Earnings Call
Waters Corp /De/ (WAT)
Earnings Call Transcript - WAT Q4 2025
Operator, Operator
Good morning and welcome to the Waters Corporation Fourth Quarter 2025 Financial Results Conference Call. This call 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.
Caspar Tudor, Head of Investor Relations
Thank you, Leyla, and good morning, everyone. Welcome to Waters Corporation's Fourth Quarter Earnings Call. Joining me today are Dr. Udit Batra, our President and Chief Executive Officer; and Amol Chaubal, our Senior Vice President and Chief Financial Officer. 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, including the expected financial and operational impact of Waters' combination with the Biosciences and Diagnostic Solutions business of Becton, Dickinson and Company. We will provide guidance regarding possible future results, as well as commentary on potential market and business conditions that may impact Waters Corporation over the first quarter of 2026 and full year 2026. These statements are only our present expectations and are subject to risks and uncertainties. Please see the risk factors included within our Form 10-K, our Form 10-Qs, our other SEC filings and the cautionary language included in this morning's earnings release. During today's call, we will refer to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are attached to our earnings release and in the appendix of the slide presentation accompanying today's call. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the fourth quarter of calendar year 2024. In addition, unless stated otherwise, all year-over-year revenue growth rates and ranges given on today's call are on a comparable constant currency basis, and all quarter-over-quarter revenue growth rates and ranges are on a comparable constant currency basis. Finally, we do not intend to update our guidance, predictions or projections, except as part of a regularly scheduled earnings release or as otherwise required by law. I would now like to turn the call over to Udit to begin with our key messages for the quarter. Over to you, Udit.
Udit Batra, CEO
Thank you, Caspar, and good morning, everyone. We ended the year on a high note, achieving solid revenue growth and adjusted EPS growth in the fourth quarter. This continues our trend of strong sales growth in the industry. Today, we also complete our acquisition of BD's Biosciences and Diagnostic Solutions business, combining our expertise in chemistry, physics, and biology to create a robust scientific entity with strong brands and a culture of innovation. We are excited to welcome our new colleagues this morning and gain full operational control over the convey business. With extensive integration planning now complete, we are ready to execute effectively, utilizing the same focus that has driven results at Waters. We are starting this new phase from a strong position. Our strategic road map, laid out five years ago, is progressing well, with our key performance indicators ahead of our commitments from our Investor Day in March 2025. Innovation is a significant growth driver as we introduce a new series of groundbreaking products. Our involvement in high-volume testing areas, including GLP-1s, PFAS, and Indian generics, has exceeded expectations. We have made significant strides in transitioning Empower to a subscription model, while also carefully expanding into growth areas like bioseparations and bioanalytical characterization. These results highlight the effectiveness of our straightforward, repeatable business model serving high-volume regulated markets, as well as the dedication of our team to excellence in customer service and science. Now, focusing on the quarter, reported sales and adjusted EPS were at the upper end of our guidance. Sales rose by 7% on a reported basis and 6% in constant currency, driven mainly by high single-digit growth in the pharma and industrial sectors. Adjusted EPS increased to $4.53, while GAAP EPS was $3.77. Recurring revenue grew by 9%, led by chemistry, and instruments grew by 3%, largely due to high single-digit growth in LC-MS. TA Instruments saw a decline this quarter due to cautious spending in the U.S. and Europe. We also achieved significant success in our transition to Empower's subscription model, with several large pharma customers adopting it; this shift did reduce our overall instrument growth rate slightly but represents a strategically advantageous change with better economics. The new features we introduced are expected to contribute positively by 2027 through added recurring revenue. Over the full year, sales grew by 7% on both a reported and constant currency basis. Recurring revenue saw an 8% increase, spurred by a 12% rise in chemistry. Instrument revenue rose 5%, led by consistently strong performance in LC-MS throughout the year. Adjusted EPS increased by 11% to $13.13, benefiting from strong sales, operational efficiency, and effective tariff management, while GAAP EPS stood at $10.76. I will now elaborate on the factors driving our remarkable performance and our expectations for continued momentum into 2026. Our commercial execution remains ahead of external commitments, with strong progress toward our long-term targets. Instrument replacement growth continues to improve, now tracking approximately 2.5% CAGR compared to 2019, reflecting a return to a historical growth rate of 5%. Service plan attachment has risen to 54%, indicating substantial improvement this year, setting the stage for strong growth in 2026. E-commerce now accounts for about 45% of consumables revenue, creating a positive growth environment alongside new chemistry