Waters Corporation (WAT) Q4 2018 Earnings Conference Call Transcript

WAT earnings call for the period ending December 31, 2018.

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Waters Corporation  (NYSE:WAT)
Q4 2018 Earnings Conference Call
Jan. 23, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning. Welcome to the Waters Corporation Fourth Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode until the question-and-answer session. 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. Bryan Brokmeier, Head of Investor Relations. Please go ahead, sir.

Bryan Brokmeier -- Senior Director, Investor Relations

Thank you, operator. Good morning, everyone, and welcome to the Waters Corporation fourth 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 first 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 31st, 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 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 earnings -- the next earnings release call and webcast is currently planned for April 23rd, 2019.

During today's call, we'll be referring to certain non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to the -- to our earnings press release issued this morning. In our discussions of the results in operations -- 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 fourth quarter of 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 constant -- 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 and Chief Executive Officer

Thanks, Bryan, and good morning, everyone. Thank you for joining us today. Along with Bryan Brokmeier, 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 fourth quarter and full year 2018 operating results, as well as some broader commentary on our business. Sherry will then review our financial results in detail and provide commentary on our first quarter and full year 2019 financial outlook. We will then open up the line to take your questions.

Jumping right in I'm pleased with our fourth quarter results, particularly given the dynamics of the business earlier in the year, as we delivered growth across all three of our broad market categories and demonstrated strength in key geographies and product lines. Geographically, we saw a continued strong performance in China in Q4, as well as strengthening in the United States, offsetting expected softness in Europe and India, as we closed out the year.

Q4 product sales included continued strength in demand for stand-alone liquid chromatography systems, our expected rebound in sales for thermal analysis systems after a temporary Q3 dip, and increasingly positive signals in demand for our mass spec technologies. Furthermore, steady recurring revenues contributed to our strong finish in 2018. Overall our fourth quarter revenues grew 5% and adjusted earnings per share grew 14% versus prior year Q4. On a full year 2018 basis, revenues grew 4% and earnings per share grew 11%.

Taking a closer look at the business starting with a review of our market categories at the corporate level, sales to every major market category were up for the quarter and for the year. Fourth quarter sales to our broadly defined pharmaceutical category increased 7% year-over-year, driven by double-digit growth in China and the aforementioned pickup in the United States, partially offset by expected softness in both European and Indian pharma markets. Importantly demand for our LC product line remains strong outside of market related pockets of weakness in Europe and India.

For the full year 2018, overall sales to our pharmaceutical category grew 4%. In total, our 2018 results were characterized by strong performance with pharmaceutical customers including steady growth in small molecule and robust growth in large molecule.

As noted before, our pharmaceutical category also includes sales to biomedical research customers, which were down for the year, partially offsetting strength noted above with our pharmaceutical customers. We feel very good about our pharma market position including both small molecule applications, as well as the ever increasing application requirements of our large molecule customers. The investment environment in pharma remains robust, particularly as it relates to the increasing pace of innovation on new biologic drugs.

Fourth quarter sales to our worldwide industrial category, which includes material science, food and environmental markets, grew 2% year-over-year led by strength in material science. Industrial growth for the full year was 1%. Sales within our TA brand bounced back from Q3, as we expected resulting in 7% TA growth for both the fourth quarter and the full year. Our strong TA performance gives us confidence in the positive outlook for our industrial category, as volume in our thermal and rheology product lines has historically been our best proxy for industrial and market demand.

Sales into our governmental and academic category increased by 3% in the fourth quarter with strong growth in Asia, partially offset by softer demand in Europe and the Americas. Weakness in biomedical research applications was more than offset by strength in pharmaceutical discovery. For the full year 2018, sales into our governmental and academic categories were up 7% over 2017.

Next, I'll review our sales performance by geography at the corporate level. Asia, our largest region in terms of revenue was up 9% in the fourth quarter on strong double-digit growth in China, as well as great performances in Korea and Japan. Demand in China continues to be robust and in Q4 was led by strong growth in pharma.

