders, we repurchased approximately 369,000 shares of our common stock for $151 million in Q3. At the end of the quarter, our net debt position was $958 million, with net debt-to-EBITDA ratio about one. Our capital deployment priorities are to invest in growth, maintain balance sheet strength and flexibility, return capital to shareholders and to deploy capital to well thought out, attractive and adjacent growth opportunities.

As we look forward to the remainder of the year, I would like to provide you with some update on our thoughts for 2021 on Slide 11. Throughout this year, we've seen good momentum driven by robust end market demand and strong commercial execution. We believe that this momentum will continue and expect our near-term growth initiatives to continue to contribute meaningfully to our performance.

Looking at the fourth quarter, the comparison is more challenging as it was the first quarter in our transformation journey and was further favorably impacted by post lockdown elevated year-end budget plus spending. In addition, we have six fewer calendar days in the fourth quarter of this year. This dynamic supports raising full year 2021 guidance to 15% to 16% constant currency sales growth. At current exchange rates, the positive currency translation is expected to add approximately one percentage point, resulting in full year reported sales growth guidance of 16% to 17%. Gross margin for the full year is expected to be approximately 58% to 59% and operating margin is expected to be approximately 29% to 30%. We expect our full year net interest expense to be $34 million and full year tax rate to be 14% to 15%.

Average diluted 2021 share count is expected to be approximately $62 million. Our share repurchase program will also continue into Q4 and we'll provide quarterly updates as appropriate. Rolling all this together on a non-GAAP basis, full year 2021 earnings per fully diluted share are now projected in the range of $10.94 to $11.04. This includes a positive currency impact of approximately two percentage points at today's rate and assumes no material adverse supply impact from COVID.

Looking at the fourth quarter of 2021, we expect constant currency sales growth to be 5% to 7%. At today's rates, currency translation is expected to subtract approximately two percentage points resulting in fourth quarter reported sales growth guidance of 3% to 5%. Fourth quarter non-GAAP earnings per fully diluted share are estimated to be in the range $3.40 to $3.50. This includes a negative currency impact of approximately three percentage points at today's rates and assumes no material adverse supply impact from COVID.

Now, I would like to turn it back to Udit for summary comments. Udit?

Udit Batra -- President, Chief Executive Officer & Director

Thank you, Amol. Before I wrap things up, I would like to make a few comments on our ESG efforts and our core principles to fuel innovation and make a positive impact. This includes doing our part to reduce our environmental footprint and leave the world better than we found it, being representative of the diverse society we live in and providing effective governance that enhances long-term shareholder value. You will see more of our progress in each of these areas in our 2021 sustainability report coming out later this month.

Turning to Slide 10, I was particularly moved recently by the new internship program we developed with Team New England designed to increase access to STEM education for students of all backgrounds. Over the course of six weeks, we gave high school students a hands-on learning experience with a mix of science, business and soft skills. Over 70 Waters employees were involved, who gave practical exposure and mentorship. We look forward to continuing these efforts in the future.

In summary, we continue to be pleased with our performance this year, we're sustaining our commercial momentum with our initiatives which continue to perform well and should provide a multiyear benefit as we continue to strengthen our core. We are continuing to track 6% on a two year CAGR [Phonetic] 6% on a two year CAGR for our revenue in constant currency, showing that our core is strong. We are focused on accelerating innovation to our portfolio and reaching these higher growth rate areas in adjacent markets.

With that, we will now begin the Q&A answer session. Thank you.

Questions and Answers:

Operator

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

Daniel Brennan -- Cowen & Company -- Analyst

Great, thanks guys. Thanks for the call. Thanks for the questions. Maybe first off Udit, just on 2022, you provided some early look here with some of the drivers come to how they're going to impact. I'm just wondering if we think ahead given the comps you're coming off of 2021. What's the right way to think about the early look for 2022 here? Consensus has you growing organically about 5% which would imply a pretty nice acceleration on a two year stack basis.