products. Contract organizations now represent 27% of pharma sales, increasing from 15% five years ago, which strengthens our position among diverse capital expenditure sources. Innovation continues to enhance our performance, with strong growth from new products launched in recent years and the introduction of more innovations throughout 2025. For the full year, Alliance iS HPLC sales more than doubled due to strong adoption of our flagship platform, which reduces errors in QC labs significantly. Xevo TQ Absolute mass spec platforms grew over 30% driven by PFAS demand and the recent launch of the Absolute XR. MaxPeak Premier chemistry saw over 35% growth, indicating the positive impact our technology has on larger and more complex molecules. Furthermore, we have strengthened our presence in high-growth areas such as bioanalytical characterization, where our light scattering and BioAccord technologies are being adopted for pharma development and quality control. The Xevo CDMS allows us to expand into the routine characterization of complex molecules. In bioseparations, we have built on the success of MaxPeak Premier technologies to create new products aimed at separating complex large molecules, resulting in double-digit chemistry growth in 2025. Regarding our unique growth drivers, these contributed over 300 basis points to our growth in 2025, all exceeding our commitments. Revenue related to GLP-1 testing more than doubled, contributing around 100 basis points of year-over-year growth. PFAS testing demand grew over 40%, adding roughly 80 basis points of growth. Performance in India continued to be strong, with non-GLP-1 revenue increasing low teens, resulting in about 130 basis points of growth. Overall, we achieved 7% growth in 2025, with all regions delivering positive growth. Pharma revenue grew by 9%, with particularly strong results in the Americas and Europe, and solid growth in Asia. In industrial markets, growth was 6%, while A&G experienced a slight decline. In China, we saw a 9% increase for the year. Our team performed exceptionally well, leveraging momentum in biotech and CDMOs, executing effectively in food and environmental testing, and winning various academic and government contracts. As we gear up for 2026, we anticipate continued organic growth driven by the instrument replacement cycle and new product innovations. We are also expanding our framework for growth drivers from three to five, adding biologics and informatics to GLP-1s, PFAS, and Indian generics. We foresee ongoing strength in bioseparations and bioanalytical characterization, as well as significant growth potential linked to the transition of Empower from a legacy model to a subscription-based offering, which we expect will grow our informatics business significantly by 2030. As we work on integrating BD Biosciences and Diagnostics Solutions, this combination presents a substantial value creation opportunity on two fronts. Firstly, it enhances our position in bioseparations and bioanalytical characterization by adding essential technologies and expertise. Secondly, it offers a chance for execution improvement through our operational discipline. We aim to replicate the growth acceleration we have achieved in our existing businesses, positioning Waters for sustainable, high single-digit growth beyond the current replacement cycle. The transaction is also expected to yield meaningful cost synergies, with our baseline plan targeting less than 5% of the combined cost base with further potential. To quickly capture this value, we have organized Waters into four divisions, ensuring accountability and clarity in performance across key segments. Each division will operate under our proven business model. Moving forward, we have clear priorities for effective integration now that we have operational control. While some recent BD Biosciences and Diagnostic Solutions results fell short of expectations due to demand fluctuations and regulatory impacts, we are on track to achieve planned cost and revenue synergies in 2026. Specifically, we expect to realize around $55 million in adjusted EBIT from cost synergies and approximately $50 million in revenue, along with $25 million in corresponding adjusted EBIT from revenue synergies in 2026. For revenue synergy realization, we will focus on instrument replacement, where there are approximately 22,000 instruments due for replacement and new products to be launched. We aim for an incremental increase of 100 instrument replacements per year to achieve our revenue synergy target. Similarly, for service plan attachment and e-commerce, we plan to see gradual increases, maintaining consistent performance with our historical rates. Now, let me share our guidance for 2026. With our revitalized portfolio and growth strategies, we anticipate organic constant currency revenue growth of 5.5% to 7% from our current businesses. Following the completion of the acquisition, we expect the Biosciences and Diagnostic Solutions to contribute around $3 billion in revenue for 2026, factoring in a conservative baseline growth rate. Combined, we project total reported revenue in 2026 to be approximately $6.405 billion to $6.455 billion, translating to industry-leading year-over-year growth of about 5.3%. Regarding profitability, we anticipate an adjusted operating margin around 28.1% for 2026, reflecting expansion compared to our deal model in 2025. This would lead to adjusted EPS ranging from $14.30 to $14.50, indicating significant growth and including contributions from the acquisition. Now, I will pass the call to Amol to provide detailed financial insights and guidance.
