Earnings Call Transcript - WAT Q1 2026

Operator, Operator

Good morning. Welcome to the Waters Corporation First Quarter 2026 Financial Results Conference Call. To ask a question during the Q&A portion of the call, please press star then one on your telephone keypad. This call is being recorded. If anyone has 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, Lila, and good morning, everyone. Welcome to Waters Corporation's First 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 financial and operational impact of Waters' combination with the Biosciences and Diagnostic Solutions business of Becton, Dickinson and Company, or BD. We will provide guidance regarding possible future results, as well as commentary on potential market and business conditions for Waters Corporation over the second 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 or in the appendix of the slide presentation accompanying today's call. Unless stated otherwise, all organic revenue growth rates are presented on a constant currency basis and are in comparison to the first quarter of 2025. For acquired company revenue, unless stated otherwise, all results cover our period of ownership from the transaction closing date on February 9, 2026, through to the end of the quarter for acquired company revenue growth rates. Unless stated otherwise, all growth rates for the acquired company are presented on an estimated as-reported basis, covering the period of ownership in comparison to the prior year equivalent period that predates Waters' ownership. 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. On today's call, Udit will begin with our key messages and business highlights. Amol will then review our financial results and outlook. After that, we will open up the lines for questions. I'll now turn the call over to Udit.