Udit Batra -- President, Chief Executive Officer & Director

Thanks for the question, Dan. Look, First, just for this year, I mean, we were tracking at a 6-plus percent sort of stack growth rate. So really, the base business is doing rather nicely. And we would feel that the transformation is now hitting it's stride. So the base business should continue to track along those lines now. We've always said market plus and what gives us conviction that market plus, the initiatives that we've outlined, including the replacement, including additional penetration in different channels and better launch of new products. So wherever the market is, we expect to be market plus given the initiatives. And in terms of what you should expect for next year, again, the same logic applies, right? If the market is four, we should be four plus, if it five, we should be five plus and if it's six, it should be six plus.

There's no reason to believe that the market should slow down. The -- all our end markets are doing super well. I mean you saw that year-to-date, both pharma and industrial are tracking close to 20%. On a two year basis, they're well ahead of what we've seen over the history of Waters. So feel really good going into the next year and we have concrete initiatives that make us believe that we should be market plus.

Daniel Brennan -- Cowen & Company -- Analyst

Great. And then just maybe as a follow-up, you've been at the helm about a year plus right now. You've done -- obviously, you've outlined some areas for improvement which we've executed on in terms of new product, commercial execution, customer identification, where you were lagging. How do you think about the evolution of your impact on the business? Should we expect at some point here as we enter 2022, that there's going to be possibly a new wave of kind of initiatives. Just kind of thinking through what the next leg is for Waters. And related to that, just wondering how M&A kind of fits into that.

Udit Batra -- President, Chief Executive Officer & Director

Thanks for the question. The first, we have to make sure we do more of the same, right? And that's, that I feel really good about, especially with the leadership of John Pratt and Ian King really executing even further on our initiatives. Second, feel very good about our ability to bring in new products to the market. They have tremendous, tremendous traction, right, especially the products that we've launched recently, Arc HPLC, the Premier columns, both adding significantly the top line. And the MRT, the Select series MRT, has a lot of interest from our customers across proteomics, across imaging and across many different segments. So we feel very good about what our pipeline is contributing and there is more to come there. And finally, to your question on M&A, look, I mean, we've outlined the areas of growth we are interested in. And I think, what you will see is that we're not just interested in entering these areas really [indecipherable].

We are really thinking hard about what are the key problems to solve, right? So as an example, with bioprocessing as an engineer and freshly minted after finishing my PhD days into my new job. I was ushered into a manufacturing plant where we were still manufacturing vaccines using chicken embryo eggs. So I sat with eggs opening them up and I won't tell you the rest of the process. The process was designed many, many years ago, probably a decade ago. And the reason that you were -- that you -- and that's how in the [indecipherable] vaccines are still manufactured today. While we have much better technology in cell culture to be able to manufacture the same type of vaccine. And the reason for that sort of conservatism is that the process and the product are indistinguishable in the drug master file that you file for biologics. And that's something that we really want to work on. We believe that our collaboration with the University of Delaware will help us make strides in that direction. And I'm super excited about what we just announced with Sartorius. Sartorius is a leader in bioprocessing and they have probably the deepest penetration of small early stage bioreactors that are used for clone selection.

And that collaboration has two benefits. One, we're able to take the BioAccord and improve a process that takes about six weeks down to two days. and that's been shown in collaboration with Sartorius scientists and our scientists as well as customers. So very excited about that. There are several hundred amber bioreactors out there and so we hope to be able to take advantage of that. And then secondly, it opens up for Waters a higher growth area where we would have not otherwise entered. I mean in this case, we want to enter with the capabilities that we possess. So feel extremely good about the initiative. So in summary, continuing the commercial momentum; second, recharging innovation; and third, looking to enter these faster growth areas through first partnerships and increasingly open to M&A, if it makes sense. But I remind you that for M&A, we are a financially disciplined company. So you won't see us jumping in head first into something that doesn't make.

Operator

Our next question is from Tycho Peterson, JPMorgan.

Tycho Peterson -- JPMorgan -- Analyst

Udit, maybe I'll start with China. You noted the $12 million shipment delay. It doesn't sound like you're flagging any demand issues but I'm just curious, if you could elaborate a little bit on what you're seeing in that market. And then any comments on supply chain. And obviously, there's a lot of focus on that in the current environment.