Our Indian business was about flat on a year-over-year basis in Q4, although for context Q4 in 2017 was the largest quarter of sales in our history in India. The pharma environment in India appears to be improving with customers operating and (ph) increasing instrument utilization, which bodes well for future instrument purchases. Additionally, we are seeing encouraging development of other Indian growth opportunities, particularly in food safety testing. For the full year, Asia grew 6% again highlighted by double-digit growth in China.

Turning to the Americas, overall sales grew 6% in the quarter with sales within the US growing 5%. Growth in the US was broad-based across key end markets and product lines. We were particularly encouraged by the pickup in spending from large pharmaceutical customers in the United States, who have been more cautious in the first half of the year. For the full year, sales in the Americas were up 3% with the US growing 2%.

In Europe, sales were down 1% in the quarter, as pharmaceutical growth was not sufficient to offset weakness in both industrial and governmental and academic. Central and Southern Europe were both strong offset by Northern and Eastern Europe largely due to macro factors, including concerns related to Brexit in Turkey. Overall, Europe played out as we expected in Q4. For the full year, Europe grew 1%.

Finally, I'll review product line dynamics within our Waters and TA brands. Waters-branded instrument sales were up 3% in the quarter and were flat for the full year with strength in liquid chromatography instruments. Our overall LC sales growth was largely driven by QA/QC demands in drug production with strong growth across most major geographies. further reinforcing the strength of our LC position in regulated markets.

Our mass spectrometry product line continued to show signs of improvement in the fourth quarter including continued stabilization in our high resolution mass spec portfolio. In particular, we were encouraged by the strong mass spec growth in our pharma business, which was mostly offset by weakness in biomedical research.

During the quarter, we also began shipping the recently launched RenataDX, our next generation screening system for high throughput, general use, clinical diagnostics. This fully integrated bench top system is an open platform with proven reliable and robust performance and it builds upon Waters' 20 years of experience serving the needs of newborn screening and general clinical diagnostic laboratories. We're looking forward to further strengthening our mass spec product line in 2019 across multiple categories.

Waters-branded recurring revenues, which reflect the combination of service and precision chemistries grew 6% in the quarter, leading this performance were our chemistries, which grew 8% year-over-year, further emphasizing the recurring nature of our business model. This continued strength in our recurring revenues was driven by global strength in service plans, application kits, UPLC columns and bioseparations columns. For the full year, our service and chemistry revenues both grew 6%, indicative of strong utilization rates for the installed base of Waters' instruments.

Turning to our TA product line, sales increased 7% in both the fourth quarter and for the full year. Q4 instrument system sales for TA increased by 6% and service grew 10%. For the full year, TA instrument system sales grew 6% and service grew 9%. There was broad-based sales growth across our key thermal analysis, rheology and ElectroForce product lines in the quarter and for the full year. We are paying close attention to the dynamic macro conditions affecting the industrial markets, but we continue to see strength in our TA business. Furthermore, we are still relatively early in the broader product cycle of our discovery line of thermal analyzers.

In summary, I'm pleased that Waters ended 2018 on a high note, with improving momentum in key market categories, products and geographies. I was particularly encouraged by strength in our pharmaceutical category, our liquid chromatography and TA product lines in China, as well as strengthening performance in the United States. And looking at the P&L, we maintain strong operating discipline all year long, while investing heavily in R&D and exceeding our earnings expectations for both the quarter and the year.

Looking ahead to 2019, I'd like to start by reiterating that we remain steadfastly focused on executing on our five point value creation model. As we regularly communicate, we aim to create shareholder value by first, holding a focused and highly differentiated leadership position in structurally attractive markets; second, executing a clear growth strategy driven by organic innovation; third, seeking the opportunity for continuous operational improvement; fourth, being a disciplined capital allocator; and fifth, operating with a performance oriented culture and management team.

We have now turned the page to 2019, and I am truly looking forward to what lies ahead. While Sherry will provide further detail, our outlook for 2019 is based on four key factors. First, generally positive end market dynamics; second, building on the momentum, we have coming off a robust Q4; third, the benefits of a new product introduction cycle; and fourth, the continued implementation of our enhanced capital deployment plan, which starts with investing more assertively to grow the business and also includes working to optimize our balance sheet and return more capital to shareholders.