Amol Chaubal, CFO
Thank you, Udit, and good morning, everyone. In the fourth quarter, we delivered a strong finish to the year with as-reported sales and adjusted EPS landing at the high end of our guidance. Sales of $932 million grew 7% as reported and 6% in constant currency. Orders growth outpaced sales growth in the quarter. By end market, pharma grew 7%, industrial grew 8%, while academic and government declined 3%. In pharma, growth was led by mid-teens performance in Asia, high single-digit growth in Europe, and low single-digit growth in the Americas. Instrument replacement remains strong along with new product adoption in both our instrument and chemistry portfolios. In industrial, our division grew low teens with double-digit strength across chemical analysis, food, and environmental testing. Performance was supported by continued momentum in PFAS-related workflows, led by the sensitivity and robustness of the Xevo TQ Absolute XR mass spec system. The TA division was flat, reflecting an improvement versus the first half of the year as customer spending trends continue to recover. In academic and government, strong double-digit growth in the Americas was offset by year-over-year spending declines in other regions. By region, Asia grew low double digits, while the Americas and Europe grew mid-single digits. Within Asia, India grew high teens, reflecting continued strength in pharma generics. In China, sales grew 3% as strength in pharma and industrial was partially offset by the timing of stimulus-related funding in academic and government. By product line, instrument sales grew 3%. High single-digit LC-MS growth was partially offset by a low single-digit decline in TA system sales. We also incurred a low single-digit percentage growth impact from successful customer migration to Empower subscription agreements, which carry long-term recurring revenue benefits. Recurring revenues grew 9%, driven by 8% growth in service and 12% growth in chemistry. We again saw fantastic customer adoption of our bioseparation columns which have been a vertical success in the market. Adjusted earnings per share grew 10% to $4.53, while GAAP earnings per share were $3.77. For the full year, sales grew 7% on both a reported and constant currency basis. By end market, pharma grew 9%, industrial grew 6%, while academic and government declined 1%. In pharma, all regions delivered high single-digit growth or better, led by Asia, which grew low double digits. In industrial, our division grew low double digits with broad-based double-digit strength across chemical analysis, food, and environmental testing. This was partially offset by a 1% decline in the TA division. In academic and government, the Americas and China grew mid-single digits, while Europe declined 5%. By region, Asia grew low teens while the Americas and Europe grew mid-single digits. Within Asia, India grew high teens and China grew 9%. Our strength in China was driven by broad-based growth across pharma, industrial and A&G. This was supported by share gains in biotech and CDMOs, chemical and environmental workflows, and A&G. By product line, instrument sales grew 5%, led by high single-digit LC-MS growth. Recurring revenues grew 8% with 7% service growth and 12% chemistry growth. For the full year, adjusted earnings per share grew 11% to $13.13. On a GAAP basis, EPS was $10.76. Within the P&L, gross margin was 61.1% for the quarter and 59.3% for the full year, which was better than expected. Adjusted operating margin was 35.2% for the quarter and 30.5% for the year. This reflects the deliberate acceleration of strategic R&D investments in chemistry and informatics, along with the impact of regional sales mix and tariff surcharges. Our operating tax rate came in at 15.7% for both the quarter and the year. The full year rate includes approximately 50 basis points of discrete benefit related to a change in U.S. tax legislation enacted in 2025. Turning to cash generation and the balance sheet. Free cash flow was $125 million in the quarter after funding $39 million of capital expenditures, and $15 million of transaction-related costs. For the full year, free cash flow totaled $677 million, after funding $113 million of capital expenditures, inclusive of tariff-related mitigation actions and $29 million of transaction-related costs. Our net debt position at the end of the year was $820 million. Now I will share further commentary on our 2026 outlook and provide our first quarter guidance. We are executing well with a revitalized portfolio leveraging instrument replacement and benefiting from our idiosyncratic growth drivers. We expect this momentum to continue into 2026. As a prudent starting point, these dynamics support stand-alone full year 2026 organic constant currency revenue growth of 5.5% to 7%. We expect favorable foreign exchange translation to provide a 0.5% tailwind to organic