Waters - Q4 2025

Transcript

Operator (participant)

This call is being recorded. If anyone has any objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Head of Investor Relations. Please go ahead, sir.

Caspar Tudor (Head of Investor Relations)

Thank you, Leila, and good morning, everyone. Welcome to Waters Corporation's Fourth Quarter Earnings Call. Joining me today are Dr. Udit Batra, our President and Chief Executive Officer, and Amol Chaubal, our Senior Vice President and Chief Financial Officer. Before we begin, I will cover the cautionary language. In this conference call, we will make various forward-looking statements regarding future events or future financial performance of the company, including the expected financial and operational impact of Waters' combination with the Biosciences and Diagnostic Solutions business of Becton, Dickinson and Company. We will provide guidance regarding possible future results, as well as commentary on potential market and business conditions that may impact Waters Corporation over the first quarter of 2026 and full year 2026. These statements are only our present expectations and are subject to risks and uncertainties.

Please see the risk factors included within our Form 10-K, our Form 10-Qs, our other SEC filings, and the cautionary language included in this morning's earnings release. During today's call, we will refer to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are attached to our earnings release and in the appendix of the slide presentation accompanying today's call. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the fourth quarter of calendar year 2024. In addition, unless stated otherwise, all year-over-year revenue growth rates and ranges given on today's call are on a comparable constant currency basis, and all quarter-over-quarter revenue growth rates and ranges are on a comparable constant currency basis. Finally, we do not intend to update our guidance, predictions, or projections except as part of a regularly scheduled earnings release or as otherwise required by law.

I would now like to turn the call over to Udit to begin with our key messages for the quarter. Over to you, Udit.

Udit Batra (President and CEO)

Thank you, Caspar, and good morning, everyone. We delivered a strong finish to the year, achieving high single-digit reported revenue growth and low double-digit adjusted EPS growth in the fourth quarter. This reflects yet another quarter of industry-leading sales growth. Today also marks a transformative step forward as we complete the acquisition of BD's Biosciences and Diagnostic Solutions business. We're uniting world-class expertise across chemistry, physics, and biology into a scientific powerhouse with category-defining brands and a shared culture of pioneering innovation. We look forward to welcoming our new colleagues later this morning. It also marks the point at which we will have full operational control over the conveyed business. With months of rigorous integration planning behind us, we're now moving immediately into execution, applying the same focus and discipline that have driven exceptional results at Waters. We're entering this chapter from a position of strength.

Throughout 2025, we have advanced the strategic roadmap that we laid out five years ago. Commercial execution continues to strengthen with KPIs running ahead of the commitments we made at our March 2025 Investor Day. Innovation remains a powerful growth driver as we launch a new wave of pioneering innovation. Our unique exposure to high-volume testing opportunities across GLP-1s, PFAS, and India generics again outpaced expectations. We secured key wins in our transition to Empower as a subscription-based model, and we continued to expand deliberately into our high-growth adjacencies like bioseparations and bioanalytical characterization. These outcomes reflect the strength and discipline of our simple, repeatable business model serving high-volume, regulated growth markets. They also reflect the dedication of our team, whose focus on customers, science, and operational excellence continues to differentiate Waters.

Now turning to the quarter, as reported sales and adjusted EPS landed at the high end of our guidance range. Sales grew 7% on a reported basis and 6% in constant currency, driven by high single-digit growth across our pharma and industrial end markets. Adjusted EPS grew low double digits to $4.53. On a GAAP basis, EPS was $3.77. Recurring revenue grew 9%, led by chemistry growth. Instruments grew 3%, led by, yet again, high single-digit LCMS growth. TA instruments declined for the quarter due to cautious spending in the U.S. and Europe. During the quarter, we achieved strong wins in our transition to a subscription-based model for Empower, with successful adoption across multiple large pharma customers. While this reduced our overall instrument growth rate by a low single-digit percentage for the quarter, it reflects a strategically attractive shift to a model with superior economics.

Together with our new feature releases, this supports accretive tailwinds in 2027 with the incremental recurring revenue that it brings. For the full year, sales grew 7% on both a reported and constant currency basis. Recurring revenue grew 8%, driven by 12% growth in chemistry. Instrument revenue grew 5%, led by LCMS, which grew high single digits or better every quarter of the year. Adjusted EPS grew 11% to $13.13, supported by top-line strength, operational excellence, and effective tariff mitigation. GAAP EPS was $10.76. Let me now highlight the drivers behind our strong performance and why we expect the strong momentum to continue into 2026. Starting with commercial execution, our KPIs continue to run ahead of external commitments, and we're progressing well towards our long-term targets. Within instrument replacement, momentum continues to build.

Instrument growth is now tracking at 2.5% CAGR approximately versus 2019, up roughly 100 basis points since the start of the replacement cycle. This reflects a steady mean reversion towards the long-term historical instrument growth rate of 5%. Service plan attachment increased to 54%, reflecting approximately 400 basis points of improvement in a single year. This is the strongest annual expansion we have ever delivered and sets us up for above-average service growth in 2026, supported by the associated revenue pull-through. E-commerce penetration reached approximately 45% of consumables revenue, driving a growth tailwind along with new products across our chemistry portfolio. Contract organizations now represent 27% of pharma sales, up from 15% five years ago, positioning us well among diversified sources of CapEx. Innovation is also augmenting our results.