Udit Batra, President and Chief Executive Officer

Thank you, Caspar, and good morning, everyone. We delivered an excellent first quarter as a combined company, marking the start of a new powerful era of growth across our four divisions. We achieved double-digit organic growth in our legacy businesses, delivered meaningfully better-than-expected revenue for our newly acquired businesses and grew adjusted earnings per share by 20%. We also took decisive steps towards building our new platform for sustained long-term growth, driving strong momentum and underpinning our raised full year growth outlook. Before turning to the numbers, I want to recognize our teams for delivering this strong start to the year. They are enacting immediate operational improvements, continuing to deliver pioneering innovation and collaborating effectively to deliver revenue synergies already, all while ensuring a smooth transition from BD. It is a true privilege to work with my colleagues, and I'm proud of what they have accomplished. In the first quarter, total company as reported revenue was $1.267 billion, comprising $747 million of organic revenue and $520 million of Biosciences and Diagnostic Solutions revenue following the February 9 acquisition closing date. Organic revenue grew 13% as reported and 11% in constant currency, exceeding the high end of our constant currency guidance range by approximately 200 basis points. Orders again outpaced sales. Biosciences and Diagnostic Solutions revenue exceeded guidance by $40 million and grew an estimated 7% on a reported basis versus the prior year equivalent period, a strong opening performance for these businesses under Waters' leadership. On a full quarter pro forma basis, comparable revenue growth also exceeded expectations and improved meaningfully relative to fourth quarter trends. Execution initiatives launched at closing drove flat year-over-year reported growth despite a $20 million headwind in respiratory testing due to the weak flu season. Excluding these impacts, growth was approximately 3% for the full quarter. With our strong top line performance, combined with disciplined cost management and operational excellence across the organization, adjusted EPS grew 20% year-over-year to $2.70 per share, exceeding the high end of our guidance range by $0.35. Let me now cover these drivers of strength in more detail. Beginning with our organic revenue performance. The Analytical Sciences division grew 12% in constant currency, with instruments up 8%, chemistry up 13% and service up 14%. In pharma, we grew mid-teens with sustained above-market performance supported by our unique exposure to idiosyncratic growth drivers, continued strong instrument replacement and excellent adoption of new products in our high-growth adjacencies. In academic and government, we grew high teens, driven by strength in Europe and broad-based demand for our revitalized high-resolution mass spec portfolio. In industrial, we grew low single digits, led by chemical analysis and continued momentum in PFAS testing applications. Thanks to effective cross-divisional collaboration, given our diligent integration planning, approximately one percentage point of Analytical Sciences growth was driven by tandem quadrupole mass spectrometry sales through the Biosciences channel and early proof of revenue synergy realization. Within the Advanced Diagnostics division, the clinical business unit previously reported within the Waters division grew 14% despite DRG weakness in China. Strength was led by double-digit growth in the Americas and Europe. The Material Sciences division grew low single digits, reflecting solid performance across core industrial and high-growth applications given present macro conditions. Turning now to our newly acquired businesses. The Biosciences division delivered $230 million of revenue, representing 7% estimated growth on an as-reported basis from the closing date of the transaction to the end of the quarter. Flow research and Flow clinical both grew 7%, reflecting improved execution and increased commercial activity. Reagents grew low double digits, while instruments remain pressured due to U.S. academic and government trends and ongoing China-related constraints, including export restrictions of high-parameter products and lack of a localized product portfolio. Meanwhile, overall demand for our recently launched FACSDiscover A8 and S8 systems remained strong. On a full quarter pro forma basis, Biosciences declined 1%, marking a significant improvement from the 10% decline in the fourth quarter of 2025. This inflection is further underscored by our ex-China growth, which was 4% for the full quarter. As we localize the China portfolio in the second half of this year, launch additional new products and implement incremental new commercial actions as the year progresses, the business is poised for further acceleration throughout 2026. Within the Advanced Diagnostics division, Diagnostic Solutions delivered $288 million of revenue, representing 8% estimated growth on an as-reported basis from the close date. Microbiology grew 10%, reflecting improved commercial momentum tied to the newly enacted KPI discipline ahead of our BACTEC FXI launch in blood culture. On a full quarter pro forma basis, the Diagnostic Solutions business grew 1%, a clear acceleration from the high single-digit decline in the fourth quarter of 2025. Excluding respiratory testing headwinds, growth was 6% for the full quarter, reaching mid-single-digit underlying growth sooner than expected. At the divisional level, including the clinical business unit, Advanced Diagnostics grew 3%. Excluding these same respiratory headwinds, the Advanced Diagnostics division grew 7.5% for the full quarter on a pro forma basis, reflecting strong underlying momentum. This inflection was delivered even ahead of the full benefit of our commercial execution initiatives and new product launches and despite a 2% China DRG-related headwind that will annualize into the baseline in the second half of the year, positioning the business for continued acceleration as we enter the back half of the year. Less than 90 days post-close, we have already made notable progress after taking control of the Biosciences and Diagnostic Solutions businesses as is evident in our results. Immediately after the February 9 closing date, we launched a 180-day plan to reinvigorate growth centered on a focused set of rapid execution initiatives. Early results have been outstanding, driving a clear and meaningful step-up in revenue performance relative to pre-close trends. Our first priority was to instill focus, accountability and urgency across our newly acquired businesses. We have since substantially increased the frequency and rigor of forecast and funnel reviews, with deeper inspection of conversion rates, deal progression and pipeline quality. This has driven greater visibility and transparency, faster decision-making and improved commercial execution. In parallel, we have taken deliberate actions to increase commercial activity across the organization. We have raised expectations around customer engagement, driving our sales team to spend more time in the field, getting in front of customers and increasing outbound activity. This has been reinforced with clear KPIs and daily management, resulting in meaningful increases in call volume, customer visits and pipeline generation, which is driving stronger funnel trends and overall commercial momentum. Our second near-term priority under our 180-day plan is pricing discipline. We have deployed our experienced Waters pricing team across Biosciences and Diagnostic Solutions where we have conducted a comprehensive pricing review and are establishing two new deal desks. We are already seeing tangible results with pricing actions taken right away in the quarter, beginning to augment revenue performance. In addition, we are actively reviewing reagent rental contracts and utilization data to identify commercial opportunities. Within U.S. Diagnostic Solutions alone, our initial review of 1,600 contracts has identified approximately 700 that are currently out of compliance, representing a double-digit million shortfall annually. We see meaningful opportunity to improve operational follow-through on these contracts in the quarters ahead. Our third near-term priority is to regain share in Flow research. We have already approved and initiated actions to localize manufacturing of Flow instruments in China to improve market access and reduce export complexity, addressing a key source of share loss. We intend to begin manufacturing key products in China for China starting in the third quarter, which is already providing our team a strong impetus to begin competing for tenders that require local manufacturing. We're applying the same playbook that has made our Analytical Sciences business a growth leader in China. For Flow research reagents, we're improving product availability and speed to customer by adjusting our distribution strategy, leveraging new channels and mobilizing Waters' existing distribution network. These actions are expected to begin resolving prior constraints that have impacted share beginning in the second half of this year. We remain the market leader in