Waters Corporation (WAT) Q1 2025 Earnings Call Transcript

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Overview

The earnings call presents mixed signals. Financial performance shows modest growth, with strong Pharma demand, but macroeconomic challenges and competitive pressures persist. The Q&A highlights potential risks, including supply chain uncertainties and unclear guidance on reshoring impacts. Despite strong PFAS-related sales and positive recurring revenue growth, the cautious guidance and lack of clarity on certain strategic aspects balance the overall sentiment. Given these factors, a neutral stock price movement is anticipated over the next two weeks.

Key Financial Performance

Sales $662 million, up 4% reported and 7% in constant currency, driven by strong demand in Pharma and industrial end markets.

Earnings per Share (Non-GAAP) $2.25, reflecting low single-digit growth reported and high single-digit growth in constant currency.

Earnings per Share (GAAP) $2.03.

Gross Margin 58.2%.

Adjusted Operating Margin 25.5%.

Free Cash Flow $234 million, representing 35% of first quarter sales.

Net Debt Approximately $1.1 billion, returning to pre-Wyatt acquisition levels.

Net Debt-to-EBITDA Ratio Roughly 1x.

Full-Year 2025 Adjusted EPS Guidance $12.75 to $13.05, translating to approximately 8% to 10% EPS growth.

Orders Growth Exceeded sales growth, indicating strong momentum.

Recurring Revenue Growth Increased mid-single digits, in line with expectations.

Instrument Sales Growth 11%, led by mid-teens growth in liquid chromatography and mass spectrometry.

PFAS-related Testing Sales Growth Over 90% in the first quarter.

India Revenue Growth Close to 20% in constant currency.

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Operating Highlights

New Product Launches: In the first quarter, Waters 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 for atmosphere-sensitive materials in battery, polymer, and drug development testing.

Empower Software Enhancement: Waters announced the launch of Empower for multi-angle light scattering detectors, expanding the scope of critical quality attributes that biopharmaceutical laboratories can manage and submit to regulators.

Market Growth in Pharma: Sales in the Pharma sector grew 8%, with double-digit growth in Asia and the Americas, driven by strong customer spending.

Growth in China: Sales in China grew 5%, led by double-digit growth in industrial and academic/government applications.

PFAS Testing Demand: PFAS-related testing sales grew over 90% in the first quarter, continuing a strong growth trend.

India Market Growth: The India team delivered revenue growth close to 20% in constant currency, driven by strong demand from generics manufacturers and CDMOs.

Operational Efficiency: Waters implemented swift operational actions to mitigate the impact of newly announced tariffs, limiting the net impact to a modest $10 million on adjusted operating margin for 2025.

Free Cash Flow: First quarter free cash flow was $234 million, representing 35% of first quarter sales, allowing for rapid debt reduction of approximately $170 million.

Guidance Update: Waters raised its full-year constant currency sales growth guidance to 5% to 7% and adjusted EPS guidance to a range of $12.75 to $13.05, reflecting better-than-expected first quarter performance.

Focus on Customer Needs: Waters emphasized staying close to customers and supporting their evolving needs while enhancing competitive positioning through differentiated new products.

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Risk or Challenges

Tariff Impact: The newly announced tariffs are expected to have a gross impact of $45 million on Waters Corporation's operations, with a net impact of approximately $10 million on the adjusted operating margin for 2025. The company has implemented mitigation strategies to limit this impact.

Supply Chain Challenges: Waters Corporation has faced supply chain disruptions in the past, which have been a challenge for the company. However, they have taken swift actions to adjust their supply chain in response to recent tariff announcements.

Regulatory Issues: The company anticipates that emerging regulations, particularly related to PFAS testing, will drive demand for their products. This regulatory environment presents both opportunities and challenges for Waters Corporation.

Economic Factors: The company is navigating a dynamic macroeconomic environment, including inflationary pressures and shifts in customer CapEx spending, which could impact future performance.

