Waters - Earnings Call - Q1 2025

Executive Summary

• Waters delivered a high‑quality start to FY25: Q1 revenue $661.7M (+4% reported, +7% cc) and non‑GAAP EPS $2.25 landed at the high end of guidance, with double‑digit instrument growth and solid pharma/industrial demand.
• Results modestly beat S&P Global consensus: EPS $2.25 vs $2.22* and revenue $661.7M vs $655.6M*, driven by mid‑teens LC/MS growth and PFAS testing strength; orders grew faster than sales, underscoring momentum.
• Management raised FY25 guidance: cc sales growth to +5%–+7% and non‑GAAP EPS to $12.75–$13.05, with tariff headwinds ($45M gross) largely mitigated to ~$10M net via surcharges, cost actions, and FX tailwinds.
• Catalysts: elevated instrument replacement cycle, PFAS testing tailwinds (PFAS +90% y/y), India generics demand (~20% cc growth), and Empower–Wyatt MALS integration expanding biologics QC workflows.

What Went Well and What Went Wrong

What Went Well

• Double‑digit instrument growth; LC/MS grew mid‑teens, with Alliance iS HPLC sales more than tripling y/y and Xevo TQ Absolute sales up >50%: “Our first‑quarter results exceeded expectations, driven by double‑digit instrument growth” and “Alliance iS … more than tripled …; Xevo TQ Absolute … sales growth of over 50%”.
• PFAS secular tailwind: PFAS‑related testing sales grew over 90%, with EPA regulation momentum; management stressed TQ Absolute’s sensitivity positioning Waters to capture rising demand.
• Estimates beat and guidance raise: non‑GAAP EPS $2.25 (high end) and revenue at high end of range, with FY25 cc sales growth and non‑GAAP EPS ranges raised.

What Went Wrong

• FX headwinds: non‑GAAP EPS growth of ~2% reported included ~5 ppts of FX headwind (company commentary in release).
• Europe flat to slightly down and TA Instruments soft on timing/lumpiness (TA −1% reported, +1% cc); mgmt cited US TA order timing.
• U.S. Academic & Government derisked: proactively haircut ~$15M for rest of year (assumed −20%), a ~50 bps headwind to FY sales growth, albeit offset by ~50 bps tariff‑related pricing tailwind.

Transcript

Operator (participant)

Good morning. Waters Corporation, first quarter 2025 financial results conference call. All participants will be in listen-only mode until the question-and-answer session begins. This call is being recorded. If you have 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, Leila, 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 forward-looking statements regarding future events or future financial performance of the 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 second quarter of 2025 and full year 2025. These statements are only our present expectations, and actual events or results may differ materially. Please see the risk factors included within our Form 10-K, our Form 10-Qs, 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. Both are available on the Investor Relations section of our website. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal 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. 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. Now, as we begin, thank you all for joining us today. We have structured today's call to highlight how Waters' resilient growth profile, operational agility, and innovation are driving strong results as we navigate a dynamic global environment, including recently announced tariffs.

Udit will start by framing our key messages and cover how we are well-positioned to deliver against our 2025 objectives. Amol will then walk you through a detailed review of our first quarter performance, updated guidance, and the actions we have taken to stay ahead of evolving external conditions. After their remarks, we will open the lines for questions. With that, let me turn it over to Udit.

Udit Batra (President and CEO)

Thank you, Caspar, and good morning, everyone. We had a fantastic start to the year. Double-digit instrument growth drove our performance as customer spending, especially in pharma, exceeded expectations. Demand remained solid across all our end markets and geographies. These results are driven by our strong commercial execution and our steadfast commitment to operational excellence. I want to take a moment to thank all my colleagues for their dedication and outstanding performance. Their focus and agility enable us to accelerate the benefits of pioneering science and deliver solid financial outcomes, especially in dynamic market conditions. We have consistently shown leadership through turbulent times. Just look at the last 5 years where we have successfully navigated the pandemic, the global chip shortage, supply chain disruptions, and inflationary pressures. Through it all, Waters has become a stronger company by focusing on three guiding principles.

First, we stay close to our customers and work tirelessly and with urgency to support their evolving needs as conditions shift. Second, while mitigating risks, we never lose sight of opportunities to enhance our competitive position. We remain focused on launching differentiated new products and investing in our capabilities. Third, we redouble support and communication with our colleagues who are dedicated to the mission of the company and lead with an indomitable spirit. Staying true to these principles has enabled us to consistently deliver robust results over the past 5 years. Today, we continue to navigate a dynamic macro environment. However, our resilient downstream-weighted revenue profile and swift operational actions position us to deliver high single-digit earnings growth this year, even after accounting for newly announced tariffs. Amol and I will discuss these points in greater detail later in the call. Turning now to our results.

In the first quarter, sales grew 4% as reported and 7% in constant currency, landing at the high end of our guidance. Instruments grew 11%, led by mid-teens sales growth in both liquid chromatography and mass spectrometry, with strength driven by pharma and industrial end markets. Recurring revenue increased mid-single digits, which is in line with our expectations for a quarter with two fewer days. In China, sales grew 5%, led by double-digit growth in both industrial and academic and government applications. Earnings per share were also at the high end of guidance, supported by strong sales volume and an improvement in FX. Non-GAAP earnings per share were $2.25, reflecting low single-digit growth and high single-digit growth in constant currency terms. On a GAAP basis, EPS was $2.03. Our 11% instrument growth was led by mid-teens growth in pharma.