Udit Batra -- President, Chief Executive Officer & Director

So Tycho, thanks for the question. Look, China year-to-date is over 30% growth. Only second, to India in organic growth. From a demand perspective, for the quarter, we were up mid-teens. And unfortunately, a shipment got stuck in the last few days of the quarter which made it to our customers now. And if you included that into the Q3 numbers, it would be the high single digit to low teens for China growth. So really nothing to slag from a China perspective. In fact, I would say very happy with our new leader in China who has been implementing initiatives really, really well, Arc HPLC has great fraction. We built really strong commercial momentum even in a Food and Environmental markets super well [Phonetic]. So feel extremely good about where we are in China. So nothing really to flag from a demand perspective.

And on your question on supply chain, look, like everybody else, in fact, like everybody else, we are seeing constraints in shipping in different ports that appears sporadically, right? We don't think it's a systemic issue. It's a sporadic issue. And we are not unique in experiencing those challenges. In fact, I was with a few colleagues in different industries last week and virtually everyone is experiencing for us a little bit of unpredictable changes in supply chain. So we're not immune to that. And I think if somebody tells you that they are, they're probably not shipping as much. And then, the other two pieces are of the supply chain that are -- that have been talked about a lot are inflation. We do see inflation specifically in U.S. labor but I think we haven't been able to offset by price increases with our customers. So hopefully, that gives you enough color on how we see it.

So China, really nothing to flag, no problem at all from a demand perspective and from a supply chain perspective, feeling what everybody else feels, really happy with the way our teams are working to surmount these issues and passing on prices where it makes sense to our customers.

Tycho Peterson -- JPMorgan -- Analyst

Okay. And then for the follow-up, academic government is only 10% but it was down 11%. Can you maybe just touch on what you're seeing there? And do you expect that to turn into the fourth quarter with a big budget flush?

Udit Batra -- President, Chief Executive Officer & Director

Look Tycho for AMG, I mean, we do year-to-date, we're growing roughly 6%. And if you look at the consumables revenue, that's tracking nicely. So there's activity across our customers we are tracking in double digits. So recurring revenues are still growing double digits like with other end markets. So nothing to sort of point out systemically. Overall, if you look at the market. Now the performance is a bit sort of different by region. Europe is doing extremely well, whereas China and the U.S. are a bit slower. And that has to do with two reasons. One, as we pointed out, academic and government is a small portion of our business and historically has not been a huge focus for Waters. We have, with John's arrival, we have started to increase our focus on that segment as well. And if you think about the instruments part of the business, that really depends on deep P&L relationships and customer relationships. And this, over time, had sort of slowed down in many markets. In Europe, we've come out of the gates very well. We've started to reestablish those relationships and you see the impact on the results year-to-date.

In U.S. and China, that's work in progress and we'll give you updates as we go along. I'm optimistic with the activity I see, especially on e-commerce and in procurement and you see the results in our consumables business. And on the instrument side, with improving KOL relationships, I expect that to turn as well.

Operator

And thank you. Our next question is from DJ Kumar, Evercore.

Unidentified Participant

Hey guys, good morning, and thanks for taking my questions. Udit, one for you, the $12 million shipping delay in 2Q, what segment did that impact was the instrument impact government and academia? I'm curious how [indecipherable] from any supply chain disruption. I would be curious with the visibility you have.

Udit Batra -- President, Chief Executive Officer & Director

Similar to what I just said to Tycho, really nothing to be concerned about from a demand perspective in China. The $12 million has made it to the customers and it is a bit spread. It's basically all instruments. It's not any consumables. So it's all instruments and it's made it to the customers, a bit spread across the different customer segments, Pharma, industrial as well as academic and government. So nothing sort of one segment feeling more pain. And in terms of how we're dealing with these issues, look, we have a superb supply chain department. We have extreme transparency on the shipments and the timing of the shipments. And we have started to build inventory where we see order spikes in the different regions. And so we feel that we should be able to manage the volatility that we are seeing in different [Phonetic].

