Good morning and welcome to the Waters Corporation Fourth Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session of today’s call. This conference is being recorded. If anyone has any objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Head of Investor Relations. Please go ahead, sir.

Thank you, Catherine. Good morning, everyone and welcome to the Waters Corporation fourth quarter earnings call. We are very pleased to be speaking to you from Santa Barbara this morning where Wyatt Technology is located. We have a lot to cover today given our exciting – given our earnings results and our exciting announcements. Today, I am joined by Dr. Udit Batra, Waters’ President and Chief Executive Officer; and Amol Chaubal, Waters' Senior Vice President and Chief Financial Officer. We are also glad to be joined by Wyatt Technology's Chief Executive Officer, Geof Wyatt; as well as its President, Cliff Wyatt. Now, before we begin, I will cover the cautionary language. In 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 future possible results and commentary on potential market and business conditions, including with respect to the announced transaction with Wyatt that may impact Waters Corporation over the first quarter of 2023, full-year 2023 and 2024. These statements are only our present expectations and actual events or results may differ materially. For more details, please see the risk factors included in our most recent annual report on Form 10-K, our Form 10-Qs, and the cautionary language included in this morning's earnings release. During today's call, we will refer to certain non-GAAP financial measures, including in our discussions of the results of operations. 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 were available on the company's website. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the fourth quarter of fiscal year 2021. In addition, unless stated otherwise, all year-over-year revenue growth rates and ranges given on today's call are given on a comparable constant currency basis. Finally, we do not intend to update predictions or projections except as part of a regularly scheduled quarterly earnings release or as otherwise required by law. Now, I'd like to turn the call over to our President and Chief Executive Officer, Dr. Udit Batra. Udit?

Thank you, Caspar, and good morning, everyone. Before diving in, I would like to extend our thoughts and our prayers to the thousands of those who are affected in Turkey and Syria by the earthquakes. Today marks a major milestone in accelerating value creation for our customers and shareholders as we progress to the next step in the execution of our strategy. This morning, we made the exciting announcement that Wyatt Technology, the recognized leader in light scattering will be joining forces with Waters, bringing with it a fast growing, attractive business with key capabilities to accelerate our 1.8 billion double-digit growth opportunity in Bioprocess Characterization. More than 40 years ago, Wyatt was the first commercialized light scattering instruments incorporating lasers as their light source. Ever since they've defined and redefined state-of-the-art light scattering instrumentation, software, and services. Along the way, we've also added several related technologies including dynamic light scattering, viscometry, refractometry, and field-flow fractionation. Together, the innovative products are used to determine the properties of novel therapeutics such as cell and gene therapy, vaccines, and proteins, as well as synthetic polymers and nanoparticles. Wyatt was the top asset and priority we identified for bioanalytical characterization, making the acquisition a significant step forward in this high growth adjacency. I would like to take this opportunity to invite Geof and Cliff to say a few words about this exciting combination. Geof?

Thank you, Udit. We are thrilled to be with you here today at this incredible moment for our company. For over four decades, Wyatt Technology has delighted customers with industry leading innovation in light scattering, characterizing life enhancing large molecule therapeutics. Our common scientific heritage deep mutual respect for science-based innovation and a passion for customer success makes Waters the ideal steward to propel our family legacy into its next chapter. Now Cliff, would you like to add anything?

Sure. Thank you, Geoff. I would like to echo your comments and also [my father's] [ph] Dr. Wyatt’s sentiment that we could not have been more excited, but could not be more excited about this combination. Waters will broaden Wyatt global reach scale and will accelerate deployment of light scattering technologies in downstream and QA/QC spaces, integrating this technology onto Waters' well-established empowered platform. Waters is such a natural and logical fit for us in this next exciting chapter of Wyatt’s history.

Thank you, Geoff, and thank you, Cliff. We are honored to get this unique opportunity to carry Wyatt forward into the future. This combination is a fantastic opportunity to integrate our powerful analytical technologies, which are highly complementary to each other. And as you highlighted Geoff, our shared deep scientific culture and common passion for customer success will accelerate integration and drive value creation for our customers and shareholders in the years to come. Today, Waters has a strong and growing portfolio serving large molecule separation and characterization, which are approximately 30% of our pharmaceutical revenues. These applications serve high volume downstream workflows in biologic development and QA/QC Central Labs using LC-UV and LC-MS. Wyatt’s significant exposure to the very fast growing biologic applications will build on this presence and will give our customers an unmatched set of analytical solutions across large molecules, including gene therapy and viral vectors. For Wyatt, as Cliff mentioned, this combination will provide expanded geographic reach and will accelerate the adoption of light scattering and downstream applications through our established presence and empowered informatics platform. As you can tell, we're excited to share more details about the strategic benefits of this combination. However, this is our fourth quarter and our full-year earnings call, and we have some excellent results to share with you first. So now, I will cover our key messages and financial results for the core business. Then we will continue outlining the value of this combination as we take this next step in the evolution of our strategy. Looking at our financial results, we ended another very successful year delivering strong results in the fourth quarter with growth across our end markets. This was led by yet another outstanding double-digit instrument growth quarter. Our incredible performance this year would not have been…