Additionally, order growth exceeded sales growth, highlighting continued momentum in our business. These results underscore our strong position in attractive secular markets, particularly as customer CapEx spending has continued its recovery. As I highlight the drivers behind our strength, our message remains consistent. First, our team is executing well in an analytical instruments market, still early in its recovery. Second, our revitalized portfolio closely aligns with customer needs at a time when instruments are ripe for replacement. Our innovation remains highly differentiated in markets that we serve, commanding premium pricing. Thirdly, our leadership position in downstream high-volume applications enables us to capture growth across an exciting mix of fast-growing testing opportunities, such as those of GLP-1, PFAS, and genetics testing. Innovation played a key role this quarter, reflecting in excellent customer adoption of our new products.

In liquid chromatography, sales of our Alliance iS HPLC system more than tripled year-over-year, driven by growth across replacement and greenfield opportunities. Within replacement, customers are upgrading to leverage its smart features, flexibility, and productivity advantages. At the same time, adoption at new and expanding manufacturing facilities within pharma is particularly strong, notably among large U.S. CapEx investments. We recently expanded the Alliance iS Bio HPLC product line by adding the photodiode array detector to enhance spectral insights for biopharma development and QC. Waters now has four configurations of Alliance iS HPLC platform to support routine quantitative analysis and expanded spectral analysis of small and large molecules in development and in QC. Mass spectrometry growth was led by our Xevo TQ Absolute System, our top-selling mass spec again this quarter, achieving sales growth of over 50%.

Its superior sensitivity and sustainable design continue to drive demand, particularly in high-volume testing areas such as food and environmental analysis and pharma quantitation. In our chemistry consumables business, MaxPeak Premier Columns again significantly exceeded expectations, growing more than 30%. These products provide excellent solutions for separating complex molecules such as biologics and novel therapeutic modalities. Our differentiated portfolio continues to command strong pricing. As we look ahead, this combination serves us well as a mechanism to provide offsets and capitalize on new demand opportunities in a dynamic global environment. Our unique exposure to emerging high-volume testing drivers also contributed meaningfully to our growth this quarter. For GLP-1 testing, we saw continued demand of our PATROL UPLC system. This advanced analytical tool has become indispensable for in-process testing of these peptides during manufacturing.

Additionally, our chemistry and HPLC offerings saw continued momentum in post-fill finish quality testing, supported by solid CapEx investment and production volumes. While we have a leading position in the analytical testing of current GLP-1 injectables on the market today, we are also very well positioned for future oral introductions. PFAS-related testing sales grew over 90% in the first quarter, continuing the 40%+ growth trend seen both in 2023 and 2024. LC-MS has become the dominant workhorse technique for regulated analysis of these compounds, including drinking water, soil, and wastewater compliance monitoring. This is because most regulated compounds are polar and non-volatile, making them best suited for liquid chromatography. We expect emerging regulations governing PFAS to drive testing in areas like food packaging and consumer products, which is an attractive opportunity for Waters.

Given the need to detect these same non-volatile compounds, LC-MS is also the method of choice in these areas. Our India team again delivered revenue growth close to 20% in constant currency, driven by strong demand from genetics manufacturers and CDMOs. Looking ahead, as outlined at our recent investor day, we expect approximately 30 basis points of annual growth accretion from both GLP-1 and PFAS testing, and an additional 70-100 basis points from growth in India. These volume growth drivers, combined with the instrument replacement cycle and our strong pricing performance, present a compelling high single-digit plus growth profile for our company in the near to midterm. Turning now to new products.

In the first quarter, we launched two new products in the TA division: the ElectroForce Apex 1 for precise mechanical testing of high-performance polymers and composites, and TGA Smart-Seal Pans, which support analysis of atmosphere-sensitive materials in battery, polymer, and drug development testing. Today, we also announced the launch of Empower for multi-angle light scattering detectors, which is an important milestone and commitment from our integration of Wyatt. This advancement expands the scope of critical quality attributes that a biopharmaceutical laboratory can manage and submit to regulators using our Empower software. Our steady stream of innovation continues to strengthen our core business and support our expansion into higher growth adjacencies. I will now cover our updated 2025 full-year guidance. Waters has a unique and resilient revenue profile anchored by our focused exposure to downstream high-volume applications.

This includes pharma QA/QC, where growth is closely tied to manufacturing output and CapEx spending trends. Within these segments, customer spending has remained robust. Looking ahead, customer manufacturing needs continue to evolve, with potential for additional investment driven by tariff-related capacity shifts and U.S. pharma reshoring initiatives. Our team continues to execute well with our revitalized portfolio, particularly as the instrument replacement cycle continues to ramp. We also expect sustained contribution from our idiosyncratic growth drivers and continued achievement of strong like-for-like pricing gains. Given our better-than-expected first quarter performance, we are raising our full-year constant currency sales growth guidance to 5%-7%, while adequately accounting for U.S. policy developments in the academic and government end market. Our adjustment to A&G growth expectation represents a 50 basis point impact on our full-year growth outlook.

Incremental price accretion from tariff-related actions is separately expected to contribute an equivalent 50 basis point tailwind. As such, our growth assumptions for the rest of the year remain unchanged. I will now talk about the current tariff situation and how Waters is positioned to meet the challenges from recent global trade policy changes. Our manufacturing footprint is highly globalized, and it includes a strong existing U.S. presence. A significant portion of our ex-US manufacturing also takes place in jurisdictions subject only to the lower baseline tariff rate. We also do not have a significant tariff exposure to goods entering the U.S. from China or vice versa. After the tariffs were announced, we quickly stood up a cross-functional task force to assess tariff exposure and implement mitigation plans.