In particular I'm very excited about our innovation efforts. We continue to prioritize and invest in organic product development with full year 2018 R&D investments up 8% growing consistently faster than sales. While we continue to evaluate select external technologies to supplement our overall innovation formula, it is our internal product development efforts that have our organization so energized for 2019. We are looking to benefit from the increased pace of product launches we saw in 2018, but more significantly, we will be launching several major new systems in 2019 that form the foundation for an exciting new product cycle.

Our current innovation efforts are highlighted by yesterday's launch of the BioAccord LC-MS system. The pace of innovation in the biopharmaceutical industry is clearly accelerating and with that we are seeing increasing requirements by our customers and regulators in monitoring multiple critical quality attributes. Waters has designed the BioAccord system as a fit for purpose LC-MS solution for large molecule applications. For the first time in history, Waters is now delivering the benefit of rich, time-of-flight, mass spectrometry data in routine workflows for improved productivity, more effective decision making and enhanced regulatory compliance. We have long invested in a robust channel serving this target market, and we have already received a significant amount of positive feedback from our customers through our early access program. Sales activities are now under way. We have already shipped revenue units, and we eagerly await further customer feedback and experience. We'll provide further detail on our BioAccord strategy at our upcoming Investor Day on February 28th, 2019 in New York City.

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

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

Thank you, Chris and good morning, everyone. In the fourth quarter, we recorded net sales of $715 million, an increase of approximately 5% in constant currency. Currency translation decreased sales growth by approximately 1%, resulting in 4% sales growth, as reported. For the full year, sales grew by 4% before currency translation, which increased sales growth by 1%, resulting in 5% full year sales growth, as reported.

In the quarter, sales into our pharmaceutical market category grew 7%, our industrial category grew 2% and sales into our governmental and academic market category grew 3%. For the full year, the pharmaceutical market category grew 4%, our industrial market category grew 1% and sales to governmental and academic customers were up 7%.

Looking at product line growth, our recurring revenue, which represents the combination of precision chemistry products and service revenue grew 6% in the quarter, while instrument sales grew 4%. For the full year, recurring revenue grew 6%, while sales of our instrument product groups, grew 1%. As we noted last quarter recurring sales were impacted by one additional calendar day in the quarter, which resulted in a slight increase in service revenue sales. Looking ahead, there is one less calendar day in the first quarter and one additional calendar day in the fourth quarter of 2019 compared to 2018.

Breaking Q4 product sales down further, sales related to Waters-branded products and services grew 5%, while sales of TA branded products grew 7%. Combined LC and LC-MS instrument platform sales were up 3% and TA's instrumentation system sales were up 6%. Our total recurring revenues, which include both Waters and TA products grew by 6%.

Looking at our growth rates in the fourth quarter geographically and on a constant currency basis, sales in Asia were up 9% led by 15% growth in China, sales in the Americas were up 6% with 5% growth in the US and European sales were down 1%.

Now, I'd like to comment on our fourth quarter non-GAAP financial performance versus the prior year. Gross margin was 59.9% for the fourth quarter of 2018, compared to 60.6% in the fourth quarter of 2017. The lower gross margin relative to the prior year quarter was driven by quarter specific mix of our business. For the full year, gross margin was in line with our expectations of 59% and was unchanged compared to the prior full year.

Moving down the fourth quarter P&L, operating expenses increased by approximately 3% on a constant currency basis and foreign currency translation decreased operating expense growth, by approximately 1% on a reported basis. In the quarter, our effective operating tax rate was 12% versus 12.8% in the prior year quarter. The lower tax rate is a result of US tax reform update and a shift in the mix of profits in our tax jurisdictions.

Net interest expense was $1 million down from $4 million in the prior year, benefiting from reduced debt levels. Our average share count came in at 75.3 million shares or approximately 4.1 million shares lower than in the fourth quarter of last year. This is a net effect of our ongoing share repurchase program.