sales, which translates to organic reported revenue of $3.355 billion to $3.405 billion in 2026. Turning to the acquired business contribution, following today's expected closing of the transaction, we expect the acquired Biosciences and Diagnostic Solutions businesses to contribute $3 billion of revenue in 2026. In setting this expectation, we have risk-adjusted the underlying growth assumptions, even though most of the headwinds that impacted the business in 2025 are already in the baseline as we enter 2026. Our guidance prudently assumes approximately 2.5% underlying constant currency growth for these businesses in 2026 on an owned-period basis before any benefit from execution and pricing improvements or our organizational changes. In addition, we expect to realize approximately $50 million of revenue synergies in 2026, reflecting the initial contribution from the first wave of commercial excellence initiatives discussed earlier. Taken together, this results in a total reported 2026 revenue of $6.405 billion to $6.455 billion. These starting assumptions imply blended year-over-year constant currency growth of approximately 5.3% for the combined company in 2026. From a profitability perspective, we expect to deliver an adjusted EBIT margin of 28.1% in 2026, consistent with our deal model. This reflects approximately 80 basis points of adjusted operating margin expansion at Waters on a stand-alone basis, consistent with our Investor Day algorithm to approximately 31.3%. An adjusted operating margin percentage of approximately 22.4% for Biosciences and Diagnostic Solutions, a $25 million contribution from the $50 million anticipated revenue synergies, and $55 million contribution from anticipated cost synergies. Below the line, net interest expense is expected to be approximately $179 million, and our full year tax rate is expected to be approximately 16.6%. From a share count perspective, our updated capital structure results in approximately 94.3 million diluted shares outstanding on a full-year average basis in 2026. At closing, our new share count is 98.4 million shares. This translates to full year 2026 adjusted earnings per fully diluted share of $14.30 to $14.50, and represents 8.9% to 10.4% growth. It includes $0.10 of adjusted EPS accretion versus Waters stand-alone non-GAAP EPS profile due to the transaction already before a first full year of ownership. It is important to note that quarterly EPS figures are not additive to the full year EPS due to a significant change in average shares outstanding between the first quarter and the remainder of the year. For the first quarter of 2026, we are beginning the year with strong momentum across our core businesses. We expect stand-alone organic constant currency revenue growth of 7% to 9%. With tailwinds from favorable foreign exchange translation, the reported stand-alone revenue is expected to be approximately $718 million to $731 million. Turning to the acquired business contribution. We expect the Biosciences and Diagnostic Solutions businesses to contribute $480 million of revenue in the partial first quarter of 2026. This calls for a low single-digit revenue decline. Quarter-to-date trends reinforce our confidence in this outlook. Taken together, this results in a total reported first quarter 2026 revenue of $1.198 billion to $1.211 billion. For modeling purposes, first quarter average share count is expected to be $82 million, and tax rate is expected to be consistent with our full year outlook. While the transaction is expected to be EPS accretive for the full year 2026, the first quarter will reflect the full burden of interest expense and the higher share count, with synergies beginning to ramp up in subsequent quarters. As a result, the first quarter adjusted earnings per fully diluted share is expected to be in the range of $2.25 to $2.35, which is flat to 4.4% growth. Embedded within this guide is stand-alone EPS of $2.50, or 10% growth versus prior year at the midpoint. With that, I will now hand the call back to Udit.
Udit Batra, CEO
Thank you, Amol. So to summarize, with a revitalized core portfolio, expanded high-growth adjacencies, and tangible synergy levers now underway, we are entering 2026 with strong momentum and a highly compelling growth outlook. Our growth outlook of 5.3% at the midpoint for the combined company is appropriately prudent, yet industry-leading even before factoring in the full benefits of upcoming execution improvements, which we will now work decisively to implement. Within the P&L, we are confident in our ability to accelerate value creation as the year progresses. We look forward to updating you on our progress as we move through the year. So with that, I will now turn the call back to Caspar.
Caspar Tudor, Head of Investor Relations
Thanks, Udit. That concludes our prepared remarks. We are now happy to open the lines and take your questions.