We rapidly assessed the impact of tariff exposure and implemented supply chain adjustments, selective surcharges for tariffs, and limits to discretionary spending. Thanks to our swift and decisive actions, we are well positioned to limit the net impact of the newly announced tariffs to a modest $10 million on our 2025 adjusted operating margin, effectively offsetting the majority of a $45 million gross impact. Within our EPS, the combined resulting effect of tariffs and U.S. policy changes is fully offset by favorable foreign exchange movements. As a result, there is no net impact to our original earnings per share guidance. Reflecting our first quarter outperformance, we are raising our full-year 2025 adjusted EPS guidance to a range of $12.75-$13.05. This translates to approximately 8%-10% EPS growth, or 10%-12% on a constant currency basis.

Now, I will pass the call over to Amol to cover our financial results in more detail and provide further details on our guidance. Amol.

Amol Chaubal (SVP and CFO)

Thank you, Udit, and good morning, everyone. For the first quarter, we delivered sales of $662 million, up 4% on a reported basis and 7% in constant currency, placing us at the high end of our guidance range. Orders growth exceeded sales growth, underscoring our strong momentum. By end market, pharma grew 8%, industrial grew 6%, and academic and government grew 3%. Pharma saw double-digit growth in Asia and the Americas and 3% growth in Europe. Industrial was led by Waters Division, which grew high single digits, driven by PFAS applications growing more than 90%. TA Instruments continued to benefit from battery testing demand. Within academic and government, as Udit highlighted, China grew double digits as we continued to leverage our local market presence.

Regionally, Asia grew 13%, with China growing 5%. Americas grew 6%, and Europe grew low single digits. By product line, instrument sales grew 11%, driven by mid-teens growth in both liquid chromatography and mass spectrometry. Recurring revenues grew mid-single digits as expected, given the 2 fewer days in the quarter. Customer activity remained strong, and install-based utilization remains high, with our consistent results supported by our commercial initiatives in service plan attachment, e-commerce adoption, and the launch of new bioseparations columns. Overall, the first quarter execution was strong across markets, regions, and product lines, and our resilient growth exposure positions us well for the remainder of the year. Now, I will comment on our first quarter non-GAAP financial performance. Earnings per share reached $2.25, coming in at high end of guidance, supported by robust sales volume and an improvement in FX rates.

This represents 2% reported growth and 7% growth in constant currency. GAAP earnings per share were $2.03. Gross margin came in at 58.2%, and adjusted operating margin came in at 25.5%, consistent with our expectations. Our operating tax rate for the quarter was 16%, and our average diluted share count was 59.7 million shares. Turning now to free cash flow, capital deployment, and our balance sheet. First quarter free cash flow was $234 million after funding $26 million of capital expenditures. This represents 35% of first quarter sales and a free cash flow to adjusted net income ratio of 174%. Our strong free cash flow generation allowed us to rapidly delever our balance sheet. In the first quarter, we reduced debt by approximately $170 million. Our net debt position is now approximately $1.1 billion, returning to pre-Wyatt acquisition levels.

This results in a net debt to EBITDA ratio of roughly one times. We maintain a strong balance sheet, access to liquidity, and well-structured debt maturity profile. This strength allows us to prioritize investing in growth. We continue to actively evaluate M&A opportunities that will enhance long-term shareholder value. Additionally, we'll assess the potential resumption of our share repurchase program during the course of 2025. Now, I will share further commentary on our full-year outlook and provide you with our second quarter guidance. Waters has a unique and resilient revenue profile, anchored by our focused exposure to downstream high-volume applications. Within these segments, the recovery in customer CapEx spending has remained robust. Additionally, customer manufacturing needs continue to evolve, with potential for additional investments and new capacity driven by tariff-related capacity shifts and US pharma reshoring initiatives, which is not included in our guidance.

We continue to execute well with our revitalized portfolio, particularly as instrument replacement gains further momentum. We also expect to sustain contributions from our idiosyncratic growth drivers and strong like-for-like pricing gains. We are raising our full-year constant currency sales growth guidance to 5%-7%, reflecting our better-than-expected first quarter performance, while adequately accounting for the recent U.S. policy developments in the academic and government end market. U.S. A&G customers account for approximately 3% of our total revenue, making it a relatively modest part of our business. As part of our disciplined approach to forecasting, we have proactively adjusted our outlook for this segment by $15 million to reflect recent market developments. While this adjustment represents 50 basis points to our full-year growth outlook, incremental pricing accretion from tariff-related actions are separately expected to contribute 50 basis points of tailwind.

As a result, our growth assumption for the remainder of the year remains unchanged. We are also raising our reported sales growth guidance to a range of 4%-6%, reflecting our strong momentum in the first quarter, plus recent tailwinds from FX rate assumptions. Turning now to the current impact of tariffs. As Udit outlined, we have acted swiftly to limit the net impact of the announced tariffs to a modest $10 million on our adjusted operating margin for 2025. Approximately 80% of our gross $45 million exposure relates to finished products manufactured in the U.K., Singapore, and Ireland for U.S. operations, as well as raw materials imported to support U.S. manufacturing. The remaining 20% is tied to the trade between the U.S. and China. Approximately $8 million of our net exposure and $39 million of our gross exposure relates to the second half of 2025.

To respond quickly and decisively, we established a cross-functional task force that immediately mobilized to assess risk, implement mitigation strategies, and safeguard our financial objectives. Thanks to the team's rapid actions, including targeted supply chain adjustments, selective surcharges, and disciplined discretionary spend management, we have substantially mitigated this impact. While incremental pricing actions related to tariffs help preserve profit, their impact on the reported margin percentage differs. Accounting for the modest net impact of tariffs, together with the incremental favorable benefit of foreign exchange rates, we now expect our full-year 2025 gross margin to be approximately 59% and our adjusted operating margin to be approximately 31%. In both cases, this reflects a margin percentage that is roughly in line with our 2024 levels. Below the line, we now expect full-year net interest expense to be approximately $40 million, reflecting better-than-expected debt paydown in the first quarter.

