Good morning. Welcome to the Waters Corporation First Quarter 2019 Financial Results Conference Call. All participants will be in listen-only mode until the question-and-answer session of the conference call begins. This conference call is being recorded. If anyone have objections, please disconnect at this time.

It is now my pleasure to turn the call over to Mr. Bryan Brokmeier, Head of Investor Relations. Please go ahead, sir..

Thank you, operator. Good morning, everyone, and welcome to the Waters Corporation first quarter earnings conference call. Before we begin, I will cover the cautionary language. During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the company.

In particular, we will provide guidance regarding possible future income statement results of the company for the second quarter and full-year 2019. We caution you that all such statements are only predictions and that actual events or results may differ materially.

For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see our annual report on Form 10-K for the fiscal year ended December 31, 2018, in Part 1 under the caption, Risk Factors, and the cautionary language included in this morning's press release and 8-K.

We further caution you that the company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding possible future income statement results except during our regularly scheduled quarterly earnings release conference calls and webcasts.

The next earnings release call and webcast is currently planned for July 30, 2019. During today's call, we will be referring to certain non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the mostly directly comparable GAAP measures are attached to our earnings release issued this morning.

In our discussions of the results of operations, we may refer to pro forma results, which exclude the impact of items such as those outlined in our schedule titled Reconciliation of GAAP to Adjusted Non-GAAP Financials included in this morning's press release.

Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2018. In addition, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis.

Now, I'd like to turn the call over to Chris O'Connell, Waters' Chairman and Chief Executive Officer.

Chris?.

China, Europe, and TA Instruments. Starting with China, I'd like to first give some important context for our business in that country. China is 18% of our global business and has reliably delivered strong double-digit growth for an extended period of time.

Our business mix in China is unique within our global portfolio, as well as the industry, with pharma representing approximately 50% of our revenue and food testing representing over 15%.

In the first quarter, our business in China declined 4%, which was primarily the result of the ongoing restructure of the government's food safety infrastructure, as well as the 4+7 policy impacting our generic pharmaceutical customers' capital purchasing.

While we were aware of the policy changes referenced, we had not seen an adverse impact from them in 2018 and their Q1 2019 impact was more pronounced than we expected. On the positive side, Chinese customer utilization remains strong and we expect end-market improvement throughout the year and a return to growth.

Furthermore, we continue to view China as a sustainable growth driver for the company and remain confident in our strong market position.

The government reforms that I mentioned are intended to strengthen economic growth as China transforms from a manufacturing export economy into a local innovation economy where the food and pharmaceutical industries will be key beneficiaries.

As such, we expect to benefit from these reforms even if we experience short-term volatility during these implementation phases. Turning to Europe, our business declined 5% in the quarter as customers were cautious in their Q1 purchasing decisions amid uncertainty with macroeconomic conditions, including the ongoing Brexit political stalemate.

This caution negatively impacted capital spending decisions by our largest pharma and industrial customers, particularly in Western Europe. On a positive note, our academic and governmental category in Europe saw continued strength.

Despite the Q1 capital purchasing dynamics, our pharmaceutical demo and quoting activity are strong, which indicate that demand in our European pharmaceutical business should improve over the course of the year. Third, our TA product line experienced a soft start to the year with sales down 8% in the quarter compared to the first quarter of 2018.

TA's purchasing weakness was seen across most geographies and product categories, but most notably felt in Europe due largely to the macroeconomic headwinds I referenced earlier.

Despite the slow start to 2019, we anticipate that TA will return to growth as customers’ budgets are released over the course of the year and we are confident in our strong global TA team.

Additionally, we expect to continue to benefit from our robust TA product position as we are relatively early in the broader commercialization cycle of our Discovery line of thermal analyzers and growing line of accessories.

Turning briefly to a few high level comments on the income statement, our modest earnings-per-share growth reflected the lower-than-anticipated first quarter sales. We were pleased with our disciplined operating expense control, while continuing to invest in our key growth initiatives.

Notably, our cash flow conversion remained at historically high levels, evidencing our robust business model and supporting our capital deployment plans. Taking a closer look at the business, starting with a review of our market categories at the corporate level, sales to our broadly defined pharmaceutical category were flat in the quarter.

Demand from customers in large molecule applications and biomedical research was strong, offset by slower-than-expected budget releases by our largest pharmaceutical customers as well as by generic manufacturers in China and the US.

We continue to feel good about our strong positioning in targeted LC-MS and biopharmaceutical analytical solutions, as well as the durability of our franchise in small molecule testing. Additionally, we are encouraged by our return to growth in India as the generic pharmaceutical customer base showed improving sentiment.

Sales to our worldwide industrial category, which includes the material science, food and environmental markets, declined 2% during the quarter. This decline was most notable in the material science and food markets, reflecting the previously described macro conditions in China and Europe.

Despite softer-than-expected growth during the quarter, we remain confident in our industrial product positions and pipeline as well as the breadth of opportunities across material science, food safety, and environmental applications.

Looking at our academic and governmental category, sales grew 4% in the first quarter with strong growth in the US and Europe, partially offset by the earlier-described weakness in the China food sector. Our recent success in this category reflects the continuing healthy pace of global innovation, particularly in pharmaceutical discovery.

Next, I will review our sales performance by geography at the corporate level. Asia, our largest region in terms of growth – in terms of revenue, excuse me, grew 2% in the first quarter as our aforementioned weakness in China offset solid growth in India, Japan, and Korea.