Strong growth from new products launched over the past several years has continued to compound, alongside a new wave of innovation launched throughout 2025. For the full year, Alliance iS HPLC sales more than doubled, reflecting strong adoption of our flagship platform, which reduces errors by up to 40% in QC labs. Xevo TQ Absolute mass spec platforms grew over 30%, driven by PFAS demand and the launch of the Absolute XR, which sets a new benchmark for robustness together with class-leading sensitivity. MaxPeak Premier Chemistry grew over 35%, underscoring the significant impact our technology has brought to the industry for larger and more complex molecules. Our successful strategy of entering high-growth areas further enhanced our results in 2025. In bioanalytical characterization, adoption of light scattering and BioAccord continues to build in pharma process development and quality control applications.

With the launch of Xevo CDMS, we are now expanding this position to routine characterization of mega-molecules such as ADCs and viral vectors. In bioseparations, we built on the success of MaxPeak Premier Inert Surfaces with a new generation of products designed to separate complex large molecules. These include SEC columns for viral vectors, slalom chromatography for large oligonucleotides, and affinity-based separations using specific antibodies. These new products have accelerated chemistry growth to double digits in 2025, meaningfully above our 7% historical average growth rate. For LCMS into diagnostics, we have continued to grow our assay menu, launching IVD products covering 12 new analytes in endocrinology and four new analytes in therapeutic drug monitoring over the past two years. Turning to our idiosyncratic growth drivers. In 2025, these drivers contributed more than 300 basis points of growth, all tracking ahead of our commitments.

GLP-1 testing-related revenue more than doubled, contributing approximately 100 basis points of year-over-year growth. This reflects continued wins in development and manufacturing across the globe, supported by our SPECTIN position for both oral and injection-based doses. PFAS testing growth remained robust, increasing more than 40% year-over-year and adding roughly 80 basis points of growth. Demand was broad-based, driven by an expanding regulatory landscape that is evolving towards food, materials, and consumer product testing. India, again, delivered strong performance. Ex-GLP-1 revenue grew low teens, increasing by approximately $40 million and contributing around 130 basis points of growth tied to the ongoing patent cliff of blockbuster drugs. Taken together, we grew 7% in 2025 with all regions delivering mid-single-digit growth or better. Pharma revenue grew 9% with high single-digit growth across Americas and Europe and low double-digit growth in Asia. In non-pharma end markets, industrial grew 6% while A&G declined 1%.

In China, we grew 9% for the year. Our team delivered exceptional performance by capturing renewed momentum in biotech and CDMOs, executing well in food and environmental applications, and winning a series of academic and government stimulus spenders. As we now move into 2026, we expect continued organic strength supported by the instrument replacement cycle and contribution from new product innovation. We're also expanding our idiosyncratic growth driver framework from three drivers to five. In addition to GLP-1s, PFAS, and India generics, we're adding biologics and informatics. Biologics reflects future growth linked to bioseparations and bioanalytical characterization from progress we've already made in our high-growth adjacencies before the closing of the transaction. In bioseparations, we anticipate sustained strength driven by new chemistry products already launched and in our near-term roadmap serving large molecule and novel modality applications.

In bioanalytical characterization, we anticipate continued placement of LCMS, MALS, and CDMS in process development and in QA/QC. There is potential upside beyond our current assumptions, supported by the FDA's draft biosimilars guidance, which could drive incremental demand by shifting approvals towards comparative analytical assessment rather than clinical outcome studies. For informatics, this reflects the future expected incremental growth linked to the phased transition of Empower from our legacy license-based model to our subscription-based offering. As we have shared previously, we expect to take our informatics business from its present revenue base of approximately $300 million to approximately $500 million by 2030. The move towards subscription comes with a shift in revenue timing. Under this transition, revenue is recognized consistently over the life of the contract rather than upfront.

For a typical customer converting to subscription, the breakeven point where cumulative subscription revenue equals the prior license value is reached in approximately 18 months. From that point forward, it adds incremental high-quality recurring revenue with a long-term visibility and margin benefits. We're executing this change gradually and expect it to become a more positive structural driver in the years ahead, beginning in 2027. Taken together, these five drivers are expected to contribute over 200 basis points of annual revenue growth accretion on a standalone basis between now and 2030. Turning now to our integration of BD Biosciences and Diagnostic Solutions. This combination is a significant value creation opportunity that further adds to our attractive trajectory across two main dimensions. Firstly, it strengthens our position in high-growth adjacencies across bioseparations and bioanalytical characterization by adding critical technologies and expertise.

It also adds to our LCMS diagnostics business with day-one commercial scale, customer channel access, and automation capabilities. Secondly, it provides a meaningful execution uplift opportunity. By applying our operating discipline across instrument replacement, e-commerce adoption, and service attachment, we expect to replicate the same growth acceleration that we have successfully achieved in our existing businesses. Together, this positions Waters for sustainable, high single-digit growth over the long term and well beyond the current instrument replacement cycle. The transaction also yields attractive cost synergies. Our baseline plan represents less than 5% of the combined cost base with the potential to exceed that level, consistent with market benchmarks for deals this size and prior large-scale integrations that our leadership team has successfully executed. To ensure we capture this value quickly and consistently, we have aligned the organization around a new operating structure.