Our non-GAAP earnings per diluted share for the fourth quarter were up 14% to $2.87, in comparison to earnings of $2.51 last year. On a GAAP basis, our earnings per share were $2.46 versus a loss of $4.44 last year. Our GAAP earnings in Q4, 2017 included the impact of a tax expense charge of $550 million that we incurred, as a result of US tax reform.

For the full year our non-GAAP earnings per fully diluted share were up a 11% to $8.29 per share versus $7.49 last year. On a GAAP basis, full year earnings per share were $7.65 versus $0.25 in 2017. 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 fourth quarter results and activities. We define free cash flow as cash from operations, less capital expenditures and excluding special items. In the fourth quarter of 2018, free cash flow came in at 160 -- $160 million after funding $32 million of capital expenditures. Excluded (ph) from free cash flow were $6 million related to the settlement of the US pension plan and $5 million related to the investment in our Taunton precision chemistry operation. In the fourth quarter, this resulted in $0.22 of each dollar of sales converted into free cash flow and $0.25 for full year of 2018.

Now, I'd like to update you on our fourth quarter activities related to capital deployment, which as we've shared before are prioritized into three buckets. First, invest in the business; second, maintain our balance sheet strength and flexibility; and third, return capital to shareholders. In terms of investing in the business, during the fourth quarter, R&D grew 10% on a constant currency basis in support of organic innovation. Also during the fourth quarter, we terminated our US pension plan to de-risk the balance sheet resulting in $46 million charge, of which $40 million was non-cash.

In terms of returning capital to shareholders during the quarter, we repurchased 2.6 million shares of our common stock for $498 million. For the full year 2018, we repurchased 6.7 million shares for $1.3 billion. These capital allocation activities along with our free cash flow, resulted in cash and short term investments of $1.7 billion and debt of $1.1 billion on our balance sheet at the end of the quarter, resulting in a net cash position of approximately $600 million.

Looking ahead, we remain committed to deploying capital against these three priorities. Starting with investing in the business through both organic and inorganic opportunities. Furthermore in 2019, we plan to utilize our balance sheet and working toward a near term capital structure of approximately 2.5 times net debt to EBITDA ratio. Towards that end, we currently plan to repurchase up to $750 million in shares in the first quarter and approximately $2.5 billion for the full year. These assumptions are reflected in our 2019 guidance.

Over the course of the year, we will evaluate the pace and level of repurchases and provide quarterly updates on our plans. In support of the share repurchase plans in 2019 and as noted in our press release this morning, the Board has authorized the repurchase of up to $4 billion of share repurchases targeted to be completed over a two year period. This authorization replaces our pre-existing program.

Turning to working capital. Accounts receivable, days sales outstanding increased to 74 days this quarter, up from 71 days in the fourth quarter of last year. In the quarter, inventories increased by approximately $21 million in comparison to the prior year quarter, which is in line with historical trends. As we look forward to the balance of the year, I'd like to comment on our full year 2019 guidance. Our outlook assumes generally positive end market dynamics, continued growth in our recurring revenue and incremental contribution from new products. Geographically, we assume continued strength in China and improved conditions in India, US and Europe. These dynamics support full year 2019 guidance, for constant currency sales growth of 4% to 6%. At current rate, currency translation is assumed to decrease 2019 sales growth by 1 percentage points to 2 percentage points.

Gross margin guidance for the year is expected to be consistent with our historical trends at approximately 59%. Our plan for the full year is to manage operating expense growth at a rate that is less than our sales growth.

Moving below the operating income line, net interest expense is expected to be $30 million to $35 million, an increase compared to 2018, as a result of our plans to utilize our balance sheet over the course of the year, as noted in my earlier remarks. Our full year effective tax rate is estimated to be in the range of 14% to 15%.

Our guidance regarding capital allocation assume share repurchases during the year, which would result in an average diluted share count of 68.5 million shares to 69 million shares outstanding. Rolling all this together on a non-GAAP basis, the full year 2019 earnings per fully diluted share are expected to be in the range of $9.20 to $9.45 which assumes an approximate 1 percentage point negative impact from currency translation at current rates.