We are encouraged by the mid-single digit Q1 growth in India and remain cautiously optimistic about improving trends. Turning to the Americas, overall sales were flat in the quarter, while sales in the US grew 2%.

Solid growth in both our US industrial and academic and governmental categories offset softness in pharma, which was largely due to slower-than-expected release of capital budgets by our largest customers. Despite the slower start in the quarter, we believe the US pharmaceutical environment remains healthy and we've seen this Q1 dynamic before.

In Europe, sales were down 5% in the quarter, in particular, the industrial category was a drag on the region, while academic and governmental demand remained robust. Within pharma, we saw strength in large molecule applications, offset by weaker demand in small molecule applications in our large pharma customers.

Finally, I will review product line dynamics within our Waters and TA brands. Waters branded instrument sales were down 4% in the first quarter as a result of the previously mentioned headwinds in China and Europe.

LC reflected the aforementioned weakness in generic demand in China and the slower budget releases in the US and Europe, partially offset by encouraging strength of our LC business in India.

We remain confident in our global LC franchise which is characterized by instrument and chemistry leadership, a strong installed base and the industry standard chromatography data system. Looking to mass spectrometry, our business in Q1 faced modest pressure, but we are seeing improved demand for our high-resolution mass spec portfolio.

Additionally, we are pleased with the BioAccord launch process and early market development activity. This simple, robust, fit-for-purpose, LC-MS solution is the first mover in a new biopharmaceutical category that will change the way customers characterize and monitor large molecule therapeutics.

Since our launch in January, we've seen a high level of interest from both existing and new customers. Systems have been shipped and we are building a robust demo and quoting pipeline. I look forward to updating you further on BioAccord as we progress through the year.

Waters branded recurring revenues, which reflect the combination of service and precision chemistries, grew 4% in the quarter.

Recurring revenues were driven by the stability of our large and established installed base of instruments, as well as the global strength in our service plans, ACQUITY UPLC columns, bioseparation columns and chemistry application kits.

Turning to our TA product line, we experienced a slow start to 2019 across most geographies and product categories, particularly in Europe due to a very slow Q1 budget release.

Earlier this year at Pittcon, we introduced a number of new TA products, including the Discovery Thermal Mechanical Analyzer TMA 450, which is setting a new industry standard by providing information about a materials coefficient of linear thermal expansion, shrinkage, softening and glass transition temperatures.

Returning to the big picture, we remain steadfastly focused on executing against our five-point value creation model.

As we consistently communicate, we aim to create shareholder value by first holding this leading position – specialty position in structurally attractive markets; number two, executing a focused growth strategy driven by organic innovation; third, seeking opportunities for continuous operational improvement in innovation, channel and operations; fourth, maintaining capital discipline as we shift from being a capital accumulator to a capital deployer; and fifth, operating with a performance-oriented culture and management team.

I would like to thank everyone who attended our biennial Investor Day held in February. For those who were not able to attend, I'd like to highlight three key takeaways from that meeting. First, Waters has a very unique global franchise defined by our specialty positioning.

Second, the increased investment and product development progress that we've made in the past few years now places us squarely in front of an exciting multiyear product cycle.

And third, US tax reform enabled a paradigm shift for Waters in giving us access to our significant global cash flow and, therefore, we will deploy more capital more assertively to growth initiatives, achieve a more optimal capital structure and return more capital to shareholders.

Furthermore, during the meeting, we introduced a couple of additional members of our management team which reinforced the confidence I have in the great depth and quality of our leadership and talent pipeline. In summary, sales in the first quarter fell well short of our expectations.

This result was unexpected, given the momentum we saw in Q4 of 2018 and reflected greater-than-expected macro impacts in China and Europe, as well as the slow release of budgets by key pharmaceutical and industrial customers. For context, Q1 is traditionally our smallest quarter and not necessarily predictive of how the year will shape up.

As such, while our guidance now reflects a more cautious view of the macroenvironment, we do expect improving growth over the course of 2019. We remain confident in our strong market position, underlying customer activity and the contribution of new product introductions across our portfolio already underway and planned for 2019.

Longer-term, our key growth drivers remain intact, including a global pharmaceutical demand, strength in our Asian markets, and an overall robust business model that includes consistent and highly-profitable recurring revenues. With that, I'd like to pass the call over to Sherry for a deeper review of our first quarter financials.

Sherry?.

Thank you, Chris. And good morning, everyone. In the first quarter, we recorded net sales of $514 million, which is flat against the prior-year in constant currency. Currency translation decreased sales growth by approximately 3%, resulting in a 3% decline as reported. During the quarter, sales into our pharmaceutical markets were flat.

Our industrial category declined 2% and sales into our academic and governmental category grew 4%. Looking at product line growth, our recurring revenue, which represents the combination of service and precision chemistries, grew 4% in the quarter, while instrument sales declined 6%.

As we noted on our last earnings call, recurring sales during the first quarter of 2019 were impacted by one less calendar day in the quarter, which resulted in a slight reduction in recurring revenues.

Looking ahead, there's no year-over-year difference in the number of calendar days during the second or third quarters, but there is one additional calendar day in the fourth quarter of 2019 compared to 2018.

Breaking first quarter product sales down further, sales related to Waters branded products and services grew 1%, while sales of TA-branded products and services declined 8%. Combined, LC and LC-MS instrument platform sales declined by 4% and TA's instrument sales declined by 12%.