Competitive Pressures: Waters Corporation is focused on maintaining its competitive position by launching differentiated new products and investing in capabilities, as competitive pressures in the analytical instruments market continue to evolve.

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Guidance & Outlook

Guiding Principles: Waters Corporation focuses on three guiding principles: staying close to customers, enhancing competitive position through innovation, and supporting colleagues to navigate dynamic market conditions.

Innovation and Product Launches: The company launched new products, including the ElectroForce APeX-1 and TGA Smart-Seal Pans, and expanded the Alliance IS Bio HPLC product line to enhance its portfolio.

Market Positioning: Waters is well-positioned in high-volume applications, particularly in Pharma QA/QC, and is capitalizing on growth opportunities in GLP-1 and PFAS testing.

Operational Agility: The company has implemented swift operational actions to mitigate the impact of tariffs and maintain strong financial performance.

Sales Growth Guidance: Waters raised its full-year constant currency sales growth guidance to 5% to 7% for 2025, reflecting better-than-expected first quarter performance.

EPS Guidance: The adjusted EPS guidance for 2025 is raised to a range of $12.75 to $13.05, indicating approximately 8% to 10% growth.

Impact of Tariffs: The net impact of tariffs is expected to be modest at $10 million on adjusted operating margin for 2025, with no net impact on EPS guidance.

Second Quarter Guidance: For Q2 2025, constant currency sales growth is expected to be 5% to 7%, with EPS anticipated in the range of $2.88 to $2.98.

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Shareholder Return Plan

Share Repurchase Program: Waters Corporation will assess the potential resumption of its share repurchase program during the course of 2025.

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Key Q&A

Q:Can you talk about the different customer classes within Pharma biotech and what you're seeing there?

A:Instruments performed extremely strongly in Q1, with double-digit growth driven by both LC and mass spec growing in the mid-teens. The growth was led by large Pharma, generics, and CDMOs, which is about 75% of our Pharma business, all growing in double digits.

Q:Is there any update to what your forecast was for instruments in the 2025 guide?

A:The only change for the remainder of the year in our guide is mainly around the U.S. A&G business, which we've proactively derisked, assuming a 20% decline for the U.S. A&G for the rest of the year.

Q:Have you seen any change in behavior related to tariffs from the Pharma biotech customer class?

A:No change in behavior at all. The funnels are quite strong, and we've seen momentum through the quarter.

Q:What are your expectations on pricing this year and where are you seeing the greatest ability to push price?

A:In Q1, we did 200 basis points of like-for-like price gains, and we are doing selective surcharges associated with tariffs that will contribute about $15 million or 50 basis points incremental to this.

Q:How do you think about longer-term risks around the India business with manufacturing moves more onshoring?

A:Generics have a strong role to play in relieving funding for reinvestment in innovation. If tariffs are implemented, they will look at supply chain adjustments, and we are ready to help them navigate through it.

Q:Can you elaborate on what's already completed and what remains in terms of supply chain realignment?

A:Our gross impact is $45 million, with most of that showing up in the second half of the year. We feel comfortable with the actions embedded in our guide.

Q:What are your expectations for China for the balance of the year?

A:China came in ahead of expectations with around 5% growth for Q1, but we've assumed it will remain stable at low single-digit growth for the balance of the year.

Q:How do you think about reshoring as a potential tailwind?

A:It's early days, and we expect to play a strong role as capacity expansions will support existing products.

Q:What is the latest number for your exposure in U.S. academic? Are you seeing meaningful weakness from your customer base?

A:The U.S. portion of academia and government is roughly 3%. The segment grew double digits in Q1, but we have assumed a significant decline for the balance of the year.

Q:What are you seeing from pharma as they contemplate possible tariffs later in the year?

A:No change at all. The growth is driven by the replacement cycle, and we are not seeing any pull forward.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer regarding the specifics of the supply chain realignment and the impact of IP domiciling and transfer pricing issues on LCs and mass specs. Their responses lacked clarity on the exact details of the reshoring impact and the timing of demand for products following capacity announcements.

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Earnings Word Cloud

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