Looking at the first quarter of 2019, we expect 4% to 6% constant currency sales growth. At today's rates, currency translation is expected to decrease first quarter sales growth by 2 percentage points to 3 percentage points. Combining these top line factors with a moderate increase in expenses, we estimate first quarter non-GAAP earnings per diluted share in the range of $1.65 to $1.75, which assumes an approximate 3 percentage point negative impact from currency translation at current rates. Additionally, we expect an increase in our tax rate in Q1 of about 3% due to the timing of discrete items in the prior year quarter.

I'd like to call -- pass the call back to Chris to make a few summary comments. Chris?

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

Great. Thank you, Sherry. In summary, we were pleased to end 2018 on a high note with solid momentum in our key business drivers, and we are excited about the year ahead in 2019 highlighted by our new product cycle and enhanced capital deployment activities.

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

Yes. The first question in the queue is from Stephen Beuchaw with Morgan Stanley. Your line is now open.

Stephen Beuchaw -- Morgan Stanley -- Analyst

Good morning, and thanks for taking the questions here. I would love to just get a couple of detail on how you're pulling together the top line outlook for 2019. Maybe I'll -- I'll ask a two parter and then -- then I'll get back in queue. I guess maybe the most important one is, how are you thinking about hardware growth in the 2019 outlook, given the commentary on -- on BioAccord now out on the market and it sounds like you anticipate a cadence of further product launches throughout the year. So the balance between hardware and consumables are recurring revenue growth, would be my first question.

And then the -- the second part of my very long winded two parter is, can you just talk through expectations for some of the regions in 2019, particularly India and China, and then maybe a little -- any commentary on Europe, given what we're seeing here in the quarter would be great. And I'll jump back in queue. Thanks very much.

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

Great. Thanks, Steve. Appreciate the questions, and I will take a crack at some of these and have Sherry supplement, in terms of how we're thinking about '19 overall. But really starting your first -- the first part of your question Steve, the mix between recurring and hardware, it's a good reminder to all of us that we do have that steady recurring revenue of chemistry and service and even in the type of year, we -- we have behind us those -- those lines, where we're really steady both growing 6% and so. Looking forward and not assuming everything goes perfectly right, we expect continued contribution of our recurring revenues is a nice foundation.

With that being said, we are looking at the instrument business, if you will and and looking at a year that that should firm up. We definitely showed some improvement, as we got toward the end of the year really across the board in our instrument business that's LC, mass spec, as well as TA instruments. And -- and of course, as noted in the commentary, we're very excited about new product launches. At this point, I'm not going to put a lot of specificity around what we expect relative to say the BioAccord launch other than to say that, that type of technology gives us greater confidence in our instrument outlook for the year. And then of course, as you alluded to will be supplemented by other instrument launches throughout the year.

So with -- with respect to the regions and starting with India, as noted in my comment, Q4 was interesting. It was slightly below prior year, but for context, the prior year was our number one quarter ever in India. So this fourth quarter was actually our second biggest quarter historically in India. So while the year-over-year growth wasn't there, certainly the volume was good. And the overall picture just feels like it ought to return to growth this year. Now, India has come back more slowly than we expected so, we'll probably ever be cautious until those numbers show up, but certainly a recovery in India, represents further confidence in our overall outlook for the year.

China, as -- as I commented on and Sherry commented on, was strong all year long, particularly in pharma and government and academic. As I've commented on many times before our Chinese business is a very broad-based business. We have more balance in our Chinese business than most other major geographic markets. And as typical, we'll enter the new year assume -- assuming relative stability in market conditions in China. There's certainly a lot of macro noise out there on China. but really I don't have anything new to say or updates on any of the trade type -- type matters that -- we're really just focusing on what we can control. And at the same time, we don't always assume everything goes perfectly in China. We try to have a balanced outlook in the last several years. China has outperformed our balanced outlook, but we'll again moderate our assumptions going in to the new year.

