Waters Corporation (WAT) Earnings Call Transcript & Summary

Terrific. I think we can start. Dan Brennan, life science tools and diagnostics analyst at TD Cowen. Really pleased here at 46th Annual Conference. To be joined here on stage with Udit Batra, who is the CEO of Waters Corp. So Udit, welcome.

Thank you, Dan. Pleasure to be here.

Terrific. So obviously, it's been quite a start to the year for you, closing the long-waited BD deal, integration ongoing. Listen, you've laid out plans for the business in great detail. Now that you've had a little bit of time owning BD business, maybe just zooming out what are some of your early impressions? Or feel free if you'd like to talk about 4Q and kick off that, just in terms of -- sitting on the table here for the conversation.

I think, firstly, again, thank you for having me here. It's been 3 weeks since the close occurred. So it's been some time, as you say. I've been very busy. Just traveling and going to different sites last week I got some of my colleagues in the U.S. together at our Baltimore site, which is the old diagnostics solution side for BD. This week, I'm heading to Europe then it's Asia after that. So traveling a fair bit, meeting a lot of customers. I think and meeting a lot of colleagues I think 3 things stand out. And the first is these are fantastic businesses. And how do you tell? You basically ask yourself, is if you talk to some customers, if you talk to them, what flow cytometry, what brand do they mention? And I was telling some people earlier, go search in AI, if you feel like and ask AI whichever tool you prefer to use, I wanted to buy a flow cytometer I want to buy reagents, which company should I go to? BD will be at the top of the list. And now Waters. Microbiology, go to any hospital, it's one of 2 vendors who supply most of the microbiology workflow in those hospitals. So leading brands, customers have a very strong impression of these and have had them for years. And that you tell by just looking at the gross margin. For most of the business, the gross margin is around 60%, which is healthy. And it's been there for a while. You go and talk to the teams and especially with the R&D teams, I mean -- and you do searches on PubMed or you search in any sort of publication, go to any conference in flow, in microbiology, you'll find BD colleagues presenting. So the teams are highly engaged, and I'll come back to that in a bit. The challenge has been executed. I think we've been pretty clear about that during the time that we've gotten to this point. But it's pretty clear that the level of precision that is required to run such a business, especially in a dynamic environment, I think needs improvement. I think that's it. I mean so fantastic businesses, great brands, highly engaged teams. The question is, can you focus on a precise few things? And so I've been spending a fair bit of time with the teams sort of assessing that. And as I said last week, I was with our U.S. teams. What we do is what sort of -- what I'm trying to do now is I'm going to go region by region. I'm going to get the top commercial people together and the top finance people together in a room and go business by business and say, hey, tell me about the past, past 4, 5 years. Tell me about quarter-to-date sales and orders and quarter to-go sales and orders, what are your risks and benefits and tell me about the organization. And we go team by team. And we say, okay, tell me, tell us about one or the other. And it's just an awesome learning experience. And you see cross-pollination. For instance, our Waters, our incumbent Waters business, the Analytical Science business, has been passing on pricing for a while. We have something called the pricing desk, the deal desk. And they talked about it, and said, this is the deal desk. And yes, during this time, there was some pressure, on A, B, and C customer segment. And this is how we passed on 250 basis points this year. And you could see the Bioscience colleagues or the Analytical Science colleagues who've had -- 0 to 50 basis points of price being passed on, look at it and say, okay, I can implement this, this and this. So really fantastic discussions. And to sort of talk about the software side, we had our Town Hall, where we welcomed all the colleagues, roughly 12,000 people joined live. So we did -- we broadcasted across 4 different sites. My leadership team was spread out, and the rest sort of had it on replay. I must say there's a lot of energy in the organization. So very happy with where we are. Very happy with the starting point, and yes, focused on execution now.

Awesome. Maybe just sticking on 4Q for sec since I introduced that. I think the -- obviously, the core Waters business has been doing quite well. BD in their calendar fourth quarter, they had a pretty steep decline 11%. I know there were a bunch of numerous nonrecurring factors, which you kind of flagged and if you strip those out, maybe the growth was more like flattish. So what do you think the message is I think that's been a key factor. Kind of what's the message on BD's 4Q? And should those results in any way, lead to lower confidence in the asset or the outlook.

