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Waters Corporation  (NYSE:WAT)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Waters Corporation Third quarter 2018 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 has objections, please disconnect at this time.

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

Brian Brockmeyer -- Head of Investor Relations

Thank you operator. Good morning everyone and welcome to the Waters Corporation third 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 fourth quarter and full year 2018.

We caution you that all such statements are only predictions and that actual events or results may differ materially. For 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, 2017 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. 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 January 23, 2019.

During today's call, we will be referring to certain non-GAAP financial measures. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to the earnings press 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 we say otherwise, references to quarterly results increases or decreases are in comparison to the third quarter and fiscal year 2017. In addition, unless we say 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 Waters' Chairman and Chief Executive Officer, Chris O'Connell. Chris?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Thanks, Brian and good morning, everyone. Thank you for joining us today. Along with Brian Brockmeyer, joining me on this morning's call is Sherry Buck, Waters' Chief Financial Officer. During today's call, I will provide an overview of our third quarter operating results, as well as some broader commentary on our business. Sherry will then review our financial results in detail and provide comments on our fourth quarter and full year 2018 financial outlook. We will then open up the phone lines to take your questions.

Briefly reviewing our financial highlights. Our revenues grew 3% for both third quarter and year-to-date and adjusted earnings per share grew 8% for the quarter and 9% year-to-date. While we continue to make significant progress on our key strategic initiatives, our third quarter sales growth came in below our expectations that we shared with you during the July call. While we continue to see strength in China and had a nice improvement in US pharma, we saw weaker-than-expected performance in two key areas, our TA Instruments product line and the European pharma market. Furthermore, the recovery of normalized growth in India is progressing slowly.

To give you a bit more color on Q3 soft spots, I'll start with TA Instruments. While growth in this product line was 6% year-to-date, TA had a soft sales quarter due to the timing of certain shipments to US, European and Chinese customers. That said, underlying TA order growth in Q3 was encouraging and was in line with year-to-date order trends, despite the slower-than-expected sales in the quarter. We continue to be excited about the near and long-term prospects of the TA product line, which is in the early innings of a major new product cycle in thermal analysis and is supported by solid economic backdrop.

Our European growth was challenged in the quarter by the pressure within our pharmaceutical end market. Though we saw an improvement in big pharma in the US during the quarter, spending among top pharma customers in Europe remains tempered with uncertain dynamics heading into the end of 2018. On the positive side, sales to our pharmaceutical customers in the US picked up meaningfully during the quarter. We are encouraged with the improved spending that we are seeing by our largest pharma customers in the US and our Q4 expectations assume a continuation of that trend. Outside of the US, we continue to excel in China with strong mid-teens growth. Furthermore, worldwide LC instrument demand remains stable.

Looking briefly at the P&L. We are pleased with the solid earnings results, despite the slower-than-expected top line growth. While investing in future growth through organic innovation, we demonstrated disciplined operating expense management that drove modest margin expansion, enabling us to exceed our earnings per share target.

Taking a closer look at the business now, starting with a review of our market categories at the Corporate level. Third quarter sales to our broadly defined pharmaceutical category increased 2% year-over-year, driven by double-digit growth in China and the aforementioned pickup in the US, partially offset by a modest decline in European pharma markets and a decline in sales into clinical applications. Importantly, our LC product line remained solid outside of market-related pockets of weakness in India and Europe.

Year-to-date, overall sales to our pharmaceutical markets are up 3% against a solid prior-year performance. We feel good about our pharma market position and in particular our ability to meet the needs of customers in biomolecule applications. The investment environment remains positive and we see long-term growth opportunities based on the global pipeline of new drug development. Sales to these customers continue to perform well and we are confident in our positioning in large molecule applications, which account for approximately one-third of our pharma business.

Third quarter sales to our worldwide industrial category, which includes the materials characterization, food, environmental and fine chemical markets, grew 2% year-over-year, led by strength in the chemical analysis and food markets. Despite softer-than-expected growth in the quarter, we remain confident in our product positions and pipeline, as well as the breadth of opportunities across material characterization, food safety and environmental applications. Year-to-date, our worldwide industrial category sales were up 1%.

Sales from our governmental and academic category increased by 8% in the third quarter, with strong growth in Asia and the Americas, partially offset by softer demand in Europe. Weakness in biomedical research applications was more than offset by strength in both environmental research and pharmaceutical discovery among these customers. Year-to-date, our governmental and academic category was up 9%.

Next, I will review our sales performance by geography at the Corporate level. Asia, our largest region in terms of revenue, was up 7% in the quarter and -- on double-digit growth in China and modest growth in India. Demand in China remains robust with strong growth in pharma, food and fine chemical markets, partially offset by softness within our TA Instruments product line.

Turning to the Americas, overall sales grew 2% in the quarter, while sales within the US were flat. Although Canada and Latin America were strong, growth in these regions was offset by softness in the US. Increasing strength in our US pharma customer base that we mentioned before was offset by softness in clinical applications and our TA Instruments product line.

In Europe, sales were down 2% during the quarter, as solid industrial sales in the region were offset by a lower than expected pharmaceutical growth, driven by unexpected weakness from large pharma, clinical applications, and biomedical research.