downstream high-volume life science applications, spanning LCMS, light scattering and precision chemistry workflows together with related service and informatics. In the first quarter, we launched our next-generation Microflow LC Chemistry Columns with MaxPeak Premier technology, delivering up to twice the sensitivity of traditional microflow columns used in high-throughput bioseparations, DMPK and OMEX applications. In light scattering, we also recently launched our omniDAWN Multi Angle Light Scattering Detector, which is an industry-first extended range detector for use in UPLC and meets the rising throughput and resolution requirements of our customers. These new product launches increased our degree of differentiation when serving large molecule applications in our attractive end markets. In microbiology, we recently announced that our next-generation blood culture system, the BACTEC FXI, has received CE marking under the European Union's In Vitro Diagnostic Regulation, representing a key milestone in our microbiology product roadmap and delivered ahead of schedule. BACTEC FXI is a groundbreaking new product that combines industry-leading automation, allows 60-sample loading capacity and offers a 3-hour faster detection time than the current generation BACTEC, which was launched over a decade ago. This system is now available in Europe and Japan, and we're pursuing additional regulatory approvals in other key global markets in the months ahead. In molecular, we recently received FDA clearance for our BD Onclarity HPV self-collection kit and BD Onclarity HPV assay, enabling at-home cervical cancer screening with extended genotyping for multiple high-risk strains. This solution allows patients to collect their own sample at home, which is then analyzed in the lab using the BD Onclarity HPV assay, removing barriers to screening access. Cervical cancer is highly preventable, yet remains significantly underscreened. Nearly one in four women in the U.S. is not up to date with cervical cancer screening despite HPV being the primary cause of nearly all cervical cancers. Screening gaps persist due to access challenges, discomfort and patient avoidance of pelvic exams; self-collection directly addresses these challenges by offering a less invasive and more convenient alternative with a proven ability to increase screening participation. As the most comprehensive at-home cervical cancer screening tool available, we are empowered by a mission to remove these barriers that prevent individuals from receiving routine screening. Our goals are aligned directly with the priorities established by the U.S. Department of Health and Human Services, which identified expanding at-home testing as a top public health priority last year. We have already begun to sign contracts with strategic partners as we bring this solution to market. Now turning to the synergies. On cost synergies, we remain firmly on track to deliver our $55 million target for 2026 driven by organizational optimization, procurement savings and network optimization with a clear line of sight to deliver. Since February 9, we have moved quickly to enact our restructuring plan and are now in advanced stages of implementation. We expect these actions to improve cost efficiency by optimizing spans and layers, eliminating redundancy and achieving a leaner centralized cost structure as part of the integration. The associated savings will hit the P&L beginning in the third quarter of this year. We've also activated our centralized spend control tower, increasing visibility into indirect spend and driving more disciplined procurement execution. These actions are enabling us to capture savings across key categories while improving control and accountability. At the same time, we're also taking business-level cost actions, separate from our synergy program, and rightsizing costs in areas where there is clear opportunity to realign with the revenue base. Together with our growth outlook, these actions support solid margin progression in the second half of the year. On revenue synergies, as I mentioned earlier, we're already ahead of plan. We have moved quickly to activate cross-selling across the combined commercial organization, leveraging the Biosciences channel to drive incremental demand for mass spec in pharma clinical settings. We expect further contribution as we continually scale these efforts throughout the year. As we progress through 2026, additional synergy levers will start to build across instrument replacement, service plan attachment and e-commerce. In total, we remain well on track to deliver $50 million of expected revenue synergies this year. On instrument replacement, of the 22,000 ripe for replacement, 12,000 are BACTEC, with over 50% greater than five years old and over 25% greater than ten years old. Since February 9, we have accelerated the U.S. and European launch of BACTEC FXI by three to five months relative to the inherited business case, creating earlier revenue capture across the significant installed base opportunity. On service plan attachment, we have completed the first ever full coverage analysis of low microbiology and molecular diagnostics installed base. Beginning this quarter, we are assigning these opportunities to account-level representatives supported by clear KPIs and our Waters service leadership team. In this effort, we expect to drive at least $20 million of incremental revenue over the next five years. On e-commerce, we have scaled our digital capabilities team in recent weeks. We now have more than 100 full-time employees in our e-commerce team at our global capability center in Bangalore. This investment is a key enabler of a future best-in-class e-commerce platform, strengthening our competitive position and driving increased customer adoption of digital ordering channels, which is a key synergy. Turning now to 2026 guidance and our value-creation roadmap. We have begun 2026 with significant momentum, driven by the instrument replacement cycle, idiosyncratic growth drivers and accretion from our high-growth adjacencies. As a result, we are raising our full year 2026 organic constant currency revenue guidance to 6.5% to 8%, reflecting our strong first quarter performance and embedding $15 million of expected revenue synergies from cross-selling of mass spec. For the acquired businesses, we now expect Biosciences and Diagnostic Solutions to generate approximately $3.035 billion of reported revenue in 2026, which includes $35 million of expected revenue synergy contribution tied to the vectors I just covered, including instrument replacement, service plan attachment and e-commerce. Together, total 2026 reported revenue is expected to be approximately $6.405 billion to $6.455 billion based on latest FX rates. Turning now to EPS. Given our strong first quarter results, updated FX assumptions and the prudence embedded in our second half outlook, we are raising our full year adjusted EPS guidance by $0.10 to $14.40 to $14.60 per share, reflecting growth of 10% to 11%. With our synergy levers now underway, we have an excellent platform for continued strong performance as a new powerful era of growth begins, unfolding in three phases over our midterm outlook. In Phase I, where we are today, the incremental performance at our acquired businesses is tied to immediate operational improvements, such as those outlined in our 180-day plan, together with early revenue synergies from cross-selling. The strong Q1 results give us confidence that this foundation is being built at speed. In Phase II, these operational improvements are then joined by our full first tranche of revenue synergy levers, spanning instrument replacement, service plan attachment and e-commerce. These are near-term well-defined opportunities that are expected to begin contributing starting in the third quarter of this year. In Phase III, the strategic power of this combination becomes most visible. New product launches and bioseparations taking Flow into QC in bioanalytical characterization and our new platform launches such as rapid stability testing are expected to add further incremental growth vectors as we increasingly leverage our joint capabilities. Each of these spaces takes us further up the growth curve from the mid-single-digit pro forma growth rate where our full year guidance sits today, progressively upwards into the high single digits over the next several years. This is very similar to what we have seen at our legacy Waters business over the last five years. At the same time, we expect to drive significant margin expansion augmented by our cost synergies and expect to achieve at least 100 basis points of adjusted operating margin expansion every year through the end of the decade. Together, this powerful equation yields a mid-teens adjusted EPS growth algorithm and one we are executing against with increased confidence. In summary, we are laser-focused on delivering value through our execution and operational improvements, innovation launch excellence and synergy realization. With this transformation already underway, this value creation journey is beginning now and we are doing so at speed. With that, I will now turn the call over to Amol to cover our financial results and guidance in more detail.