We have organized Waters into four divisions where each follows our repeatable business model with simple yet sophisticated instruments, compliant software, customized consumables, and world-class service. This structure enhances accountability and will provide investors with a clear, transparent view into the performance of all our key segments across the company. First, Waters Analytical Sciences, formerly known as Waters Division, will continue to be led by Rob Carpio, who you all know well. The division comprises LC mass spec, light scattering, and particle analysis together with our Empower informatics platform, chemistry consumables, and our service team. Going forward, revenue from Waters' clinical business will be reported within our Advanced Diagnostics division. Waters Biosciences, formerly BD Biosciences, will be led by Steve Conley, who has led the business for the past 3.5 years and has played a key role in the launch of its next-generation flow cytometry platforms.

The Waters Biosciences division consists of leading flow cytometry brands like FACSDiscover and FACSLyric, the Horizon Real dyes brand of fluorescent dyes and reagents, and FlowJo software. Waters Advanced Diagnostics will be led by Jianqing Bennett, who has been running our clinical and TA business unit over the past several years and has transformed the top-line growth profile of these businesses. Jianqing has a strong background in diagnostics, having served as Senior Vice President of High Growth Markets at Beckman Coulter Diagnostics before joining Waters. The Waters Advanced Diagnostics division consists of leading microbiology testing brands, including BACTEC, Phoenix, and Kiestra, as well as molecular diagnostics solutions with the MAX and COR platforms, LCMS-based solutions, and point-of-care testing. Waters Material Sciences, formerly TA Division, will be led by Dan Rush on an interim basis while we appoint a successor to Jianqing.

Dan is our Senior Vice President of Strategy and Transformation and has a long history of leading commercial and strategy teams. He served as Vice President of Worldwide Commercialization Strategy and Innovation at Bristol Myers Squibb before joining Waters in 2021. The Material Sciences division consists of products, services, and informatics spanning a diverse range of materials characterization techniques, including thermal analysis, rheology, and microcalorimetry. These are used in a range of applications such as battery testing for electric vehicles, pharma, and medical devices. Together, these businesses bring leading scientific capabilities serving customers in high-volume regulated applications. They're anchored by a shared operating model that leverages category-defining brands and a universal culture of pioneering innovation. In parallel, we have aligned early execution priorities to hit the ground running now that we are gaining full operational control of the biosciences and diagnostic solutions business.

With several months of integration planning behind us, we have a clear line of sight to the initiatives that will drive the most value in the early innings of the integration. In the most recent quarter, BD Biosciences and Diagnostic Solutions results came in below expectations due to impacts that became apparent during the quarter. In China, demand weakened due to increased focus on reducing consumption in diagnostics testing, while the U.S. government shutdown affected the biosciences business as export approvals got delayed. At the same time, the point-of-care business was impacted by a milder flu season compared to the previous year. As we look ahead, our cost and revenue synergies are firmly on track. In 2026, we will make swift and decisive progress towards achieving the objectives we've laid out.

On cost synergies, restructuring, procurement savings, and network optimization are key vectors that we expect to begin realizing this year. As a prudent starting assumption, we expect to realize approximately $55 million of adjusted EBIT from cost synergies in 2026. On revenue synergies, while there is meaningful opportunity across each of our workstreams over time, our first priority in 2026 is enhancing commercial execution and forecasting discipline. We will quickly begin to leverage untapped growth vectors in instrument replacement, in e-commerce, and service attachment, and will immediately establish a deal desk to manage pricing discipline. As a prudent starting assumption, we expect to realize approximately $50 million in revenue and $25 million in corresponding adjusted EBIT from revenue synergies in 2026. Let me now describe the first phase of revenue synergy realization in a little bit more detail.

These are the same levers you've seen us execute successfully at Waters over the past five years. Starting with instrument replacement, there are approximately 22,000 flow and BACTEC instruments that are ripe for replacement. At the same time, a meaningful wave of new products is being launched, such as FACSDiscover A8, S8, A7, and BACTEC FX. To achieve our revenue synergy target of $20 million by year five, we need to drive an incremental 100 instrument replacements per year. To put that into perspective, during our prior instrument replacement initiative at Waters, we delivered double that target in half the time. For service plan attachment, our $20 million revenue synergy target can be achieved by increasing attachment by approximately one percentage point per year, a rate that is more than consistent with our historical performance of more than 2% annually over the past five years.

For e-commerce, our target is to increase adoption by approximately 4% annually, which too is a more measured growth trajectory compared to our historical performance. I will now cover our 2026 guidance. Across our existing businesses, the team is executing well with a revitalized portfolio, leveraging instrument replacement and realizing benefits from our idiosyncratic growth drivers. As a prudent starting point, these dynamics support organic, constant currency revenue growth of 5.5%-7%. Turning to the acquired business contribution, following today's expected close of the transaction, we expect the biosciences and diagnostic solutions businesses to contribute $3 billion of revenue in 2026. While the majority of headwinds that impacted the business in 2025 are already in the baseline, we have further risk-adjusted our outlook to ensure a prudent starting point.

We're assuming approximately 2.5% underlying growth in 2026 on an owned period basis before any benefit from execution and pricing improvements or planned organizational simplification. Taken together with revenue synergies I just mentioned, this results in total 2026 reported revenue of approximately $6.405 billion-$6.455 billion. These starting assumptions imply a blended year-over-year revenue growth of approximately 5.3% at the midpoint of the combined company in 2026. This is an industry-leading growth guidance and carries clear opportunity for outperformance as the year progresses. From a profitability perspective, we expect to deliver a 2026 adjusted operating margin percentage of approximately 28.1%, which is already more than 100 basis points of margin expansion compared with our deal model in 2025. This translates to full-year 2026 adjusted EPS of $14.30-$14.50, which is also an attractive starting point reflecting 8.9%-10.4% growth.