Finally, I will review product line dynamics within our Waters and TA brands. Waters branded instrument sales were flat in the third quarter with strength in stand-alone chromatography instruments. Within LC, momentum continues to build for the ACQUITY ARC Bio and the ACQUITY PLUS, which we launched earlier in the year. Meanwhile, our overall LC instrument sales growth was largely driven by the Alliance system with strong growth across all geographies, further reinforcing the underlying strength of our HPLC position in regulated markets.

Our mass spec product line improved modestly compared to the first half of the year and encouragingly, we saw stabilization in our high resolution mass spec portfolio. Our core tandem quad mass spec portfolio has sold well over the last year, highlighted by the Xevo TQ-XS. During the quarter, we began shipping the Xevo TQ-GC system and DART QDa with LiveID, both of which will initially target the food safety testing market. There is significant opportunity in Asia and particularly in China where food safety testing is just beginning to shift from legacy government labs to newly established independent labs.

We're also excited about the newly announced launch of the RenataDX, our next generation screening system for high throughput, general use clinical diagnostics. This fully integrated benchtop system is an open platform with proven, reliable and robust performance and it builds on Waters' 20 years of experience serving the needs of newborn screening and general clinical diagnostic laboratories.

Waters branded recurring revenues, which reflect the combination of service and precision chemistries and represent approximately 50% of the business' total sales, grew 5% in the quarter. We saw strong growth of recurring revenues in pharma, driven by global strength in our service, application kits, UPLC columns and bio-separation columns. In particular, we are encouraged by the strong demand for our recently launched BioResolve reversed-phase monoclonal antibody columns.

Turning to our TA product line, sales increased 1% in the third quarter. Instrument system sales for TA increased by 1 -- decreased by 1% and service sales increased 8%. Softer sales in our thermal analyzers offset strength in our rheology, microcalorimetry and ElectroForce product lines. As we highlighted earlier, our consistent order growth, strong product portfolio and leading market position give us confidence in the continuing strength of our TA products.

In summary, our year-to-date growth has been uneven, due to some unexpected dynamics in a few key geographies and product categories. That said, we have maintained strong operational discipline and exceeded our earnings expectations. We are making significant progress against our growth initiatives, headlined by our efforts over the past several years to transform our innovation process that is beginning to deliver a series of next generation products to market.

Before some additional comments on innovation and capital deployment, I'd like to reiterate that we remain steadfastly focused on executing on our five-point value creation model. As we have previously communicated, we aim to create shareholder value by, one, holding a focused and highly differentiated position in structurally attractive markets. Two, executing a clear growth strategy, driven by organic innovation. Three, seeking opportunity for continuous operational improvement. Four, being a disciplined capital allocator. And five, operating with performance-oriented culture and management team.

We continue to prioritize and invest proactively in organic innovation with year-to-date R&D investments growing 7%. To augment these internal innovations, we are increasingly evaluating select external technologies to strengthen our overall product portfolio and enhance our organically developed products. There is a lot of excitement throughout Waters about our innovation transformation and the resulting enhancements in our new product pipeline. Our management team has stepped up the pace and focus of new product development over the past several years and we are now beginning to see the benefits of these efforts.

In 2018, we have launched the ACQUITY Arc Bio system, the ACQUITY UPLC Plus series, the Xevo TQ-GC, the DART QDa with LiveID, the RenataDX screening system and numerous chemistry products, as well as additions to our TA product lines, such as the DMA 850. While these new products have seen successful launches, we expect to realize greater revenue contribution from them in 2019 and beyond.

Looking ahead to 2019, we are excited about a number of additional launches that will begin a major new product cycle, highlighted by the first steps of our Bio Taft program. This biopharmaceutical LCMS system is the industry's first integrated benchtop mass spectrometry-based platform for routine monitoring and release testing. Our biopharmaceutical customers employ a diverse range of users who need to make analytical decisions more efficiently. This system delivers a sample to result streamlined workflow process that will enable routine operators to acquire reproducible, decision-supporting data that is more of a challenge to obtain using existing research grade mass spec systems. This new system is compact enough to sit on a bench, but powerful enough to deliver the high-end performance needed to monitor and quantify multiple product and/or process attributes within a single analysis.

Shifting to capital deployment, we have concluded an extensive review of our capital deployment strategy following US tax reform. This seminal event has provided Waters with more tax efficient access to our global cash and as a result, we intend to put our balance sheet to work in 2019. We will further accelerate our recently enhanced share buyback program and target a near-term capital structure, featuring a net debt to EBITDA ratio of approximately 2.5 times. Sherry will provide further details on capital deployment in her comments.

To go further on these critical topics and provide investors with deeper insights into Waters and our key growth initiatives, I am pleased to announce that we plan to host an Investor Day on the morning of February 28, 2019 in New York City. I look forward to engaging with you in that forum, which will include in-depth management presentations, an opportunity for Q&A and informal interaction with the management team. More details about the event will be forthcoming, but please save the date on your calendars.

With that I'd like to pass the call over to Sherry Buck for a deeper review of third quarter financials. Sherry?