Unidentified Participant

That's helpful, Udit. And I did have one on gross margins. 3Q gross margin is very consistent with 2Q but I recall FX has an impact on you guys at the gross margin line. Given the 200 basis points headwind in Q4, any comments on FX impact on gross margins either in Q4 or as we look through fiscal '22?

Amol Chaubal -- Senior Vice President & Chief Financial Officer

Yes. So Vijay, I mean, we do expect our gross margins in Q4 to be about 58% to 59%, right? And we've seen so far in Q3, as we said, 1% tailwind on the gross margin. Looking ahead, I mean, dollar has sort of strengthened and we do have most currencies, we are operationally has accept pound [Phonetic] and that's the currency where we are exposed. But other than that, I mean, we've sort of included that in our guide. And that's why you see we have close to $0.10 headwind on EPS versus the last earnings call in our Q4 EPS guide.

Operator

Our next question is from Jack Meehan with Nephron Research.

Jack Meehan -- Nephron Research -- Analyst

Good morning. I wanted to just get a little bit more color on the shipment you flagged in China, the $12 million. So that was delivered in October. Obviously, the supply chain dynamic seems to be getting incrementally more challenging each week. So I was just curious what -- how things are going there? And do you think -- Does your guidance contemplate any orders could slip from 4Q into 2022 as well?

Udit Batra -- President, Chief Executive Officer & Director

Jack, look, nothing that we have visibility on that will go from Q4 to Q1. As I said, there is increased inventory in the different regions where we are seeing the demand going extremely, extremely well. And from an overall perspective, the $12 million was shipped rather promptly in Q4, right? It's just unfortunate that ends on the days it does and the shipping toward the end of the quarter. So, I don't see anything that gives us visibility at this point that would tell us that there would be an impact in Q4. And in terms of what is within our hands, I mean, you heard me talk about earlier the extreme transparency that we have on supply chain, the processes that are much, much improved over the last year. And then finally, the increased inventory in the different reasons. So we're reasonably comfortable that we should be able to manage our rather ambitions end of the year.

Jack Meehan -- Nephron Research -- Analyst

Great. And then I was just curious about labor trends. You called it out the fact that you were now above the -- recovering from the pre-pandemic levels. I was just curious, if you felt like there was more spend coming in, in 4Q and just maybe overall competition for labor, how you think you're managing in terms of retention.

Amol Chaubal -- Senior Vice President & Chief Financial Officer

Yes, look, I mean, U.S. labor continues to be sort of a place where we are seeing inflationary pressures, right? I think with a strong HR function, we've put a lot of measures in place to reduce attrition and sustain talent, right. However, that doesn't play out so much in terms of cost and operating expenses into Q4. As you model in Q4, what you have to keep in mind is that Q4 is a heavy revenue quarter for us and that results in a commission payment accrued heavily in Q4 which is why typically it sees historically operating expenses, especially SG&A and EBITDA in Q4. And that's reflected in our guidance.

Operator

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

Patrick Donnelly -- Citigroup -- Analyst

Great. Thanks, guys. Udit, maybe one on the two commentary. Certainly, appreciate you're expecting to continue to grow above market. When we look at '21, it feels like one of the accelerants for you guys was the replacement cycle. I think last quarter, you talked about maybe the sixth to seventh inning using the baseball analogy. How do you think about that in '22 kind of setting up as an opportunity for you guys to continue on that front? Or was that mainly condensed into '21 when we think about what the growth rate could look like there?

Udit Batra -- President, Chief Executive Officer & Director

Patrick, thanks for the question. Unfortunately, I was learning baseball, so I kept using the baseball analogy and people have talked sense into me to start talking in revenue numbers. So that's why we put that slide together which was Slide 6 in the prepared remarks. Look, we saw, what, say, 1% to 1.5% acceleration on a stacked basis due to the initiatives. And the initiatives were not just the instrument replacement. We saw service attachment increase of aftermarket. We saw e-commerce adoption grow from 20 to 27, 28%. Contract organizations grew which was a new channel for us, grew roughly 40% over a two year basis. And new product contribution also did extremely well. So across the board, 1% to 1.5% sort of benefit over what I would say, the base growth and robust end markets. Next year, we think that's roughly 1% versus the base market growth or whatever the base market growth will be. So for instrument replacement this year, we had roughly $30 million or so of benefit. Next year it will be $40 million which is $10 million incremental, right? So that's how I would think about it, right? So for service, 200 basis points, another 100 basis points on top. So the 200 basis points already benefits us next year.