Thanks again, Udit. Well, Wyatt is a remarkable company and we owe much of its success in high growth applications to our amazing team. Our flagship technology is multi-angle light scattering MALS, which is used by leading biopharma, biotech, and academic institutions to measure fundamental properties of complex biologics, including cell and gene therapies, mRNA vaccines, biopolymers, biosimilars, and therapeutic protein. We're based here in Santa Barbara, California and have 225 outstanding employees of whom roughly 25% have Ph.D.’s. Over the past 40 years, we've built Wyatt into the recognized leader in light scattering detection, defining the segment very much like Waters did for liquid chromatography and mass spectrometry. Our sales have grown around 20% on a three-year CAGR to approximately $110 million in 2022. We're also a highly profitable business with an adjusted operating margin of approximately 40%. More than 80% of our revenues are in large molecule applications. Our biopharma customers are eager to use light scattering for QA/QC applications and have been keen for us to combine our software with Empower. So, you can only imagine how excited we are with this combination, which will add additional choices and capabilities for our existing customers and let us delight even more. Back to you, Udit.

Thank you, Geoff. I look forward to welcoming our new colleagues to Waters. Let's now talk about some of the benefits that integrating Wyatt and Waters’ capabilities that provide for our customers. In our existing Waters portfolio, our [LC system] [ph] separate complex mixtures into individual constituents for both property analysis by UV and detailed characterization by mass spec. These are properties such as titer aggregation and protein sequence. A missing piece has been additional critical information about the intact molecule, like the Empty/Full capsid ratio of adeno associated viruses or the size of lipid nano particles or mRNA therapies. These will be augmented by Wyatt’s MALS detectors, which will allow our customers to develop a more comprehensive critical quality attribute profile for their biologics. This is essential to fully characterizing their manufacturing process. In each case for these tools to gain successful adoption in point of view settings, they must be: Number 1, sophisticated, but simple for use in high volume applications, such as what we've already demonstrated with BioAccord; Number 2, supported by leading service like Waters already has to help run workflows and respond to evolving needs; And Number 3, and most importantly, they need to be connected to a common informatics platform so that all the data comes together in one place. Our ambition is to create an ecosystem of sophisticated, yet simple instruments that can all use Empower to collect data and submit to regulators. No differently than what Waters established for small molecules years ago. This transaction will create a number of compelling revenue synergies and results in an attractive set of pro-forma financials. First, from a geographic footprint, Waters revenues are highly diversified, whereas Wyatt’s presence is concentrated in the United States. This provides us an opportunity to expand Wyatt’s geographic footprint in…

Thank you, Udit, and good morning, everyone. It's been great to work with Geoff, Cliff, and the entire team at Wyatt Technology. Like Udit, I'm very thankful to the Wyatt family for considering us as the rightful stewards of their mission and legacy and for providing us this opportunity to create value for our customers and for our shareholders. Now, to the transaction highlights. This 1.36 billion investment will result in immediate accretion of our revenue growth and our adjusted operating margin percentage. The synergies that Udit just described, along with Wyatt’s highly attractive financials, are expected to result in accretive non-GAAP EPS impact as early as first quarter of 2024. Altogether, as Udit mentioned, this combination is expected to deliver a high-single-digit plus return on invested capital by year five. We will fund this investment through cash on our balance sheet and existing debt capacity that is available on our revolver. On day one, our net debt-to-EBITDA ratio will be around 2.3. We will temporarily suspend our share buyback program for the remainder of 2023 and will utilize our free cash flow to pay down the debt through the rest of the year. We expect our net debt-to-EBITDA ratio to land at around 1.7 by year-end 2023. The transaction is expected to close in the second quarter of this year subject to regulatory approval and customary closing conditions. Now, to our fourth quarter financial results. We delivered an excellent close to a very strong year for Waters with constant currency growth of 9%. Waters division grew 8%, and TA grew 15%. By end market, pharma grew 6%, Industrial grew 14%, and academic and government grew 8%, which Udit already covered. By geography, sales in Asia grew 7%, Americas grew 8%, and Europe grew 11%. In Asia, growth in region…