And then you asked about Europe, a little more on Europe. Again for -- for context, while -- while soft in aggregate over the course of the year. We have had several regions within Europe that have been strong, particularly Central Europe and Southern Europe. Our Northern Europe business which is UK, Ireland, Nordics, Benelux et cetera, it was -- we had a bit of a down year, but just had a huge comp from a year before. And so we think the businesses in -- is in good hands and is in good shape there, and we're expecting some modest improvement in Europe. We're certainly not expecting, we're modeling a large bounce back. But we're being cautious given the macro environment and some of the uncertainties, but do expect some basic improvement there. So as in most years, we will enter the year with a balanced outlook across all these markets, and we'll obviously update everything as we go along. I don't know, Sherry, do you have anything to add to that. Okay. Okay. maybe the next question?

Operator

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

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

Hey, thanks, Chris. I'd like to start with the pharma recovery. I'm just curious as to whether you think there was any kind of one-time dynamics here in terms of budget flush, I know, you know, you called about the lack of a budget flush earlier in the year. So how much of this is maybe transitory in a catch up effect? And then on BioAccord, I understand you don't want to kind of put numbers around it. But can you maybe just talk to the degree of pent-up demand you see into the launch? And do you think the adoption curve will be different than prior systems given that you're really kind of going after the QA/QC and process development market.

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

Sure. Great. So starting with pharma Tycho, we'll just give a couple of comments there. So we grew 7% in the quarter and that was clearly a strong quarter and better than we've seen all year overall. And I would also note that -- that pharma result was delivered even with India, obviously being flattish and as you know, India is a by and large a pharma market. I would say, there was nothing unusual, as it related to a flush at the end of the year. We certainly have seen the pattern in the US for the last couple of years, where we have a slower start to the year and a faster finish that kind of manifested itself again. But I think we were encouraged. We are encouraged by the balance in pharma, as I mentioned for the year in retrospect, we ended up solid in small mole (ph) and very strong in large mole for the year. And we're particularly encouraged in the quarter by high res mass spec in pharma.

So as I -- as I mentioned, the tone has been improving in mass spec and -- and the area we probably saw that most acutely was high res mass spec in pharma. US pharma was -- were strong and even within Europe, pharma was better than the other market categories in Europe. It was still relatively modest, but it was positive. So I think heading into the year again taking a balanced view, there's a lot of dynamics affecting the pharmaceutical industry. But what's -- what's unmistakable to me is just the pace of innovation that's happening.

And we talk a lot about that in large molecule, but there's also quite a bit going on in small molecule and a diversification and a globalization of the generics business, so where we typically see a lot of good generics business and revenue out of markets like India and China. We're seeing the United States contribute a lot of -- lot of growth in generics, as -- as some of those companies look to increase their footprint in the United States.

So maybe segueing from there to the BioAccord, and you use -- you used the term pent-up demand. It's interesting because I think there is a gap there, and just let me clarify. We do see the BioAccord ultimately finding its way to QA/QC, but we're really targeting assay development and process development, so late stage development, where methods are being developed. As -- as you know today, there are many, many different tests being run on bio molecules. I've seen data that as many as 30 or 50 different assays are being run on bio molecules and that's just simply over time is going to require more powerful tools. I actually just after -- actually after your conference in San Francisco, I went out to the field and visited one of the major biotech companies and sat down with their development people and we had a hour and a half discussion on the pressures on speed to market and cost and the frustrations, they have moving faster on multi attribute monitoring because they just don't have the right tools.

The tools today that are sold into, they are including our own are too manual, too slow and the data systems are not fully -- fully ready to handle the regulatory requirements. And so this particular group, as well as many of the folks that have seen the BioAccord are very excited and want to learn more. In fact, this group was actually going to come to the WCBP meeting in DC next week, where we're going to be showcasing the system just to see it. But all the requirements that are unmet today around robustness, reproducibility, easy to operate, the performance informatics, that's -- that's a gap in the market, and we think we have the right product at the right time.

So again, the way technology rolls out in this space is a matter of happening over years, not months. And so while we do assume incremental revenue coming from the BioAccord this year, we will not put too fine a point on that at the outset, and we'll update you more on that, as we get to the year. And obviously, we're going to try to go a little deeper on this exact topic at our Investor Day coming up at the end of February.

Bryan Brokmeier -- Senior Director, Investor Relations

Next question, please.