It includes $0.10 of accretion from the transaction versus Waters' adjusted EPS on a standalone basis even before reaching a full year of ownership. With that, I will now turn the call over to Amol to review the financials and walk through our guidance in more detail.

Amol Chaubal (SVP and CFO)

Thank you, Udit, and good morning, everyone. In the fourth quarter, we delivered a strong finish to the year with, as reported, sales and adjusted EPS landing at the high end of our guidance. Sales of $932 million grew 7% as reported and 6% in constant currency. Orders growth outpaced sales growth in the quarter. By end market, pharma grew 7%, industrial grew 8%, while academic and government declined 3%. In pharma, growth was led by mid-teens performance in Asia, high single-digit growth in Europe, and low single-digit growth in Americas. Instrument replacement remained strong along with new product adoption in both our instrument and chemistry portfolios. In industrial, Waters Division grew low teens with double-digit strength across chemical analysis, food, and environmental testing. Performance was supported by continued momentum in PFAS-related workflows led by the sensitivity and robustness of the Xevo TQ Absolute XR mass spec system.

Operator (participant)

TA Division was flat, reflecting an improvement versus the first half of the year as customer spending trends continued to recover. In academic and government, strong double-digit growth in Americas was offset by year-over-year spending declines in other regions. By region, Asia grew low double digits, while Americas and Europe grew mid-single digits. Within Asia, India grew high teens, reflecting continued strength in pharma generics. In China, sales grew 3% as strength in pharma and industrial was partially offset by timing of stimulus-related funding in academic and government. By product line, instrument sales grew 3%. High single-digit LCMS growth was partially offset by a low single-digit decline in TA system sales. We also incurred a low single-digit percentage growth impact from successful customer migration to Empower subscription agreements, which carry long-term recurring revenue benefits. Recurring revenues grew 9% driven by 8% growth in service and 12% growth in chemistry.

We again saw fantastic customer adoption of our Bioseparations columns, which have been a vertical success in the market. Adjusted earnings per share grew 10% to $4.53. GAAP earnings per share were $3.77. For the full year, sales grew 7% on both a reported and constant currency basis. By end market, pharma grew 9%, industrial grew 6%, while academic and government declined 1%. In pharma, all regions delivered high single-digit growth or better, led by Asia, which grew low double digits. In industrial, Waters Division grew low double digits with broad-based double-digit strength across chemical analysis, food, and environmental testing. This was partially offset by a 1% decline in TA Division. In academic and government, the Americas and China grew mid-single digits, while Europe declined 5%. By region, Asia grew low teens, while Americas and Europe grew mid-single digits. Within Asia, India grew high teens, and China grew 9%.

Our strength in China was driven by broad-based growth across pharma, industrial, and ANG. This was supported by share gains in biotech and CDMOs, chemical and environmental workflows, and ANG. By product line, instrument sales grew 5% led by high single-digit LCMS growth. Recurring revenues grew 8% with 7% service growth and 12% chemistry growth. For the full year, adjusted earnings per share grew 11% to $13.13. On a GAAP basis, EPS was $10.76. Within the P&L, gross margin was 61.1% for the quarter and 59.3% for the full year, which was better than expected. Adjusted operating margin was 35.2% for the quarter and 30.5% for the year. This reflects the deliberate acceleration of strategic R&D investments in chemistry and informatics, along with the impact of regional sales mix and tariff surcharges. Our operating tax rate came in at 15.7% for both the quarter and the year.

The full year rate includes approximately 50 basis points of discrete benefit related to a change in U.S. tax legislation enacted in 2025. Turning to cash generation and the balance sheet, free cash flow was $125 million in the quarter after funding $39 million of capital expenditures and $15 million of transaction-related costs. For the full year, free cash flow totaled $677 million after funding $113 million of capital expenditures, inclusive of tariff-related mitigation actions, and $29 million of transaction-related costs. Our net debt position at the end of the year was $820 million. Now, I will share further commentary on our 2026 outlook and provide our first quarter guidance. We are executing well with a revitalized portfolio, leveraging instrument replacement and benefiting from our idiosyncratic growth drivers. We expect this momentum to continue into 2026.

As a prudent starting point, these dynamics support standalone full year 2026 organic constant currency revenue growth of 5.5%-7%. We expect favorable foreign exchange translation to provide 0.5% tailwind to organic sales, which translates to organic reported revenue of $3.355 billion-$3.405 billion in 2026. Turning to the acquired business contribution, following today's expected closing of the transaction, we expect the acquired biosciences and diagnostic solutions businesses to contribute $3 billion of revenue in 2026. In setting this expectation, we have risk-adjusted the underlying growth assumptions, even though most of the headwinds that impacted the business in 2025 are already in the baseline as we enter 2026. Our guidance prudently assumes approximately 2.5% underlying constant currency growth for these businesses in 2026 on an owned period basis before any benefit from execution and pricing improvements or our organizational changes.