Looking at our growth rates in the first quarter geographically and on a constant currency basis, sales in Asia were up 2% despite a 4% decline in China, while sales in the Americas were flat with 2% growth in the US and European sales were down 5%. Now, I'd like to comment on our first quarter non-GAAP financial performance versus the prior year.

Gross margin for the quarter was 57% compared to 58.3% in the first quarter of 2018. The lower gross margin relative to the prior-year quarter was driven by mix and lower fixed cost absorption.

Moving down the first quarter P&L, operating expenses increased by approximately 2% on a constant currency basis and foreign currency translation decreased operating expense growth by approximately 4% on a reported basis. In the quarter, our effective operating tax rate was about 11%, consistent with prior year.

Net interest expense was $3.2 million, down about $1 million from the prior year, benefiting from reduced debt levels. Our average share count came in at 72.4 million shares, a share count reduction of approximately 9% or about 7 million shares lower than in the first quarter of last year. This is a net effect of our ongoing share repurchase program.

Our non-GAAP earnings per fully diluted share for the first quarter increased to $1.60 in comparison to $1.59 last year. On a GAAP basis, our earnings per fully diluted share increased to $1.51 compared to $1.40 last year. A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning.

Turning to free cash flow, capital deployment and our balance sheet, I'd like to summarize our first quarter results and activities. We define free cash flow as cash from operations less capital expenditures and excluding special items.

In the first quarter of 2019, free cash flow came in at $158 million after funding $16 million [ph] of capital expenditures. Excluded from free cash flow was $7 million related to the investment in our Taunton precision chemistry operation. In the first quarter, this resulted in $0.31 as each dollar sales converted into free cash flow.

Now, I'd like to provide an update on our first quarter activities related to capital deployment, which we categorize into three areas – investing for growth, balance sheet strength and flexibility, and the return of capital to shareholders. During the quarter, R&D grew 4% on a constant currency basis.

In terms of returning capital to shareholders, we repurchased 3.3 million shares of our common stock for $745 million in the first quarter.

These capital allocation activities, along with our free cash flow, resulted in cash and short-term investments of $1.2 billion and debt of $1.2 billion on our balance sheet at the end of the quarter, resulting in a roughly net neutral cash position.

Looking ahead, we remain committed to deploying capital against these three priorities and continue working towards a near-term capital structure of up to 2.5 times net debt to EBITDA ratio.

Our current plans are to repurchase approximately $600 million in shares during the second quarter, and consistent with our previous communications, about $2.5 million for the full year. These assumptions are reflected in our 2019 guidance. We will evaluate our share repurchase plans over the course of the year and provide quarterly updates.

Turning to working capital, accounts receivable days sales outstanding stood at 88 days this quarter, up slightly compared to the first quarter of last year due to the timing of sales and currency translation.

In the quarter, inventories increased by $33 million in comparison to the prior-year quarter, which reflects some anticipated inventory build due to Brexit-related contingency planning and lower-than-expected sales in the quarter. As we look forward to the balance of the year, I'd like to comment on our full-year 2019 guidance.

While we are confident in our market position and new product pipeline, we are tempering this with appropriate caution due to the factors that affected the first quarter. As a result, we are reducing our full-year 2019 guidance for constant currency sales growth to a range of 2% to 4% from our prior guidance range of 4% to 6%.

At current rates, currency translation is assumed to decrease 2019 sales growth by 1 to 2 percentage points. Gross margin guidance for the full year is 58.5% to 59% from our prior guidance of approximately 59%. Our other key assumptions for full-year guidance are unchanged.

Operating expense growth at a rate that is below our sales growth rate, net interest expense of $30 million to $35 million, full-year effective tax rate of 14% to 15%. We anticipate that better-than-expected tax rate in the first quarter will be offset by higher rates of the remaining quarters of the year.

And lastly, an average diluted share count 68.5 to 69 million shares outstanding. Rolling all of this together, and on a non-GAAP basis, full-year 2019 earnings per fully diluted share are now projected in the range of $9.05 to $9.25, a decrease from our prior range of $9.20 to $9.45.

At current rates, the negative currency impact on full-year earnings per share growth is expected to be 1 to 2 percentage points. Looking at the second quarter of 2019, we expect 2% to 4% constant currency sales growth. At today's rates, currency translation is expected to decrease second quarter sales growth by 1 to 2 percentage points.

Combining these top line factors with a moderate increase in expenses, we estimate second quarter non-GAAP earnings per fully diluted share in the range of $2.05 to $2.15. At current rates, the negative currency impact on second-quarter earnings per share growth is expected to be 1 to 2 percentage points.

Now, I'd like to turn the call back to Chris for some summary comments.

Chris?.

Thank you, Sherry. As we move through 2019, we will stay focused on our innovation strategy and commercial execution across the business. As I stated before, we did not meet our expectations in the first quarter. We understand the causes and are focused on delivering improved growth over the course of the year.

With that, we will now begin the question-and-answer session. As we are not always able to get to everyone's questions, please limit yourself to one question and one follow-up. And if you have additional questions, please contact the Waters investor relations team after the call.

Operator?.

Yes. The first question in the queue is from Ross Muken with Evercore ISI. Your line is now open..

Good morning, guys. I'd love to dig a little bit more into the China side of things. I know you called out the generic piece. Obviously, we know about the major restructuring there.