Sherry L. Buck -- Senior Vice President and Chief Financial Officer

Thank you Chris, and good morning everyone. In the third quarter, we recorded net sales of $578 million, an increase of approximately 3% in constant currency. Currency translation decreased sales growth by approximately 1%, resulting in 2% sales growth as reported. In the quarter, sales into our pharmaceutical and industrial markets both grew 2% and sales into our governmental and academic markets grew 8%.

Looking at product line growth, our recurring revenue, which represents a combination of precision chemistry products and service revenue, grew 6% in the quarter, while instrument sales were flat. As we noted last quarter, there was no year-over-year difference in the number of calendar days during the third quarter, but there is one additional calendar day in the fourth quarter of 2018 compared to 2017.

Breaking product sales down further, sales related to Waters branded products and services grew 3%, while sales of TA branded products grew 1%. Combined, LC and LCMS instrument platform sales were flat and TA's instrumentation system sales decreased by 1%. Our total recurring revenues, which include both Waters and TA products, grew by 6%.

Looking at our growth rates in the third quarter geographically and on a constant currency basis, sales in the Americas were up 2% with flat sales in the US. European sales were down 2% and sales in Asia were up 7%, led by 13% growth in China.

Now I'd like to comment on our third quarter non-GAAP financial performance versus the prior year. Gross margin was 58.3% for both the third quarters of 2018 and 2017. Moving down the third quarter P&L, operating expenses increased by approximately 1% on a constant currency basis and foreign currency translation decreased operating expense growth by approximately 2% on a reported basis.

In the quarter, our effective operating tax rate was 15.1%, up 290 basis points year-over-year, which was in line with our expectation and reflects the net impact of US tax reform that we discussed in our Q4 2017 earnings call. Net interest expense was $2 million, down $3 million from the prior year, benefiting from reduced debt levels as part of our capital deployment framework, as well as higher rates of return on investments versus the prior year.

Our average share count came in at 77.1 million shares, approximately 3.4 million shares lower than in the third quarter of last year. This is a net effect of our ongoing share repurchase program.

Our non-GAAP earnings per diluted share for the third quarter were up 8% to $1.92 in comparison to earnings of $1.77 last year. On a GAAP basis, our earnings per share were $1.83 versus $1.69 last year. A reconciliation of our GAAP to non-GAAP earnings can be found in the press release that we issued this morning.

Turning to free cash flow, capital deployment and our balance sheet. I'd like to summarize our third quarter results and activities. We define free cash flow as cash from operations, plus capital expenditures and excluding special items. In the third quarter of 2018, free cash flow came in at $136 million, after funding $27 million of capital expenditures. Excluded from free cash flow were $8 million for US tax reform-related payments, $5 million related to the funding of certain international pension plans and $4 million related to the investment in our Taunton Precision Chemistry Operation. In the third quarter, this results in $0.24 of each dollar of sales converted into free cash flow and $0.26 year-to-date.

In terms of returning capital to shareholders during the quarter, we repurchased 1.4 million shares of our common stock for $264 million. Year-to-date, we have purchased 4.1 million shares for $808 million. These capital allocation activities, along with our free cash flow, resulted in cash and short-term investments of $2.1 billion and debt of $1.2 billion on our balance sheet at the end of the quarter, resulting in a net cash position of approximately $900 million.

I'd like to provide some additional comments related to capital deployment and our near-term capital structure. Consistent with prior communications, we prioritize capital deployment in three buckets. Number one, invest in the business. Second, maintain our balance sheet strength and flexibility. And third, return capital to shareholders. We continue to be committed to returning cash to shareholders.

In April 2018, we announced a new share repurchase program of $3.5 billion, which was the first step from our comprehensive review of capital deployment following US tax reform that provided us with more tax-efficient access to our global cash. Following up on Chris' earlier comments, we've continued to review our capital structure and have concluded with our Board of Directors that we have the ability to accelerate the pace of our share repurchase program, while also maintaining the financial flexibility to invest in the business through both organic and inorganic opportunities. Towards that end, we plan to continue the acceleration of share repurchases during the fourth quarter and anticipate buying back approximately $500 million of our common stock. This would bring our full year 2018 share repurchases to about $1.3 billion.

As we look forward to 2019, we plan to utilize our balance sheet to support a near-term capital structure of approximately 2.5 times net debt to EBITDA ratio with a robust share repurchase program for 2019. We will provide more details of our 2019 plans during our Q4 earnings call and at our Investor Day in February 2019.

Accounts receivable days sales outstanding increased to 77 days this quarter, up from 73 days in the third quarter of last year. In the quarter, inventories increased by approximately $16 million in comparison to the prior year quarter, which was in line with typical seasonal patterns.

As we look forward to the balance of the year, I'd like to comment on our full year 2018 guidance. Our outlook assumes continued global growth and demand from our end markets and continued growth in our recurring revenue. These dynamics support full year 2018 guidance for constant currency sales growth of 3% to 4% from our prior guidance range of 4% to 6%. At current rates, currency translation is assumed to increase 2018 sales growth by about 1 percentage point. Gross margin guidance for the year is unchanged at 58.5% to 59%. Our plan for the full year is to continue managing operating expense growth at a rate that is below our sales growth rate.

Moving below the operating income line, net interest expense is expected to be approximately $11 million from our prior guidance of $14 million. This assumes that the debt repaid in the first three (ph) quarters of 2018 is not reborrowed during the course of the year. Our full year effective tax rate is estimated to be in the range of 13% to 15%.