In addition, we expect to realize approximately $50 million of revenue synergies in 2026, reflecting the initial contribution from the first wave of commercial excellence initiatives discussed earlier. Taken together, this results in a total reported 2026 revenue of $6.405 billion-$6.455 billion. These starting assumptions imply blended year-over-year constant currency growth of approximately 5.3% for the combined company in 2026. From a profitability perspective, we expect to deliver an adjusted EBIT margin of 28.1% in 2026, consistent with our deal model. This reflects approximately 80 basis points of adjusted operating margin expansion at Waters on a standalone basis, consistent with our investor day algorithm, to approximately 31.3%. An adjusted operating margin percentage of approximately 22.4% for biosciences and diagnostic solutions. A $25 million contribution from the $50 million anticipated revenue synergies and $55 million contribution from anticipated cost synergies.

Below the line, net interest expense is expected to be approximately $179 million, and our full year tax rate is expected to be approximately 16.6%. From a share count perspective, our updated capital structure results in approximately 94.3 million diluted shares outstanding on a full year average basis in 2026. At closing, our new share count is 98.4 million shares. This translates to full year 2026 adjusted earnings per fully diluted share of $14.30-$14.50 and represents 8.9%-10.4% growth. It includes $0.10 of adjusted EPS accretion versus Waters' standalone non-GAAP EPS profile due to the transaction already before a first full year of ownership. It is important to note that quarterly EPS figures are not additive to the full year EPS due to a significant change in average shares outstanding between the first quarter and the remainder of the year.

For the first quarter of 2026, we are beginning the year with strong momentum across our core businesses. We expect standalone organic constant currency revenue growth of 7%-9%. With tailwinds from favorable foreign exchange translation, reported standalone revenue is expected to be approximately $718 million-$731 million. Turning to the acquired business contribution, we expect the biosciences and diagnostic solutions businesses to contribute $480 million of revenue in the partial first quarter of 2026. This calls for a low single-digit revenue decline. Quarter-to-week trends reinforce our confidence in this outlook. Taken together, this results in a total reported first quarter 2026 revenue of $1.198 billion-$1.211 billion. For modeling purposes, first quarter average share count is expected to be 82 million, and tax rate is expected to be consistent with our full year outlook.

While the transaction is expected to be EPS accretive for the full year 2026, the first quarter will reflect the full burden of interest expense and the higher share count, with synergies beginning to ramp up in subsequent quarters. As a result, the first quarter adjusted earnings per fully diluted share is expected to be in the range of $2.25-$2.35, which is flat to 4.4% growth. Embedded within this guide is standalone EPS of $2.50 or 10% growth versus prior year at midpoint. With that, I will now hand the call back to Udit.

Udit Batra (President and CEO)

Thank you, Amol. So, to summarize, with a revitalized core portfolio, expanded high-growth adjacencies, and tangible synergy levers now underway, we are entering 2026 with strong momentum and a highly compelling growth outlook.

Our growth outlook of 5.3% at midpoint for the combined company is appropriately prudent, yet industry-leading even before factoring in the full benefits of upcoming execution improvements, which we will now work decisively to implement. Within the P&L, we are confident in our ability to accelerate value creation as the year progresses. We look forward to updating you on our progress as we move through the year. So, with that, I will now turn the call back to Caspar. Thanks, Udit. That concludes our prepared remarks. We are now happy to open the lines and take your questions. We will now begin Q&A. 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 9 to raise your hand and star 6 to unmute.

Operator (participant)

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 Tycho Peterson with Jefferies. Your line is now open. Please go ahead.

Tycho Peterson (Managing Director and Senior Equity Analyst, Life Sciences & Healthcare)

Hey, thanks. Udit, I think the two things people really want to dig into here are obviously the BD results this morning and the numbers obviously have deteriorated relative to the original deal model. So, maybe just talk a little bit about your take on the numbers this morning, particularly for the lagging parts of the portfolio: U.S. academic government, China, early-stage research on the BD side, and how do we think about the path to recovery there? And then the second thing is instruments and the Empower impact on that transition.

Operator (participant)

Understand it's, call it, 250 basis point headwind this quarter, but how do we think about the go-forward P&L impact on instruments from this Empower transition? Thanks.

Udit Batra (President and CEO)

Yeah. So, Tycho, thanks for the two questions. So, let me start with the BD diagnostic solutions and bioscience business first. Look, several issues emerged in Q4 that impacted the growth of both of those businesses that were not fully known in Q3, and I'll let Amol describe those in a few minutes. But what is important is that all of these will now be present in a lower baseline for us in 2026 to basically help us deliver the 2.5%, which we think has several upsides. Now, this reminds me of Waters almost five years ago.

You couple this with a host of innovative new products in both diagnostic solutions and in bioscience across flow cytometry, as well as across the microbiology business and the molecular diagnostics business. You start at a fresh portfolio. So, we are now really squarely focused on first improving the operational execution, for instance, by implementing a deal desk for pricing discipline and discounting discipline, ensuring launch readiness of this fantastic portfolio just like we did with Alliance iS, and improving forecast accuracy to minimize surprises. Equally, after months of detailed integration planning, we're now ready to deliver the synergies, be it around instrument replacement, e-commerce, or service attach. And look, I mean, with service attach, we're starting at a 40% number, and you've seen what we've already done in 2025 alone. So, we're very confident to deliver the $50 million in revenue synergies and more.

You add this to what Waters' standalone guidance is, and you end up with over 5%, close to 5.3% at the midpoint of the guide for the combined business. So, we're feeling pretty good about that industry-leading growth rate as we head into 2026. Amol, do you want to comment on the dynamics of the two businesses in 2025?