I guess, as you get a sense on timing, how long do you think that will take to kind of unwind itself? And then, relative to the food side as well, one of your key competitors there has talked about sort of disruption for the better part of the last several quarters. You had sort of held in better and now, obviously, you saw a bit of weakness.

I guess, how are you thinking about also a bit of unwind in that, given sort of the long-term trend still should be pretty favorable in that business?.

Yeah. Thanks, Ross. Appreciate the question. And I agree with your last comment there that the long-term trend in both the food and the pharma businesses is structurally attractive. And we certainly have seen a gyration in these markets in the past. Although, as you know, China has been a very, very steady contributor to Waters.

In fact, nine of the last 10 years here at Waters, China has been a double-digit grower.

In terms of the unwind of those two factors, starting with the food side, as you recall from other market activity, the restructuring of the food government processes is something that really began in the earlier part of last year and had about a one-year lifecycle.

During the course of 2018, we saw a relatively stable demand because a lot of the capital purchases on the food side that had been committed at the beginning of the year, we saw mostly hold through the year. And so, this particular initiative didn't really affect us that much in 2018, but clearly affected us in the first quarter.

We do see the evolution of that process maturing in the first through second quarter here. We do expect some ongoing caution but, over time, that's the really important priority for the Chinese government to invest in food safety testing. And as you pointed out, it's a market that we all expect to return to growth.

From the standpoint of the pharma situation, with the 4+7 initiative, which is really a centralized bulk purchasing pilot process, we have seen early in this year some meaningful hold on capital spending. But I will point out that underlying activity remains reasonably robust.

We actually had a strong growth in chemistry during the quarter that reflects the underlying testing activity among pharma and generic pharma type of companies that are, in particular, affected by the 4+7 policy. So, all in all, these macro factors definitely hit us harder than we expected.

And as a result of that, we have lowered expectations as reflected in our guidance. But we do expect that to moderate over the course of the year, expect modest improvement and a return to growth, albeit more modest growth in China than we're typically accustomed to in this fiscal year.

But, certainly, I have a lot of faith in the strength of our team and our market share position that has been always a source of strength and we expect we will continue to be so looking forward..

And then, maybe just in terms of like the execution cadence, looking at kind of Q4 now, though in Q1, it was obviously a pretty substantial outperformance at some businesses. TA had huge sequential uptick in Q4 from Q3. And then, obviously, we saw a downtick in Q1 and a bit of that also on the Waters Instrument business.

I guess, as you just think about sort of whether we had any pull forwards or just how is the sort of seasonality of the business is shifting over time, I guess two years in a row, we've had this kind of strong Q4, weak Q1 dynamic. It's happened before in the past for Waters.

But, I guess, how much of that is sort of in your control and how much is out of your control? How much – when you saw the numbers, as you looked at it, did you sort of stare at it and say, wow, this happened to us again, how much can we control.

I'm just trying to get a sense of what's in your hands versus what's out of your hands a bit and how this business is kind of performing on at least a sequential basis?.

Yeah, thanks. Fair question. And certainly, as you pointed out, we saw a lot of strength across the board in Q4. And, frankly, based on that confidence and an assumption of more stable market conditions heading into the year, we had kind of a normal outlook for the first quarter. And we did see the downtick.

As you point out, the seasonality effect in this pattern of a slow start to the quarter, in particular, as it relates to the release of budget by pharma companies and industrial companies is something we've seen. And in the example of last year and even in 2017, we saw strength at the end of the year.

And so, at this point, as we look out over the course of the year, we certainly expect that the budget release cycle will lighten up and we'll get the benefit of expected planned customer spending, particularly in pharmaceuticals and in major industrial customers.

And, I guess, the other major controllable from our standpoint is just the great progress we're making in product development and the increasing impact we expect from the product launches that we have new in the market and that are coming over the course of the year.

On the Waters side, that is headlined by the BioAccord launch which, as I pointed out in my prepared remarks, is going well in its early stages from the standpoint of training and demoing and market development.

And then, there's a lot more coming on the Waters side, including new entrants in the high-resolution mass spec technology category, more LC technology, and more MS technology as well. And on the TA side, we're really in a sweet spot relative to the product cycle on thermal.

We have more technology coming on rheology and we have a wave of accessorization, which often is a great complement to the core instrument development. So, I think we feel about as good as we can possibly feel about where we sit in front of the product cycle still.

And, certainly, the macro effects of Q1 are disappointing and were unexpected, but they do not diminish in any way our enthusiasm for what's happening on the innovation side here..

Thanks, Chris. Appreciate the color. .

Thanks, Ross..

Next question is from Doug Schenkel with Cowen & Company. Your line is now open..

Hey, good morning. I want to start with a high level, but I think a really important question. For many years, you guys have been running what was the premium growth name in the tools group. Waters consistently delivered above peer group growth.

But in the last 18 months, Waters has delivered below peer group growth and management – your ability to forecast has not been as solid as it was in the previous few years.

But what's your diagnosis for this at this point and what's being done to remedy this? Because, yes, it was a disappointing quarter, but beyond that – this isn't the first quarter where we've been disappointed at the top line over the last 18 months.

So, I'm just wondering what you're doing to improve visibility and what your diagnosis is of what's been below peer growth over the last several quarters?.

Sure, Doug. Thanks for the question. Appreciate it. I think stepping back and looking at the big picture, this is a great franchise. Waters is a very well-established and a very durable business. And really, a lot of the factors we've seen in a couple of individual quarters, of course, including Q1, are very unique to the particular mix of our business.