Operator, Operator
Our first question will come from Tycho Peterson with Jefferies.
Tycho Peterson, Analyst
Udit, I think the two things people really want to dig into here are obviously the BD results this morning and the numbers, obviously, have deteriorated relative to the original deal model. So maybe just talk a little bit about your take on the numbers this morning, particularly for the lagging parts of the portfolio, U.S. academic, government, China, early-stage research on the BD side. And how do we think about the path to recovery there? And then the second thing is instruments, right, and the Empower impact on that transition. I understand it's, call it, a 250 basis point headwind this quarter. But how do we think about the go-forward P&L impact on instruments from this Empower transition?
Udit Batra, CEO
So Tycho, thanks for the two questions. So let me start with the BD Diagnostic Solutions and Bioscience business first. Look, several issues emerged in Q4 that impacted the growth of both of those businesses that were not fully known in Q3. And I'll let Amol describe those in a few minutes. But what is important is that all of these will now be present in a lower baseline for us in 2026 to help us deliver the 2.5%, which we think has several upsides. Now this reminds me of Waters almost 5 years ago. You couple this with a host of innovative new products in both Diagnostics Solutions and in Bioscience across flow cytometry as well as across the microbiology business and the molecular diagnostics business. You start at a fresh portfolio. So we are now really squarely focused on, first, improving the operational execution, for instance, by implementing a deal desk for pricing discipline and discounting discipline, ensuring launch readiness of this fantastic portfolio, just like we did with Alliance iS, and improving forecast accuracy to minimize surprises. And equally, after months of detailed integration planning, we're now ready to deliver the synergies. Be it around instrument replacement, e-commerce, or service attachment. The service attach was starting at a 40% number, and you've seen what we've already done in 2025 alone. So we're very confident to deliver the $50 million in revenue synergies and more. You add this to what a stand-alone guidance is and you end up with over 5%, close to 5.3% in at the midpoint of the guide for the combined business. So we're feeling pretty good about that industry-leading growth rate as we head into 2026. Amol, do you want to comment on the dynamics of the two businesses in 2025?
Amol Chaubal, CFO
Yes. I mean, look, coming into the fourth quarter, we were starting to see the direct revenue generation headwind in China. And then we knew Q4 had a higher baseline from the prior year IP onetime revenue, right? But then a couple of other things sort of crept in, which is a weaker flu season, coupled with challenges getting exemptions on shipments to China because of the government shutdown. Now as we get into Q1, three out of the four are sort of behind us in terms of the baseline for the flu season, no IP issues in the baseline for the first quarter as well as, remember, the China export ban started at the beginning of the first quarter last year. So from a baseline point of view, it's pretty clean, except for the DRG issue, which will start to come in the baseline late Q3. And quarter-to-date trends give us a lot of confidence that where we are guiding, which is a low single-digit decline for Q1 is sort of a reasonable guide.
Udit Batra, CEO
So now turning to your second question on instruments. Really happy with instruments performance. LC-MS grew high single digits again. And this is like through the year, every quarter has been high single digits to double digits for LC-MS with the same drivers; instrument replacement cycle still going strong, as well as the idiosyncratic growth drivers plus the new products. TA was a drag at a low single-digit percentage to the overall instrument number given the weakness in both the U.S. and Europe. What's great news is something that we've been telegraphing for a while is the transition of Empower from on-prem to subscription where several large pharma customers transitioned in Q4, and that was about a low single-digit headwind to the overall instrument number. So overall, LC-MS high single-digit growth. TA was a low single-digit percentage headwind just given the challenges in U.S. and Europe. Empower really a wonderful transition that we told you that we will talk about it in the rearview mirror. Now as you look ahead into 2026, Q1 started off extremely well on the instrument side. The funnel is extremely strong. Orders grew faster than sales in Q4. So we feel very good about where we're starting. And the guide we have given for Q1 and the full year, and all the drivers are currently fully intact. We've also accounted in the guidance that we've given for the Empower headwinds that we expect during the year as customers transition from the CapEx to a recurring revenue model. So all going according to plan, and we're really happy, especially with the Empower transition that is happening.
Amol Chaubal, CFO
Yes, I mean, it's a fantastic problem to have, right? Two of the top 5 pharmas converted. I mean, Q1 funnel is strong, so we're not less.
Operator, Operator
Your next question will come from Catherine Schulte with Baird.