Amol Chaubal (SVP and CFO)

Yeah. I mean, look, coming into the fourth quarter, we were starting to see the DRG headwind in China. And then we knew Q4 had a higher baseline from the prior year IP one-time revenue. But then a couple of other things sort of crept in, which is a weaker flu season coupled with challenges getting exemptions on shipments to China because of the government shutdown. Now, as we get into Q1, three out of the four are sort of behind us in terms of the baseline for the flu season.

No IP issues in the baseline for the first quarter, as well. Remember, the China export ban started at the beginning of the first quarter last year. So, from a baseline point of view, it's pretty clean, except for the DRG issue, which will start to come in the baseline late Q3. And quarter-to-week trends give us a lot of confidence that where we are guiding, which is a low single-digit decline for Q1, is sort of a reasonable guide. So, now turning to your second question on instruments, really happy with instruments performance. LCMS grew high single digits again. And this is like through the year, every quarter has been high single digits to double digits for LCMS with the same drivers: instrument replacement cycle still going strong, as well as the idiosyncratic growth drivers plus the new products.

TA was a drag at a low single-digit % to the overall instrument number given the weakness in both the U.S. and Europe. And what's great news is something that we've been telegraphing for a while is the transition of empower from on-prem to subscription, where several large pharma customers transitioned in Q4, and that was about a low single-digit headwind to the overall instrument number. So, overall, LCMS, high single-digit growth. TA was a low single-digit % headwind just given the challenges in the U.S. and Europe. And empower really a wonderful transition that we told you that we will talk about it. We will talk about it in the rearview mirror. Now, as you look ahead into 2026, Q1 started off extremely well on the instrument side. The funnel is extremely strong.

Orders grew faster than sales in Q4, so we feel very good about where we're starting and the guide we have given for Q1 and the full year. All the drivers are currently fully intact. We've also accounted in the guidance that we've given for the Empower headwinds that we expect during the year as customers transition from the CapEx to recurring revenue models. All going according to plan and really happy with, especially the Empower transition that is happening. Yeah, I mean, it's a fantastic problem to have. Two of the top five pharmas converted. I mean, Q1 funnel is strong, so we're not less.

Tycho Peterson (Managing Director and Senior Equity Analyst, Life Sciences & Healthcare)

Thank you.

Your next question will come from Catherine Schulte with Baird. Hey, guys. Thanks for the questions.

Catherine Schulte (Senior Research Analyst and Director, Life Sciences and Diagnostics)

Maybe first, just for the full year guide of 5.5%-7% after starting at 7%-9% in the first quarter, implies some deceleration for the balance of the year. Is that just prudence to start the year? Is it comp-driven, or are there some other dynamics we should be aware of? So, first, on the full year guide, the 5.5%-7%,

Udit Batra (President and CEO)

Catherine, look, our guidance philosophy is generally not changed. I mean, the lower end of the guide constitutes where we think instruments are going to end up. And I'd given a lot of detail to Tycho's question on that front already. So, we feel very good about where we're starting on the instrument side at 5.5%. And on the 7% at the top end of the guide, that is our recurring revenue sort of guidance for the year.

This basically, again, constitutes several upsides that we've not baked into the guide itself. I mean, we've assumed that the academic and government drug discovery, pharma research segments don't recover. In China, we've assumed a mid-single-digit growth versus what we've done this year, which is about 9%. I mean, a fantastic growth in China, but we've assumed mid-single-digit and not included any sort of stimulus revenue. We've incorporated already the Empower headwinds from converting from CapEx to a recurring revenue. This does not include reshoring revenues. And finally, for the full year, we've assumed that Chemistry is roughly 6% in our guide while finishing the year at 12% in Chemistry growth rate. So, several areas to basically have risk on the upside. And so, feel pretty good about where we're starting with the guide. On Q1, Amol, do you want to talk about the 7%-9%?

Amol Chaubal (SVP and CFO)

Yeah. I mean, look, in general, the momentum coming into Q1 is really strong, and that coupled with four extra working days sort of supports our guide, and that then sort of de-risk the remainder of the year. Okay. Got it. And apologies if I missed it in your response to Tycho's question. But for the outlook for the BD assets, any comment on pacing there and maybe what we should expect from a fourth-quarter exit rate for BD on the path to recovery? Yeah. I mean, look, we expect sort of a low single-digit decline in Q1 and then growth sort of gradually starting to ramp up as we go through the remainder of the year as some of the headwind gets more and more rooted in the baseline, particularly as we enter Q3 and Q4 when the DRG headwind is in the baseline. Yeah.

Udit Batra (President and CEO)

Catherine, look, equally, you should know that we are squarely focused on improving the operational execution. As I mentioned before, this is around ensuring that there is forecast accuracy in the business. There is a pricing discipline, not just on setting the price, but also on discounting, which impacts both the top and the bottom line. We've done that successfully at Waters. Also ensuring that the launches for the new products that are coming through go extremely well and something we've done by targeting, segmenting very precisely for our Alliance iS and TQ Absolute products. Equally, we're squarely focused on taking all the work that's happened in integration planning and implementing that throughout the year to increase momentum on the revenue synergy side. Instrument replacement, service attach, and e-commerce should contribute immediately. Feel very good about the starting point after a lot of planning.

Operator (participant)

Our next question will come from Jack Meehan with Nephron.

