Welcome everyone. Welcome back to day two of the Wells Fargo Healthcare Conference. We are excited to have Waters here on stage. Udit Batra, CEO. Welcome. Thank you for joining us.
Thank you, Evan.
Maybe the best place to start is just on 2Q. Really strong quarter, 9% organic growth, above the high end of the guide. Book-to-bill above one. Real highlight on BD, was ahead of expectations. What were the most important drivers here, and where did you most exceed your plan?
Firstly, thank you for having us.
Of course.
It's a pleasure to see you again. Look, coming in Q2 was, on the base business, a continuation of what's been happening for the last seven to eight quarters, right? We've been growing high single digits, about 8%-ish for that timeframe, and the drivers are somehow consistent, right? Instruments grew high single digits again, LC-MS, no matter how you look at it, geographically, the same sort of growth rate. Recurring revenue really nice growth. Chemistry double digits, and if you adjust for the Liberation Day pull forward, it was 16%. Service was high single digits. So the portfolio has been doing extremely well across the board. End markets, pharma double digits, Academia & Government also double digits, despite the fact that we'd sort of talked about slowdown in different geographies. We saw a double-digit growth. Even academic customers reward innovation.
They find money if you have something meaningful for them to solve problems. If you look at it geographically, China grew 6%-ish. But if you, again, take out the pull forward from Liberation Day, it was 10%. Pharma in China was 24% growth, right? So really strength across the board geographically, portfolio-wise, and customer-wise on the base business, and same was true with the acquired businesses, where we saw nice momentum build up. We're already at mid-single-digit growth rate. The second half of the year, we'll see more acceleration versus what we've seen in the first half, even for the acquired businesses. So the setup is exceptionally good. The end markets are even better than what we started with when we started the transformation.
I guess we can just leave it there. It sounds like the whole portfolio is doing really well, which is really good to see. Maybe just quickly on guidance. The guide, I know everything's performing really well, but the guide does imply some deceleration in 4Q, I think mid-single-digit growth. BD, it's really easy comp. I think it's - 11%. So how should we think about the level of prudence? I think that's how you guys typically talk about it.
I think-
embedded in that
Think about it qualitatively and quantitatively. I will try to address, I think your question was quantitative, but let me give you the qualitative underlying basis. On the base business, we just went through the litany of reasons why there is momentum. There is no reason for the underlying momentum to slow down. We see the funnels are very strong. Customer conversations are stronger. Geographically, China is going from strength to strength, and the stimulus is not even in the guide. Qualitatively, there is no reason for the base business to slow down. When you just stay on the base business from Q3 to Q4, we usually talk about step up and step downs. The step up, usually in the last two years, has been high teens in terms of growth rate. Even if you adjust for days, we see only a 13% step up in guide.
There is room for overachievement in Q4. Long way of saying quantitatively and qualitatively that there is room for overachievement on the base business. On the BD side, given it is an acquisition year, it is better to look at a two-year CAGR. If you look at a two-year CAGR, Q2 and Q3 guide are roughly 1%-2% growth. Q4 is -2% to 3%, so there is room there as well. We simply have given ourselves room in Q4. What is important to remember, for the base business is we are traversing at the high end of our old market, and we are growing pretty nicely ending 2026. For the BD acquired businesses, Q4 will likely exit at least around 6%, if not more.
Now, I would not want that to be a starting point for anything going forward, but the setup, the drivers, the execution, is really going well, right?
It sets us up nicely for 2027.
Got you. Yeah. Maybe we'll stick with BD. That's got a lot of attention there, obviously. Especially the acceleration and turn to growth in 2Q, I think surprised people, ahead of expectations. Can you really talk high level about the 180-day plan? Where are we in the process? Any positive or negative surprises that you've run into now that you've had the business for a full quarter?