Our guidance assumes continued acceleration of share repurchases in the fourth quarter as mentioned in my earlier remarks and will result in an average diluted share count of approximately 78 million shares outstanding. Rolling all this together, on a non-GAAP basis, full year 2018 earnings per fully diluted share are projected to be in the range of $8 to $8.10 from our prior guidance range of $8.05 to $8.20. At current rates, the foreign currency impact on full year earnings-per-share growth is expected to be neutral, which is consistent with our prior guidance.

Looking at the fourth quarter of 2018, our guidance assumes a continuation of our year-to-date performance trends. Therefore, we expect 3% to 4% constant currency sales growth in the fourth quarter. At today's rates, currency translation is expected to decrease fourth quarter sales growth by 1 percentage point to 2 percentage points. Combining these top line factors with a moderate increase in expenses, we estimate fourth quarter non-GAAP earnings per diluted share in the range of $2.55 to $2.65, which assumes an approximate 4% negative impact from currency translation at current rates.

Chris will now make a few summary comments. Chris?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Great, thank you Sherry. To recap, during Q3 and through the first three quarters of 2018, we have seen some unexpected bumps in a few key geographies and product categories. That said, we have maintained strong operational discipline and exceeded our earnings expectations, while remaining steadfastly focused on delivering our significant new technology pipeline through our enhanced innovation program. Furthermore, we remain confident in the health of our end markets and our strong competitive position in our priority categories. I look forward to updating you further in early 2019.

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?

Questions and Answers:

Operator

Thank you. (Operator Instructions) And we will take our first response from Steve Beuchaw, Morgan Stanley. Your line is open.

Steve Beuchaw -- Morgan Stanley -- Analyst

Hi, good morning, and thanks for the time here. I think, Chris, it would help if you just tried to think about 2018 in totality and compare that to the sort of historical norm of mid-single digit plus pharma growth, which we think of generally as the bellwether for Waters. Over the course of this year, you've had a couple of one-off headwinds. How would you summarize what this year is a one-off headwind and what can you tell us about how big you think new products are as drivers of acceleration from here?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes, thanks Steve for the question. And I think you characterized it well. The pattern we've seen throughout the year has shown some bumps in the road that were not fully expected as we headed into the year in a couple of key geographies and product lines. Obviously, the most consistent headwind we've seen over the course of the year has been in India, which has knocked down our growth by a 1% (ph) or point or more and we can go deeper on India with what a year ago was a customer base working through the GST tax implementation issues, has evolved a little bit to some broader economic concerns. Obviously, the rupee is way down on a year-over-year basis and so a variety of factors, including some political uncertainty in India have really contributed to that being a consistent headwind.

And outside of that we've had some pockets of market-related issues in Europe that we saw in the quarter. That said, we have some real positives that we've seen over the course of the year as well. China has been very consistent as a tailwind and the US, which started out quite slow has been improving, particularly in pharma, which is probably the thing that we watch most closely.

And so, as I look at the year in totality and on your point of innovation, we've just tried to remain steadfastly focused on the execution of what is a really exciting multi-year innovation cycle. This year in 2018, particularly in the back half of the year, we've seen more incremental product launches than the prior two years combined. And those really should start showing their promise. And of course as we look ahead to 2019, we have what I'd consider non-incremental type of product launches coming with the Bio Taft program, some new entrants in high resolution mass spec and in some other areas. So that's really our core strategy, we've not wavered from that and as we've worked through some of the geography and product line bumps in '18, I think we remain very confident in the outlook for the business long term.

Steve Beuchaw -- Morgan Stanley -- Analyst

And just to quickly follow up on a couple of points you made. Can you give us a sense for whether you're embedding any assumption for improved trends in India in 4Q? Can you give us any more color on what is behind the slowness that you called out in pharma in Europe there? And then I'll get back in queue. Thank you.

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Sure. You know, in terms of India, we have moderated our outlook for India. India has been a great market for a long time, as you know, and what we've observed over the years is that Indian customers tend to be pretty patient buyers. We do see pent up demand building, but like I said, it's become more clear over the course of the year that the environment in India is reflecting some political uncertainty with the next round of elections coming up next year and some degree of economic moderation, in part impacted by the rupee devaluation. And so we have just remain very focused. We believe India will come back. It's come back more slowly than we expected and so we're not assuming a huge bounce in Q4 in terms of our guidance. We're assuming more of a continuation of the trend that we've seen throughout the year and that's consistent with Sherry's overall comments on our Q4 outlook, reflecting the continuation of what we've seen throughout the year. And what was the last part of the question?

Steve Beuchaw -- Morgan Stanley -- Analyst

Just looking for clarity on what you believe the catalyst for the change to trend in Europe. The growth, actually considering the comp wasn't particularly different relative to trend, but curious why was that you called it out?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Well, we did have a strong double-digit trend in Europe overall with growth in third quarter of prior year. And I guess, if we look at Western Europe, we did have a significant 2017. 2018 has been a bit softer. We certainly believe our performance reflects more market related factors and we're obviously watching that closely. The tough comp was particularly with strong double-digit pharma comps, but we've probably seen some incremental effects of some country specific dynamics. Certainly the Brexit situation as it rolls closer to, hopefully, some sort of a positive resolution, has probably put a bit of a chill on sentiment and certainly, there are some other specific countries like Turkey with some near-term uncertainty. But, our franchise in Europe is very strong and we've got a customer base there that we expect to persevere and like I said on my prepared comments, we don't necessarily anticipate a big bounce in Europe in the immediate term, but certainly as we look ahead to next year, we expect to see a normalization.