Operator

Ross Muken with Evercore ISI. Your line is now open.

Ross Muken -- Evercore ISI -- Analyst

I just want to get back to China pharma for a minute. So it sounds like the market was quite robust, but the government late in December made a number of changes around pricing and they're sort of essentially encouraging a consolidation of the generic industry in China, and then seemingly also trying to promote the innovator side. And so help us understand how that dynamic and sort of mix shift has played out in your business. And if we think about where your revenue mix is today at least in the generic and serial (ph) market versus what seems like it will be a much bigger biotech market. Just help us kind of understand how that plays out through the P&L.

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

Sure. Yeah, I -- Ross, as you know, the Chinese market is one we watch very closely and it's constantly changing in terms of policy and standards and so forth and I can't speak specifically to the policy changes, you're referring to. I'm generally familiar with some of those directions and they're consistent, where the Chinese government has been in the past. I mean to the extent, the government has an interest in consolidating the generic space, that's being done for the reasons of scale. The government is intent upon increasing patient access to basic medical therapies and in whatever tactic is needed to do that if it's consolidation, if it's regionalization, then it's all being driven at that aim and that's all going to drive volume. And as you know, our small mole business is very much a volume oriented type of business.

And on the other end of the spectrum, the promotion of innovation that's clearly happening. There's tremendous activity in China around the development of biosimilar companies and even novel drug innovators. And -- and so I think in that way, China is sort of a microcosm, if you will of what's going on in the world. There's -- there's business for us at both ends of the volume side of it on generics, and also on the kind of testing intensive side of the innovation.

And just in terms of our business, in rough terms and we'll update this further at the Investor Day. But in rough terms, two-thirds of our business is related to the small molecular world that -- that's sort of generics volume business and one-third relating to the biomolecule development with very, very little in QA/QC. But we see biomolecules going down that same path. Just like our small molecule business grew up around late stage development, method development, process development and evolved into manufacturing quality control, we see large molecule going down the same path, which is why we're investing so much to make sure that we can serve the market to make that transition. And at this point both -- both ends of that formula are important to us.

Next question, please.

Operator

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

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Hey, good morning.

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

Good morning Derik.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Hey, two questions. The first one, just a little bit more commentary on your academic and government comment about Europe. And then also on that just sort of what you are sort of taking plans, in terms of preparing for Brexit because you -- you do have that big UK facility in Manchester. And then, just any signs of any pull forwards at the end of the year because the people are worried about trade issues? Thanks.

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

Sure. Again, thanks Derik for the questions. And I may ask for a clarification on the pull forward part of it, but let me jump into the academic and government. We did have a -- as you know, a really kind of a strong year if you will in academic and government that's 7% growth with a little less growth at the end of the year, and that was really a function of Europe, but we actually grow both in the US and strong growth in China and Asia in academic and government in the quarter, which really reflected a pattern all year long with a little bit of softness in Europe. In Europe, it probably reflects more of that wait and see kind of tone in some of the markets related to some of the macro conditions that's about as it's good of a thought I can have there.

There is a bit of a mix in the academic and government sector between our medical research. where we -- where it's been weaker and pharma discovery, where it's been stronger. And again for reference, keep in mind, our academic and government is a significantly smaller part of our portfolio than everything else and even within that our academic and government business is about two-thirds or more academic and university and therefore, the government pieces is smaller. But we're watching that closely. And like I said earlier and it was nice in Europe even though, it was a little bit of a soft year than we expected that pharma was a -- could offset that some a little bit as well.

So from a Brexit standpoint yeah, we watch Brexit closely. I've been very tuned into this since the beginning. And as you point out, we have a large research facility in Wilmslow in the UK. There's obviously a range of possibilities as to what could happen with the Article 50 process, and while it seems that most -- more recent political events have made a hard Brexit probably less likely because I think politicians on both sides are sort of in violent agreement, if you will that a hard Brexit is the worst scenario and whether it's a pause or whether it's a renegotiation or whether it's even a new referendum. There's a lot of other things that could happen.