The China business, for example, is 18% of our worldwide revenue. And as you know, the mix within China is uniquely focused on pharma, with an over-index on generic pharma and food. And so, some of the macro effects, given that we're a more specialty oriented company, certainly, have the potential to hit us in a unique way.

Relative to product cycle, I think that's been a big area of focus for me personally. It's really my number one area of focus. And there are some aspects of the portfolio that we weren't where we needed to be. And we've invested a lot and worked hard in product development to shore that up.

And as I mentioned in the previous question, we're excited about what's ahead relative to the product cycle. So, we really feel like, in that way, we control our destiny and there are better things to come as that product cycle matures.

And, obviously, we're doing all we can to gain visibility into some of these end market macro factors to improve the forecasting, to make sure that we can see with reasonable certainty what's ahead. But like I said, Q1 was an outlier for us. It was something that, coming off the end of the year last year, was not something we expected to see.

And so, we're just reacting to the changing environment and making sure that we stay very, very focused on delivering on our product pipeline and delivering on our sales execution. And as I sort of alluded to before, yes, Q1 was soft, but it's certainly not deterred that focus or the conviction in the great opportunities that lie ahead for Waters..

Okay. Thanks for that, Chris.

And maybe just more of a near-term timing question, recognizing you've walked through what happened in the quarter a couple of times here, just to go back to the point you made about some of this being a function of delays in the release of capital budgets at biopharma and industrial customers, it doesn't seem like your Q2 guidance treats these delays and the release of capital budgets as a transitory issue where you recover some of that lost Q1 revenue in Q2 just because of timing.

Is that right? And if so, why? Essentially, what I'm trying to get at is, if this was a transitory issue, whether or not you've seen a recapture of at least some of that revenue three weeks into the second quarter?.

Yeah. Certainly, Doug, we don't give updates on a weekly or a monthly basis.

But I would just say that the philosophy on the Q2 guide is that we don't expect all the factors that affected us in Q1 to just bring back – right as we get into April that these budget release cycle dynamics can take time to play out, that the macroenvironment which we're watching closely and studying and learning more about again doesn't just spring back in one quarter.

So, I think the Q2 guide really reflects that moderated outlook that we've made for the rest of the year. And, obviously, it's our job to do the very best to deliver the most we can within that..

Okay. All right. Thanks again..

Thanks, Doug..

Next question is from Tycho Peterson with J.P. Morgan. Your line is now open..

Hey, thanks. I want to start with capital deployment and maybe following up on Doug's question earlier about some of the volatility you've seen. As you talked about, you repurchased 3.2 million shares during the quarter.

Can you just talk to the thought process here given the underlying volatility, maybe the lack of visibility, why is this the right time to be buying back stock, why not wait till business stabilizes a bit? And then, can you also talk to the degree – with the tempered outlook, if you're considering any cost actions?.

Hi. I'll start off on this question. As far as our capital deployment, maybe just to put some context around it, it's really going back to our strategy around our capital structure after tax reform where we had access to all of our global cash.

And so, from a capital structure standpoint, we are working towards 2.5 times net debt to EBITDA leverage ratio. And during the first quarter, we deployed about $750 million and our guide for Q2 is about $600 million.

And as we look at this, we look at our capital deployment opportunities in three buckets –investing in the business and our balance sheet management and then return to shareholders.

And we have the capacity and flexibility to return capital to shareholders, while still investing in our business at the appropriate levels and for other opportunities that may come along. So, despite the weaker Q1, we are committed to continuing on our capital allocation path.

But I think the other question you had, Tycho, was around our operating expenses. I think as you look at Waters, we have been very disciplined historically around managing our expenses.

But, again, this is a point in the quarter and we will still continue to invest in R&D and other critical areas of growth for us and balance our different capital allocation levers. But during the quarter, we were also maintaining costs and will continue to do that as we manage through the year..

Okay. And then, one for Chris. You touched on a number of the pharma components. I'm just curious if you can disaggregate how much of the softness was the China generic impact versus kind of the global pharma budget release dynamic.

And to be clear, can you just clarify what your expectations are for pharma for the remainder of the year? Do you expect them to get back to kind of low-single digit or mid-single digit growth?.

Yeah. I think our confidence in the pharma business for the year is still positive and we expect to work our way back into what might be more traditionally normal type growth rates over the course of the year. As I mentioned in the prepared remarks, the biopharma business was strong in the quarter and that continued the pattern that we've been seeing.

We've been executing well in biopharma and we continue to benefit from all the innovation in that space. And, obviously, we've made incremental investments in that space ourselves. The hit in the quarter on pharma was really around the small molecule business. Generics is an important part of that. We're a leader in LC-based testing for QA/QC.

As you know, the vast majority of our pharma revenue is oriented to late-stage development in QA/QC. And so, when a sector like generic gets hit, we tend to feel the effects. As I mentioned, China is a slightly bigger mix of generic in its pharma business than our global average. And so, we saw particular effect there.

The thing that we realize in this business is that small molecule business, particularly generics business, that's where market share is the stickiest and it's where also we have sort of a good read on the ongoing activity in that installed base based on our chemistry business, which remains solid.

So, I think we have confidence that capital purchasing will come back over time over the course of the year, both within China as well as within other parts of the business.

Our top pharma accounts in Western Europe and in the US were soft in the first quarter based on the kind of budget release cycle, but that's something that traditionally does come back over the course of the year. So, we feel generally that the pharma trends outside of those specific situations are intact.