Amol Chaubal, Senior Vice President and Chief Financial Officer

Thank you, Udit, and good morning, everyone. In the first quarter of 2026, we continued to deliver industry-leading growth. We delivered reported revenue of $1.267 billion, which was ahead of expectations. Momentum remained strong at Waters organically, and our newly acquired businesses delivered a strong start as our 180-day growth revitalization plan began to take hold. Organic revenue was $747 million, growing 13% as reported and 11% in constant currency, which was 200 basis points above the high end of our guidance range. Our newly acquired businesses delivered $520 million of revenue during our period of ownership, $40 million ahead of our guidance and representing 7% estimated as-reported growth versus the comparable prior year period. Importantly, performance was ahead of expectations on a full quarter pro forma basis as well. As reported growth for the full quarter was flat, improving notably versus the prior quarter and underscoring the strength of our execution and growth revitalization initiatives. Excluding $20 million of respiratory testing headwind, growth was 3% for the full quarter. By geography, as reported, revenue was $505 million in the Americas, $412 million in Europe and $350 million in Asia. We effectively managed our supply chain and mitigated elevated freight costs, tariff costs and inflationary pressures while continuing to invest for the long term. Total company adjusted gross margin was 54.7%, approximately 200 basis points better than expected. Adjusted operating margin was 23.6%, also approximately 200 basis points better than expected. This reflects strong margin results in a dynamic macro environment and one achieved before the benefits of our cost synergies and broader cost actions start to flow through the P&L. Our operating tax rate came in at 15.6% and net interest expense was $38 million. With our top line strength, disciplined cost management and operational excellence, adjusted EPS grew 20% to $2.70. On a GAAP basis, we reported a diluted loss per share of $0.87, reflecting acquisition-related purchase accounting charges, including amortization of acquired intangibles and inventory step-up as is typical following a transaction of this scale. Free cash flow for the quarter was $42 million, impacted by deal-related transaction costs and the timing of net cash settlement with BD. Turning to our results by operating segments. The Analytical Sciences division, which is our legacy Waters division excluding the clinical business unit, delivered as reported revenue of $607 million, up 14% as reported and 12% in constant currency. In constant currency, instruments grew 8%, chemistry grew 13% and service grew 14%. Instrument strength was broad-based across both LC and MS driven by robust replacement activity and our idiosyncratic growth drivers across GLP-1s, PFAS, India generics and biologics. Leveraging the Biosciences sales channel, we also achieved strong mass-spec results in pharma clinical settings, as Udit outlined. Chemistry growth was again led by MaxPeak Premier and new products within bioseparations which have been a vertical success. Our service results reflect strong pull-through from recent expansion in service plan attachment levels. By end market, pharma grew 14%, non-pharma grew 8%; academic and government grew 18% and industrial grew 3%. Within Pharma, spending trends remain strong across ethical pharma, CDMOs and Chinese biotech. Growth was broad-based with high single-digit growth in Americas and Europe. Asia grew nearly 30%, led by over 50% growth in China, low teens growth in India and low teens growth in Japan. Within academic and government, growth was driven by strong spending trends in Europe and solid demand globally for our revitalized high-resolution mass spectrometry portfolio, including Xevo MRT and Xevo CDMS. In China, we continued strong capture of stimulus standard opportunities. Within Industrial, Asia grew mid-single digits, Europe grew low single digits and the Americas was flat. Growth was led by chemical analysis and PFAS applications. For PFAS, we sustained strong growth despite a tough prior year comparison led by double-digit growth in both Europe and China. The Biosciences division, which represents the former BD Biosciences business, delivered as reported revenue of $232 million, representing 7% estimated as-reported growth from the closing date to the end of the quarter versus the comparable prior year period. Reagents grew low double digits while instruments remain pressured due to U.S. academic and government trends and China-related constraints such as lack of localized product portfolio. Overall, Flow Research grew 7% and Flow Clinical grew 7% with stronger commercial execution driving increased activity levels across both business areas. Within Flow Research, performance was led by reagents and strength in our FACSDiscover A8 and S8 instruments, particularly in Europe. Within Flow Clinical, ex-China grew 13% while China declined 25% due to DRG headwinds. By geography, Europe grew over 30%, the Americas grew 10% and Asia declined high teens, led by China. On a full quarter pro forma basis, Biosciences declined 1%, representing significant sequential improvement versus the fourth quarter trend tied to our commercial actions. On an ex-China basis, Biosciences growth for the full quarter was 4%. The Advanced Diagnostics division comprises the former BD Diagnostic Solutions business and the mass spec Diagnostics clinical business unit previously reported within Waters division. Total as reported revenue for the division was $349 million. Diagnostic Solutions delivered $288 million of as reported revenue, representing 8% estimated underlying growth from the transaction closing date to the