Steve Beuchaw -- Morgan Stanley -- Analyst

Thanks so much, Chris.

Operator

Thank you. Our next question will be from Tycho Peterson of J.P. Morgan. Your line is open.

Tycho Peterson -- J.P. Morgan -- Analyst

Thanks. Chris, I want to hone in on a few of the other soft spots you called out. I'll start with industrial, you know, you talked about the timing of shipments there and I think you said the order book was a little bit better. Obviously, the data points on the industrial side have not been very encouraging, including a few more headlines today. So I guess what gives you confidence that this really is a timing issue coming out of the quarter?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes. Thanks Tycho. The comments that you referred to I made specifically around the TA Instrument product line. And really what happened in TA is as we got to the very end of the quarter, there was a kind of a mix in timing of certain orders that had delayed shipments, including some Chinese shipments. That dynamic we saw in a couple of different regions, but China we've seen this for a few quarters now, just with an elongated process of order to sale. But know interestingly enough, the order growth, which -- we typically don't provide as much color to, but wanted to in this case, the order growth in TA was encouraging, it was consistent in Q3 with where we have seen it all year. I think we have a lot of confidence in our TA Instruments franchise in terms of the core product position that we have with the new Discovery launches we've seen and more coming. And certainly from an inventory standpoint, we just had a slightly different mix on hand as we headed toward the quarter in terms of what we saw from an order standpoint. Much of that will normalize in Q4. The Chinese situation possibly has some effect linked to the broader trade dynamics in China. But we have a robust overall global franchise in TA and expect that to bounce back in Q4.

Tycho Peterson -- J.P. Morgan -- Analyst

Okay. And then similarly, can you comment on the clinical softness? You called that out a few times in your prepared comments as well.

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Sure. Yes, clinical has actually had a really strong first half, particularly in Europe and is up nicely year-to-date. We just saw a slightly weaker clinical quarter on top of what last year was a pretty big comp and what was a lot of activity in the first half of the year. Some of the comps tend to be lumpy in certain parts of the clinical business, such as the pain management business, where there has been some weakness, due to shifts in reimbursement policy in that space. But again, stepping back and looking at the bigger picture of clinical, we've had a solid year year-to-date and we have new product coming into that category. I mentioned in my remarks the RenataDX, which is a next generation clinical screening system and we have a focused position in clinical diagnostics, particularly in the general use IVD category and we continue to like that business.

Tycho Peterson -- J.P. Morgan -- Analyst

Okay. And then just one last one on operational discipline, since you highlighted that as well. I'm just curious if you're accelerating any cost actions in this environment or how you're thinking about OpEx?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

I would say that we continue to monitor our operating expenses very closely. We haven't taken any unusual cost actions. We've certainly been more conservative in headcount expansion in some of our operating spending over the course of the year, as we saw some of these bumps in the road from a top line standpoint. But as you know, Waters has always been a very disciplined operator and will continue to stay focused on those. And like I said in the remarks, we're pleased to have delivered on the bottom line, despite some of the bumps on the top line.

Tycho Peterson -- J.P. Morgan -- Analyst

Thank you.

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Thanks.

Operator

Thank you. Our next question is from Daniel Brennan of UBS. Your line is open.

Daniel Brennan -- UBS -- Analyst

Hey, Chris. Thank you. So I was hoping to maybe just revisit European biopharma for a moment. Just -- could you just give us a little more detail there in terms of actually what did the European biopharma grow or actually shrink in the business? And it sounds like it's really related more to the UK and Turkey, is what you call -- I guess I'm just looking for a little bit more color, more broadly across Europe and kind of what you're seeing with your biopharma customers.

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes, you know, it's a bit of a mixed bag on biopharma, generally, because we did see some weakness in Europe, which really related to some of the comps that we had that were strong there and also some of the general market chill that we've seen in Europe in the past quarter too. But that was very much offset by strength in biopharma in the U.S. We -- as I mentioned before, we saw a really robust quarter in the U.S. in biopharma in particular and in pharma generally. Since we report by trade class our clinical and biomedical research numbers, which were both a bit weak in the quarter, really offset some very encouraging growth in U.S. pharma, in particular, strength in biopharma. So it is a bit of a mixed picture globally Dan I'd say and reflects some of the broader themes I mentioned.

Daniel Brennan -- UBS -- Analyst

And then maybe just one more on India. So India sounds like it grew modestly in the quarter, but obviously you're flagging maybe the rupee in some kind of economic uncertainty there. So maybe can you just give us a viewpoint toward your India business and how we should think about the growth rate of that kind of going forward and other -- what are the signposts we should watch for, do you think, to see if an Indian recovery is on the horizon for Waters? Thank you.