Look, I mean, it was as much of a surprise to many of you outside as it was for us in some places. Now each individual item can be explained, and we will get out of this idea of explaining all the time. I think that's something that as Waters we don't try and do. If there is a challenge, what did you precisely do to surmount it. But sort of to explain the facts first and then we'll get to 2026 in a minute. There were 3 nonrecurring items, and we've cross examined this at a -- there's a lot of detail. And I'll get into that in a minute. 3 nonrecurring items and 1 recurring item. And if you take those out, as you said, the business was flat. But you shouldn't be taking those out. Just as a matter of record. The 3 pieces that were nonrecurring were the licensing costs for the licensing revenue for the Bioscience business, that didn't recur. The point-of-care slowdown due to the flu season. And the third was the government shutdown sort of impacting exports into China. And the recurring item, which is the DRG headwinds in China. We think that will still persist into this year, sunsets in July in the baseline and then the baseline is a bit better. Now if you take 3 of these in turn just to sort of first stick to the facts and then we'll come back to sort of what we're doing to make it a bit different in the future, overall, the business declined about 10%. You take this out, it's roughly flat. In Q1, we've said, look, the DRG piece is still going to be there. So we're going to guide to minus 2.5% or so 2% to 3% decline in Q1. As you progress through the year, that gets a bit better. So it's flat to low single-digit growth in Q2 and Q3. And then in the low single digit to mid-single digit in Q4. So sort of a mathematical progression that just benefits from the baseline progressing. That's all it is. And we've said we're going to haircut the versus the deal model, the top line for the full year by 200 basis points, and that's largely due to the DRG headwind in China. And so we've said, look, we'll take it down by $65 million, which is about a 30% decline on top of what has already taken place. So rather conservative starting point. It does not include improvements in pricing, on tariffs, on the daily sort of sales mechanism I mentioned. It does not include the revenue synergies. So a whole bunch of things are not included in the operational improvements. But we think it's a prudent starting point because it allows us also to adjust the cost base and still delivered the EPS that we had promised. So even with all of this, we said, look, the EPS commitment is still sacrosanct, and we're going to deliver the EPS growth that we promised. Now to the 4 issues and why I said the explanation business will at some point stop, and I just want to take one case in point, which is the weaker flu season impacting the Diagnostics business by about $30 million. And we looked at it. And so my CFO and I had run a diagnostics, a flu business back in 2008 and '09. And first, you never forecast a flu business to be great. You usually forecast it to be lower. And if it's better, you claim victory. This is what we did when we were in charge of those businesses. But here, we sort of claim -- we said we're going to forecast it at a medium or a high level. The question is not that you were down by $30 million. The question is precisely in which hospital, in which setting, how many patients, why is that number around number at $30 million, and it's not $3.5 million or $21.8 million. Because the level of precision missing means to me that it was a reason as opposed to being a precise causal impact. And so I think that was a big discussion we had last week when we were sitting together as a team and we cross examined it. And I think my BD colleagues or my past BD colleagues simply said, look, we've never had that sort of precision being requested. And I said, look, you've got to go back and you got to fix these things yourself. If point-of-care went down, something else must have gone up, why didn't you focus on that. So I think going forward, you should not -- you should expect us not to get into this reasoning for why things missed. And yes, there's force majeure. Things happen. And those everybody in the industry is impacted with, but you will not see unique things.

Maybe just one more kind of on this area, and then we can jump out. But just particularly on the Bioscience business in the U.S. I know that was weak and you had the IP comp. But that business was still down 10%, and those are some questions we got. So on that business itself, kind of you elaborate a little bit on that business being down. And kind of what type of growth are you planning for '26 for that business?