Thank you, Amol, as I outlined at the beginning of our transformation journey and later at our Investor Day last year, our first focus was to regain our commercial momentum and strengthen our organization with new leadership capabilities. As you have observed over the last 2.5 years, we have delivered incredible results with consistently strong execution, and we have assembled an amazing leadership team that brings with it a proven track record in transformation, which is pivotal to driving seamless integration. Our second focus was to revitalize our portfolio. The success of our new product launches, the increased vitality index of our portfolio, and the rich pipeline ahead of us underscores our accomplishments this year. Today, we're entering our next phase, which is to accelerate value creation for our customers and shareholders by adding a fantastic fast growing technology platform. And increasing our capabilities to address high growth adjacent markets. So, with that, I'll turn the call back over to Caspar.

Thank you, Udit. That concludes our formal comments and we are now ready to open the phone lines for questions.

[Operator Instructions] The first question is coming from Luke Sergott of Barclays. Your line is open.

Hi guys. Thanks for the question here. So, I guess, before we get into Wyatt, can you kind of give us a sense on continued instrument strength you guys hear it a lot? Your visibility here, how the backlog built, mass back up over 30%, that's from the strength in the business building here the last six months. Any kind of color here we can get going forward on that – on the new instrument launches there in the revitalization?

Sure. Sure, Luke. Thank you for the question. So, instrument growth in the quarter, again, finished with double-digit instrument growth. For the year, it's 16%. And it's really across the board, right? For the full-year, you see mass spec well into the [20s] [ph], TA in the high-teens, LC also in the double-digit range. And this is largely due to the success of our commercial initiatives, which were around instrument replacement and really focusing on our new product launches. And there you've seen a complete revitalization of the portfolio, especially on the mass spec side, where we've gained traction in biologics application with the Xevo G3 with the BioAccord more recently with the cyclic and [indiscernible] absolute for food and environmental applications [on the light] [ph]. On the LC side, same thing with Arc HPLC and ACQUITY Premier. So, you see very strong new products coming through, which are gaining traction. Now, as we look ahead, I mean, orders are as strong as ever. We see a very, very healthy backlog going into the year. And as we look forward, the end markets are still very robust, right. So, we don't expect – and across the board, they are pretty robust, in industrial pharma itself, as well as academic with additional funding, but as we look ahead, I would caution against using the 16% and extrapolating. I think we've been saying this for a while, these are incredible growth numbers. On a stacked basis, you're looking at double-digit growth for instruments, but we cannot expect the instrument growth to continue at a double-digit level. I mean the long-term average is around 3% to 4%. And if I were to just dig into the guide a little bit, when we say 5% to 6.5%, so the 5% – if you just take the higher-end and then make it consistent, let's say, with the recurring revenues and the lower-end consistent with the instrument growth in the future, long-term averages for instrument growth are between 3% and 4%. Add 100 basis points of additional commercial execution and another 100 basis points for pricing, and there you have the 5%-ish instrument growth. So, we think it – long term, we should be seeing healthy instrument growth. And I've heard several comments which say, ‘hey, you've seen serious significant instrument growth, will it come crashing down?’ Not at all. We don't see any signs of that. We do see it reverting back to, sort of long-term growth averages, and we think we will out-execute the overall market growth with our commercial initiatives, with our new products and with additional pricing.

All right. Great. Just a quick follow-up on that. Can you clarify if orders grew faster than sales? And then I'd love to dig in on Wyatt where – so where that fits into the overall characterization portfolio? So, you have the BioAccord on the raw materials on the upstream, where would Wyatt's light scattering technologies, kind of fit into the overall instrument portfolio and the bioprocessing workflow?

This is a fantastic question. So, the orders are growing very nicely, Luke. And we've been saying that for a while, and they continue to do so. Now, moving on to Wyatt, look, it's a perfect strategic fit. We've been talking about bioanalytical characterization, a 1.8 billion market, growing 10% to 12%. And Wyatt a 110 million, I mean, there are hardly many companies that are accretive to us in the industry on margins, 40% margins and growing at a 20%-ish CAGR, right? So, terrific, terrific financial profile. When you look at the bioanalytical space, and you talk about LC-UV and LC-mass spec, LC-UV and mass spec are used to characterize the sequence of the proteins, the configuration of the proteins, the chemical composition, right. There are exquisite techniques to characterize the composition of the molecules and the composition of raw materials, upstream, downstream process development, and of course, in QA/QC. Light scattering, on the other hand, gives you biophysical characterization, the size of the molecule, the level of aggregation of the molecule, think about monoclonal antibodies and proteins. And even more exciting these days is what it does for us in viral vector therapies, empty versus full [indiscernible], right. Light scattering allows you to get at that lipid nanoparticles, how aggregated they are, how well characterized, how full they are with mRNA molecules. Super exciting applications. And our customers, and Geof and Cliff tell me, have been asking us – or their customers have been asking us to integrate it with a compliant software platform so they can use it in QA/QC applications. It's already used by a significant number of large pharma players as an at-line testing tool. So, super excited, highly complementary. It gives you even a better footprint of biologics. And our dream is – and our ambition is to make large molecule characterization similar to small molecule characterization as we've done in the past.