end of the quarter. The clinical business unit delivered $61 million of revenue, up 16% as reported and 14% in constant currency. On an as-reported basis, microbiology revenue was $203 million, reflecting 10% underlying growth for the owned period, driven by improved commercial momentum as our execution initiatives began to take hold. Ex-China grew low double digits, while China declined 12% due to DRG headwinds, which was better than expected. Molecular Diagnostics and Point of Care revenue was $84 million, reflecting 2% underlying growth for the owned period. On a full quarter pro forma basis at the divisional level, advanced diagnostics grew 3%, which includes a 4.5% headwind from respiratory and a 2% headwind from China. The acquired Diagnostic Solutions business grew 1%, reflecting a significant improvement in growth versus fourth quarter trends. Growth for the full quarter was driven by microbiology, which grew 5% led by high single-digit ex-China growth. Excluding the same respiratory headwind, Diagnostic Solutions grew 6%, setting us up well for the rest of the year as these headwinds are not expected to recur. The Material Sciences division delivered as reported revenue of $79 million in the quarter, representing an increase of 6% as reported and 2% in constant currency. Growth was led by strength in high-growth segments such as batteries and electronics testing as well as aerospace, and we saw continued momentum in electric vehicles and data center applications. However, this was partially offset by soft trends in core industrial applications such as chemicals and materials. Now I will share further commentary on our full year outlook and provide our second quarter guidance. Beginning with organic revenue, we have entered 2026 with significant momentum, driven by the instrument replacement cycle, our idiosyncratic growth drivers and accretion from our high-growth adjacencies. We are raising our full year 2026 organic constant currency revenue growth guidance to the range of 6.5% to 8%, reflecting our strong first quarter performance and embedding $15 million of expected revenue synergy contribution. We now expect foreign exchange translation to have neutral effect on organic sales, which translates to organic reported revenue of $3.37 billion to $3.42 billion in 2026. Turning to our acquired businesses. We now expect Biosciences and Diagnostic Solutions businesses to generate approximately $3.035 billion of revenue in 2026, which includes $35 million of expected revenue synergies. Together, total reported 2026 revenue is expected to be approximately $6.405 billion to $6.455 billion based on latest FX rates. The restructuring actions tied to our cost synergies are taking place towards the end of the second quarter, together with business-level cost realignment. This supports solid margin progression in the second half of the year. In addition, we have a range of operational initiatives in place to fully offset anticipated impact of elevated freight, raw materials and component costs due to ongoing conflict in the Middle East for the balance of the year. Together with our strong first quarter results, we now expect our full year adjusted EBIT margin to be 28.2% in 2026. Below the line, net interest expense is now expected to be approximately $186 million. Given diligent work by our tax team, our full year tax rate is now expected to be approximately 16%, which we expect to persist in future years. This translates to a full year 2026 adjusted earnings per fully diluted share of $14.40 to $14.60, which is a $0.10 raise in our guidance range, reflecting our strong first quarter results, partially offset by incremental prudence embedded in our second half assumptions and updated FX rates. For the second quarter of 2026, we expect organic constant currency revenue growth of 6% to 8%. Foreign exchange represents a headwind of approximately 0.5% at current rates, resulting in organic reported revenue guidance of $814 million to $829 million. We expect revenues from the Biosciences and Diagnostic Solutions businesses to be approximately $802 million in the second quarter of 2026, which represents approximately 2.5% of reported growth. Together, these result in our total reported second quarter 2026 revenue of $1.616 billion to $1.631 billion. Second quarter adjusted earnings per fully diluted share is expected to be in the range $2.95 to $3.05, which is flat to 3.4% growth given the full burden of higher interest costs and newly issued shares and ahead of cost synergies and business-level cost action benefits that begin to flow through the P&L starting in the third quarter. Turning to our implied guidance assumptions for the second half of the year. Even with the full year raise in organic growth guidance, our strong first quarter results and the second quarter guided midpoint of 7% implies a prudent 6% organic constant currency growth in the second half of the year. This is deliberately lower than what was implied in our prior guidance as it further derisks our back half organic growth outlook. For the Biosciences and Diagnostic Solutions, our strong first quarter performance and second quarter guidance also meaningfully derisks our implied second half outlook. Our second half assumptions reflect a prudent growth rate of 1.5 percentage points above our second quarter guidance, well supported by incremental commercial and operational actions already underway and a favorable prior year comparison. With that, I will now hand it back to Caspar.

Caspar Tudor, Head of Investor Relations

Thanks, Amol. That concludes our prepared remarks. We are now happy to open the lines and take your questions.

Operator, Operator

To ask a question, please press star then one. Our first question will come from Tycho Peterson with Jefferies.