Yes. So I mean similar sort of theme. First, take a step back, I mean, the businesses are exceptional. I mean flow cytometry, BD in the past and our Bioscience business sets the standard with the FACSDiscover with FACSLyric. Our antibodies set the standard in the industry with reagents and dyes that only we produce. And roughly 50% of the business is in regulated applications that are no different than our QA/QC business. So it's -- the structure of the business is exceptional. When you look at the facts, and you say minus 10%, yes, that's lower than the market. And you sort of do a survey and this we did over the last 2 weeks of all similar competitors, given the markets, the business should have been down low to mid-single digits, not double. So there's a 500 basis points underperformance versus what I would have called the market. And again, sort of let me go into a little bit of detail and how we're going to fix it. So first, just the math. Into Q1, we're saying this business is still going to be down mid-single digits. Remember, I said 2.5%. The Diagnostics business will be down low single digits. This one will be down mid-single digits. So we want to sort of give the team a bit of time to recover. And that's for the own period. And over the year, it will start to get better. But digging a little bit deeper on the sources of underperformance and why I'm confident that these types of things will not recur. Let's just take one of the explanations that was -- that I sort of talked about earlier was the decrease in shipment of -- or the decrease in getting licenses for shipment to China. With a 45-day government shutdown. The government was shut down for 45 days. And remember, I said last week, we had all our U.S. heads together. So I said to them, I said, why don't you review your business by end market. So the U.S. General Manager reviewed his business by end market. And in the U.S., our academic and government segment grew 14%, Americas was up 10%. The shutdown impacted them as well. How did you manage to grow 14%? Because one university was not growing, another one was growing. We knew the shutdown was coming. So we preloaded some of the orders and had the customers buy in advance of it. And customers did. I mean I'm witnessed to the fact that we had a run-up in orders and sales right up to the government shutdown and an immediate buying and then a slowdown towards the end. But we saw that, whereas our Bioscience team said 45 days the government to shut down, I can't get licenses. Why didn't you go to the folks and say, hey, you can get these licenses before the shutdown because the shutdown was telegraphed. It was not a surprise. So that showed us the difference in precision and execution. As I said before, the businesses are great. Customers love them. The teams at the ground level are great. It's a question of precision of management. And being resilient during those times. And I think that piece I expect to have an immediate impact on. And the second one is pricing. I mean, in this business alone with the most differentiated portfolio in the industry on reagents. So I -- at the Town Hall 2 weeks ago, I took our whole set of businesses, and I put them on the XY chart. And I said on the X axis, we'll have growth on the y-axis will have gross margin, and we'll go 2 or 3 levels deeper into the portfolio. The highest margin business in the new company is the reagents business of Bioscience, by a lot. Higher than our chemistry, higher than our informatics. That tells you how profitable that business is. The challenge is if you do this XY axis the top right is great. I usually tell people don't ask me, just keep going. Top left, is accretive to margins, but growing slower than the company average. And I say just stop everything else, especially if you're the reagent business, find ways to grow. And in that business, we've been getting -- 0 to 50 basis points of pricing. We are the most differentiated reagents company in the market. Why aren't we getting better pricing? Why aren't we getting better distribution? So the marching orders become clear, and that is 70% of the Bioscience business. You see there are sort of immediate opportunities to impact the business, and that's where my attention is focused. I was sort of talking to my IR head, who is a fantastic guy, Caspar is here, and Caspar keeps sort of -- he says, it's our job also to go and talk to investors. And yes, but I got to go and talk to the teams and got to talk to the customers because the business has to start moving, you said you're not that as necessary as you think you are. So -- but I'm enjoying that part a lot.

So maybe just kind of putting a bow on this conversation. And so you set the guide, you talked about the cushion that you baked in. Then subsequently in the last 2 weeks, you've done a lot of these meetings, Town All, Forensic Analysis. How do you feel after all the Forensic Analysis versus the guy that you set on BD?

I think the 2.5% is sort of our -- as we said in the open -- in the quarterly call as well. I mean it's a prudent estimate. And you know us for several years now. We have 5, 7 ways of getting to 2.5% and more. It doesn't include pricing. It doesn't include the operational improvement. It doesn't include all the reagent stuff that I just talked about, definitely doesn't include the revenue synergies. So I feel pretty good about the 2.5%.