On the momentum that we saw in Q2 and its continuation, the 180-day plan had three components, right? The first was just sort of funnel management and how do you look at the customer order pattern, and how do you get visibility on it? What is the discipline? Very happy with what we're seeing. Every quarter, I review with the region heads, that is direct reports of my direct reports, certain pieces of execution, right? And that review was earlier this week across all the regions. So there's now we have four divisions, so you have 12 different people who show up in those meetings, and we review how everyone's doing funnel management. It's fantastic, right? Everyone sort of picked up the same sort of rhythm, and some of the acquired business folks learning from the others.
There's one way of doing funnel management now at Waters. That's gone pretty well. Second piece was pricing. Pricing had two components. There, I think nothing speaks more than facts. Already in the full owned quarter, we saw 90 basis points of price increase versus zero to 50 basis points that we had seen in the legacy businesses in the past. There's a lot of work going on on that front with deal desks, the adoption of it, the visibility, the buy-in into that. Because remember, as commercial folks, people will adopt processes and systems that help them achieve their targets without doing anything heroic. These are processes, and if you have better tracking tools, you're able to pass on pricing much more easily.
It was just a question of having the courage to do it, having the processes, and follow-up to do it. The second was reagent rentals. Reagent rental compliance. As we said, there's roughly 700 customers which were not in compliance in the U.S. alone. We have them tracked. You shouldn't expect us to claw all of that back in one go. The idea is to use that to embed some of our other pieces of the portfolio, like FXI for diagnostics. The third piece was around China and our China business on both sides on diagnostics as well as flow on bioscience was declining quite rapidly. A lot of that had to do with not having a local portfolio, so the portfolio had not been localized. Some of that had to do with export restrictions, both areas that we've addressed.
You should start to see a nice ramp in Q4 as a consequence. The first products that are localized will already be sold at the end of this quarter and into Q4. Then the baseline in Q4 is low enough that with the arrival of some meaningful new products like the A7 flow cytometer, the FXI, you should start to see a nice ramp there as well.
Great. On pricing, let's see. Let's maybe move to China, where I think that was. You touched on it a little bit, but maybe just dig a little bit deeper into the issues that you were seeing there, I guess both on the diagnostics and the tool side, and kind of where are we in the process of lapping those headwinds?
Yeah. It's worthwhile just taking a step back. China for legacy Waters, let me start there and then I'll go into the BD side. Used to be 20% of our base business. It went all the way down to 12%, and at our analyst day we said, "Look, China will be dilutive to our growth going forward." It used to be 100 basis points accretive, it'll be dilutive. We said that in March of 2025. Turns out China has been accretive to our growth for the first half of the year. It's going really well, right? A lot of that has to do with the improvement in the biotech industry there, that then fueling the growth in CDMOs and as a consequence, creating the impetus to form a local homegrown large pharma company in China, right?
Really nice growth on the pharma segment, and we grew over 50% in Q1 in pharma in China. In the second quarter is close to 25%, and the growth is not slowing down, right? It's fantastic setup, and we have the model that we used when the business slowed down back in 2023 due to BIOSECURE Act. Business went down by 25%. We restructured, we reorganized, we localized our portfolio, we improved commercial execution, and here we are less than two years later, really growing nicely, right? In a market which admittedly has not been generous to everyone, right? We're applying the same sort of principles on bioscience. Exactly the same thing, where the product portfolio was not localized. We were going direct to customers where we could have used a distributor, and we were going to customers with distributors where we should have gone direct.
To give you an example, in academia, we're going direct, where there are so many academic customers across China. In pharma, we were going through distributors, where there are very few pharma players and we have very deep relationships in Waters. We're just flipping that now, right? From a commercial standpoint. We didn't have a local portfolio, so now we've localized a good portion of our bioscience portfolio. On the flow cytometry side, some of our most innovative dyes were not available in China. Don't ask me why, but now they're available, right? You'll start to see the bioscience business turn as a consequence. When you go to the diagnostics business, there are some interesting external things that have changed, and there are some internal self-help that has to be implemented as well.