And so, we're just staying very, very focused on taking advantage of those growth opportunities here over the course of the year..

Okay, thank you..

Thanks, Tycho..

Next question is from Derik De Bruin from Bank of America Merrill Lynch. Your line is now open..

Hey. Thanks for taking the question. It's Mike Ryskin on for Derik. I want to follow-up on something that was brought up earlier regarding the volatility in the quarter. Just given some of the optimism and the tone in your analyst day in late February, it seems like there were a few surprises across the business.

Is there anything that's changed in the underlying fundamentals of any of these markets where there is reduced visibility now versus prior levels? And then, I've got a follow-up..

Yeah. Thanks, Mike.

Just in terms of the volatility in the quarter and the Investor Day comment you made, our focus at the investor day was certainly on the bigger picture and the overall strategy of the company, particularly the innovation story and the strength of our management team and really that – we were clear at the meeting that those were the issues we were focusing on.

And, certainly, as you know, our quarters tend to be back weighted. We generate approximately half of our sales in the last month of the quarter. And so, certainly, March was unexpectedly soft and some of the volatility we saw related to some of the macro and budget release factors was particularly pronounced in the month of March.

And so, when we look at the overall pattern of the quarter and some of those factors, we really don't think there are fundamental underlying changes in the attractiveness of the market segments we participate in or in the strength of our franchise and we're just trying to stay very, very steady and focused to understand these unique factors to manage through them and to continue to keep our focus on our strong conviction of the growth that's ahead of us in these areas..

Appreciate that. Thanks. That was going to be one of my follow-ups over the pacing and the progression through the quarter. One last quick one was, any change in sort of your expectations for contributions from new products over the course of the year. typically, you'd think you'd want to launch into strong or at least improving end markets.

And given some of the choppiness you called out in the macro and in China, does that change your outlook at all?.

I think the contribution for new products is definitely a hallmark of 2019. And, certainly, as we've thought about this from the very beginning, it has always been something we saw developing over the course of the year, strengthening in the back half of the year, reflecting that technology that's already in the market.

New technology like BioAccord is is more of a market development game and takes time, especially with a big ticket purchase that needs to be worked through budgets. But also, we have incremental technology coming in in the second and third quarters that will also help create that effect.

And so, I think our new product contribution story is still very much the way we thought it would look as we came into the year and something that gets greater and greater traction through the year and then into the future..

All right. Thanks, Chris..

Thanks, Mike..

Next question is from Brandon Couillard with Jefferies. Your line is now open..

Thanks. Good morning. Chris or Sherry, I want to come back to the 2Q guide, if we can, and it'd be great if you can just elaborate on whether or not you expect Europe and China specifically to return to growth in the second quarter, especially given this is kind of the third quarter in a row now, I think, where Europe has been down.

And it would also be great if you can help us with kind of what you're expecting out of Europe for the full year?.

Yeah. I'll just make a quick comment and then let Sherry add to it. I think we've taken a more cautious guide outlook for sure. But with that, we do expect modest improvements in both those markets. We think Europe and China remain structurally strong; and notwithstanding some the macro headwinds, are focused on some of that underlying activity.

Certainly, not forecasting it to be where we thought it would be coming into the year, but we are expecting stepping back towards growth over the course of the year. So, Sherry, I don't know if you want to say more about the guide..

Yeah. I think you covered as far as those geographies, Chris..

Great..

Thanks.

And then, maybe for Sherry, how much of the guidance reset in terms of the organic growth for the year was TA versus Waters, specifically? And then, could you speak to exactly how orders trended in the first quarter? I know you kind of spoke qualitatively to the demo and quote activity, but would be curious if the book to bill was north of 1 actually in the first quarter?.

Yeah. So, as far as our full-year guide, as we looked at the factors that impacted us in Q1 and our results, the lowering of our guide was mainly due to our overall lower volume and lower expected revenue, as well as our miss in Q1. Probably won't get as specific as breaking it down between Waters and TA.

We've really looked at it kind of as our whole portfolio as we put the guidance together.

Do you want to comment on the orders, Chris?.

Yeah. I would just – we don't want to get into too much detail on the order book versus sales, but would comment that we did carry some incremental backlog into the second quarter..

Okay, thanks..

Next question is from Daniel Brennan from UBS. Your line is now open..

Great, thank you. Chris, first question. I wanted to go back to China.

Could just elaborate on the 4+7 policy, maybe its impact on your business and how long you think this change in how China is operating will persist?.

Yeah. Just a little bit more on the 4+7. This is something that we, in the market, became more aware of later in the year. It was really kind of an October, November, December kind of awareness of this particular pilot program for more centralized bulk purchasing of generic medicines within four major cities and seven other provincial type cities.

As I sort of alluded to earlier in the call, this particular initiative did not affect our sales in 2018. We saw very typical year-end type purchasing that reflected more of a status quo type situation.

Certainly, as we got in the quarter, it became more clear that even though the underlying utilization of the installed base was there, as I spoke of earlier, we had strong chemistry sales in China in the quarter that capital purchasing was being put on hold, much like many of the capital investments that the companies affected by this particular initiative were experiencing.

So, I think we don't have perfect visibility into how quickly we can recoup some of that capital investment. And that's why we've moderated our guidance for the quarter and for the year.

As I've alluded to earlier, we have a really strong market position and a really strong team in China that's consistently delivered in a variety of operating environments. And so, while we have lowered our expectations, we do expect some modest improvements over the course of the year..