Tycho Peterson, Analyst (Jefferies)

Maybe just starting with the guide here, a number of moving pieces. Obviously, the $40 million beat on the BD side, you've got headwind you called out. So it looks like the base business is getting better by about $5 million on an organic basis. The $35 million in revenue synergies, though, can you maybe just touch on where you think those are coming from earlier? I know you gave a little bit of color, Udit. And then what's captured on pricing? I know you kind of flagged that as maybe showing up a little bit earlier.

Amol Chaubal, Senior Vice President and Chief Financial Officer

Yes. I mean, look, on the revenue synergies, the first phase of revenue synergies is around things such as instrument replacement, service plan attachment and e-commerce, and that's what is embedded in that $35 million outlook. What's not embedded in that guide is the pricing actions that we are taking. What's not embedded in that guide is also how we've successfully neutralized the impact of tariffs on our legacy Waters business. And what's not embedded in that guide is the benefits of being more disciplined on our reagent rental contracts.

Udit Batra, President and Chief Executive Officer

Yes. So Tycho, just building on that, I think that the revenue synergies that Amol outlined—the three levers we've talked about in the past. But what's really new is the 180-day plan, right? I mean, we basically worked diligently to look at how we were doing funnel reviews, what the activity was in the field. In fact, in some cases, the weekly call rates have actually doubled, especially in the U.S. Advanced Diagnostics business. We've also implemented pricing improvements and our deal desk both in Biosciences and Diagnostics. And we're looking at reagent rental contracts across the Diagnostic Solutions business. And having looked at roughly 1,700 or so accounts, close to half of them are out of compliance, and that's a double-digit opportunity. So these will start to now play out starting Q2. And then finally, we are localizing our portfolio in China, really using the same playbook that we did for the Analytical Solutions business, which had incredible growth this quarter. So the 180-day plan is having quite an early impact.

Tycho Peterson, Analyst (Jefferies)

Okay. And then for the follow-up, Udit, can you talk about biology. Obviously, there was a comp factor there, but 10% growth is notable, up low double digit ex China. Just talk about your confidence in turning that business around, obviously, the new BACTEC coming fairly soon. So yes, maybe just talk about your confidence in recovery there.

Udit Batra, President and Chief Executive Officer

So Tycho, maybe first, just some contextual comments. Take a step back: Waters is focused on high-volume regulated applications. That's what we've done throughout our existence. We take sort of lean brands and then with smart commercial execution and meaningful new products, deliver what we are seeing as industry-leading growth for our Analytical Sciences business, both growth and margins, and we intend to do the same with microbiology, where the unmet needs are very significant and we've gotten off to a fantastic start. Microbiology has the same characteristics—high-volume regulated applications with significant unmet needs. Great start, about 5% to 6% growth in spite of the DRG headwinds. As you go into the back half of the year, the baseline becomes easier and the FXI launch, which we're very excited about, should augment not just the revenue synergies from instrument replacement but the underlying business itself. So very exciting times and significant unmet needs that excite our team. Expect to see that business strengthen over time.

Operator, Operator

Our next question will come from Patrick Donnelly with Citi.

Patrick Donnelly, Analyst (Citi)

Udit, maybe one on the core kind of legacy Waters instrumentation side. It seems like LCMS, you had a pretty nice quarter. I know you called out pharma. And then it seemed like biopharma demand actually improved a little bit. Can you just give a little more color on what you saw and how the biopharma conversations trended in the quarter? And then as well, just a quick follow-up, what you're seeing in the backlog?

Udit Batra, President and Chief Executive Officer

Yes. So sure, Patrick. First on instruments overall, LCMS was high single digits, yet again. The replacement cycle is still underway, contributing nicely, especially in the U.S. and in Europe. It's augmented by the new products, Alliance iS and now the Xevo MRT having a wonderful start, with chemistry doing a great job there as well, and the idiosyncratic growth drivers—GLP-1 testing, biologics, India generics—all contributing to the instrument growth rate. Now to your question on pharma itself, I'm really pleased with what we see. For a downstream high-volume regulated player, we've seen terrific trends. We brought new products into that space. We're seeing mid-teens growth overall, high single digits in Americas and Europe, where ethical pharma is leading the charge with instrument replacement. In China, we saw over 50% growth driven by biotech, CDMOs and emerging innovative large pharma companies that are homegrown in China; India continued its strength. So feel extremely good about what's happening in pharma and looking forward to what the rest of the year brings in that category.

Patrick Donnelly, Analyst (Citi)

Okay. That's helpful. And then maybe one on BD. I guess in hindsight, now that you guys have been behind the curtain a little bit here for a few months. When you look back at the 4Q kind of underperformance, how much do you think was just kind of an air pocket as the transition of the management happened? I guess what I'm asking is on the execution improvement versus the actual market improvement, what have you seen from 4Q to 1Q and then the expectations going forward?