Our guidance assumes average diluted share count remains at approximately 59.7 million shares. We continue to anticipate full-year tax rate of around 16.5% in line with last year. Consequently, we are raising our full-year 2025 EPS guidance to account for better-than-expected first quarter performance while absorbing the full impact of tariffs and US policy changes without any degradation to our prior earnings expectations. We now expect full-year 2025 adjusted earnings per fully diluted share to be in the range of $12.75-$13.05, inclusive of all tariff impacts. This is approximately 8%-10% growth and 10%-12% on a constant currency basis. Our guidance accounts for announced tariffs that are currently enacted and those scheduled for after the 90-day pause. Turning to the second quarter of 2025, we expect constant currency sales growth of 5%-7%.

Net of currency translation, reported sales growth is expected to be in the range of 4%-6%. For EPS, we anticipate our second quarter non-GAAP earnings per fully diluted share to be in the range of $2.88-$2.98. This represents approximately 10%-13% reported EPS growth, or 12%-15% growth on a constant currency basis. With that, I will hand the call back to Udit for closing comments. Udit?

Udit Batra (President and CEO)

Thank you, Amol. In summary, our first quarter results reflect excellent momentum and reinforce our confidence in both the recovery of the instrument market and the steady growth of our recurring revenues. We are executing from a position of strength anchored by resilient sources of growth and a revitalized portfolio that continues to command strong pricing.

We remain firmly on track to achieve our 2025 objectives despite the currently the recently announced tariffs and no expected impact to our original EPS expectations for the year. Our commitment to operational excellence, financial discipline, and rapid execution continues to deliver solid outcomes and create value for our shareholders. We are energized by our progress, confident in our positioning, and immensely proud of our team who have been instrumental in achieving these strong outcomes. With that, I will 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 (participant)

Thank you today. If you would like to ask a question, please use the raise your hand feature at the bottom of your screen.

If you are dialed in by phone, press star nine to raise your hand and star six to unmute. Please accept the prompt and unmute your audio when called upon. As a reminder, we are allowing one question and one follow-up. We will wait a moment to allow the queue to form. Our first question will come from Jack Meehan with Nephron. Your line is open. Please go ahead.

Jack Meehan (Equity Research Analyst)

Thank you. Good morning. Good morning, Udit. Wanted to start, talk a little bit more about the replacement cycle dynamics that you're seeing called out in this group, that it's still ramping. Can you just talk about the different customer classes within pharma biotech, what you're seeing there? And then for Amol, within the 2025 guide now, is there any update to what your forecast was for instruments?

Udit Batra (President and CEO)

Jack, good morning and thank you.

Look, instruments performed extremely strongly in Q1, came in ahead of expectations, right? Double-digit growth driven by both LC and mass spec growing in the mid-teens. Now, your question is around the replacement cycle in pharma in particular. LC in pharma also grew in the mid-teens, really, really strong growth. There, the growth was led by large pharma, where I'll remind you that our focus is on late-stage resilient applications in QC, in manufacturing, and in the genetic segment. Large pharma, genetics, and CDMOs, which is about 75% of our pharma business, all grew in double digits. The replacement cycle is well and truly underway. The funnel is quite strong, and our customers are really responding well, both in greenfield and brownfield opportunities to the Alliance iS, making a stake, building a stake there as well. Amol, on the 2025 guide?

Amol Chaubal (SVP and CFO)

Yeah.

The only change for the remainder of the year in our guide is mainly around the U.S. A&G business. It's a very small portion of our business, like 3%. What we've done is we've proactively, meaningfully de-risked our U.S. A&G forecast. We've prudently assumed a 20% decline for US A&G for the rest of the year, which brings our overall A&G for the full year to a mid-single-digit decline for the full year. That creates a 50 basis point stop-line headwind. Separately, our selective surcharge actions on tariffs add about 50 basis points on the top line. For the rest of the year, net of the two, there is no impact. That's roughly the guide change.

Jack Meehan (Equity Research Analyst)

Right. As one follow-up, in the pharma biotech customer class, have you seen any change in behavior related to tariffs?

Like, specifically, from what you can tell, was there any pull forward in the first quarter, or have you seen any increase in ordering in the second quarter, just around customers' positioning around tariffs? Any color on that would be great.

Udit Batra (President and CEO)

Really no change in behavior, Jack, at all, right? The funnels are quite strong. I mean, we've seen momentum through the quarter. Really no change in behavior. In terms of the tariff impact on pharma itself, look, just like us, the pharma customers are spending time thinking through what actions they would take if tariffs were implemented on their products. Just like us, they're thinking through supply chain modifications. You must have read sort of the over $160 billion commitment that many large pharma players have made to reshore in the U.S. We're very well positioned with all of them.

If and when that comes, we are sure to benefit from it. It's not included in our guide, but seeing absolutely no change on the replacement dynamics in large pharma in particular. I just want to take the opportunity also to take a step back, right? We're getting caught up in sort of the small, the changes that are occurring every single day. The pharma industry remains one of the most attractive end markets. Look, I've spent close to 30 years of my career, half of it in pharma and half of it sort of serving pharma through the life science tools industry. And I can tell you, innovation has never been stronger. It is there to meet the needs of an aging population, both on the acute and chronic side.

We feel very good about our position in serving the pharma industry as we together work to getting the benefits of this pioneering science to many, many, many customers in need. Very positive about the long-term prospects of pharma. In the short term, really no change in dynamics on the replacement cycle.

Operator (participant)

Our next question will come from Tycho Peterson with Jefferies. Your line is open. Please go ahead.