Jack Meehan (Equity Research Analyst, Life Science Tools and Diagnostics)

Thank you. Good morning. Udit, on BD, you talked a couple of times about setting up a deal desk for pricing. Can you talk about which product areas are in focus and how you think that's been optimized in the past?

Udit Batra (President and CEO)

Yeah. So, look, I mean, almost five years ago, we set up the same process at Waters. It has two, maybe three parts. The first is a centralized examination of what the list prices are, as well as what the discounting is. That escalates all the way up to me as discounting requests come from the different regions. Basically, we take away the ability for regions and sales teams to discount. Anytime there's a list price increase, the stick rate is much higher. This is especially relevant for products in the instrument category.

Now, here, you have a couple of new products that have been launched across the biosciences and diagnostics businesses, the most of all being the FACSDiscover line, S8, A8, as well as now the S7 and A7 that are coming up. And for instruments, it's extremely important to not sort of lose the pricing discipline as you negotiate the deals. It's pretty easy to sort of give away pricing on highly innovative products if you're not disciplined. And on the recurring revenue side, we see a benefit both on the service piece so that we are charging for installation, we're charging for spare parts in an appropriate way, but also on the reagent side where there is no reason for BD to not command the same sort of price premium that our chemistry revenue does.

These are highly differentiated dyes and antibodies that only BD produces, and these are of the highest quality. So, there is zero reason why there should be discounting there. So, we expect those to immediately impact. And those impact both the top line and the bottom line, Jack.

Jack Meehan (Equity Research Analyst, Life Science Tools and Diagnostics)

Great. And then for Amol, can you give us an update on the pro forma leverage for Waters and how you expect that to evolve over the year? And kind of similarly, what does the guide for interest expense assume for any refinancing? Thank you.

Amol Chaubal (SVP and CFO)

Yeah. So, I mean, look, we will be roughly at a net debt of somewhere around $4.6-$4.7 billion. And that would translate to roughly around 2.4x net debt to EBITDA, slightly more than what we announced because the deal closed earlier than what we had anticipated, which is great.

Then we expect to be below 2 times within sort of 18-month timeframe. Then interest expense on a pro forma basis is about $179 million for 2026.

Operator (participant)

Our next question will come from Doug Schenkel with Wolfe.

Doug Schenkel (Managing Director, Senior Research Analyst and Head of Life Science Tools and Diagnostics)

Good morning. I actually just have one topic I'd like to cover just on the synergy targets. I think your initial year-one guidance assumes you cut 5%-6% of the acquired businesses' OpEx, assuming I have that math right. So, I guess one question would be, do I have that math right? And if so, recognizing this is on day one, and I think it's about twice what you previously outlined, what's driving this increase? Recognizing this is a pretty big number to start, I'm just wondering how you're thinking about potential upside to that year-one target given what seems to be strong momentum in identifying opportunities in the early going.

Amol Chaubal (SVP and CFO)

Thank you. Hi, Doug. So, look, I mean, our underwriting model assumed roughly 4%, 4%, 4.5% of the pro forma cost base of Waters standalone plus the acquired business. And that had certain elements baked into it, like site consolidations, like sort of commercial and technology. And also, it did not include certain elements in the underwriting. When you compare and contrast it versus deals of this size, you typically see sort of 6% number. What Udit and Chris Ross achieved at MilliporeSigma was more like 8% number. We haven't baked in that level of targets in our underwriting because, one, we want to give ourselves some space.

And two, for a deal of this size, there's always skeletons that you find, and it gives this room to cover for that. If you now look at our guide, we're pretty much on track to deliver exactly what we said in our deal announcement. And we feel really good that after having done a lot of work over the last several months, we are well on track to deliver our deal announcement commitments.

Operator (participant)

Your next question will come from Matt Larew with William Blair.

Matt Larew (Partner and Senior Equity Research Analyst of Healthcare)

Hi. Good morning. Sticking with BD, maybe thinking about the revenue synergy size, the results from the most recent quarter call out a number of issues, but maybe even over the last couple of years might be suggestive of a business in need of commercial investment to improve execution.How do you think about the level of investment needed for the business long-term and how that perhaps works with the idea of the EBIT contribution you're hoping to get from revenue synergies?

Udit Batra (President and CEO)

So, Matt, that's a really good question and something that we invested a lot of time in doing the integration planning. Now, you take what I mentioned on the pricing discipline or launch readiness. We have central teams that we will now deploy into the acquired businesses to implement this pricing discipline and train the teams locally and eventually leave a few of these people behind to manage that on a day-to-day basis, something we've done in the past as well. So, the pricing discipline that we've seen at Waters or TA or clinical in the past will now be applied to the new divisions in the same way.

So, there will be commercial investment to ensure operational excellence, be it on launch readiness, be it on pricing. And equally, we've looked at separately the amount of resources that are going after the launches, be it the FX on the microbiology business, be it BD COR, where it is enhancing HPV testing across the overall population, or on the flow cytometry side, we've taken specialists and moved them into the different businesses, equally investing further in commercial readiness. So, we feel pretty good about the resources we've put against improving the execution rhythm but also getting a stronger uptake of the new products.

Matt Larew (Partner and Senior Equity Research Analyst of Healthcare)

Thank you.

Operator (participant)

Your next question will come from Casey Woodring with J.P. Morgan.