From an external standpoint, the Chinese government just issued their new pricing guidelines, and we stand to benefit from it, right? From a microbiology standpoint, we'll basically be reimbursed for each individual bottle as opposed to per patient. That's an advantage. Second, the government is going to reimburse the use of each antibiotic, and Waters has the broadest portfolio of antibiotics in its AST test, versus any other competitor, right? Each antibiotic gets reimbursed. If you use five antibiotics per patient, all five get reimbursed separately as opposed to one panel. Third, in the past, there was no reimbursement for analysis and recommendations. Now there is reimbursement for that. The market structure has dramatically improved after many years of VBP implementation.
on the BD diagnostic solutions side. On LC-MS, given that it is an innovative technology that can uncover some things that cannot be uncovered by other techniques, that gets reimbursed as well. The reimbursement environment for that business has improved dramatically. The self-help sort of tools are exactly the same as bioscience. There is a localization to be done, there is improvement in supply chain, there is improvement in execution, and you will see the benefit of those start to show up in the latter part of this year, but mostly in 2025.
When you say localization, that just means it is not a different portfolio, it is just making it-
Same portfolio and basically satisfying the requirements for something to be local-
so that it can compete in local tenders.
Got you.
Especially for academic customers and government-funded customers, there is a requirement in tenders that you must have certain part of your supply chain local.
Yep. Just maybe sticking with China. You brought up two things. You talked about reimbursement, which actually has been a headwind to-
Yeah
MorphoSys businesses. I was not aware of that. Was that coming from the country or were these regional province decisions?
No, it is a country-level decision, but implemented at a province level.
Okay.
Like anything in China,
Yeah
there is a country-level ruling and provinces decide.
Okay. You also earlier mentioned some stimulus.
I didn't.
You did not. Okay. I just ask because one of your peers has brought that up.
Yeah.
I am just curious, have you heard about potential stimulus?
Yeah. So there is a potential for stimulus in the latter half of the year.
Very concretely so. It's not in our guide. And we usually, as a matter of approach, we usually talk about stimulus impact in retrospect.
not prospectively. Right? So to take a step back, our Academia and Government end market has been growing double digits overall globally. In China, it's been flat to slightly declining. But for the first half of the year, and that's without stimulus. Right? With stimulus, I mean, for the second half of the year, we'll see.
Is that geared directly towards life science tools, this stimulus?
Yeah. Life science tools, it initially focuses on food and environmental segments.
Okay.
the academic segment.
Great. Okay.
Again, this is directly related to having a localized portfolio. Right? In the past, say two, three years ago, even the Waters legacy portfolio was not localized to the extent it is localized now. So we compete very effectively for stimulus dollars.
Excellent. Okay. Moving to diagnostics. Really strong performance there. I think 15% growth, and that was across both parts of the business. But diagnostic solutions, I think it sounds like the main issue you were having there was reagent rental noncompliance, and that's really what you've gone out to fix. Can you help explain that, what you're doing, if there's been any kind of pushback, and maybe some of the other opportunities you see in the business, including the issues you're seeing in China?
Diagnostic solutions is basically, if I don't take the legacy Waters business, just take that out for a minute, that grew 15% in the quarter. Diagnostic solutions, the legacy BD business grew mid-single digits for the quarter.
Okay.
Microbiology in that grew 4%. Molecular diagnostics grew high single digits. The drivers in the microbiology business were threefold. One, we started to charge better pricing, 90 basis points of pricing versus what we'd seen in the past, which was flat to sometimes even declining. Second, we saw better uptake of our BACTEC bottles, which were out of supply in the past. The theoretical maximum that the team had said is we would get back to about 85% of our. We had a supply crisis before we acquired the business, and we basically went down to almost 50% of the volume that we used to supply in the past. They said the theoretical maximum would be 85%. We achieved that already sort of in the partial quarter that we had. This quarter, it was even higher.