Udit Batra, President and Chief Executive Officer

Look, as we've come into ownership we've seen tremendous collaboration among the teams. The integration plans were put together across the BD teams and the Waters teams and it was, in some ways, an advantage to have time between announcement and close. That diligence really got the owned period of the quarter off to a fantastic start. The diligence that you've seen with Waters in the past—focusing on high-quality funnels—means our funnels look better than they ever have and forecast accuracy improved as a consequence. We've implemented pricing initiatives across the two new businesses, improved transparency and collaboration on reagent rental contracts and the China localization piece. The 180-day plan itself was put together in collaboration with the teams. To your question on any air pockets, it's difficult to judge, but you do see the advantage of giving the business focus. These are two businesses with leading brands that define their categories. They operate in high-volume regulated settings and our Waters playbook is very relevant there. You're seeing the impact of that.

Operator, Operator

Our next question will come from Vijay Kumar with Evercore ISI.

Vijay Kumar, Analyst (Evercore ISI)

Great. Udit and Amol, congrats on a nice spread and thanks for all the detailed disclosures in the presentation. That was really helpful. Maybe my first one on this BD performance in Q1. And when I look at the full quarter reported growth for BD, it looks like it was flattish, but for the period owned under Waters, it was up 5%. Maybe just talk about this delta between the full quarter versus period owned. Was there any timing of shipments or those kinds of things that aided performance under Waters ownership? Is this because of extra days? And I'm curious, I think the prior guidance was assumed BD to grow maybe up low singles, around 2%. Has that changed at all?

Amol Chaubal, Senior Vice President and Chief Financial Officer

When we put together our guidance, we factored in things such as there will be a few extra days because of the quarter, but also a few days when the situation will be disturbed during the close, and that's how we prepared our guidance. The way the teams executed makes us feel really proud that things are working—the 180-day growth revitalization plan is starting to bear fruit, and that's what resulted in this significant $40 million beat. What we've done with that is we've derisked our second half of the guide and made it more palatable. We've also taken down point-of-care expectations in the second half of the year to be significantly below average, which gives us a lot of room to outperform and puts us in a great spot for the remainder of the year.

Vijay Kumar, Analyst (Evercore ISI)

Understood. And then maybe my follow-up—given that you mentioned that days of—when you look at core Waters, it was 11% organic, what was underlying organic ex days? When you say back half is 6%, is that for core organic or pro forma organic inclusive of BD? And given your comment on order strength, I'm curious on why back half couldn't be better.

Amol Chaubal, Senior Vice President and Chief Financial Officer

The extra days benefit our recurring revenue. We had roughly four extra working days, and that brings about 4% more recurring revenue, which is roughly 2% more total revenue for the legacy Waters business. But even if you strip that out, chemistry grew 13% and service grew 14%. So both of them, even after you take out the four-day effect, are performing at meaningfully elevated levels versus historical performance, and that's due to how our teams are executing in the field. For guidance perspective, our first half growth for the legacy business in constant currency is roughly 9%, and we've derisked the second half. One reason is the four fewer working days in Q4 relative to the first half; another is caution given the current macro. The second half embedded constant currency growth guidance is roughly 6%. That puts us in a really solid spot because our funnel remains very strong, and we continue to operate at the high levels that give us confidence for the second half of the year.

Udit Batra, President and Chief Executive Officer

As you go into the remainder of the year, there's fantastic momentum on the base business. The 180-day plan has set the acquired businesses off to a great start. Remember, there's a lower baseline already starting in Q2 with the respiratory headwinds gone. For the latter half of the year, there is no DRG headwind anymore as well. Then you augment that with new launches—FXI BACTEC—as well as the A7 in our Bioscience business and the reagents and the revenue synergies that start to play out. So we are very positive about the setup for the balance of the year.

Operator, Operator

Our next question will come from Douglas Schenkel with Wolfe Research.

Douglas Schenkel, Analyst (Wolfe Research)

So first, on competition. One—I guess there are two here. Your team is bringing a new level of discipline to the life science business. I'm just wondering if there's been any notable competitive responses worth calling out. The second question is, there are two product areas where you are or will soon be competing with private equity-owned businesses. Generally speaking, how does competing with PE differ? And does this create new opportunities for the business?

Udit Batra, President and Chief Executive Officer

Excellent questions, Doug. On Waters itself and competition, I'll repeat what I said earlier: we are diligent about being focused on high-volume regulated settings, where the drivers are well understood and consumption oriented, and that's allowed us to outpace the market over the last several years. In those setups, we have leading brands—legacy Waters has been a leader, and now we have Biosciences which defines the flow cytometry category and reagents, and Diagnostic Solutions with microbiology. We feel very good about the brands we've inherited and we're working hard on bringing the same execution discipline that has made Waters a growth and margin leader. Regarding competing with private equity-owned businesses, we expect competition to be rational in terms of pricing. We are a pricing leader in the categories we compete in because we bring tremendous innovation into the markets. We expect a similar rational approach from PE-owned firms, and we're not worried. We are focused on unmet needs, proof of principle of our new products and commercial execution.

Operator, Operator

Our next question will come from Elizabeth Koslosky with Goldman Sachs.

Elizabeth Koslosky, Analyst (Goldman Sachs)

So starting with the core business, can you talk to the mid-teens growth in chemistry? I think it's well above the full year guidance that you previously gave of around 6% to 7%. So how durable is this growth moving forward? And what's the updated guide for chemistry in the full year?