Got it. Okay. So maybe switching gears to core Waters, right? So the core Waters I think 2026, you're like [ 0.0625% ] organic guide for stand-alone. You grew a little bit faster than that in 2025. Maybe what are the puts and takes kind of underneath that guide? Should there be a slight deceleration? Still very healthy growth versus the rest of the industry. But I'm just wondering or is it kind of a rounding error?

Our guidance philosophy has not changed. So we start the year at a certain point, and then we get constructive as the data point comes in. Second, I'd also said this in the call -- in the analyst call earlier, the year has started off well. The funnels look very strong. I mean the end markets have stabilized. So it's quite a good setting. I mean, notwithstanding what's happened over the weekend. But that said, the end markets have stabilized. The funnels are strong. There's no reason to believe that there should be any deceleration. That said, if you just look at the guide very simply, the lower end of the guide, the 5.5-ish percent or 5-ish percent is the instrument number, at least as a starting point. And the top end of the guide is the recurring number. On the recurring side, chemistry, we assumed grows between 6% and 7%. I'm saying this with a straight face for now. And services 7% to 8%. Now chemistry has grown 12% in 2025. Service has grown 7% in 2025. On the chemistry side, yes, new products are coming in. We just want some room given the stronger baseline. And on the service side, we've expanded our attachment rate by 400 basis points in 2025. I mean we've given Rob Carpio and his team 100 basis points. So a target, they did 400 so we didn't set the target right. We need to take a look at it. But every time you get 100 basis points of service attachment improvement, the next year, you see 70 basis points of revenue increase. So that's 250, 280 basis points just like that, that we are spotting for the next year. So we feel pretty good about the guide. As I said, as the runs come on the board we'll start to get more constructive. And to sort of complete the story on instruments on the replacement cycle on a 6-year CAGR basis, we're at 2.5%, still low single digits. The idiosyncratic growth drivers are contributing nicely. We have a very good position in GLP-1, PFAS testing India generics. And new products are now augmented with CDMS with the ever-expanding chemistry portfolio. Super excited about the Empower superhighway, really going from an on-prem to a subscription model. So feel good about the Waters based business, and we have a fantastic group of people managing that business.

So maybe just on the LCMS replacement cycle, you just mentioned where you're stacking on a 6-year CAGR so I think you've talked about getting back to high single digits. So where would you put that duration then? Like where do you think maybe the peak quarter would be on like LCMS?

I think, I mean, we're probably in the mid-innings. So I would think sometime in 2027, it starts to go back to the average. And remember, we haven't yet seen any meaningful replacement in biotech and pharma drug discovery, to some extent, the CROs are starting to come to the table. We haven't seen anything in genetics in China. So those segments are still pending. And in spite of that, we're seeing nice replacement, especially in large pharma, in U.S. and Europe. That's what's been driving the replacement cycle a lot more. So mid-'27. And then what happens then, and we have sort of good customer discussions on reshoring. I mean we will not quantify that. I mean there's -- we're not afraid to quantify anything. I think there's just not enough facts available to say, precisely, this is what the upside is, but the conversations are there. The ground has been broken. You look at the different announcements of the pharma companies. And we're all over the -- we're all over those, and we'll see a benefit starting sometime in '27. And that dovetails nicely into the finish of the replacement cycle sometime in 2027, you'll start to see probably another growth cycle for instruments and ironic -- I mean it's not a long-term benefit, this reshoring. But in a strange way, you might see strong LCMS growth for a while.

Right. So typically, when it peaks, the goal would be, what kind of get back to like a 5% growth or what typically happens there?

Yes. 5-ish percent. And it stays there and then it will probably saturate, people get more comfortable with their instruments and they extend the use too much. Our service team is very proud. So they extend the use as well with the customers. And then they realize, geez, this is too late, and there's a new sort of instrument coming in. And then it flips again. So it will always be just human behavior is such that you'll get excited. You get this replaced and then they'll extend the life too much. It's like driving your car as a graduate student. I mean I remember, I used to drive my wife when I started dating in a car, which had a hole in the middle. So I had to pull the gear shift out and then move it. And she said, hey, I don't -- is this a car as best you can do? I said, yes, you have an extra window. So you find a way.