The next question is coming from Vijay Kumar of Evercore. Your line is open.

Hey guys. Congrats on the transaction. And I had two questions. Udit, first maybe on the guidance here. The 5% to 6.5% guide for the year, what is that resuming for pricing and China outlook? And I thought FX headwinds came down. Why is FX a margin headwind?

So, I'll comment a bit on China first and what we expect there, and I'll pass it on to Amol to take it up from there. Look, Q4 in China, I mean, has been especially tough with 50% to 75% of our colleagues, at any point in time, being infected due to the reopening. And despite that, if you take from November last year, we had a shipment delay from third quarter to fourth quarter. And if you take that into account, China grew roughly 4%-ish, despite that headwind. We expect our colleagues to, of course, enjoy the Chinese New Year, reconnect with their families after several years and we see the same with the customers. So, step-by-step, I think China will open up. We expect better growth in the second half of the year than the first half. But Vijay, as you can imagine, it's anyone's guess how fast this comes back. We currently assume a high single-digit-ish, sort of growth for the full-year with the second half of the year being stronger than the first half. Amol, do you want to talk about the guide in FX?

Yes. So, I mean, look, Vijay, the FX situation has improved versus what we said at the end of Q3 earnings call. Now, we are looking at 1% headwind on sales and about 3% headwind on EPS. The 3% headwind on EPS translates to about 50 basis points headwind on operating margin. And the reason for that is, I mean, U.S. dollar progressively strengthened throughout the course of 2022, and then it, sort of weakened towards the end of 2022. But where it is today, it is still a significant headwind for the first half of the year 2023, and that is, sort of playing through the numbers. And the reason there is an headwind on the operating margin is, we are one of the most geographically diversified companies in the sector, and we have a lot of revenue coming out of markets like Japan and China. And while we are operationally hedged in a currency like euro and pound, we still have significant profit there. So, if you have a headwind that profit shrinks, and then we don't have the level of cost structure in these other markets like China and Japan, which then creates higher FX flow-through on our operating margin versus our sales profile by a little bit. And that's why you see the headwind on FX, on operating margin.

And just, Vijay, your question on pricing, it was roughly 300 basis points. For this year, we expect 200 basis points as an assumption for 2023. And you can imagine that's largely because the inflation is still not gone. Second, our new products definitely should command a higher margin as we go forward. And then, finally, the teams have built a muscle through these very, very difficult times on passing on pricing wherever it seems [reasonable] [ph].

And [indiscernible], I mean we had 80 basis points of headwind on FX. And the business was resilient. It sort of offset pretty much all that impact and delivered a flat operating margin. So, if dollar goes back to where it started back in 2022, I mean, all the work is done in terms of margin expansion.

Now going into the year, we feel very good about where our margin profile is.

That's helpful Udit. And one quick one on the acquisition, 70 million of revenue synergies. That's a big number relative to Wyatt's revenue base. Can you give us some background on how well was this asset known? What kind of due diligence was done? What Wyatt's revenue mix is coming from established biopharma versus early stage? What gives you the confidence in the revenue synergy?