Catherine Schulte, Analyst
Maybe first, just for the full year guide of 5.5% to 7% after starting at 7% to 9% in the first quarter. It implies some deceleration for the balance of the year. Is that just prudence to start the year? Is it comp driven? Or are there some other dynamics we should be aware of?
Udit Batra, CEO
So first on the full year guide, the 5.5% to 7%, Catherine, look, our guidance philosophy has generally not changed. The lower end of the guide constitutes where we think instruments are going to end up and I've given a lot of detail to Tycho's question on that front already. We feel very good about where we're starting on the instrument side at 5.5%. And on the 7% at the top end of the guide, that is our recurring revenue guidance for the year. This basically again constitutes several upsides that we've not baked into the guide itself. I mean we've assumed that the academic and government, drug discovery, and pharma research segments don't recover. In China, we've assumed a mid-single-digit growth versus what we've done this year, which is about 9%. A fantastic growth in China, but we've assumed mid-single-digit and not included any stimulus revenue. We've incorporated already the Empower headwinds from converting from CapEx to a recurring revenue. This does not include reshoring revenues. Finally, for the full year, we've assumed that chemistry is roughly 6% in our guide, while finishing the year at 12% in chemistry growth rates. So several areas to basically have risk on the upside, and so we feel pretty good about where we're starting with the guide. On Q1, Amol, do you want to talk about the 7% to 9%?
Amol Chaubal, CFO
Yes. I mean in general, the momentum coming into Q1 is really strong, and that, coupled with 4 extra working days, sort of supports our guide. And that then sort of derisks the remainder of the year.
Catherine Schulte, Analyst
Okay, I understand. I apologize if I missed this in your response to Tycho's question, but could you provide any insights on the outlook for the BD assets? Specifically, what should we anticipate regarding the pacing and the fourth quarter exit rate for BD as we move toward recovery?
Amol Chaubal, CFO
Yes. I mean, look, we expect sort of a low single-digit decline in Q1 and then growth sort of gradually starting to ramp up as we go through the remainder of the year as some of the headwind gets more and more rooted in the baseline, particularly as we enter Q3 and Q4 when the DRG headwind is in the baseline.
Udit Batra, CEO
Yes. And Catherine, look, equally, you should know that we are squarely focused on improving the operational execution. As I mentioned before, this is around ensuring that there is a forecast accuracy in the business. There is a pricing discipline, not just on setting the price but also on discounting, which impacts both the top and the bottom line, and we've done that successfully at Waters. Also ensuring that launches for the new products that are coming through go extremely well; something we've done by targeting and segmenting very precisely for our Alliance iS and TQ Absolute products. Equally, we're squarely focused on taking all the work that's happened in integration planning and implementing that throughout the year to increase momentum on the revenue synergy side, instrument replacement service attach, and e-commerce should contribute immediately. So feel very good about the starting point after a lot of planning.
Operator, Operator
Our next question will come from Jack Meehan with Nephron.
Jack Meehan, Analyst
Udit, on BD, you talked a couple of times about setting up a deal desk for pricing. Can you talk about which product areas are in focus and how you think that's been optimized in the past?
Udit Batra, CEO
Yes. So look, I mean, almost 5 years ago, we set up the same process at Waters, and it has two, maybe three parts. The first is a centralized examination of what the list prices are, as well as what the discounting is, and that escalates all the way up to me as discounting requests come from the different regions. We take away the ability for regions and sales teams to discount. So any time there's a list price increase, the stick rate is much higher. This is especially relevant for products in the instrument category. Now here, you have a couple of new products that have been launched across the Biosciences and Diagnostics businesses. Most of all being the FACSDiscover line S8, A8, as well as now the S7 and A7 that are coming up. For instruments, it's extremely important to not lose the pricing discipline as you negotiate the deals; it's pretty easy to giveaway pricing on highly innovative products if you're not disciplined. On the recurring revenue side, we see a benefit both on the service piece so that we are charging for installation, we're charging for spare parts in an appropriate way, but also on the reagent side where there is no reason for BD to not command the same sort of price premium that our chemistry revenue does. These are highly differentiated dyes and antibodies that only BD produces, and these are of the highest quality. So there is zero reason why there should be discounting there. We expect those to immediately impact both the top line and the bottom line, Jack.