Tycho Peterson (Managing Director)

Hey, thanks. Congrats on that quarter. I want to probe into price. I do not think I have ever heard you guys use pricing so much on an earnings call. Maybe talk a little bit about what you are expecting on pricing this year, where you are seeing the greatest ability to push price. Are you not at all concerned about pharma pushing back on pricing?

That does seem to be one of the things we're talking about in response to tariffs is leaning on their own suppliers.

Amol Chaubal (SVP and CFO)

Yeah. Look, I mean, Q1, we did 200 basis points of like-for-like price. As you know, we don't include upsell in our price. Embedded in our previous guide and also in this guide is, excluding tariffs, 200 basis points of like-for-like pricing gains. Now, we are doing selective surcharges associated with tariffs, and they are going to contribute about $15 million or 50 basis points incremental to this 200 basis points of like-for-like pricing gains. That is embedded in our revised guide.

Udit Batra (President and CEO)

Right. In terms of your second part, the second part of your question on pushback from pharma, look, I mean, we've had very close collaboration with our customers.

As far as the 200 basis points on innovative products is concerned, I mean, that's always sort of welcome if you're introducing new products. As far as the tariff surcharge is concerned, that's been conversations one by one with customers. We track the stick rate on a daily basis. I would say between 80%-90% customers have fully understood what we're trying to do. With 10%, you have to have a debate and explain the reasons why and what parts. We're very confident on both the 200 basis points driven by the product differentiation and the additional 50 basis points that is a surcharge due to the tariffs.

Tycho Peterson (Managing Director)

Okay. A follow-up on India. This has obviously been a nice growth driver. You've got some tailwinds heading into 2026 with some of Gujarat moving over there.

How do you think about maybe longer-term risks around that business with manufacturing moves, more onshoring? Do you think that what you're seeing there is sustainable?

Udit Batra (President and CEO)

Yeah, it's a good question, Tycho. Look, I mean, just like the innovative pharma industry, genetics have a strong role to play in relieving funding for reinvestment in innovation. And India has played a strong role in supplying genetics to the rest of the world. Like our large pharma customers, Indian genetics companies also have global footprints, right? They're, in a very straightforward way, able to reshore in other geographies. None of them have initiated any of those discussions. I think if at all there are tariffs, they will again look at the same levers that we have or large pharma companies have, including supply chain adjustments.

We're ready, and we have the best relationships with them to help them navigate through it. That said, the results in India, again, were close to 20% constant currency growth. We're extremely proud of the team in India that is taking our new innovative products and really embedding them in the genetics value chain.

Operator (participant)

Our next question will come from Puneet Souda with Leerink. Please go ahead.

Puneet Souda (Senior Managing Director)

Yeah. Hi, Amol, Caspar. Thanks for taking my questions here. First one on the tariffs and supply chain realignment side. Can you elaborate on what's already completed and what remains to be in terms of supply chain realignment, in terms of Wilmslow, Singapore versus U.S., and what remains to be optimized? Are the LCs and mass specs affected by the IP domiciling and transfer pricing issues that affect the API for the drugs?

Are you largely not impacted from that and have a follow-up? Thank you.

Amol Chaubal (SVP and CFO)

Yeah. Puneet, a couple of things. Look, our gross impact is $45 million. Most of that shows up in the second half of the year, primarily because in Q2, you have some inventory. Our teams did an excellent job of bringing more inventory and stockpiling before the deadlines. That partly is also the reason why the cost associated with that was the drag on our Q2 gross margins. The second half is pretty clean and can be extrapolated into the future. Within that, if you say within the $45 million, roughly $15 million is offset with surcharges. Roughly $14 million is manufacturing cost actions that are largely on a landing mode.

I mean, the actions that we have embedded in our guide are pretty much on the landing mode at this point. We feel pretty comfortable there. Roughly $6 million is discretionary spend management. In terms of your other question on IP, it does affect, right? Because at the end of the day, where you are manufacturing, you have an IP there. You are bringing the product into another domicile at a certain transfer price. You can't change those transfer prices very easily without sort of moving the IP in the first place. The $45 million exposure that we've outlined includes all of that impact in it. There are more moves sort of planned that will go live at the beginning of next year, which will allow us to completely offset the impact as we go into 2026.

Udit Batra (President and CEO)

Puneet, just one embellishment to what Amol has said. Look, none of this stuff happens automatically. I think you're used to us reacting rather rapidly to a changing and challenging environment. Many of you had the chance to meet our team at our investor day. I mean, these are folks who are extremely dedicated to assessing the problems on a daily basis. We meet daily, developing solutions and implementing them rapidly. We continue that cadence on a daily basis. I'm extremely thankful to the dedication of the team to be able to offset $35 million out of the $45 million gross impact that we saw for the full year.

Puneet Souda (Senior Managing Director)

That's great. Thanks for all the details. My follow-up is, I mean, you're indeed outperforming significantly versus the peers.

That comes to the differentiation of what Waters is, its products, the quality, and where it's situated in the pharma, servicing the pharma customers. I'm wondering, can you take a minute and talk about how the pharma customers in the U.S. and Europe versus the pharma customers in India are thinking about in this macro environment? I think the questions are still about the second half and the confidence of these pharma customers and your positioning there that helps you, gives you the confidence to raise the guide and see outperformance in the second half as well. Maybe could you elaborate a bit on that? Because obviously, we're not seeing this from the rest of the industry. Puneet, thank you for the question and the opportunity to comment on this rather important topic.

Udit Batra (President and CEO)

Look, Waters, as you know, is positioned extremely well downstream in high-volume applications where regulations are key. We've made that our home. We've been executing in that domain extremely well. Now, we're at the beginning of the replacement cycle, which helps our instrument growth. You saw double-digit instrument growth already in Q1. We're not seeing any slowdown in replacement discussions with our large pharma customers, our genetics customers, or our CDMO customers, all of which are continuing to grow in mid-teens, right? We grew in pharma high single digit. These three segments are growing in the double digits, right? Driving the growth. A large part of the story is the replacement cycle. As you look at each of these different segments I commented earlier as well, not only is the funnel strong, the conversations are extremely strong.