It's a lot of questions. I'll try to take them one after the other. 80% of the applications for Wyatt are in large molecule applications. As you know, we screen, and we were pretty clear on the Investor Day, we screen a lot of targets. And I can tell you without reservation, in bioanalytical, biophysical characterization, this is the Number 1 asset that we had in our minds. So, when we spoke with Geof and we spoke with Cliff, and we started our discussions, this was not something that's unknown to us. We've known company really well, really well for a significant period of time. And what Waters does on the chemical characterization, on the composition of characterization, Wyatt does for using light scattering for physical characterization. So with 80% of their revenues coming from large molecules, the growth is roughly 20%-ish on a three-year CAGR. Margins are accretive to our margins. And as I said before, this is not something that we see in the industry as much. 110 million in sales already. It will be accretive to our revenue growth and margin growth to our revenue and margins on day one. And to the 70 million, it comes across four dimensions. First, Wyatt is heavily concentrated in the United States, and to some extent, in Europe with less than 20% of their sales coming from APAC. And as you know, with Waters, geographically quite diversified, with APAC constituting 40% of our sales. We think there's a significant opportunity to expand and serve many more customers in fast-growing areas across the globe. Second, we want to provide customers with many more choices. If you look at light scattering instruments, especially MALS, it is sold with SEC columns, and Waters has leading SEC columns industry. The LC is used as a separator before you insert products, insert molecules into light scattering for characterization, not dissimilar to mass spec. We think the attachment rates could be significantly higher as we do the software integration across the two companies. Number 3, it starts us on the journey of building a bioanalytical platform with a suite of products that all eventually have one compliance software that can be used across to submit data to regulators. And then, finally, there is an immediate opportunity to serve our customers a really big pain point of taking MALS into QA/QC, and who better than Waters to usher that journey through. So, that's why we think, by year five, there's a potential for [70-plus million] [ph] in synergies and even higher if the bioanalytical platform starts getting established sooner than we do Empower integration faster. So that, I think, gives you a color across the synergies, Vijay.

The next question is coming from Matt Sykes of Goldman Sachs. Your line is open.

Hi, good morning. Thanks for taking my questions. Congrats on the acquisition and the quarter. Maybe just, if you could help us put a, kind of a finer point on services and chemistry growth in 2023. Udit, I heard your comment about think about it, sort of at the high-end of your guide, but just given the instrument growth that you've seen in 2022 and previous to that, how should we be thinking about services and chemistry growth in 2023?

Yes. So, Matt, it's a great question. Look, I mean, it's a prudent guide at this stage on services in particular, right. I mean service definitely will benefit from the incredible growth that we've seen in instruments over the last two years. In addition, we've increased our attachment rates by 250 basis points since we started our transformation journey roughly to roughly two-ish years ago. But I think at this point in time, especially given the uncertainty we see in China, we think it's a prudent starting point to assume what we've assumed for service. And for chemistry, I mean, it goes from strength-to-strength. We've seen our e-commerce platform do extremely well. We now have about 35% of our sales going through e-commerce. We intend to increase that number higher. MaxPeak premier columns and the pipeline looks extremely good, especially serving larger mole complex therapies. And now with a deeper understanding after the acquisition closes of the biologics space, we think there's a significant growth opportunity there as well. And there, too, we are a bit prudent thinking through what the rest of the year holds, especially in China. So, I think that's how I would look at it, right. So, really positive, but really thinking through how the year will emerge in China. And as the year progresses, we'll have more information.

Great. And then just one quick follow-up on Europe. Obviously, very strong growth there in Q4 and for the full-year. Obviously, a mild winter there, so things seem to be better than expected. Could you just talk about what you're assuming for Europe this year and kind of thoughts in terms of the end market demand within Europe for 2023?

Yes. Look, I mean Europe has been a standout across the board, right, through the early parts of the pandemic and then, of course, this year itself. And also, on a stacked basis, it looks extremely good. The full-year numbers for Europe were in the double-digit range as you've seen. As we look ahead, I mean, our assumptions are still, sort of going back to markets [indiscernible] in Europe, which is mid-to-high single-digits for the balance of 2023. The orders look extremely good across all end markets. And I'll remind you that Europe is more heavily weighted towards pharma. And then in the mass spec space, Europe came out really, really strong, especially with applications in food testing for the Xevo TQ Absolute and environmental testing, which is where we saw the first and the fastest adoption of mass spec portfolio. So, mid- to high single digits with all the puts and takes, really excited about what we're seeing in terms of mass spec, especially in pharma and industrial in Europe.

The next question is coming from Dan Brennan of Cowen. Your line is open.

Great, thanks. Thanks for the questions. And obviously, congrats on the quarter and this deal. Maybe just one on Wyatt to start off. Just kind of a multi-part of your obvious question is the company has been growing 20%, your guidance is 10% to 12%. Is that just prudence or is there any [indiscernible] the numbers just kind of why, why that delta? And then could you just clarify like what percent of their business – you said 80% is biologics? What percent of that is actually used in manufacturing, whether on a clinical basis or on a commercial basis versus R&D today?

So look, Dan, firstly, thank you for your question. You can imagine that we're just getting into the integration, and there is, of course, a little bit of prudence built in, and we want to make sure that we start off on the right foot. As the integration goes, we don't expect the business to slow down, but that's – the low double-digit guide has that in the assumptions. And in terms of biologics, I mean, a bulk of the applications are in large pharma, in discovery and development and in QA/QC and online and at-line testing. So, I mean, I think that's where you see most of the applications and increasingly now more weighted towards cell and gene therapy applications where the small particles need to be characterized really well before they are injected into people. So, I hope that gives you more color. And we don't intend to break down the full biologics piece, but you can imagine it's mostly late stage and [PAD testing] [ph] and QA/QC, Amol?