Theoretical maximum, we exceeded, and we said, "Oh, why shouldn't it be 100%?" We're chasing the 100% penetration versus the past. Those two alone were impacting the pricing of bottles and their volume. The third piece was around instruments. FXI launch has been exceptionally good. It has already started to contribute. It's an instrument which is used as an incubator for microbiology. It was launched in Japan and Europe first. In Japan, the customer feedback was exceptional, and one customer came back and said, "We improved efficiency by 80%." So they used to have 10 people, they had two people to do that job after the instrument was installed. So really dramatic customer testimonials, and there are 12,000 such instruments globally that need replacement, and so we're sort of getting that moving.
Then on the molecular side, we had launched this HPV assay with our BD COR. In Q2, we launched 14 instruments. Full year last year, we launched only four.
Wow.
Right? So rather a dramatic improvement in commercial excellence. Right? Both parts of the business have started to accelerate. Now, as you look at the second half of the year, remember, Q3 is the fiscal year-end for BD. It has some weird dynamics also because it was the quarter before we signed the deal. Right? You can never quarterize things well enough, but the second half of the year, you'll see more momentum in our guide than you saw in the first half of the year, and Q4, you'll see a nice acceleration.
Okay, great. Maybe going to analytical science, your legacy Waters business. I mean, 9% growth, that's probably the best in all of tools if I had to guess. But how much of this strength is LC replacement cycle versus idiosyncratic growth drivers? Then I know in the last call, you did have one slide where you continue to point out that the five-year CAGR is still just 2.5% versus historical 5%. So, where are we now in the cycle, and how much more runway do you think we have?
Yeah.
Because I think it's been two years?
Yeah.
-ish, two-ish years?
So-
Three-ish years?
It'll be two years in
Yeah
at the end of Q3
Okay
when the replacement cycle started. I think that's where your question's going. On the instrument side, look, qualitatively and quantitatively. Qualitatively, the funnels are super strong. We have nice visibility on orders. We see really good uptake of new products. I'm just talking instruments for a minute. When you look at it mathematically, the six-year CAGR is still 2.5%. In that, there are idiosyncratic growth drivers. There's better pricing. From volume perspective, it is way below average, which is 5% from the past. We have a long way to go to catch up to the sort of average growth rate of instruments over a 20-year period for Waters. Now with better new products, with better pricing, with better innovation, we expect that to continue for a while, right? It'll continue at least until the end of 2027, is what we can say.
In addition to pharma replacing and part of industrial replacing, we are starting to see biotech and CROs start to replace instruments as well. About 90% of our installed base is now in the midst of a replacement cycle. There is 10%, which is branded generics in China, which has still not come to the table. That is a pretty good step forward.
Okay. Also on the last call, you did talk about, I think you kind of gave a similar timeframe, 2027, 2028. But you talked about an extension of that cycle because of reshoring, that layering in on top of maybe a fading replacement cycle. So, you talked about $100 billion of CapEx. Can you help us frame what that means? Like how much of that is addressable by Waters? When we think about 2027, 2028, and then how much longer could reshoring add on top of that to keep you this maybe-
The way to think about reshoring is, look, you are taking products that were developed somewhere else or being manufactured somewhere else, transferring them because there is a benefit in general to produce in the U.S. These are largely innovative products, right? Where there is market access advantage. All told, when we looked at the customer set so far, there are about 77 customers who were bona fide producing new or breaking ground, had plans to break ground for reshoring and not for just adding volume in their existing plants. That was a pretty strict exercise that we made. We said, "Look, what is bona fide existing volume that is just increasing, and what is reshoring?" So we did a pretty rigorous exercise. We said 77 customers are breaking ground, and that number keeps increasing because as we look at the market, the number rises.
More than half of them, or about half of them, have actually already started to build, and have broken ground. So 77 were going to break ground. About 36, 37 have already broken ground. And 70% of those are primarily Waters customers. That is an important fact, right? So we have done a pretty granular analysis. We are wherever people are having these discussions, and the analysis suggests that 70% are Waters customers. We are having pretty good discussions with them on what they want to order, when they want to order. The planning is there on paper. We know when the orders will come. We do not usually talk about concrete orders this far in advance. So we want to sort of wait until things become much more precise. Second, our market share in the U.S. is at least 10% higher than it is in Europe.