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes sure. It's something we're watching carefully. We're trying to be as patient as we can with India, because as I mentioned earlier, the customers tend to be patient buyers and if you look over the long history of India, it does go in pretty pronounced cycles. That said, the long-term trend lines are still positive in India and we do believe there is demand building, particularly on the Instruments side. We saw an -- we've seen very steady contribution of our recurring revenues in India, which give us confidence in the underlying demand and the underlying utilization of the technology.

And in terms of the signposts, it's really watching that sort of pent-up customer activity and the underlying volumes they are producing, as measured in what we see in the recurring revenues for some sort of a tipping point. But I think as the rupee stabilizes and the year-over-year comps there, as it relates to our Indian customers, become moderated, hopefully that will contribute to the reacceleration of India. But, we're just staying very focused there. We really have a lot of confidence in our management team. We have confidence in the market and expect that to perk up at some point hopefully in the not too distant future.

Daniel Brennan -- UBS -- Analyst

Great. Thank you.

Operator

Thank you. Our next question will be from Ross Muken of Evercore ISI. You line is open.

Ross Muken -- Evercore ISI -- Analyst

Hi good morning guys. There's been a lot of noise around sort of share dynamics in a couple of your key categories, particularly in mass spec. I guess, how are you thinking about sort of your competitive performance? I guess some of this is just going to go back to the new product launches, which I guess address some of the markets where you were not maybe competing as aggressively as you would like. But how are you thinking in terms of the traditional markets around sort of the share dynamic and sort of the stability there we're sort of used to seeing?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes, sure. Thanks Ross. Like I mentioned before, if you looked at our total first half mass spec product line, we did see some modest improvement in the third quarter and we actually had a reasonably challenging comp year-over-year in mass spec as well. Like I said, we saw a bit of a bounce and some encouraging signs in the high res segment, and as I've said many times before, we really do like our core position there. We're a little late in a product cycle on that and looking forward to new products. But I feel like we're moving in the right direction in mass spec. We've got a very solid core tandem quad position. And as you point out, our near term product pipeline is robust and we're getting closer to it. You know, for example, on the Bio Taft program, we're well into a really exciting phase of customer evaluation and demo of the system, some of which I've personally participated in, and we do have a number of near-term new products as well in the high res and broader mass spec category. So like I said, I feel like we're moving in the right direction. It's an important product line for the Company and feel that it's reasonably stable in the near term and hopefully getting better.

Ross Muken -- Evercore ISI -- Analyst

And I guess on the capital allocation side, as you were sort of debating the merits of sort of more aggressive M&A or other technology purchases, again sort of the share repurchase, it seems like you guys are still remaining fairly biased to repurchase as you take up the leverage. I guess, how are you sort of thinking about that on a returns basis and versus what the business needs to kind of fuel the top line over the next three, five years?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes, now that's a terrific question Ross and we have -- as Sherry pointed out, say, we've spent a lot of time discussing the capital allocation, because for us tax reform was a total game changer. We were very locked on our balance sheet beforehand and now we're very unlocked and have a lot of financial flexibility, given the very strong economics of our business and global cash flows.

Our priorities for capital allocation are, first, to grow the business and in any scenario, buyback, we are retaining plenty of financial flexibility to invest in the business, headlined by organic innovation capital expense. And as I mentioned, doing more and more to make sure we're close to what's happening outside of our four walls relative to innovation in technology and in considering very purposeful additions. Certainly in a small way you saw that earlier in the year with the Prosolia DESI IP acquisition and we'll continue to maintain sufficient cash to invest in all of the growth attributes. But with that, certainly we have incremental capacity through our cash on hand, plus borrowing capacity to enhance our buyback program and we feel that now is the right time to put our balance sheet to work and to fully deploy our cash and partially deploy our borrowing capacity to work toward a more optimal capital structure.

Ross Muken -- Evercore ISI -- Analyst

Thanks a lot.

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Thank you.

Operator

Our next question will be from Dan Arias of Citigroup. Your line is open.

Dan Arias -- Citigroup -- Analyst

Good morning, thanks. Chris, apologies if you mentioned this, but it feels like your 4Q guide doesn't really assume much in the way of end of the year flush activity from pharma. Is that fair and is there any insight that you might have into the way that pharma might spend to finish in 4Q, particularly if you try to parse out Europe?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes. I think that's a good question on flush and I would say, no, I didn't directly address it. But I would say that our forecast in Q4, as Sherry mentioned, I just reiterate that. We expect a continuation of some of the trends and we're not forecasting a major flush. Certainly, we're looking at that on a geography by geography basis. The U.S. as I mentioned earlier, showed a really encouraging uptick in pharma spending in the third quarter and from where we sit today, we see that as something that ought to continue toward the end of the year. Where on the other hand, you know, we're a little more conservative on our outlook in terms of what happens in Europe relative to year-end type activity. So I think, overall, we have a balanced set of assumptions on end of the year purchasing with strength in the U.S. and China. And probably more conservative outlook for geographies like Europe and India. So I'd characterize it as a bit of a middle of the road assumption.