Yes. I mean not much COVID in the numbers, right? So it's pretty clean in that sense. So, I would say a bit prudence there. And then here on the second piece, I mean, light scattering is further along in terms of upstream adoption in large molecule setting. I mean, as Geof mentioned, customers are eager to take it downstream. And now with this, and with our Empower platform, we will be able to accelerate that journey.

And then just one last thing. I've used light scattering myself in my Ph.D., I didn't want to let the call finish without stating this. And I was reviewing my Ph.D. thesis before this call. And you know what, of course, it's great. And for the life [indiscernible], I don’t understand all the equations that I was using to analyze it. So, we're super excited even at a personal level to get access to the technology.

Great. And then just maybe one on the instrument outlook. Listen, kudos, the growth has been outstanding. Just wondering on the 5% instrument outlook, I mean investors have become accustomed to Waters' exceeding the numbers that you put out, and there's still a lot of really positive momentum there. It looks like it's around an 8% four-year CAGR, if you want to look at that. Just kind of give us a sense what's baked in on the 5%, Udit, maybe for mass spec specifically? And is there – like that 8% CAGR, I know you’ve kind of talked about the 3% to 4% long-term trend, and you're trying to be prudent here, but just maybe give us a sense on what the mass spec contribution is? And to the extent we were to get 12 months out, and you were to be stronger than that? Like where do you think the biggest opportunity would be for that? Thank you.

Dan, same thing, right? I mean we don't expect mass spec to fall off a cliff. I mean the applications are tremendous. The 5%-ish, I mean, the math is pretty simple, right? I mean, 3% to 4% long-term growth, 100 basis points of pricing in addition to the past and about 100 basis points of commercial execution and innovation in that number. And you can imagine, I mean, look, coming off such really, really strong growth over the last two years, we think the growth will start to normalize. Now that said, there's also a bit of prudence with China built in, right. I mean China is one of our fastest-growing markets. And I think, at this point in time, we feel comfortable saying, look, it's a high single-digit market by the end of the year. If the recovery goes faster, of course, there's upside and if they is more traction for new products, there is upside, right. So, I think it's a great place to start the year, and we'll keep you posted as more facts emerge.

The next question is coming from Derik De Bruin, Bank of America. Your line is open.

Hi, good morning. And thank you for taking my question. Can we talk a little bit about the pharma business, please? The 6% growth in the quarter, a little bit lower than we were looking for. Can you unpack that, talk about what was the potential impact from China? What are you seeing in demand at CROs and CDMOs, I mean that's been a driver? Have they pulled back on capital spending at all? And just, sort of your major peer in LC has talked about some of the slowing of the replacement cycle in LC and pharma in the second half of the year. Just sort of wondering what you're going to bake in for that? So, just a little bit more color on your pharma business, please. Thank you.

Thanks, Derik, for the question. Look, I mean pharma is a healthy end market. We see no weakness in pharma, especially as we are in the late stages of pharma, right. Discovery – sorry, late-stage development in QA/QC. From the numbers perspective, on a full-year basis, it's double-digit growth for the Q, it came in at 6%, largely because of China. If you exclude China, it's also double-digit growth. That should hopefully give you some clarity on what we're seeing in pharma. Going forward, we don't see the demand abating at all, right. We see significant demand for our products on the instrument side, especially mass spec and to some extent, LCs with the new products as well. We see very nice traction on the consumable side and service should benefit from really strong instrument growth that we've seen over the past two years. So, I see really no slowdown, especially as the portfolio now even more so goes towards large molecules, especially biologics, on mass spec, on LC with the instruments, especially like Acuity Premier for consumables, especially with MaxPeak. And with mass spec, with the BioAccord gaining increasing traction, with the G3 Qtof gaining more and more traction, we feel very good about what we see in pharma going forward. Now to your question on slowdown on LC cycles, look, I mean, we don't expect any of the instruments to be overall growing between 16% and 20% like we've seen in the last couple of years. I mean that's – we've always been very clear about it. Where the new normal occurs is something that will emerge over the next few months, but it's not going to go back to zero or negative growth, that we are 100% certain, right. So that's why we've guided 5% to 6.5%, and Dan had asked that question earlier on what is the justification for 5%. We think it's a prudent starting point for the year. Amol, anything to add on the instrument side?

No, I think you covered it well.

The next question is coming from Rachel Vatnsdal of JPMorgan. Your line is open.