Jack Meehan, Analyst
Great. And then for Amol, can you give us an update on the pro forma leverage for Waters and how you expect that to evolve over the year? And kind of similarly, what is the guide for interest expense assumed for any refinancing?
Amol Chaubal, CFO
Yes. So, look, we will be roughly at a net debt of somewhere around $4.6 billion, $4.7 billion, right? And that would translate to roughly around 2.4x net debt-to-EBITDA, slightly more than what we announced because the deal closed earlier than what we had anticipated, which is great. Then we expect to be below 2x within sort of an 18-month time frame. Interest expense on a pro forma basis is about $179 million for 2026.
Operator, Operator
Our next question will come from Doug Schenkel with Wolfe.
Douglas Schenkel, Analyst
I actually just have one topic I'd like to cover, just on the synergy targets. I think your initial year 1 guidance assumes you cut 5% to 6% of the acquired business's OpEx, assuming I have that math right? So I guess one question would be, do I have that math right? And if so, recognizing this is on day 1, and I think it's about twice what you previously outlined. What's driving this increase? And recognizing this is a pretty big number to start, I'm just wondering how you're thinking about potential upside to that year 1 target, given what seems to be strong momentum in identifying opportunities in the early going?
Amol Chaubal, CFO
Doug, so look, our underwriting model assumed roughly 4%, 4.5% of the pro forma cost base of Waters stand-alone plus the acquired business. That had certain elements baked into it, like site consolidations, like sort of commercial and technology. It did not include certain elements in the underwriting. When you compare and contrast it versus deals of this size, you typically see sort of a 6% number. What Udit and Chris Ross achieved at Sigma Millipore was more like an 8% number. We haven't baked in that level of targets in our underwriting because, one, we want to give ourselves some space; and two, for a deal of this size, there's always skeletons that you find, which gives this room to cover for that. If you now look at our guide, we're pretty much on track to deliver exactly what we said in our deal announcement, and we feel really good that after having done a lot of work over the last several months, we are well on track to deliver our deal announcement commitments.
Operator, Operator
Your next question will come from Matt Larew with William Blair.
Matthew Larew, Analyst
Sticking with BD, maybe thinking about the revenue synergy size. The results from the most recent quarter called out a number of issues, but maybe even over the last couple of years, might be suggestive of a business in need of commercial investment to improve execution. How do you think about the level of investment needed for the business long term, and how that perhaps works with the idea of the EBIT contribution you're hoping to get from revenue synergies?
Udit Batra, CEO
So Matt, that's a really good question and something that we invested a lot of time in doing the integration planning. Now you take what I mentioned on the pricing discipline or launch readiness. We have central teams that we will now deploy into the businesses, into the acquired businesses to implement this pricing discipline and train the teams locally, eventually leaving a few of these people behind to manage that on a day-to-day basis. Something we've done in the past as well. The pricing discipline that we've seen at Waters, or TA, or clinical in the past will now be applied to the new divisions in the same way. There will be commercial investment to ensure operational excellence, be it on launch readiness, be it on pricing. We've looked at separately the amount of resources that are going after the launches, be it the FXI on the microbiology business, be it BD COR, where it is enhancing HPV testing across the overall population. Or on the flow cytometry side, we've taken specialists and moved them into the different businesses, equally investing further in commercial readiness. We feel pretty good about the resources we've put against improving the execution rhythm, but also getting a stronger uptake of the new products.
Operator, Operator
Your next question will come from Casey Woodring with JPMorgan.
Casey Woodring, Analyst
Great. So another strong quarter of chemistry performance. Curious if you could just unpack that for us. How much of that was price? How much was new product contribution in bioseparations? As a follow-up on pricing, can you just elaborate? You had talked about, I think it was 100 to 200 basis points of pricing improvement with a high stick rate in that business. So how do you see pricing evolving here in chemistry within that 6%, 2026 guidance framework?