Great. And then, maybe kind of more of a big picture question. I know your weaker trends in biopharma comparing against stronger results in some of your peers. Obviously, you have a different mix of business. But can you just speak to the strategy, part of your five-point strategy being like a leader in your strategically focused, but narrower markets.

Is that opening up Waters to any share loss towards larger players that could use maybe their breadth to bundle and kind of how you think about that in terms of your strategy towards investment and cap deployment? Thank you..

Yeah. In terms of the question of focus versus breadth, I think we have a high level of conviction in our focused, specialty-oriented strategy. And we don't really see any evidence that we have difficulty competing based on a more limited product line.

We think that Waters is better served with a focus on depth of application expertise in more narrowly focused areas within biopharma and small molecule pharmaceuticals, as we talked in depth at the Investor Day.

We've made significant investments in the biopharm side of the business over time and we've actually gained share steadily over the last 10 or 15 years, and I'd reference you to those charts that we presented at our Investor Day.

Of course, on the small molecule side, which is the one that experienced the volatility in the quarter, because, certainly, on the large molecule side, we had another strong quarter, on the small molecule side, we think that those factors are little more specific in nature related to the macro factors that we outlined.

And looking at our market share data, particularly in LC, we see a very strong and stable and sticky market share position. And I think as everyone knows, certainly, one quarter, that type of situation doesn't move around a lot.

So, we're confident that the effect we saw on the small mol business in particular in Q1 are really related to these market factors. And we're just very, very focused on continuing to invest in our technology position and our application science to be the very best company in the specialty manner that we set out to be..

Great, thank you..

Thanks, Dan..

Next question is from Sung Ji Nam from BTIG. Your line is now open..

Hi. Thanks for taking my question. Just a two-part question on your Waters instruments. So, for BioAccord, you talked about strong early market development activity.

Would you be able to speak kind of where you're seeing that? Is that global or is that in a certain geographic region? And then, secondly, would you be able to break out kind of what your outlook is for Waters instrument growth this year and how much of that is contingent on new product sales or the new product cycle versus the existing portfolio benefiting from improving end market outlook? Thank you..

Sure. Thanks, Sung Ji. Yeah. So, the BioAccord launch has been really exciting. We officially launched the product at the well-characterized biopharmaceutical conference. And really, a lot of the early activity we saw was in some of the developed markets, US and Western Europe, in particular.

But one of the things that happened more mid-quarter was we had a significant launch in China. And literally hundreds of customers attend a really robust and kind of high-energy launch event that led to a variety of customer relationship developments and getting people into demo type situations.

I use the word market development because this is really a new category for regulated laboratories for high-resolution mass spectrometry in a compliant package to really lead us into method process development and, ultimately, QA/QC for large molecules in the MAM space. And that's, obviously, kind of a new direction for the market.

We continue to do all the right things to develop that market. We, obviously, have taken orders and shipped some units, although we never really expected to do all that much of that in the earlier part of the year. And so, I'm really looking at metrics around MQLs or marketing qualified leads as well as that demoing activity.

Another key aspect of our launch readiness is to forward place the BioAccord system in our own demonstration labs at an accelerated pace compared to what we've done historically with other systems. And that's been really effective because it's brought many more customers into the demo phase which can ultimately accelerate quoting and ordering.

And so, it's all systems go. And we continue to press on that opportunity. And by the way, we've always thought, along with the launch, it creates an opportunity for our sales folks to have a broader conversation about Waters and the collateral positive impacts of having new technology and how that affects the rest of our product line.

Interestingly enough, it's had a positive effect on our overall high-resolution mass spectrometry portfolio. So, anyway, that's just one platform and, certainly, there are others coming. And as you allude to, something that will have a positive effect on our instrument performance over the course of the year are those new product launches.

So, I don't want to get into too many specifics around the exact dollar amount or percentage increment that we expect from new products over the course the year, but we do expect that contribution to strengthen over the course of 2019..

Great, thank you..

Thank you..

Next question is from Steve Willoughby with Cleveland Research. Your line is now open..

Hi. Good morning. Two questions for you. First, Chris, you've talked quite a bit about end markets and geographies.

I was wondering if you could – if you had any thoughts as it relates to share and if you've seen any impact on your share in addition to impact from the markets? Do you think you're gaining or potentially losing any more share than maybe you have been over the last several quarters? And then, just following up on some other questions, can you explain to me again what gets better in the second quarter versus the first quarter? Obviously, you're going against a little bit more difficult comps in 2Q, but it sounds like the pressures in China and in Europe are expected to largely continue.

So, I'm trying to still figure out what exactly gets you to the 2% to 4% organic growth versus the flat here in the first quarter? Thank you so much..

Sure, Steve. Thanks.

From the standpoint of market share on the first part of your question, as I've sort of alluded to before, when you break it down into the various technology categories where we have good market share data, we feel that our market share and our core LC business, our core TA businesses is very solid and certainly all the data coming out of the 2018 market calculations reinforce that and backed up as well by import data in countries that capture that kind of information.

We've acknowledged here for some time, we've had some pressure on the mass spec side of the business which is why we've invested in differential strategies because we do believe in the growth and the potential of the mass spec product line and are excited about what's in our portfolio.

So, really, from a market share standpoint, I don't have any new information from the quarter other than what the data said at the end of last year and the overall confidence in the durability of our market share franchise and in those categories.