So since you brought reshoring, just one question. I think Waters is the size of the $300 million, you're not willing to quantify? Do you think -- I mean, any comment on their size?

I think it's too early, Dan. And we'll quantify. Look, I mean, we're very precise on our quantification on the GLP-1s and PFAS, on India generics. I think just let's get a bit more factual before we start to quantify everything.

And then kind of baked in with that 5% growth for instruments this year. What did you assume for LCMS growth in 2026? And what do you think a range of outcomes...

Similar sort of high single-digitish. No different -- I mean, and I can't promise exactly what will happen 1 quarter or the other. I mean, sometimes these are large purchases that will happen at the end of the quarter or the beginning of the quarter, and that might change things. But overall, no real change.

Right. So maybe just on chemistry, I think you just articulated the conservatism or the conservative nature of the guide on several funds. But just on chemistry itself, you talked about the kind of the 300 basis points, 2.5 points of upside that, that could generate. But with the new products, like where -- just talk about some of the new product and the opportunities on the chemistry and if you stack those, where the theoretical upside?

So I mean the strategic reason -- I mean and the strategic board was set sort of 4, 5 years ago, when we said we're going to take our investment and move it from small molecules to large. So over 70% of our R&D spend in chemistry goes into bioseparations. And that has started to pay dividends. I mean, we launched the MaxPeak Premier technology with the bioinert surfaces on top. We build specific columns for large sort of species like AAV with the SEC columns, then we said, hey, oligonucleotide, a specific solutions, so we come up with this thing called slalom. And then we said, look, and this is the latest one, we said we're going to take affinity chromatography from bioprocessing, my previous world, and we're going to move into high pressure chromatography, which is something that most people have not been able to do with reproducible results. We're going to do it in such a way that you can tune these columns. And that's what we were able to do with our affinity columns with protein A. And now we've launched another column, which is microflow, which is specifically for proteomics applications. So this will keep going. I mean, there are 7 to 8 new launches coming this year. This will keep going for a while. The difference is that this is not only targeted towards QA/QC. This has gone upstream. And when you go upstream and you are sort of one of the largest players in that space, and if the product is doing what it's supposed to do, that column stays with the molecule. The customer has no reason to change it. Customers do change those as we've experienced ourselves in Phase II, Phase III, usually qualify 2 vendors. But if you are the only solution, and you have customized the separation with the customer, especially with affinity columns, where you sort of are taking a sticker and you're designing the sticker that is only relevant to the molecule that the customer is developing. It's unique. It's a one-to-one link. That then as it moves downstream, it's like bioprocessing. It's spec-ed in, it's a low double-digit grower. I'm not promising low double digits now. All I'm saying is, as we progress we can -- that is -- there is line of sight to that. 12%, then if I say double digit right now, you say, well, double digit all the way through. No, there will be ups and downs because it's in discovery right now. High single digit to low double digit is a reasonable expectation for chemistry.

Okay. Maybe jumping over to margins. I think implicit margin assumptions of BD of like mid- to high-teens operating margin to begin the year, and I think they were like low 20s prior to the year. Just talk a little bit about the cost you're digesting, the margin guide and kind of where do you think BD margins are kind of normalize?