And then e-commerce goes and I think, we can read the chart. So, I think that for me is how I would think about 2022 and beyond, right? And as you think about what's happening in beyond, this is now part of our CRM system. This is part of our execution that John Pratt and Ian King are implementing, right? So we now have the full list of HPLC, UPLC as well as the tandem quad in the CRM system that our reps are going through step-by-step and replacing. And this will continue next year and will go on into the year after. Same thing is true for our service attachment rates. We know where the attachment rates are. We're using that database to now go after it. So it has become part of the DNA of the organization. And I think that gives me confidence that we will be able to accelerate also next year. And then finally, new products, as I mentioned, doing very well. MRT has just started to pick up. A lot of interest, we've talked about Arc HPLC and Premier doing very well. So we fairly good about that 1% incremental over what would be any sort of market growth.

Patrick Donnelly -- Citigroup -- Analyst

Now, that's helpful. I appreciate that. And then maybe just a quick one on the industrial market. You guys put up pretty good results there. It's been a little more mixed across the sector. Can you just talk about what you're seeing there and expectations going forward?

Udit Batra -- President, Chief Executive Officer & Director

Look, I mean, across all end markets, right? I mean you look at pharma and now you look at industrial, industrial, it's roughly 6% to 6.5% stacked growth. Historically, that's been 4% to 5%. So we are seeing even a bigger acceleration relatively speaking, in industrial versus seeing pharma. And I must say we're seeing extremely, extremely good performance out of the TA business, right? So nice performance across the different customer segments, be it in advanced materials, be it batteries where we test slurries for renewable batteries. And I don't need to tell you why that's important these days. Electronics, that's growing in the high teens, double digit. The life science part of our TA business also growing nicely. So in TA, we're seeing really, really good momentum. And again, on a stack basis, even outpacing the overall business roughly 8% or so growth. So I think industrial, we feel that our customers have found a way to work despite the pandemic.

Our service engineers and our sales teams have access to many of these customers initially virtually but in many regions increasingly also physically. Our service engineers, both across Waters and TA are actually more welcome at our customer site and many of their own employees. So industrial has picked up nice strength and it's true across all geographies. China is doing well. U.S., Europe, Western Asia doing quite -- basically it's really an area of strength and we're lucky to have a business like TA that's kind of pointed in that direction.

Operator

Our next question is from Derek Duran from Bank of America.

Michael Ryskin -- Bank of America -- Analyst

Thanks for taking my question. This is Mike Ryskin on for Derik. I want to Follow up a little bit on the instrument performance you saw in the quarter. I was wondering, if you could break out any mean you saw difference in terms of the LC versus mass spec and particularly sort of tying back to the academic and government question. I'm wondering if that was more on the mass spec side and just sort of how you see some of those new product introductions playing out this quarter and going forward.

Udit Batra -- President, Chief Executive Officer & Director

So firstly, overall and again, I'll talk more in terms stacked growth, I mean instrument growth for the year is roughly 30%, right both LC and mass spec doing extremely well. LC, even higher than 30%, mass spec slightly shy of 30%. So nothing to choose between the two sort of product platforms. But I think it makes more sense to talk about it on a stacked basis. But historically, Waters have seen instrument growth between 3% and 4%. We've sort of steadily now year-to-date stack growth is steadily around 5%-ish. So really nice momentum. And this is true both across LC as well as mass spec so nothing differentiates the two. Now you asked about mass spec in particular. In mass spec, the demand is driven by -- across all our portfolios across users in high res mass spec across our tandem quad which are both used the single quads are used for intact mass and also our tandem quads that are used in development as well as food and environmental. And then, of course, as I mentioned, the BioAccord, we see renewed momentum and a lot of interest in the bioprocessing arena. So mass spec is going from strength to strength.