Dan Arias -- Citigroup -- Analyst

Okay. And then maybe just on the Bio Taft, it sounds interesting, but the features that you mentioned also sound a lot like some of the ones that you hear when other LCMS players launch products. So without asking you to get too specific, can you just put some color around the differentiation that you expect to have there?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes, I'll say a little bit more Dan, because we obviously want to give you and the investment community a more complete description at the right time when we get ready for launch. But like I said, from a product development standpoint this has been, in my view, a really successful program where we've really hit on all of our key milestones along the way with a system that is very much designed for what the market needs today and in the future. And the reality is the systems in the market that are serving this category today have multi-attribute monitoring and are mostly, and including what we're selling into this segment today, really research-grade systems that really require expert users, have more complex software, can be more variable in terms of reproducibility, require certainly more service from higher skilled engineers and are really more designed for cutting-edge performance as opposed to reproducibility and robustness and regulatory compliance.

And so, we're obviously trying to build on the great success we've had on the small molecule side with HPLC, plus UV detection and power chromatography data systems, to provide a really fit for purpose solution for the accelerating segment of the market in late stage development and ultimately QA/QC, with a very versatile, easy to use, robust time-of-flight type analyzer. So I'll kind of leave it at that for now, which is consistent with I think what we've said. But we're also doing the commercialization process quite differently, say, than historically, where we're doing a very robust deep engagement with many key customers to test and trial the system, to get that final piece of feedback and to really demonstrate to our users that this is quite different from what they see on the market today.

Dan Arias -- Citigroup -- Analyst

Okay, I appreciate that. Thanks

Operator

Thank you. Our next question is from Doug Schenkel of Cowen & Company. Your line is open.

Doug Schenkel -- Cowen & Company -- Analyst

Good morning. Chris, if we look back over the past three years, core growth has gone from, I think it's 6.6% to 5,7% and now to an expected 3% to 4% this year. This is in a period where your peers have been accelerating revenue growth and more recently you've missed two of the last three quarters relative to your own core growth targets. I know you're aware of this and I don't mention this to be heavy handed. I mention it because I want to give you another opportunity to address some things that I think will be important for investors as we try to figure out what comes next. So specifically, how confident are you that you have a solid understanding of why Waters has performed the way it has relative to the peer group over the last couple of years? Maybe more importantly, why does it seem like the challenges with visibility that used to be characteristic of Waters the better part of a decade ago, have resurfaced? And most importantly, are you confident, based on your diagnosis and your visibility with the business and frankly the efforts that you put in place over the last three years as CEO that Waters can return to historical norms in 2019?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes. Hey, Doug, thanks for the question, appreciate it. And certainly we're not at this point forecasting or giving guidance for 2019, but when we do step back and look at the big picture and look at the natural product cycles that occur in a business like this and really compounded by a lot of Waters-specific mix in terms of end markets and geographies and product lines, I think when we step back and look at it, we feel very, very good about the work we're putting in to really build the type of R&D engine that can produce regular consistent cadence of new products that can drive the growth of the business and really a lot. That's why you see a lot of the commentary that I make and we make coming back to that core innovation story.

We certainly believe, we understand the market very, very well. We try to break out various segments to the market, to you and to the investment community in its level of granularity, we think that is warranted. And certainly, if you look at the overall visibility question, when you're in certain product cycles, you obviously continue to plan for success. You try to fight through various parts of the cycle and obviously, when you get closer to some of the catalysts that you're looking for to drive the business, then your confidence increases and I think that's sort of where we sit right now.

So, yes, I see the same number as you do. And what we're focused on as a management team is just continuing to make the right decisions, the right investments in both the core innovation process and in our ability to deliver that into the marketplace and certainly on a forward-looking basis, I feel very confident in what we're doing.

Doug Schenkel -- Cowen & Company -- Analyst

Okay, thank you very much. And Sherry, just a quick one, just to make sure I'm doing the math right. Based on your new guidance of a net debt to EBITDA target of 2.5 times. I think that translates into having $4 billion to $4.5 billion of capital to deploy. Am I doing the math right and did you say that you expect this net debt to EBITDA target to be achieved during 2019? Thank you.

Sherry L. Buck -- Senior Vice President and Chief Financial Officer

Yes. Doug, to clarify that our intent is to near term have a 2.5 times net debt to EBITDA and we would plan to achieve that during the course of 2019.

Operator

Thank you. And our next question will be from Derik De Bruin of Bank of America. Your line is open.

Mike -- Bank of America -- Analyst

Hey thanks. Thanks for taking us. This is Mike (ph) on for Derek. I want to follow up on an earlier question, but just sort of ask it in a slightly bigger picture view. Given some of the issues that we've talked about in 2018, some of the US pharma early in the year and then 2017 as well and now pharma in Europe and India GST and the political issues there, you've talked through the 4Q expectations pretty thoroughly and how you see those markets in the near term. But longer term, do you see a return to growth more tied to just broader improvement in those markets and sorting through those issues? Is it tied more to getting over the tough comps over the last couple of years, particularly Europe this quarter, or is it tied to innovation? Is there something in the pipeline, like the Bio Taft that's really needed to get that growth back to that mid-single digit range?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes, Mike, thanks for the question. I think it's -- I think our outlook is looking at a bunch of those factors, certainly stabilization of key geographies like India and Europe, continued improvement in the US as we've noted today that kind of we're encouraged by what's happened more recently in the United States and looking for that to continue. But, no question that a number of the new product launches should play a really important role. Like I said on the call and referred to in some earlier comments, we are in the early stages of a multi-year innovation cycle. Like I said, the launches we have seen in 2018 have been more numerous than the two prior years combined. We're only beginning to see the positive impacts on those and some of those are more incremental. But as we move into next year and beyond, we see evermore significant launches as we continue to progress some of the core building blocks of next generation technology sets, and that's really the heart of our transformational engineering initiative and so much of the heavy lifting that we've been doing in our R&D efforts. And I have a lot of confidence in that pipeline and I'm looking forward to it making a bigger and bigger difference.

