Waters Corporation Q3 FY2025 earnings call

Key managerial messages include strong third quarter results with top and bottom line exceeding guidance. Momentum in instrument growth, recurring revenue, and performance across regions and product lines. Innovation with products like Xevo CDMS and Empower updates. Pending combination with BD's Biosciences & Diagnostic Solutions business. Operational highlights include strong instrument sales, growth in GLP-1 testing, PFAS, and India generics, progress in bioseparations and bioanalytical characterization, and new product launches like Xevo CDMS and Empower advancements.

In the third quarter, sales grew 8% as reported and 8% in constant currency. Instruments grew 6%, led by high single-digit growth in the LC-MS portfolio. Recurring revenue grew 9%, driven by 7% service growth and 13% chemistry growth. By region, Asia grew 13%, while Europe and the Americas each grew 5%. China sales grew 12%, driven by double-digit growth in Pharma and Academic & Government. India grew in high teens. Instrument sales grew 6%, led by high single-digit growth in LC-MS System. Chemistry grew 13%, bioseparations grew over 20%.

Full year 2025 constant currency sales growth is expected in the range of 6.7% to 7.3% (midpoint 7%), and adjusted earnings per share guidance is $13.05 to $13.15. Fourth quarter 2025 expects constant currency sales growth in the range of 5% to 7%, with adjusted earnings per fully diluted share anticipated to be in the range of $4.45 and $4.55.

External risks include uncertainties in global trade and policy changes affecting end markets. Integration risks related to combining with BD's business, such as potential headwinds in segments like academia.

Q: Nice quarter. I'd love to unpack the pharma strength to start. America is up low double digits, China up over 20%. Can you maybe just provide a little more color on both those markets in the U.S., how much of this is on the back of the [indiscernible] announcements? And how are you thinking about kind of year 2 of the replacement cycle? And then durability of momentum in China, is this increased R&D investment? Is it a multinational activity? And how do you think about anti-involution there? It seems like that could be a tailwind in China going forward. And then lastly, just on chemistry up double digits. Can you maybe just provide a little bit more color on what's driving that? Because you are tracking above historical growth trends.

A: Look, very happy with what we're seeing in pharma. It grew double digits again this quarter. And as you mentioned, the growth is across all regions. Starting with the Americas. Look, I mean, double-digit growth overall. But if you just take U.S. and Europe as a combination. I mean the growth was driven by the success of our replacement cycle in large pharma and equally the traction of our new products, right? I mean you'll note now Alliance iS grew 300% versus last year. Xevo TQ Absolute start to enter the DMPK space, and that's benefiting the pharma growth in the U.S. and across Europe quite a bit. GLP-1 testing is doubled versus last year and increasingly our biologics characterization instruments as well as our bioseparations portfolio is doing extremely well with large pharma across U.S. and Europe. If you go to China, in China, same as last quarter, activities being driven by CDMOs supporting the local biotech industry. And again, here, our new product portfolio is doing extremely well, right? I mean these customers are supporting biotech customers who then have to transition many of these molecules globally, and they want the best characterization techniques, the best chemistry, and that's benefiting us quite a bit. and not to leave India out, I mean the India generics market continues to grow in the high teens. Now that said, there are still pockets of low growth, right? Like we mentioned in the past, China generics, pharma discovery and CROs are still a bit slower. So as those improve, the setup is extremely good as we go forward for pharma and as we look ahead. So great execution across U.S. and Europe and globally, great traction with new products and still some pending end markets or segments that are not yet growing. Now turning to your question on chemistry, right? I mean this is a real success story of our focus on innovation, especially in bioseparations. Like this quarter, we grew 13%. Year-to-date, the growth is 11%, and there is a significant contribution of our bioseparations portfolio, right? So we launched MaxPeak Premier roughly 5 years ago that created the bio-inert surface category. And on top of that, we've been step-by-step launching new products targeted to different types of novel modalities and large molecules. First came the SEC columns, basically helping us resolve large molecules that we can separate through porous particles. We launched Affinity Chromatography last year, again, with the MaxPeak Premier as a base and that is growing really, really nicely. Let me have Amol jump in just to sort of give you some help on the modeling as you think about this in the future and the contribution of new products.

Q: Pretty strong results here. I had 2 questions for you. The first is on BD transaction. It sounds like there's a lot of efforts underway. Udit, I was curious on your latest thoughts on the revenue synergies and confidence to achieve that. And then my second question, I'll go on mute is, last week, there was an FDA update around biosimilars for analytical assessments with LC-MS. Just curious if you could help us understand what that might mean for Waters?

