WATERS CORP /DE/ Q3 FY2026 earnings call

• Strong Q3 Performance: Delivered double-digit organic growth (9% reported, 10% constant currency) with adjusted EPS growing 21% to $4.10. Total company revenue was $1.767 billion.
• Legacy Waters Strength: Sustained high-single-digit growth driven by instrument replacement cycles, pharma reshoring, and specific adjacencies like GLP-1s, PFAS testing, and biologics. China organic growth reached 11% year-to-date.
• AI Integration Strategy: Waters is positioning itself as a key partner in lab AI transformation. Key initiatives include "lab-in-the-loop" science, Empower AI features for compliance and insight mining, and Service AI Advisor. AI is driving higher volume (more samples/runs) and higher value (premium subscription tiers).
• Acquired Business Transformation: The 180-day revitalization plan is delivering results, including 120 basis points of net price realization and reagent rental compliance actions. Local manufacturing in China came online ahead of schedule, ending a 10-quarter decline there.
• New Product Launches: Significant traction for new products including the FACTS Discover A7 flow cytometer, Xevo MRT P10 mass spectrometer, and Zevor TQ Absolute XR IVD instrument. Revenue synergies are beginning to contribute, on track for $50 million in 2026.
• Strategic Acquisition: Announced acquisition of Mobile Ion Systems to enhance capabilities in proteomics and large molecule analysis, leveraging SLIM technology with existing mass spec platforms.

• Analytical Sciences Division: Reported revenue of $703 million, representing 8% growth as reported and 9% in constant currency. Growth was driven by chemistry (12%), instruments (10%), and service (8%).
• Biosciences Division: Reported revenue of $396 million, representing 2% reported growth. Flow research grew 1% and flow clinical grew 4%, led by high single-digit reagent growth.
• Advanced Diagnostics Division: Reported revenue of $575 million, representing 2% reported growth. This segment includes Diagnostic Solutions ($500 million, flat YoY), Microbiology ($346 million, 4% growth), Molecular Diagnostics/POC ($154 million, down 6%), and Clinical Mass Spec ($75 million, up 17%).
• Material Sciences Division: Reported revenue of $93 million, representing 7% growth as reported and 9% in constant currency, led by semiconductor and data center testing.

• Full Year 2026 Revenue: Raised midpoint by $43 million. Organic revenue expected at 9.1% to 9.7% constant currency. Total reported revenue expected between $6.479 billion and $6.497 billion.
• Full Year 2026 EPS: Raised adjusted EPS guidance to $14.60–$14.70, representing 11%–12% growth (13%–14% constant currency). Adjusted EBIT margin target is 28.2%.
• Fourth Quarter 2026 Outlook: Organic revenue growth expected at 7%–9% constant currency. Total reported revenue projected between $1.801 billion and $1.819 billion. Adjusted EPS expected between $4.58 and $4.68.
• 2027 Starting Framework: Expects Legacy Waters to grow high single digits and Legacy BD to grow mid-single digits, resulting in mid-single digit plus organic growth for the combined company. Ambition is high single-digit growth potential by end of 2027, driven by pricing, synergies, reshoring, and AI.
• 2027 Margin Expansion: Starting framework assumes 100 basis points of operating margin expansion to 29.2%. Low teens adjusted EPS growth is the starting point, with upside potential.

• China Regulatory Headwinds: DRG policies caused significant declines in diagnostics revenue (down >20% in China), though this is expected to lap into the baseline in Q4.
• Channel Inventory Management: Actively managing channel inventory in diagnostic solutions, which impacted short-term reporting but aims to align with end-customer demand.
• Integration Costs: One-time integration and transaction costs continue to drag on free cash flow in 2026, though these are expected to fade in subsequent years.
• Working Capital Volatility: Timing items related to SAP migration and strong sequential sales affected free cash flow in Q3; receivables from BD TSAs also impact near-term cash flow.

Q: What levers could accelerate acquired business growth beyond the mid-single-digit starting point for 2027? / A: Udit Batra highlighted that while the starting point is prudent, upside exists through accelerated pricing (already at 120 bps, targeting 150+ bps), new product momentum (A7, FXI), and structural tailwinds not yet fully priced in, such as pharma reshoring orders and semiconductor/data center demand. He emphasized that execution muscle is now permeated across all businesses, providing tangible levers for growth beyond the base case.

Q: Can AI revenue contributions be quantified currently? / A: Batra stated it is too early to quantify specific revenue impacts from AI, noting that the company has grown at sustained high-single-digit levels through concrete plans rather than just signals. However, he emphasized tangible benefits already realized, such as AI-powered peak integration reducing manual interventions by 95% and improving accuracy, which enhances the value proposition of the Empower platform without compromising compliance.

Q: How does management view free cash flow conversion relative to street estimates? / A: Amol Chaubal explained that historical FCF conversion was 100% of net income, but current drag comes from one-time integration costs, BD TSA receivables ($150M), and elevated inventory levels (160 days vs. historical 110 days). He noted that as integration costs fade and ERP migrations complete in 2028-2029, FCF should normalize to 100% conversion. AI tools are also being deployed to optimize receivables and payables further.

Q: What is the strategic intent behind partnerships with LabCorp and Quest for HPV self-collection? / A: Batra clarified that this is not primarily about displacing incumbents but expanding access to over 24 million unscreened individuals in the US. The partnership involves adding the OnClarity HPV kit to their menus and using Waters’ PDCorp platform. It represents an initial entry point with plans to build out additional assays, focusing on patient access and speed to market rather than immediate competitive displacement.

Q: What drove the acceleration in flow reagent growth and how does the A7 fit into the portfolio? / A: Batra attributed the 400 bps acceleration in flow reagents to pricing, e-commerce adoption, and differentiation via Horizon Real Dyes. The A7 flow cytometer addresses reproducibility issues critical for CROs and pharma, making it a key driver for replacing aging instruments. It occupies a high-volume spot in the portfolio, distinct from the higher-end A8 with imaging capabilities, and is well-suited for AI-driven data generation due to its consistency.