Casey Woodring (Research Analyst of Life Science Tools and Diagnostics)

Great. Thank you for taking my questions. So, another strong quarter of chemistry performance. Curious if you could just unpack that for us. How much of that was price?

Operator (participant)

How much was new product contribution and bioseparations? And as a follow-up on pricing, can you just elaborate? You had talked about, I think it was 100-200 basis points, a pricing improvement with a high stick rate in that business. So, how do you see pricing evolving here in chemistry within that 6% 2026 guidance framework? Thank you.

Udit Batra (President and CEO)

Let me start with this, Casey, and Amol will elaborate. Look, very happy with what we're seeing on chemistry, 12% growth for the year, seeing really nice momentum already in Q1 with the innovation. And I mean, basically, it's a mix of what you just mentioned earlier. These are highly innovative products that command a price premium.

From a pipeline and product perspective, as I mentioned in the prepared remarks, we built on the MaxPeak Premier technology, which is bioinert, which sort of targets bioinert surfaces of all types with SEC columns, with oligonucleotides, with slalom chromatography. And sort of the newest kid on the block is the affinity chromatography where we're attaching antibodies to particles. And here, super excited about what's going to come from BD with the capability in biology and antibody preparation so we can prepare specific antibodies to conjugate to our particles. So, feel very good about what's been happening and a nice momentum already at the start of the year. Amol, do you want to talk about pricing? Yeah. I mean, on chemistry alone, Casey, as we had outlined, chemistry, we are able to get an amazing stick rate on our list price increases.

Operator (participant)

So, for like-for-like SKU, like-for-like geography, we are generating close to 400-450 basis points on chemistry. On the overall portfolio basis, we are generating about 200 basis points of like-for-like SKU, like-for-like geography that doesn't include upsell. And that's sort of running ahead of what we outlined at our investor day. But more critically, that's a significant opportunity that lies ahead of us for BD, remember, because Waters back pre-COVID was 50-ish basis points of year-over-year price. And now we are consistently delivering 200 basis points plus. And BD is exactly that, right? Historically, they've done somewhere between 40 to 50 basis points and a meaningful opportunity ahead of us to reapply our blueprint that has been so successful.

Casey Woodring (Research Analyst of Life Science Tools and Diagnostics)

Great. Thank you.

Operator (participant)

Your next question will come from Puneet Souda with Leerink.

Puneet Souda (Senior Managing Director and Senior Research Analyst of Life Science Tools and Diagnostics)

Yeah. Hi, Udit, Amol, and Caspar. Thank you for taking my question.

If I could circle back to an earlier question around the conservatism you were taking in the acquired assets growth, obviously, those numbers are lower versus the expectations you had earlier. I understand that you're baking in pricing and KPI discipline that you're going to bring about, but you are in markets that are different to what pharma QA/QC have been. So maybe just I would love to understand, if you could, how much of a cushion there is in these numbers? How adjusted are they? If you could give us a sense because I think that's the number one question we're getting from investors as to the prudence you're baking in for the acquired portfolio. Yeah. So let me start, and then Amol will give you the parts. Look, I mean, we're not baking in just to sort of correct the question itself.

We're not baking in the pricing improvements or the deal desk and the launch readiness into the numbers. Amol, do you want to describe the details? Yeah. I mean, look, we are baking in primarily the headwind from China DRG. And at this point, it's only prudent to sort of bake that in. And we are also baking in some continued slowness coming out of other elements that are associated with China or the academic and government market. But again, when you look at our own Waters standalone U.S. A&G performance, it's a tale of two worlds, right? So there is a clear, meaningful upside if we can reapply our success to some of these parts, like what we've done in China, like what we've done with U.S. A&G. But at the beginning of the year, right out of the gate, we want to be prudent. Got it. That's helpful.

And then was there any contribution from extra selling days in Q1 that you're contemplating? So, I mean, our Q1 guide reflects four extra working days.

Operator (participant)

Your next question will come from Subbu Nambi with Guggenheim. Hey, guys. Thank you for taking my question. Amol, what does operating margin progression look like this year with the addition to BD? What prudence is in those risk-adjusted assumptions given it's a cleaner base?

Udit Batra (President and CEO)

Yeah. Look, I mean, as we came into fourth quarter, we said we have few strategic R&D investments that could accelerate growth, particularly in bioseparations and informatics. And you're seeing the results of that growth on our top line. So we took the opportunity to accelerate some of those investments without changing our long-term margin algorithm, right? So coming into 2026, we're back to 31.3%, which we feel really good about.

The BD Biosciences and Diagnostics Solutions business is coming in at 22.4%. So net of revenue and cost synergies, that allows us to deliver 28.1% margin, which is perfectly in line with how we announced the deal where we said, "Look, we'll expand the margin of the pro forma company from 27% to 32% over five years." And where we are coming in on 2026 is exactly in line with a little over 100 basis points in the first year.

Operator (participant)

Thank you so much. This concludes the Q&A portion of the call. I will now hand it back to Udit.

Udit Batra (President and CEO)

Thank you. Look, I mean, guys, thank you very much for your attention today. As we get into the new chapter for Waters, we're starting our guidance for 2026 with, again, an industry-leading growth for the pro forma business, really coming out of the gate strong on operational execution and synergies with $55 million on cost and $50 million on revenue side, which yields 100 basis points of margin expansion already in year one and almost a 1% accretion in less than a year. So feel very good about where we're starting. Thank you very much for your support, and look forward to talking to you again.