A: Thank you, Jack. I think your line was breaking up a little bit, but your first question was around BD, right? Look, a very busy few months since we last spoke. I've had the opportunity to visit several customers across bioscience and microbiology. Equally, we've had a lot of discussions with our future colleagues in workshops. So let me just give you some color on both of those, and then I'll let Amol comment on the immediate impact of different types of synergies. Look, from a customer standpoint, the FACSDiscover S8 and A8 are a significant advancement in the field of flow cytometry. I had the opportunity to visit academic customers, small pharma customers and large pharma customers. And now you couple this with a more stable CapEx environment going forward where customers are able to plan without many perturbations their CapEx. I mean, we see a very significant opportunity there to increase the uptake of FACSDiscover S8 and A8. I mean, this was fantastic to see with the customers myself. On the microbiology side, I had an opportunity to visit automated and manual laboratories. Now to just illustrate the difference between the two. In manual laboratories, you get hundreds of samples in a day and about 80 or so technicians will be in any laboratory basically doing a lot of these experiments manually. And if you compare that to an automated lab, you will need roughly 5 to 7 technicians to do the same throughput or even a higher throughput of experiments, right? So significant savings. And to put that in perspective, BD's Kiestra platform has roughly 10% to 20% growth in Europe over the last couple of years, whereas in the U.S., the penetration is at a very low level. So we think there's a significant opportunity there as well. So I'm thrilled to bits to see things that we had put on paper and really verify them with customers and meet new colleagues. Now in terms of integration planning. We've had roughly 120, 130 colleagues come to Milford, our headquarters, twice in the last few months. The last workshop really focused on day 0, day 1, day 100 planning. So there is no -- nothing lost in transition from one organization to another. And then we spent significant amount of time taking the synergies that we had signed up for and elaborating the plans with milestones and targets and assigning those to individuals across the 2 organizations and take a significant amount of progress made on that front. And I'll let Amol comment on which synergies will contribute rather quickly in the next year or so.

Q: First one on the 4Q guidance and then I have a broader follow-up. On 4Q, just wondering if you're expecting a budget flush in the fourth quarter. If there are any pull forwards in the third quarter that you saw you had a pull forward in 2Q in China, but you grew strongly again 13% in China, I believe. So wondering if you can clarify on the pull forwards. Or should we expect a normal seasonality in the fourth quarter? And fourth quarter contribution instruments versus chemistry, if you could elaborate?

A: So let me start, and then I'll pass over to Amol on the breakup. Look, Puneet, we -- I mean it's a very strong setup going into the fourth quarter, right? The drivers are the same instrument replacement cycle, idiosyncratic growth drivers, innovation, really kicking hard. So feel very good about what we are seeing going into the fourth quarter. I mean -- and as usual, we have maintained our guidance philosophy, right? So when you look at the full year guide, I mean, we basically said 7% at the midpoint, high single-digit growth, EPS double-digit growth. That means that Q4 is at 5% to 7%, right? And when you take that math at the midpoint of the guidance, it's slightly less than a 16% ramp from Q3 to Q4, which is substantially lower than what we've seen on average for Waters, which is roughly 22% and even lower than what we saw last year, which was at 18%, right? So that gives us -- and it is the same philosophy as we've had through the year, we will look at it in the rearview mirror and claim success, but I can simply say, I mean, there is a significant amount of prudence built into what we have guided for Q4. Amol?

Q: Great. I have two here. The first is on TA. You said that business came back faster than expected. I think you had previously assumed TA would be down 5% in the second half, and you grew 2% here in 3Q. So maybe walk us through your latest expectations as we exit the year in TA. And then on the instrument order funnel, you talked about orders exceeding shipments again in the quarter. Maybe walk us through what you're seeing from an order funnel perspective. And I would be curious to hear your thoughts on the replacement cycle runway. You've historically said that the cycle usually lasts around 2 to 3 years. But just wondering if this current cycle could last longer, just given the strength that you've seen here, coupled with new product launches, the FDA update, Jack referenced earlier, and perhaps any sort of reshoring benefit?

A: Thanks, Casey. So quickly on TA, right? I mean the thing that was causing sort of the pain in Americas was largely driven by the volatility around tariffs with some of our large industrial customers. And as that is starting to stabilize, these customers are coming back to business and releasing capital for projects that were stalled and then that, coupled with an interest rate outlook that is improving, opens projects that were stranded for last several quarters. So in general, we feel good that the business is tracking towards a good direction. And in terms of the funnel and the order book, I mean, a lot of things are going well, right? In the sense you have large pharmas and CDMOs in middle of a replacement cycle, the innovation that we've put out in the market across both LC and MS is resonating and solving critical unmet need. And that is further than amplified by bioanalytical characterization and bioseparations where we continue to make big headways. So the funnel is pretty rich and strong. Now having said that, 3 customer groups are still on the sideline, CROs, biotechs and branded generics in China. We start to see CROs come into the mix as we come towards the end of the year, which is great because then they add to the replacement cycle as we get into 2026 and there is still a significant runway left on both large pharma and CDMOs that positions us really well for the upcoming year. And then at some point, branded generics in China and drug discovery have to consider replacement because these instruments have aged far more than their typical useful life.