Udit Batra, President and Chief Executive Officer

Let me start, and then Amol can talk to the guide. You can say nothing more than we're ecstatic about what we're seeing with chemistry. This is a journey that started a few years ago when we dedicated a large portion of R&D to bioseparations and we've delivered a steady stream of new products that are driving growth. That's what you saw in the latter part of last year and now. Virtually all new molecular entities, especially biologics, are looking at Waters' offering first. As you look at the mid- to long-term, there's no reason to believe this will not flow downstream; chemistry in the mid- to long-term could now be a 9% to 10% grower instead of a 6% to 7% grower. I'll let Amol comment on the balance of this year and our guide assumptions.

Amol Chaubal, Senior Vice President and Chief Financial Officer

In Q2, there was a little bit of pull forward, which we outlined in last year's Q2 earnings call. In general, we've been cautious given we had such amazing double-digit growth each quarter last year. We are guiding more prudently for the full year. We expect to be around 6.5% for full-year chemistry to be prudent, even though what we saw in Q1—13% growth—is real and we expect it to continue. The only reason we are guiding at 6.5% is that the baseline is pretty strong and we are being prudent in our full-year assumptions.

Elizabeth Koslosky, Analyst (Goldman Sachs)

Great. And then on the acquired asset, can you talk to the decision to localize the manufacturing in flow cytometry in China? How much of an investment does this represent? What's the local competition like? And then how durable are some of the market growth drivers like MNC pharma funding in the region?

Udit Batra, President and Chief Executive Officer

Thanks for the question. Pharma in China is doing extremely well. Roughly one-third of all biotech molecules that are being developed and are making headway globally now come from China, which has helped CDMO growth and given birth to fully integrated innovative pharma companies in China. For us, pharma in China grew over 50% this quarter behind these trends and strong execution. Our team in China insisted we localize our portfolio in China to be available to customers across the board, and we did that first for Analytical Sciences. We intend to do the same for Biosciences where currently not much of the portfolio is localized. We're doing that at a rapid pace. We have our own site in Suzhou where we'll start doing this, and in Q3 you should start seeing orders flow in from the localized portfolio. There is another headwind in China for the Flow business related to export controls; we've streamlined the process dramatically during integration planning and since closing the deal and have seen increasing orders even since the export restrictions were implemented. It's the same playbook that allowed Analytical Sciences to lead growth in China, and we expect to replicate that for Biosciences.

Operator, Operator

Our next question will come from Puneet Souda with Leerink.

Puneet Souda, Analyst (Leerink)

The first one on pricing versus volume. Could you talk a bit about how much of the growth was driven by volume in the quarter? You talked quite a bit about pricing initiatives. But wondering if you could drill down a bit and just give us some volume growth metrics in the BD business? And how sustainable is the pricing tailwind just given the competition and, say, the microbiology business?

Amol Chaubal, Senior Vice President and Chief Financial Officer

On the legacy Waters business, we did roughly a little over 200 basis points of price, which is consistent with how we've been performing over the last few years. On the BD business, we did about 0.5% of price, which is in line with how BD has been performing historically. That's what we've embedded in our full-year guide and it's not different from historical performance. We do see a very meaningful opportunity to bring the BD business to the same pricing performance as our legacy Waters business. As Udit outlined, we've instituted two deal desks and see opportunities not just in pricing but also in tariff mitigation and reagent rental contract compliance. None of those incremental opportunities are embedded in our guide, so they represent upside.

Udit Batra, President and Chief Executive Officer

And just to add one other comment on pricing: there are pockets already in Biosciences and Diagnostics where we see pricing similar to what we've implemented in our legacy Waters business. The reason we're not embedding that in the guide is we want to see it play out and become pervasive across all geographies. It's a very good starting point and I expect that to be upside as we go through the year.

Puneet Souda, Analyst (Leerink)

Got it. And then on the core, congrats on the momentum there. I just wanted to get a sense of—in the LCMS instrument replacement cycle, where do we stand? Are you seeing a pull forward of that replacement cycle peak that I think you were expecting in '27? Could we see that in '26 now? Just wanted to get a sense of where we stand in the replacement cycle.

Amol Chaubal, Senior Vice President and Chief Financial Officer

The replacement cycle is going really well. It started with large pharma and then CDMOs and later CROs, Chinese branded generics and some biotechs are still not replacing even when their fleets are significantly aged, so that gives us a good runway into 2027. Keep in mind, 2021 and 2022 were large instrument placement years, and those instruments then come up for replacement in 2029 and 2030. One could say there might be an air pocket in 2028, and that's where reshoring placements would likely bridge between cycles—second half of 2027 into 2028. The setup is really good and we could move seamlessly from one replacement cycle to another with the reshoring bridge in between.

Operator, Operator

This concludes the Q&A portion of the call. I will now hand it back to Caspar Tudor.

Caspar Tudor, Head of Investor Relations

Thank you, Lila. This concludes our call. We look forward to connecting with many of you at upcoming events and conferences.