As they think about navigating the complex macro environment, they're talking to us about changing of their manufacturing footprint, different supply chain reconfigurations. Given our relationships with these customers, we stand to benefit from it. That gives us the confidence to raise the full-year guide given the outperformance in Q1. Pharma is a large part of that story. Our downstream presence, our innovation, which is meeting these unmet needs, the focus on idiosyncratic growth drivers like GLP-1 testing, like the India genetics outperformance, like the focus on biologics is all helping. Really excited about what we're seeing from our customers and their focus on ensuring that they play a strong role in getting safe medicines to people. We have a strong role to play there.

Operator (participant)

Our next question will come from the line of Catherine Schulte with Baird. Your line is open.

Catherine Schulte (Senior Research Analyst)

Please go ahead. Hey, guys. Thanks for the questions. Maybe just what are your expectations for China for the balance of the year? Are you seeing any hesitation in customer spend there? What are your latest assumptions for stimulus?

Udit Batra (President and CEO)

Good morning, Catherine. Thank you for the question. Look, China came in ahead of expectations around 5% growth for the first quarter. This was driven by a strong performance in stimulus-related opportunities in the academic and government segment, where we're benefiting from our wider distribution as well as the localized footprint and equally benefiting from our TA portfolio, which did extremely well in the battery testing arena, right? A&G actually came in double digits for China for the start of the year. Now, as we look at the balance of the year, we've assumed that China basically remains stable at a low single-digit growth.

We have just taken it down from the 5% growth in Q1. We have assumed that it is low single-digit growth. Any wins in the balance of the stimulus would be considered upside, right? Basically, low single-digit for the balance of the year, even with a strong start for the year. A bit of prudence built in there.

Amol Chaubal (SVP and CFO)

Yeah. I mean, Q1 was consistent, right? Even if you exclude the stimulus, we were relatively flat. We have a strong local presence that is executing really well on not just the stimulus, but the broader business, which reflects in our overall number.

Catherine Schulte (Senior Research Analyst)

Great. Maybe a follow-up on reshoring. How do you think about that as a potential tailwind? How long after some of these capacity announcements do you typically see the demand start coming for your products?

I know you said it isn't in 2025 guidance, but just curious how you think that rolls out from a cadence perspective.

Udit Batra (President and CEO)

Catherine, it's early days. I mean, these are just being announced. We're in close conversation with all our customers. Nobody yet has detailed plans on exactly what they're going to do. As they emerge, we expect to play a strong role given that our focus is and it remains on late-stage or marketed compounds, which is where a lot of these capacity expansions will come to support existing products, right? We feel very confident about our position, but it's early days. There's not a lot of detail on exactly where these manufacturing facilities will be put up across the US.

Amol Chaubal (SVP and CFO)

Yeah. Just having a service organization with the best NPS scores really puts us in a driver's seat, right?

Because they are part of all these conversations around tech transfers and site movements. As Udit alluded, none of this has converted into orders. None of this is in our guide.

Udit Batra (President and CEO)

Amol's point is an excellent one. Look, I mean, the service team is the first one to find out when you're opening up a new manufacturing site. Customers want to be sure that the software is transferred appropriately, the methods are transferred appropriately, and the new products, the new instruments that they purchase, really sync up with the software as well as with their other sites. If and when it starts, we will be one of the first to find out.

Operator (participant)

Our next question will come from Sung Ji Nam with Scotiabank. Please go ahead.

Sung Ji Nam (Managing Director and Senior Equity Research Analyst)

Hi. Thanks for taking the questions. I'll just ask one at the multi-part on academic, especially U.S. academic.

Obviously, it's a very small portion of your revenue, but could you remind us kind of what is the latest number for that in terms of your exposure? Also curious kind of what you're seeing on the ground currently. Are you actually seeing meaningful weakness from your customer base? Lastly, with all the structural changes and structural changes that are being proposed, are there opportunities for Waters to kind of actually take advantage in terms of future opportunities in academic, especially in U.S. academic? Thank you.

Udit Batra (President and CEO)

I'll start, and then I'll pass it on to Amol. Look, you're right. In academia, government is the smallest end market for us. We're not really reflective of exactly what's going on in that segment, as many of our peers might be. The U.S. portion of that is roughly 3%.

Now, ironically, the start to the year was excellent, right? That segment grew double digits, driven by PFAS testing and Department of Defense orders, right? Started the year with double-digit growth. As Amol pointed out in the prepared remarks, we've assumed a significant decline for the balance of the year, right? The year started with double-digit growth, but for the rest of the year, we've said it's going to go down by 20%. Amol, do you want to build?

Amol Chaubal (SVP and CFO)

Yeah. No, I mean, look, Q1 was double-digit growth. For the rest of the year, I mean, it's a full-year $90 million or rest of the year $70 million business for us, so really small in the grand scheme of things. We've done a meaningful haircut of $15 million to it, which is assuming the rest of the year is minus 20%. It's prudent.

It's just de-risking, and we'll see how it plays out.

Udit Batra (President and CEO)

Yeah.

Sung Ji Nam (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Our next question will come from Brandon Couillard with Wells Fargo. Please go ahead.

Brandon Couillard (Managing Director)

Thanks for the morning. The PFAS business seemed to really accelerate quite a bit here in the quarter, clocking a new high at 90%. Is there any timing benefit in that growth rate? What are you assuming for the year? And maybe just unpack that acceleration a little bit for us.