Now turning to the second part of your question on new products, as I pointed out on -- in the prepared remarks, right, on HPLC, just focusing on HPLC for a minute, Arc HPLC as well as the premier technology which includes columns as well as the application of this unique technology to our instruments has led to roughly $45 million in sales in 2021. We expect that to go up to 60-plus million, so about 15 million or so incremental. That's in the LC space. On mass spec, new applications for BioAccord. I already mentioned that in the prepared remarks and the MRT has a lot of interest from many of our customers, especially ones who want to use it in the proteomics space and for imaging with our [indecipherable] technology which can be used under ambient conditions which is quite unique. So again, new products. Waters has had a history of introducing game-changing new products. I think what we are doing differently is just making sure that there is a lot of traction once we launch these products and they're not just [Phonetic].

Michael Ryskin -- Bank of America -- Analyst

Okay. A quick follow-up actually on the opex side. SG&A and R&D book came in a little bit better than we expected in our model. I was just wondering, if there's any onetime effect there. I know FX probably played a role there as well being less of a tailwind. Just wondering, if you could comment on any trends there and the $12 million shipment that got the way to 4Q in China, how should that flow through the model? Is that about a $0.05 to $0.10 benefit to 4Q PS?

Amol Chaubal -- Senior Vice President & Chief Financial Officer

Yes. So on the two questions, the first one, there is no onetime activity in R&D or SG&A, so it's pretty straightforward there. On the 12 million shipment that got delayed, I mean, you can assume it's largely instruments and instrument gross margin that would have been [indecipherable].

Operator

Our next question is from Puneet Souda with SVB Leerink. Your line is open.

Puneet Souda -- SVB Leerink -- Analyst

Yes, hi. Thanks for taking my question. So, first one is just I wanted to clarify. Obviously, instrumentation was strong last quarter. And if you pull in this $12 million order back into 3Q, that would be strong this quarter as well. So I just wanted to understand, if there's sort of application wise, what is driving the instrumentation sale. And maybe just if you could elaborate a little bit if there was any -- in terms of QA/QC of vaccines, maybe the analysis of mRNA cap structure, there were some applications notes published by Waters teams around that. So just wanted to understand, if you are working on QA/QC side of the proteins or mRNA vaccines or what are the applications that are driving the instrumentation growth that we have seen here over the last two quarters.

Udit Batra -- President, Chief Executive Officer & Director

Look, first, I mean the instrument growth is driven by strong robust end markets, better commercial execution. Second, it's our initiatives be it replacement, be it products [Phonetic]. And your question is increased applications. And I would break it into two parts. One, we are indeed seeing increased application of our technologies in oligonucleotides, in mRNA. So for instance, I met somebody from a leading mRNA company in Cambridge recently and they basically said, look, the huge aggregation problems with plasma, with the mRNA molecular cells, as well as with the lipid encapsulated mRNA molecule. So they are turning to us to help us help them solve these problems, one, by retaining more samples by using Premier; and two, by using LCMS to elucidate the structures of the molecules themselves. So good application there. And a lot of them being in development and discovery and hopefully, increasingly in QA/QC.

Second area that I would comment on is the wider application of the BioAccord. You'll recall the product was initially launched really focused on LCMS which we still have in QA/QC, we still believe that LCMS has a strong place in QA/QC provided the instrument that you have is simple, robust and fast and give you faster results. But that same value proposition is equally relevant in development of -- in early stage development of complex biologics and we're seeing really good application there. We demonstrated with Sartorius that within some experiments that takes six weeks can now be turned around within two days and this has been replicated in Sartorius lab, our labs and in several customer labs. So as you can imagine, there's a ton of excitement on that front. And the BioAccord is rather unique here.

The results are fast; it's a simple-to-use instrument, even somebody like me can use it and it provides you a wide range of results not just on cell culture media applications where it's much wider than any sort of application use today but also on the drug substance. So seeing wider application of our technologies and really excited about where LCMS is going, especially the BioAccord with the simplicity and robustness and peak in early stage development and bioprocessing.