Lastly, I think this is something I have talked about in the past, anytime there is a new opportunity, our win rate is higher than our incumbent replacements or our incumbent customers. Right? So it is a very good setup on reshoring. I would not get too excited about it right now. I know folks are talking about concrete orders right now. I do not know. But we are very sort of diligent about what we call reshoring versus not. So, for instance, if Lilly expands their site, which they are, that could potentially have gone to Europe, but we are not counting that as reshoring. Unless there is a concrete cause and effect from a European site to the U.S. site or an ex-U.S. site to a U.S. site, we do not call it reshoring.
Right? So just so you understand the math.
Yeah.
At the end, just look at the results. I do not think the rest of it is all sort of conjecture.
Right. No, that is helpful. I guess people are just trying to understand that if there as a replacement cycle, maybe peters out in 2028, I guess how long you can potentially continue that pacing.
I think you can be sure that reshoring is a real event.
Yeah.
It will dovetail into the replacement cycle. Let's not get too precise about it.
Right.
When it happens, when it doesn't happen, I don't know. I think what is more important to realize on the replacement side, on the base business is in 2021, coming out of the pandemic, we had a massive replacement year. Those instruments are coming due for replacement in 2028, 2029. So in a strange way, you have a confluence of factors that keep the instrument growth rate higher.
I think what you also have to keep in mind, the replacement cycle generally started well before any of our peers started talking about it. It's usually triggered by something that you're offering customers that they don't have. So innovation leads to a faster replacement cycle, a prolonged cycle. Now we're not just talking LC and LC-MS for us.
We have a much broader portfolio that is benefiting from biologics. I think if you want to do the mathematical exercise of instruments, which is roughly 20% of our portfolio, there are enough drivers to assume that the instrument growth rate will be high single digits for a while to come, including innovation, including new products, et cetera, including replacement, including reshoring. If that's sort of the mathematical exercise you're trying to do, I think you can be pretty safe that it's going to be high single digits for a while.
Pretty crazy that we're already talking about replacement cycle of COVID instruments. It puts in perspective how long ago that was, when it doesn't seem like it. Maybe looking at A&G, you guys, 11% growth in A&G, double-digit growth in Asia, and you even talked about 6% growth in the Americas. I think you mentioned semiconductor research as an area, as one driver in the U.S., but what's driving your outperformance here relative to peers?
Again, I cannot judge what others are seeing exactly. What we're doing is pretty straightforward. So we sort of scour the funding landscape, we look at applications, and we go to specifically those customers. It doesn't matter if they were previous customers or not. In the past, what we used to do is, okay, if we're selling to Harvard, we'll keep going to Harvard. But now we say, "Well, no, if Harvard doesn't have money for this application, somebody else does." And the funding is pretty transparent in the U.S., by the way. The grants are pretty transparent, so if you have a good database that is live and you're close to the customers, you know when this is happening. Usually when it appears in the database, it's too late.
You have to have enough contacts and enough other leading indicators to find out where the funding is going. So that's number one. Number two, no matter what end market, customers pay for innovation. When you have a new product like the Xevo MRT P10, which is a desktop mass spectrometer, high-resolution mass spectrometer that sets a standard in speed and resolution, and it is half the price of floor standing high-resolution mass specs that our competitors supply, customers find money to pay for it, for metabolomics applications as well as our other applications. So if there's an innovative product, the customers will find money to pay for it. So that's the second piece. The third is around applications that you're talking about. It's semiconductors, it's battery testing, it's PFAS testing. When PFAS goes from environmental matrices to food matrices to textile, academic institutions lead the charge.
Public health institutions lead the charge.
Knowing where that is is part of the trick. Then, of course, having the Xevo TQ Absolute XR, which is again, the most sensitive quantitative mass spec in the market, the customers will pay for it. I think it is a lot of blocking and tackling, and this double-digit growth rate for the first half of the year is without a China stimulus. The stimulus, as you asked earlier, is anticipated in the second half of the year, and that is not in our guide.
