Daniel Leonard: One question on your gross margin expansion in the quarter. How much did better-than-expected product mix contribute to that? You mentioned that liquid chromatography did a bit better than planned and mass spec was a bit worse. So I’m curious how much of the contribution that was.
Amol Chaubal: Dan, yes, I mean, look, the product mix is helping at this point, especially given lower instrument mix, that’s contributing about 30 basis points. But keep in mind, there was also a good 70 to 80 basis points of FX headwind that we offsetted, right? So the remaining delta is favorably coming from price and some of the productivity initiatives in manufacturing.
Operator: Next, we’ll go to the line of Patrick Donnelly from Citi.
Patrick Donnelly: I guess in terms of some of these conversations you’re having, I’m wondering what stage do you think we’re in? It sounds like again, the conversations with the funnel to your point, maybe improving a little bit, specifically with China, it sounds like maybe you’re expecting the actual revs to show up late this year at the earliest. So how do you think about just the progression of these conversations into orders, into revs. And again, is there a potential for a bit of an air pocket as these conversations pick up and the dollars materialize a little later in the year? How do you think about just the progression there?
Udit Batra: It’s a great question. Look, Patrick, let’s just take a full step back on Waters, right? As you know and many on the call know, we’ve grown instruments roughly 5%. And I know your question is targeted towards instruments. Instruments have grown on average 5% over the last 15 years, right? And those statistics are sort of easily available given that we’ve not done a lot of M&A. You can look at our longitudinal history on instruments, right? So about 5% on average, but no year is actually 5% on the dot, right? There are 5 that are well below 5 that are well above and 5 close to the average, right? So you start with that. And since I’ve been at the company in the last 3.5 years, we’ve seen a microcosm of that already, right?
So 2 years of 20-plus percent growth and now a bit of decline in instrument growth rate. We didn’t get too excited when things were at 20-plus percent growth for several quarters in a row. And we said this is not going to last just given the long-term averages. And we’re not so phased when we look at what we are seeing now. And now let me sort of address your question just with that as context, it’s very difficult to predict a quarter-on-quarter rollout of instruments for Waters. But I think it’s more instructive to look at the 5-year average, especially when you think about LC. And a 5-year CAGR for LC is operating now at the low single-digit level. In China, it’s almost double-digit decline. So we are due for a replacement cycle to begin very soon in LC instrumentation.
And remember, these are used in QA/QC. So you can’t forever defer these replacements. And the conversations that we’ve had with customers, and as I said, I spent a whole day with one of our largest customers, especially in QA/QC, they are raring to go and start the replacement cycles, right, on LCs. The aging fleet is not something that they want to have, especially for new launches, which are going to be high volume and, of course, marketed compounds. So I think things are trending in the right direction. But again, I mean, just put this all in context, there’s really, again, one shouldn’t get too excited when you see high growth and decline, especially for our instrument portfolio. And when you look at the full year, again, I’ll remind you that it’s a 45, 55 average for the overall business, right?
First half, 45%, second half, 55%, and that’s what we’ve assumed for the full year phasing overall, and the step-up in the second quarter is roughly 10%. So just sort of give you broad sort of signpost. But the conversations were with a QA — with a heavy focus on QA/QC. And we see replacement — signs of replacement cycles beginning both in China, which we commented on earlier, ex-China.
Patrick Donnelly: And then Amol, maybe just quickly on the margin side. Can you just talk about the progression as we work our way through the year. I know you guys have some kind of cost initiatives working the way through the year last year. So I’m just trying to think on the cadence there and any moving pieces you want to call out as you work our way through ’24 here.
Amol Chaubal: Yes. Look, I mean, already in Q1, we put good numbers on board and continued our good financial performance. As you get into second half of the year, keep in mind, the proactive cost actions that we took are already in the baseline, and there will be some headwind as we accrue for bonuses. So you may not see meaningful margin expansion in the second half, net of those 2 effects, but we would have mostly covered our ground for the 20 to 30 basis points of margin expansion mostly in the first half. So we will still end up delivering an adjusted operating margin expansion of 20 to 30 basis points.
Operator: Next, we’ll go to the line of Doug Schenkel from Wolfe Research.
Douglas Schenkel: Udit, thank you for the commentary on the quality of the funnel and also providing context, looking back 15 years at seasonal patterns, that’s helpful. That said, recognizing those points and even being mindful of the year-over-year comparisons and how they progress over the course of the year. Your guidance, it doesn’t seem conservative to me to be direct, at least as I look at the model. I’m struggling a little bit to kind of see how you get there in spite of all the helpful commentary you provided. To explain where I’m coming from, starting on revenue, the 45, 55 H1, H2 revenue split. It’s a long-term norm, but it certainly isn’t the recent norm. And then looking at things a different way, I think you would need to go down — go from being down more than 6% organic in the first half, to being up more than 7% positive in the second half.
And for margins, if I’m doing the math right, I think you’re essentially implying a targeted second half operating margin of around 33.5%, which is a bigger first half to second half ramp than normal. So with all of that in mind, my questions are really the following: one, how dependent are you on an instrument recovery and, in fact, a normalization to trend in the fourth quarter to get to these targets? Two, if the answer is you are assuming a normalization, how do we put that with the margin guidance? And then third, given investor concern and just the market backdrop, keeping in mind, none of your peers sound good on China or instruments right now, did you contemplate cutting guidance a bit? I know that was a lot, so I’ll get back in the queue and listen.