Operator

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

Joshua Waldman -- Cleveland Research -- Analyst

Good morning, and thanks for taking my questions. Wondering, if you could provide a breakout of growth in LC and MS separately here in a quarter. I don't think you provided those numbers, I miss them, if you did. And I guess, broadly, it seems like the Waters instrument business was a bit lighter than expected. I mean, any additional color you can provide on maybe what drove this would be helpful. Was it largely timing related? Or is it more a reflection of possibly a normalization in orders?

Udit Batra -- President, Chief Executive Officer & Director

Firstly to your second question. I mean year-to-date, instrument growth is roughly 30% we go about that; so I don't know [Phonetic]. In Q3, we saw nice growth, double digit again on instruments with stronger comp in Q3 from last year already. So double-digit growth across the two pieces, the two lines of instruments, where you have three lines of instruments, mass spec, TA. As I mentioned earlier, on a year-to-date basis in the quarter is the same. LC grew in excess of 30%, mass spec in the mid-20s. So really nothing to choose between the two sort of instrument platforms. It makes less sense to look at it quarter-by-quarter, given the instrument given the instrument trajectory. But again, nothing to choose between the two fields that both LC and mass spec have significant momentum in Q3 and year-to-date. So -- and also going into Q4, we feel very good about where we are [indecipherable].

Operator

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

Catherine Schulte -- Robert W. Baird -- Analyst

Hey, guys. Thanks for the question. I guess, just first on the instrument side of the business, revenue was down about 8% constant currency last year. do you think you've largely recaptured that revenue at this point? Or is there still some to make up or do you think there is some that is just indiscernible] revenue that won't be recaptured? Would just be curious how you'd allocate across those three buckets.

Udit Batra -- President, Chief Executive Officer & Director

Catherine, thanks for the question. I think on the instrument side, we really feel that we are on a very, very good track. I mean, if you just look at historical averages, right, I mean 2020 can confound things given all the COVID impact. But on a stacked basis, we're traversing nicely in excess of 5%, close to 6% in some cases, for our instrument business and historically that average for Waters and across the industry is between 4%. So really nicely clear of the historical averages. And in terms of how much have we clawed back, I mean we think that looking at three sort of data points. One, comparing our stacked growth rates, both instrument and consumables with the rest of the industry. Wherever they are comparable products, we feel very good that we are operating well ahead of the market. So it's market plus performance on [indecipherable]. That's the first data point that makes us feel that we're flowing back rather nicely. Second, we have been loss ratios that we measure internally. Those have been tracking ahead of historical averages for the last four quarters.

And finally, there are public reports that are available which are rather idiosyncratic because they changed the definitions every quarter but according to those also we're doing pretty well on our market share. So feel very good about how we are traversing with our footing. Now, we are a work in progress. There's a lot more that we do well. A lot of opportunity as well, lot of applications for our instruments, a lot of, lot more penetration to be had but feel really good so far the result we have.

Operator

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

Udit Batra -- President, Chief Executive Officer & Director

Thank you very much for your participation and questions. On behalf of our entire management team. I'd like to thank you for your continued support and interest in Waters. We look forward to updating you on our 2021 call which is going to be on February 1, 2021. Thank you.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Caspar Tudor -- Manager of Investor Relations

Udit Batra -- President, Chief Executive Officer & Director

Amol Chaubal -- Senior Vice President & Chief Financial Officer

Daniel Brennan -- Cowen & Company -- Analyst

Tycho Peterson -- JPMorgan -- Analyst

Unidentified Participant

Jack Meehan -- Nephron Research -- Analyst

Patrick Donnelly -- Citigroup -- Analyst

Michael Ryskin -- Bank of America -- Analyst

Puneet Souda -- SVB Leerink -- Analyst

Joshua Waldman -- Cleveland Research -- Analyst

Catherine Schulte -- Robert W. Baird -- Analyst

More WAT analysis

All earnings call transcripts

AlphaStreet Logo

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.