Mike -- Bank of America -- Analyst

Thanks. And on the capital deployment front, a follow-up, historically obviously been a very organic growth story and you talked about 2.5 times net leverage even with the share buybacks that leaves room for relatively sizable deal. What gives you confidence that you'll be able to execute that and integrate that, have the bench for it? And then also how should we think about potential targets? You're relatively focused in a few very specific products and markets. Are you thinking about complementary deal to something in the technology space, or are you looking outside of your core -- sort of core areas?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes, Mike that's a fair question on M&A and I would just continue to reiterate that our core Corporate strategy is really around specialty focus and innovation leadership and we do -- we are taking probably a broader look at how we can emphasize the strength of our core products and enhance the strength of our core products with some tuck-in type M&A. Certainly, if we go down that path, we would do so in a very selective manner, in a very purposeful way that reinforces our core strategy. And like you say, while we have the -- we certainly have the financial wherewithal to stay flexible, to take advantage of opportunities that present themselves and at the same time we're building capability within the Company through our new corporate development department, and how we would look to operationalize that. But until there was something specific to talk about, I would just leave it at that.

Operator

Thank you. Our next question is from Jack Meehan of Barclays. Your line is open.

Jack Meehan -- Barclays -- Analyst

Thanks. Good morning. Chris, I wanted to dig in a little bit more on the chemistry results in the quarter and as it pertains to that small molecule. I'm curious if you're seeing any change in the market, whether it be related to price or volume and just what -- if you could elaborate a little bit more on the chemistry result in the quarter?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Sure. Thanks, Jack. From an overall chemistry standpoint where we grew mid-single digits, we were up against a double-digit comp in prior year. So while the chemistry number tends to bounce around a little bit, based on prior year and prior quarter, we feel very solid in our chemistry business. We were quite strong in pharma, which we think is a good indicator of underlying health of that market. We had strength in our application kits in our UPLC columns and I mentioned some new bio-separations columns, such as the BioResolve reversed-phase that was partially offset by a little softness in consumables for clinical diagnostics and then just the vagaries of customer ordering. So really it's steady as she goes in the chemistry consumables area. And it's a really important part of our business.

Jack Meehan -- Barclays -- Analyst

Great thanks. And just one follow-up on China. Sounds like the growth was good in the quarter, but curious if you're seeing anything on the ground related to trade and tariffs and what would your expectation for the fourth quarter growth be?

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Yes, I think it's fair question on China. We've seen a very balanced contribution of China all year long and we continue to expect China to perform at a high level. We have a lot of balance in our Chinese business between end markets, we are actually more diversified in China, if you will, than other major geographies. From a tariff standpoint, because the vast majority of our products trade in tariffs really, vast majority of our products come in from places other than the United States, we've seen less of a direct effect. I did mention earlier that the TA Instruments product line, which is the one product line for us that comes in from the United States, has seen some delays between the order and sales cycle or elongated sales cycle. Whether or not that's tied to the trade-type activities, we're watching that closely. But when we step back and look at the big picture of China, when it all comes together, it's been a very solid story all year long and our current assumptions call for the continuation of that trend.

Jack Meehan -- Barclays -- Analyst

Great. Thanks Chris.

Christopher J. O'Connell -- Chairman & Chief Executive Officer

So it is a little bit after the top of the hour, so maybe we'll conclude the call here in a few minutes. And as I do that, I do want to thank everybody for your great questions.

In conclusion, after our third quarter, we're focused on delivering on our growth objectives for the fourth quarter, headlined by the continued improvement within our US pharmaceutical category, resumption of growth in TA Instruments and broad-based growth in China. We are at the beginning of an exciting new product cycle across the business and believe that market conditions and our strong competitive position support continuing success.

So on behalf of the 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 Q4 2018 call, which we currently anticipate holding on January 23, 2019. Thank you all and have a great day.

Operator

We thank you all for your participation in today's conference. That will conclude the call. You may now disconnect. Thank you.

Duration: 62 minutes

Call participants:

Brian Brockmeyer -- Head of Investor Relations

Christopher J. O'Connell -- Chairman & Chief Executive Officer

Sherry L. Buck -- Senior Vice President and Chief Financial Officer

Steve Beuchaw -- Morgan Stanley -- Analyst

Tycho Peterson -- J.P. Morgan -- Analyst

Daniel Brennan -- UBS -- Analyst

Ross Muken -- Evercore ISI -- Analyst

Dan Arias -- Citigroup -- Analyst

Doug Schenkel -- Cowen & Company -- Analyst

Mike -- Bank of America -- Analyst

Jack Meehan -- Barclays -- Analyst

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