Udit Batra (President and CEO)

Yeah. Yeah. So really happy with the performance on PFAS testing, Brandon, and thanks for the question. Look, we've gone from strength to strength. I'll remind you that for the last 2 years, that business has grown 40% each year. So it's not a one-quarter phenomenon. This quarter, it grew 90% across the food and environmental segments, but also academia, especially in the United States.

We did not see any semblance of a pull forward on that, right? Our Xevo TQ Absolute remains the instrument of choice. The funnel is extremely strong on the food and environmental side for the balance of the year, not just in the U.S., but in other geographies. Recently, despite sort of moving towards deregulation across many different segments, PFAS has the opposite trend going for it, right? On April 28, the EPA announced 21 measures to combat PFAS pollution. This includes, of course, aligning PFAS across many agencies, but in no small part, limiting the effluent, the effluent PFAS in effluents for metal finishers and other customers, and equally ramping up the development of testing methods to improve detection and strategies to address PFAS, right? This is not a one-time event.

We're seeing even more focus from the EPA on implementing regulations and asking for even better detection methods. The reason I went on that diatribe is to illustrate the need for the most sensitive instrument in the industry. That's where the TQ Absolute continues to do extremely, extremely well.

Brandon Couillard (Managing Director)

Okay. That's helpful. To follow up, the balance sheet's in great shape. Net debt's down to back where it was through Wyatt acquisition. What's your appetite for another billion-dollar-plus deal or maybe even something more transformative? Do you expect the macro volatility to actually lead to more assets becoming available, perhaps at more attractive valuations?

Udit Batra (President and CEO)

Thanks. Brandon, thanks for the question. Look, Wyatt is a poster child for an acquisition. The strategic fit has been excellent, and it's played out exactly like we thought.

It has helped us build our bioanalytical business, which we want to continue to build on. Second, we committed to taking light scattering into QA/QC. As of this morning, we announced that light scattering is now compatible. That is, the Wyatt instruments are compatible with Empower, which allows our customers, and many of whom have been talking to us about this, to take light scattering into QA/QC, basically post-haste. This is a significant opportunity. Now, do not ask me to quantify it. I will not do it today. We will look at the facts after they are after the sales are consummated, but extremely excited about what we've seen with Wyatt. Yes, if we find other acquisitions like Wyatt, there are several in the pipeline, and valuations have become a lot more reasonable, we would go for it.

But again, as Amol has said many, many times, if the strategic fit and the financials do not make sense, we will resume our share buybacks.

Operator (participant)

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

Vijay Kumar (Senior Managing Director)

Hi, Udit and Amol. Good morning. And thanks for taking my question. Congrats on a nice sprint here. Maybe on instruments here, Q1, very pleased with double-digit growth. Your prior guidance, I think, assumed something like 4%-5% to hit the midpoint of the guidance. Is your instrument outlook changing? How should we think about 2Q and balance of the year on instrument growth?

Udit Batra (President and CEO)

Vijay, good morning. And thank you for the question. Yeah. I mean, great start to the year with instruments, double-digit growth, both LC and mass spec in the mid-teens.

When you look at the guidance for the balance of the year, look, we've raised it, but it's basically 5%-7%. The guidance philosophy has not really changed. Recurring revenues basically take in the high end of the guidance, so 6%-7%. For the balance of the year, we do not see any issues with the number of days in the quarter, right? It should land between 6% and 7%. In fact, there is an extra day in the fourth quarter, if I'm not wrong. 6%-7% on the high end, bringing in the high end, which is 60% of the business. Instruments, we are still assuming roughly 5%-ish, right? In such a dynamic environment, we think we will get constructive as the year goes along, right?

Great start, good funnel, both LC and mass spec doing well with the replacement cycle fully underway, new products making a difference, idiosyncratic growth drivers doing what they're supposed to do and according to our prediction. We still want to have a sufficient level of prudence in the guide. We've assumed roughly 4%-5% instrument growth for the balance of the year.

Amol Chaubal (SVP and CFO)

Yeah. I mean, largely unchanged for the rest of the year other than the meaningful downsizing of U.S. A&G. That's helpful.

Vijay Kumar (Senior Managing Director)

Maybe one quick follow-up on Amol for you. Share kind of assumptions went up a tad versus prior guidance. Curious why no buyback assumptions within the guide.

Amol Chaubal (SVP and CFO)

Yeah. I mean, it's net neutral versus the previous guide. We took down our interest expense assumptions, and we took up our share count assumptions. When you net the two, it's net neutral on EPS.

Operator (participant)

Our next question will come from Matt Sykes with Goldman. Please go ahead.

Matt Sykes (Analyst)

Hi. Good morning. Thanks for taking my questions. Maybe just the first one, sort of a high-level question for you, Udit. When you look at sort of the commercial exposure you have, it's clearly where you want to be in this current market environment. Just given all the challenges we're seeing sort of more upstream in research, given your lower levels of exposure there, does this make you want to take advantage of the environment to perhaps invest a little bit more in upstream, either organically or inorganically, or are you fairly content with remaining sort of commercial for this time being, just given the macro uncertainty?

Udit Batra (President and CEO)

I think, Matt, firstly, good morning. We're very happy with our commercial exposure, as you pointed out.

I think the fact that we have high-volume applications in a recurring setting, which are regulated, I mean, plays to our strength. There is a lot to do here, right? I mean, there is a lot more to do with the hand that we have rather than thinking about the hand we should have or we should get. So many examples, right? I mean, this morning, we announced that we are taking light scattering into QA/QC with Empower. I mean, several of you have asked that question in the past, and we are finally here. There is a lot more to do there, right? We want to continue to develop new products that go and fit into QA/QC with Empower as our primary highway to do so. When you look at instruments, right?