In terms of what gets better in Q2, some of the factors that I alluded to, we do expect a softening up some of the restrictive factors on budget release, particularly in the pharmaceutical sector, to take place over the course of the year and have some impact in Q2.

We certainly expect to increase the impact of some of the new product launches that we have in Q2 versus Q1.

And, certainly, there are – while we don't expect something – a country like China to completely bounce back in one quarter, we are looking to improve upon our performance in China and there are some small incremental positives such as the lowering of the VAT tax that's happening this month in China, which ought to create some additional incentives for capital purchases among key customers.

So, really, it's a composition of a number of those factors. And we're looking to improve upon every one of the factors that affected us in Q1 and continue to improve over the course of the year..

Chris, can I sneak one more question in there? I appreciate that answer. You commented you don't want to get into the impact this year from new products, but maybe you can just give us some context since the BioAccord is now out there. You alluded to a number of other new products coming this year.

While I'm sure you don't want to launch those new products on today's conference call, can you just give us some feel or perspective on the other products you have coming and their potential significance versus the potential significance of the BioAccord, meaning the other products you're going to launch later on this year potentially a bigger deal or a smaller deal relative to the BioAccord?.

Yeah. A fair question. And I would just say, BioAccord has been the headliner simply because of the timing and also the strategic importance of that platform, and both the market segment it's targeted at as well as the conviction we have in the solution.

The other one that we haven't specifically mentioned, but you are well aware of, Steve, is the cyclic high mobility, high-resolution mass spectrometer that we continue to expect to launch at the ASMS meeting coming up here shortly. So, we're really excited about that. And, obviously, we're going to get a benefit of that in the second half of the year.

And what I'll just say on the other product launches that we'll provide details on as we move along is that there are a number of what I might call more iterative technologies.

If BioAccord and cyclic IMS are new platform technologies, we have a variety of other iterative technologies in both our LC and our mass spec portfolio which will benefit us in particular because those technology categories and product families are well accepted platforms in the market. They can benefit from the refresh as we have them.

So, I'd rather stop there from the standpoint of describing the new product introductions. But everything we said at Investor Day relative to the number of launches and the excitement we have around the launches is very much in front of us here..

Thanks very much..

We're at the hour, but we'll take one more final question and then wrap it up?.

Okay. The final question for today is from Jack Meehan with Barclays. Your line is now open..

Yeah. Thank you. Chris, I just want to go back to Europe. I appreciate, with Brexit, maybe there was slower purchasing. But, logically, what was the feedback you were hearing from customers related to that? The reason I ask is it's not something that we've heard from a couple of your peers.

And I think the prevailing logic was there might be actually some stocking related to Brexit. So, again, the feedback that you're hearing from customers would be helpful..

Yeah. Related to Brexit, we certainly didn't see any unusual stocking activity, whether it was over the course of last year or early this year. And, obviously, the Brexit stalemate has been kicked down the road to the October timeframe. And we continue to develop our contingency plans for the eventuality – the potential eventuality of a hard Brexit.

I think what we saw in our business was softer demand, particularly in Northern Europe, in and around the UK and countries that are the most active trading partners with the UK. And a lot of that really related to just the general caution of budgets in a new year where some of the macro clouds continue to hang.

We, obviously, see different dynamics in different parts of Europe and actually saw better performance in Southern Europe and some other parts that were maybe a little bit away from the Northern European areas. So, Europe has been a very strong market for us historically.

It's gone through some bumps here in the last quarter, in the last year, but we have a lot of confidence that the customers in those areas will be there for the long-term.

And we're just trying to stay very focused on the underlying activity, which, as I mentioned in my prepared remarks, is actually positive relative to demoing and quoting type of activities, particularly in pharma.

So, anyway, we're just going to stay very focused on trying to get that business back and return Europe to a growth profile over the course of the year..

Okay.

And then, just as a final – what was growth in India in the quarter and can you talk about the economic activity that you're seeing there?.

Sure. Yeah. For a final comment, that's a good place to end because India was obviously a very dynamic situation over the last year. But, India, we're seeing all the signs that we hoped and expected to see coming into the year of stabilizing business.

As I alluded to in my comments, India grew solidly in the mid-single digits and had even better performance in LC and in pharma. So, we actually saw strength in pharma and strength in LC in India, and that is on the heels of what was actually a pretty good fourth quarter as well.

The fourth quarter of 2018 was our second-highest quarter ever in India and had a tough comp, but we rolled into this year with continuing steady demand returning on the instrument side to complement the business on the chemistry and service side. Obviously, India is not out of the woods yet as it relates to political questions.

As you know, the election cycle is underway. And while most people expect the stability of a Modi government, and that's certainly our hope as well, we're just being appropriately cautious as we kind of work through that.

But the fundamental underlying health of the pharma sector and of our business appears to be on the rebound there in India and we're gratified by that..

So, thank you very much for that question. And thanks for all of your questions today. In conclusion, we are focused on delivering improved growth over the course of 2019, headlined by improving instrument purchasing dynamics, continued growth in our recurring revenue and the growing contribution from new products.

As always, we are committed to delivering reliable earnings performance based on our organic growth and supported by our enhanced capital deployment program. On behalf of our entire management team, I'd like to thank you for your continued support and interest in Waters.

We look forward to updating you on our progress during our second quarter 2019 call, which we currently anticipate holding on July 30, 2019. Thank you. And have a great day..

This concludes today's call. Thank you for your participation. You may disconnect at this time..