So there's a few moving parts. Let me sort of take it in turn. So the most important thing to know is 22.4% is the full year margin. I mean that's sort of BD or bioscience and diagnostics stand-alone, not including synergies. There are 2 or 3 things to keep in mind. One is that the first on the phasing and then on the amounts. On the phasing Q1 is the smallest quarter. So BD has a specific phasing. Q1 is about 23% of sales. Q3 is the largest quarter that used to be their Q4, so that's 27%. And Q2 and Q4 are 25% each. That's the revenue phasing. The cost phasing is such that the Q1 is about 300 basis points lower or 200 basis points or so 2 to 300 basis points lower than the average. And Q3 is 300 basis points higher. So Q1, 200 basis points lower, Q3, 300 basis points higher in margin just because of the revenue phasing and the way the costs are. So that's the baseline. On top of that, what we've done with the business slowing down last year, we said, look, you haven't implemented tariffs. So we're going to implement tariffs this year, and I just want a -- small anecdote, when we said that, the team said, hey, you're going to implement tariffs. That was a year ago, the customers are not going to respond to it well. Our President is pretty active. So he changed the tariff regime now, and that's the reason to do it now right. So we'll implement tariffs like we did in Waters, we'll offset the whole thing in -- before the beginning of '27, but in 2026, there's a 60 basis points lift due to the tariffs. And then the slowdown in China should have led to a readjustment of the cost structure. Our colleagues at BD never did that. So we're -- we've already implemented that and you will see the benefit of that in the second half of the year. That's about 120 basis points. So 120 plus 60, 180 basis points you add to what you would have calculated as the baseline, and you get to 22.4%. And the margin progression through the year will reflect a little bit of conservatism at the beginning of the year. We just want to sort of keep a little bit on our back pocket and a bit of a lift due to the cost savings and the tariff implementation towards the back half of the year. And then you superimpose on that the phasing, you'll get the math that is pretty straightforward. So not a lot of rocket science in it. Again, the more important thing to keep in mind is these actions are in place. They are getting implemented. No cost synergy, no operational improvement isn't it. Pricing is at 50 basis points today. We think we should be at 200 plus given the differentiation in the portfolio. Don't ask me if it comes tomorrow, but it's coming. The weekly sales calls and funnel management, then it was not a discipline. It's happening now as of last week, we sort of showed people exactly what we do at the top level, what we expect at the regional level, what we expect at the sales level. What level of precision we expect in the funnels. And thirdly, if there's any changes, how do you sort of combat it. So I expect that to have a significant impact on the business as well. I believe the 2.5% and the 22.4% are minimum numbers that we should be achieving.

And do you feel on BD, just thinking about BD again like the people that you've seen so far, will there be a lot of like -- like how significant a change do you think you might have to implement there? Is it just pruning around the margin or just...

It's -- Dan, it's always a difficult question to answer, but go back 5 years at Waters. We turn the business without changing any of the top management. I mean you remember in 2021 -- 2021 alone, we had 16% of growth, and that was coming off years of sort of trailing the market, and that was one of the highest growths in the market, that was without changing anybody in the leadership team. And Amol came in the middle of 2021. The others came a bit later. So I don't -- I see the same thing here that at the grassroots level, the sales teams, the R&D teams, the supply chain teams, and people are super dedicated. I mean there's a lot of pent-up energy. The challenge has been focusing on a few things that are important. I mean focus on getting the reagents business moving and not -- don't just get obsessed with the instrument business, which is struggling because of the end markets. So don't be obsessed with that because 70% of your business is in reagents. That sort of thing. So focusing people on specifics and then holding them accountable and giving them support. So on pricing, we're asking people to do more, but we're going to train them. On tariffs, we're asking people to do more. We had the training session last Friday. So the method to the madness on this commercial meeting that I'm having with each of the regions is also cross pollination. I mean, so for instance, in the U.S. A&G market, as I mentioned, slowed down. Our U.S. team found ways around it, and they shared those tactics with our Bioscience team. And so I think I would expect the same sort of turn. And when these turns happen, they happen very rapidly because you're not asking people to learn new things. You're asking them to do what they knew how to do all the way all in the past, and you're taking out barriers from a corporate setup. I mean at a corporate level, our China team wants to localize a bit more of the portfolio in flow, we have done it on LCMS very rapidly. I spoke to the GM there, and he said, hey, Udit, I want to localize. I said, okay, how can I help? I'm not saying I'm not going to do it. I know you know your business best, but just let me know how I can take our barriers from a corporate setup. So I feel good about the baseline. But yes, there's a bit of discipline that will be put in place.

Well, great. I think that's a great wrap up. We started on BD. We ended on BD. We told the story in between Waters. But thank you, Udit for being here, thanks, everyone, in the audience as well.