I mean, I think back when I joined the company 5 years ago, people said, "Well, LC is a commoditized segment, especially for small molecules." You introduce Alliance iS, customers respond to innovation. Look at TQ Absolute, right? I mean, the most sensitive mass spec in the industry, and that's benefiting from the PFAS testing. There is a lot to do where we are. Our focus remains squarely on high-volume applications and equally not to lose focus on battery testing, on clinical. There is a lot to do here, Matt. Not really getting distracted with other areas at this point.

Matt Sykes (Analyst)

Thank you. Just to follow up, just on services, it came in a little bit later than what we were expecting. Is this just the natural output of just having very high instrument placement growth?

Amol Chaubal (SVP and CFO)

Yeah.

I mean, look, we had two less days, so that accounts for roughly 2% lower growth. But then we also had lower purchases of parts from third-party service providers, people who also service our instruments. And that was a little bit of the drag on our service revenue for the quarter.

Operator (participant)

Our next question will come from the line of Dan Arias with Stifel. Please go ahead.

Dan Arias (Managing Director)

Thanks for the questions, guys. Udit, can you just touch on TA for the quarter? 1% growth was a bit lower than I think where the street was, but industrial was up. So what are the moving parts that get you from one to the other, and then what's going on from a product and customer standpoint? And then along those lines, what's the outlook on the cyclical side of the business for the year?

Udit Batra (President and CEO)

Yeah.

Look, so Dan, generally very pleased with TA overall, right? I mean, it's a heavy instrument business, so it can be quite lumpy. That said, we did extremely well on battery testing, especially out of China, which grew double digits. The U.S. came in a bit lighter than we had initially hoped, but that is basically timing of different orders. Really pleased with where the TA business is. Again, this morning, we announced a couple of new launches in the TA business focused on polymer testing, material testing, and equally on helping our battery testing customers. Very happy in general with that business. I think it's just lumpy, and you see it go up and down quarter on quarter. I wouldn't pay too much attention to it.

Dan Arias (Managing Director)

Okay. Thanks for that.

Just as a follow-up, and I realize this is getting pretty specific, is there anything that you can say about mass spec in biopharma? The reason I asked is just because it is very clear that PFAS is helping LC-MS pretty significantly. I am just kind of curious what the market for instrumentation beyond LC looks like if you look in your core biopharma markets.

Udit Batra (President and CEO)

Yeah. It is a great question, and thank you for the opportunity to comment on it. If you come up with a sensitive instrument that is easy to use and customers like it, of course, there are benefits in other segments. The drug metabolism segment is one such segment where historically Waters has not had a strong presence, largely due to limitations in our software.

We've worked very hard on improving the Waters Connect software to make it simple to use, to make it reliable from a regulatory standpoint. Several customers are testing that. We are starting to see some traction in the DMPK segment, both in large pharma but equally in mid-size CROs, right? I will stop there and not comment on it anymore for competitive reasons. That said, very happy with what the team's been doing in taking a highly sensitive instrument, not just for PFAS testing, into drug metabolism for pharma and also into clinical, where mass spec is starting to play an increasingly important role in diagnostic testing.

Operator (participant)

Our final question will come from Dan Brennan with TD Cowen. Please go ahead. Dan, your line is open. Please feel free to unmute.

Dan Brennan (Managing Director and Senior Equity Research Analyst)

Sorry about that. Can you hear me? Apologies.

I think you got this question earlier, but just wanted to go back to it a bit if you could. Just what are you seeing from pharma now as they contemplate possible tariffs later in the year? Are they trying to accelerate orders now? Is that a benefit maybe in the first half of the year? I think you didn't see—I think you said you didn't see any impact in the first quarter of the Jack's questions. Just wondering if there's any kind of change in activity of what you're seeing from that customer base.

Udit Batra (President and CEO)

Same as I said, Dan, earlier, no change at all, right? I mean, this is basically driven by the replacement cycle. The growth is driven by the replacement cycle, traction of Alliance iS, and we can go customer by customer and seeing significant benefit of our downstream presence.

That, of course, gets compounded if you look at our focus on GLP-1 testing, look at generics, look at the growth in CDMOs. Customers that are downstream that have high-volume applications are continuing to replace instruments. This is across generics, CDMOs, and pharma, which is over 75% of our pharma sales. No real pull forward that we can see.

Dan Brennan (Managing Director and Senior Equity Research Analyst)

Great. Just beyond the QA/QC part of the portfolio, excuse me, because you talked about mid-teens growth and the rest of pharma a little bit slower. Just what's happening in discovery and development, even though it's a smaller part of the business? Just wondering what you're seeing there. Thank you.

Udit Batra (President and CEO)

Continued pressure, Dan. I mean, like we also commented earlier, continued pressure on biotech, on drug discovery, and pharma research. I think these are segments probably that will recover down the line.

For now, we see continued pressure on those segments. Drug discovery, pharma research, and CROs, all three are still under pressure. Again, I'll remind you that's less than 20% of our overall business, our overall pharma business.

Operator (participant)

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

Caspar Tudor (Head of Investor Relations)

Thank you, Leila. I will hand it over to Udit to deliver our closing remarks.

Udit Batra (President and CEO)

Thank you again for joining us on the call today. We had a wonderful start to the year, thanks to the focus on downstream high-volume applications driven by the momentum in the replacement cycle, game-changing new products, as well as our idiosyncratic growth drivers.

I want to thank our team who has risen yet again to meet another set of challenges, solving problems on a daily basis, collaborating closely with each other and with our customers, coming up with creative solutions in real time and implementing them with excellence. Thank you for supporting Waters and the indomitable spirit of our colleagues.

Caspar Tudor (Head of Investor Relations)

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