Great. Thanks for taking the questions. [Indiscernible] on the quarter and the deal. So, first up, I just, kind of on the follow-up on some of these China comments. You talked about China returning to high single-digit growth for the year in 2023, but I really wanted to dig into the expectations embedded into that 1Q guide for China. So, you noted that China declined low-single-digits in 4Q, and that you expect that to continue into 1Q. So, can you just give us some color on, do you expect further sequential declines in China? And then how much of a headwind do you think China will be to that 4% to 6% growth that you've guided to for 1Q?

Yes. So, I mean, look, we expect some of the headwinds we saw in China in Q4 to continue into Q1. And our adjusted Q4, when you adjust for that shipping was sort of 4%, and we think sort of our Q1 in China would be similar. And then as we know, you know China bounces back very quickly. And so, we expect that trend to, sort of catch up through the remainder of the year when people are back to work.

Yes. In terms of end markets – Rachel, this Udit, in terms of end markets, in terms of what we see as visibility, there is no signal that the fundamental demand for our products in China is slowing down. There is no sub signal. So, we feel very good about China and it's a good place to start at the beginning of the year to assume a high single-digit-ish growth. And as I mentioned, if the recovery is faster, of course, you expect faster growth.

The next question is coming from Josh Waldman, Cleveland Research. Your line is open.

Hi guys, thanks for taking my question. Udit, I appreciate you were reviewing your Ph.D. thesis before the call, really covering all your bases. Just two questions for you, I think, Udit. Wondered if you could give us an update on where you think Waters is in the LC replacement opportunity? Maybe comment on what portion of the LC sold in 2022 were in the Acuity or Arc platform versus legacy alliance? And what you think that could look like in 2023? Just I guess curious your thoughts on like if we do see a slowing in the LC replacement cycle, kind of broadly, do you think Waters' push to rotate customers into the [new RLC] [ph] platforms could elongate that refresh?

Yes. So Josh, thank you for your comment. Look, on the LC replacement cycle, and I guess, overall, the instrument replacement cycle, we've been pretty clear, we're almost one-third of the way through in 2022 when we started about two years, two-ish years ago. So, there's a pretty significant runway. Now, it's – these things don't go in a smooth, smooth way, right? So, they go in – given that these are large orders, they go in a lumpy cycle, be it LC, be it mass spec, be it Acuity, be it Arc. So, I think that's the first comment on what you should expect in terms of smoothness of the growth. Second, in terms of what has accelerated the growth and how the replacement cycle has happened? Undoubtedly, the introduction of Arc HPLC has given the customers a more of an [impetus] [ph] to replace the old alliance instruments. And that has helped us quite a bit. Some of them have also replaced it with the Acuity line, which is more the UPLC space. But like-for-like, there are equal number of customers who've gone from Alliance to Alliance, customers have gone from Alliance to Arc, and then fewer have gone from Alliance to Acuity. Acuity, I'll remind you, is a UPLC platform, whereas Arc HPLC was specifically designed for high volume small molecule applications in QA/QC, and it's a direct, sort of replacement for Alliance. So, I hope that gives you a bit more color. But I think the right assumption would be Alliance to Arc HPLC and Alliance to Alliance. And then Acuity, small minority of applications.

The next question is coming from Jack Meehan of Nephron Research. Your line is open.

Good morning. Congrats on the Wyatt deal, had just a question on that, which is, could you tell us what is their mix today of instruments versus recurring? Do you think there's any opportunity to shift that over time? And then just one clarification, $70 million of revenue synergies, is that included in the low to mid-teens growth you talked about? Or is that being additive or...

Yes. So, let me quickly cover the second one. The load double-digit growth that we're talking about, that's the stand-alone business, the 70 million synergies that we are talking about are sort of incremental to that. And on the first question, there's roughly about 75% of the revenue is instruments, roughly a quarter today is what we traditionally call recurring revenue. But as you know with Waters, we think instruments are also recurring. And again, there is a great opportunity on that, not just on the light scattering platform, but also the HPLC and the SEC columns that go with it.

Yes. I mean – and with such a significant service team around the globe, slightly shy of 2,000 people, we believe that there is a significant opportunity to increase the service attachment rates. And in addition, about 1,400 to 1,500 sales, field sales representatives should help us increase penetration of light scattering. And Geof is smiling, as I say that, light scattering is deeper into our collective customer segments. So extremely, extremely excited about the opportunity there. But as Amol said, we think of instruments as recurring just as much as we think of service and consumables. They just recur over a longer time frame. And if you're disciplined, you can make sure that they are.

The next question is coming from Patrick Donnelly of Citi. Your line is open.