We have grown outside of that in academia. Now, I would caution in assuming that the academic market on average is going to be double digits. That is just simply not the case. It is a low single-digit grower over the long term. We are very fortunate to have good commercial teams and good leading indicators.
That is super helpful. Maybe going back to BD, I think you are well ahead on the cost synergy side of things. You talked about run rate $200 million by the end of this year, which I think was your expectation for year three, if I am not mistaken. That is pretty impressive. So where are you finding, are you finding more opportunities, or are you just finding it easier to attack them?
Nothing is easy, man.
Yeah. Clearly. But it's been only a quarter and a half or so. You're clearly either finding more or you're just finding it quicker. So how should we think about the ultimate opportunity here?
I think firstly, the teams are doing an incredible job, right? This is hard work anytime you do an integration, and I have the dubious distinction of doing two large ones like this, one at MilliporeSigma and the other one here. On the cost side, I think you'll recall us saying, look, the average in general is 7%-8% of the cost base, at least in Sigma, which we did 7.5%, and we have signed up for 4%. So therein gives you already the indicator. We came out of the gates very fast, and I believe that whenever you have to do restructuring in an organization, you're better off doing it as fast as possible so that the teams have stability, and then they can just build from there.
That was the intent, and you see the result of that on the $200 million on a run rate basis that's already been delivered. But we're far from done. We haven't even started the manufacturing footprint optimization, which is a very significant component, the distribution optimization. There's direct and indirect procurement that is a long way to go, right? So there is a lot more here. The question behind the question is the margin progression, right? I think there are puts and takes, that the $200 million plus all the other pieces will show up in the margin, but we also want to invest for growth for the future. We'll talk more about that as the year progresses and we have even more data by the time we guide for next year.
But we're well ahead of the model, and I think we'll remain ahead of the model for a while to come.
Okay. And just moving to, you've talked about organic growth for the base business. It sounds like high single digits is a decent place to think about things. But, I mean, BD is also now at mid-single digits, and that's just only after really one full quarter of it being in your hands. And then, on top of that, you have new products there. You've talked about replacement cycles in BD. So when you put these two things together and BD becomes organic next year, what is the potential for Waters from a top-line perspective?
So I think, go back to sort of the deal model and our earlier thoughts on this, right? On average, the acquired businesses grow faster than our base Waters business historically. Over a 20-year period, the base business grew between 5% and 6%, closer to 6%. The acquired businesses grew north of that, right? So if you keep that in mind as a starting point and say history can be used as a way to sort of project the future after this sort of perturbation of the acquisition, right? And now we've taken that 6% to the highest single-digit domain for the analytical science business. The ambition is similar for the BD business. It won't happen overnight. The levers are pretty clear, right? The levers are operational improvement, the 180-day plan, and then you have the revenue synergies with instrument replacement, service, e-commerce, pricing, and the like.
And then you have the strategic synergies where you're basically going into the industrial facility segment. And I can go on repeating what I've said in the past, but that then allows you to take the business from where we inherited it, already at mid-single digits. We'll exit Q4 closer to 6%. Now, I'm not saying that's a jump-off point for the next year, but the answer's between that and what we inherited it at.
Right? We will have enough time to have looked at the full year and then guide beyond that. Midterm, you should absolutely expect Waters to make this whole thing a high single-digit business pro forma. We are absolutely confident, just given the number of drivers we have, given the market structure that we have. The market structure in the acquired businesses is even better. You have one to two competitors in every segment. You have a differentiated value proposition. The unmet needs are significant. The R&D spend has always been high. The question is, can you direct it in the right places, right? So really good setup for the future.
Sounds great. I have a bunch more questions, but we are out of time. It was really great to talk to you, and thank you so much for your time.
No, thank you, Evan. Good to see you.
Good to see you, too.