Udit Batra, CEO
Let me start with this, Casey, and Amol will elaborate. Look, very happy with what we're seeing on chemistry, 12% growth for the year. Seeing really nice momentum already in Q1 with the innovation. Basically, it's a mix of what you just mentioned earlier. These are highly innovative products that command a price premium. From a pipeline and product perspective, as I mentioned in the prepared remarks, we've built on the MaxPeak Premier technology, which is bio-inert — which targets bio-inert surfaces of all types. With SEC columns, with oligonucleotides, with slalom chromatography, and the newest kid on the block is the affinity chromatography where we're attaching antibodies to particles. Super excited about what's going to come from BD with the capability in biology and antibody preparation, so we can prepare specific antibodies to conjugate to our particle. We feel very good about what's been happening and a nice momentum already at the start of the year. Amol, do you want to talk about pricing?
Amol Chaubal, CFO
Yes. I mean on chemistry alone, Casey, as we had outlined, chemistry, we are able to get an amazing stick rate on our list price increases. For like-for-like SKU, like-for-like geography, we are generating close to 400 to 450 basis points on chemistry. On the overall portfolio basis, we're generating about 200 basis points of like-for-like SKU, like-for-like geography. That doesn't include upsell, and that's sort of running ahead of what we outlined at our Investor Day. More critically, that's a significant opportunity that lies ahead of us for BD. Remember, because Waters back pre-COVID was 50-ish basis points of year-over-year price increase. Now we are consistently delivering 200 basis points plus. BD is exactly that—historically, they've done somewhere between 40 to 50 basis points, and there's a meaningful opportunity ahead of us to reapply our blueprint that has been so successful.
Operator, Operator
Your next question will come from Puneet Souda with Leerink.
Puneet Souda, Analyst
If I could revisit an earlier question regarding the cautious approach you're taking with the growth of acquired assets. Clearly, the numbers are lower than your previous expectations. I understand that you're incorporating pricing and KPI discipline into your strategy. However, your markets differ from those in pharma QA/QC. Could you clarify how much flexibility there is in these numbers? How much have they been adjusted? This is the top question we're receiving from investors about the caution you're applying to the acquired portfolio.
Udit Batra, CEO
Let me start, and then Amol will give you the parts. Look, I mean, we're not baking in, just to correct the question itself, we're not baking in the pricing improvements, or the deal desk and the launch readiness into the numbers. Amol, do you want to describe the details?
Amol Chaubal, CFO
Yes. I mean, look, we are baking in primarily the headwind from China DRG. At this point, it's only prudent to sort of bake that in. We are also baking in some continued slowness coming out of other elements that are associated with China, or the academic and government market. But again, when you look at our own Waters stand-alone U.S. A&G performance, it's a tale of two worlds. There is a clear meaningful upside. If we can reapply our success to some of these parts, what we've done in China, like what we did with U.S. A&G. At the beginning of the year, right out of the gate, we want to be prudent.
Puneet Souda, Analyst
Got it. That's helpful. And then was there any contribution from extra selling days in Q1 that you're contemplating?
Amol Chaubal, CFO
So I mean, our Q1 guide reflects four extra working days.
Operator, Operator
Your next question will come from Subbu Nambi with Guggenheim.
Subhu Nambi, Analyst
Amol, what does operating margin progression look like this year with the addition to BD? What prudence is in those risk-adjusted assumptions given it's a cleaner base?
Amol Chaubal, CFO
Yes. Look, I mean, as we came into fourth quarter, we said we have a few strategic R&D investments that could accelerate growth, particularly in bioseparations and informatics, and you're seeing the results of that growth on our top line. So we took the opportunity to accelerate some of those investments without changing our long-term margin algorithm. So coming into 2026, we're back to 31.3%, which we feel really good about. The BD Biosciences and Diagnostic Solutions businesses are coming in at 22.4%. Net of revenue and cost synergies, that allows us to deliver a 28.1% margin, which is perfectly in line with how we announced the deal where we said, look, we'll expand the margin of the pro forma company from 27% to 32% over 5 years. Where we are coming in on 2026 is exactly in line with a little over 100 basis points in the first year.
Operator, Operator
This concludes the Q&A portion of the call. I will now hand it back to Udit.
Udit Batra, CEO
Thank you. Look, I mean, guys, thank you very much for your attention today. As we get into the new chapter for Waters, we're starting our guidance for 2026, with, again, an industry-leading growth for the pro forma business. Really coming out of the gate strong on operational execution and synergies with $55 million on cost and $50 million on revenue side, which yields 100 basis points of margin expansion already in year 1, and almost a 1% accretion in less than a year. I feel very good about where we're starting. Thank you very much for your support and look forward to talking to you again.