Hey guys, thank you for taking the questions. Udit, maybe one on the industrial piece, that put up pretty nice growth in the quarter, I think, in the mid-teens. Can you just talk about what you're seeing there? I mean, I know in the past quarters, you talked a little bit about PFAs testing, environmental being nice tailwinds. So, maybe just talk to what you're hearing from the customer base their expectations into 2023. Thanks.

Sure. So thanks for the question, Patrick. Industrial for the year just on the fact, I mean, grew 15%. And we saw nice high teens in the U.S., mid-teens in Europe, China, high single digit to low teens despite the lockdowns. And industrial across the board, right, so applications in food testing with the Xevo TQ Absolute, with PFAs testing was excellent. The PA business with battery testing, especially with the introduction of our new [indiscernible], we see incredible opportunity there to increase penetration of our existing instruments, and that's been going extremely well. And electronics, electronic chemicals testing has also been doing extremely well in the TA business, which has been in the high teens in the Industrial segment. So industrial, across all regions, across the food and environmental segments, as well as materials segment has been doing extremely well. So, I hope that gives you color on how we explained the results so far. Going forward, with the new products, there is a lot more runway for Xevo TQ Absolute and PFAs applications. We intend, of course, to take that instrument into the pharma space. We think there's incredible opportunity. For TA, we are seeing really, really good traction of our products in the battery testing value chain, all the way from raw materials to process development, not unlike bioprocessing, to now establishing online, at-line testing with our instruments for several of our customers. So, also going forward, a really healthy outlook. And I think the only prudence that we, sort of built-in is with what we expect in China, like China is a pretty strong grower in that segment as well, and we want to make sure that we get more data before we start reaching out more.

The next question is coming from Puneet Souda, SVB Securities. Your line is open.

Yes. Hi, Udit and Geoff, congrats on this acquisition. It's great to see a light scattering outlook going into QA/QC. So, maybe my first question there is, when we look at the downstream QA/QC and late stages, when you look at the [five-year 70 million] [ph] synergies, is that sort of the time line you're thinking about moving light scattering into a number of these applications? And, Udit, could you maybe elaborate what is needed to integrate MALS into Empower? And what's the, sort of the outlook for Empower potentially becoming, sort of the backbone for biomolecules with BioAccord and light scattering? And last one, if I could squeeze in, any thoughts on the China loan stimulus benefit for 2023? Thank you.

To your first question, Puneet – thanks for the question. So, your first question on light scattering and its application in biologics, light scattering is actually further ahead than mass spec in late stages of characterization of particles. As you can imagine – and particles being biologics here. As you can imagine, proteins, when they are purified, can sometimes appear as aggregates. And this can create severe immunogenetic responses in patients. And so, light scattering is the technique of choice to ensure that the proteins that we consume as therapeutics or viral vectors for cell and gene therapy are not aggregated. This is the instrument of choice for it. So, there is a pretty significant penetration in some large accounts and key accounts for light scattering. We see a lot of opportunity in that area to expand geographically and also to take it into key accounts that Waters has had and relationships at Waters has had, especially in QA/QC. Now, to your question on Empower, look, I would think about software in two to three steps, right. The first step is to make sure that the instruments talk to each other, and that work has been ongoing for a while as the companies have collaborated over the years. And so, there's a data bridge that would be built, rather seamless data bridge so our customers can transfer data from one instrument to the other and control one instrument from the software of the other. The final piece is, of course, on Empower and the compliance software. That is an ambition that we have for instruments across the board, not just light scattering for mass spec, as well as LC-UV and several other instruments. And that's a journey that we have started with the Waters Connect platform. The architecture is rather open. So, you can imagine, over the next one to two years, you should start to see serious progress in that direction. So, it's slightly longer term than the immediate talking of instruments to each other and transferring data from one to the other.

And just to clarify that, on the 70 million that we talk about, there is very little – or we are assuming that is the time where it's super early days on Empower. Most of that is coming really from geographical expansion and SEC column and HPLC attachment.

Yes. So, the first two synergies, geographic expansion, segment expansion, increased attachment over the next five-year period get us to close to 70 million. And the last two, the larger sort of opportunities, the more ambition with the bioanalytical platform. And taking MALS into QC with Empower is something that we expect in the latter part of the five-year period, but not a significant contribution to the 70 billion.

And then the last piece on China, Puneet, I mean it's early days. We're still evaluating. Hard to put a number at this stage on that.

So at this point, I want to thank you for your participation and all your questions. And on behalf of our entire management team, on behalf of Geof and Cliff and the Wyatt family, I'd like to thank you for your continued support and interest in our company. Thank you very much.

This will conclude today's conference. All parties may disconnect at this time.