But even with that we've decided that it's prudent to prepare a contingency plan for short term disruption in the case of a hard Brexit. And so, we are well down the path on that contingency plan and that plan is simply designed to maintain our servicing of customers about 4% of our worldwide revenue is in the UK. And obviously, you can imagine, there would be some forward stocking just to prepare for any disruptions. And then furthermore on the export side making sure that we have plenty of inventory, finished goods inventory that comes from the UK, outside the UK.

I'll say that over time, we've evolved the majority of our mass spec production out of the UK into Ireland and other places, and so really Wilmslow is primarily research and development facility with some smaller volume, high res lines that we can certainly manage through in that type of a scenario. So well, I think a hard Brexit personally is a very low probability. We're just trying to be prudent in -- in preparing for that. But on the pull forward question and I'm happy to get a clarifying point from you on that. I don't really see evidence of that particularly in Europe. So I think if we -- if there was more of a pull forward dynamic, we probably would have seen stronger results in Europe. But I -- I just -- I think that people are more in a wait and see mode is how I'd characterize it.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Yeah, I was just talking about the fact that some of the life sciences and industrial companies have talked about trying to -- some -- some of their Chinese customers pulling forward just because they're worried about trade issues. I'm just wondering (ph), if you could saw that? (multiple speakers)

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

Yeah. China -- China, I wasn't thinking about China, when you ask the question but that's a -- that's perfectly fair. And again, don't have a lot of evidence of an unusual pull forward or a flush of any type there. It was the -- the business throughout the fourth quarter in China reflected more typical Q4 type dynamics.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

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

Thank you.

Operator

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

Doug Schenkel -- Cowen & Company -- Analyst

Good morning, and thank you for taking my questions. I'll just get them both out there and then get back into the queue. First on TA, would you quantify the impact of timing dynamics on Q4 core growth for TA. And what are you assuming for 2019 TA growth, presumably you're thinking above the corporate average again. And then my -- my second topic is on mass spec. What was mass spec core growth in Q4? And are you assuming in guidance that growth improves to at least mid single digit levels in 2019 given new products and favorable comparisons? Thank you.

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

Yeah. Thanks. Doug. I appreciate it. On TA, when you roll the whole year up, it was a -- it was a really solid year growing 7% and it was growth in 7% for the quarter. And as you recall from Q3, we had a little bit of a dip down to the low-single digits for TA sales growth in the quarter, although we felt strongly enough that that was a temporary dip that was really based on a different mix of inventory at the end of the quarter that we identified the fact that our underlying orders growth was consistent in Q3, as it was in the first half. And really, when you roll together, I think that -- that's exactly what played out in terms of both order and sales growth for the year being really solid right in the range that we reported.

And in terms of 2019, we're making the same type of forecast of our risk adjusted number. I don't want to give you a specific number. And but I would say, TA will rather perform at least to the Company average. We're -- we're in a good product position there. The -- the business continues to diversify one -- one experience I had also recently in -- being in the field calling on customers is, is the -- the increase in tech companies for example buying our thermal analysis rheology and even as they work to develop better materials for -- for various computer type products, utilizing the Waters' chemical analysis, particularly the gel permeation chromatography type -- type product line. So our materials franchise is broader than TA, and -- and it -- it does feel to me over time that that industrial market is diversifying to include other sectors besides the traditional chemicals and polymers and organics side of the business.

Related to mass spec, I don't really want to breakout the details on the specific growth. But what I would say about mass spec is, it was better in Q4 than it was in Q3 and Q3 was better than the first half. And furthermore, our orders performance in Q4 was better than our sales performance. And so, I think we are heading into the year with a -- on a little stronger footing and we certainly expect our mass spec product line to contribute to growth in the year -- in the year ahead, where it in -- in aggregate didn't contributed all that much growth in 2018. So certainly very excited about the product cycle.

BioAccord, as I mentioned before we have a new super high resolution mass spec technology coming out during the year, as well as some other things that I don't want to comment on yet. So anyway, thanks, Doug. Appreciate the questions.

Operator

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

Sung Ji Nam -- BTIG -- Analyst

Hi, thanks for taking the questions. Chris, was wondering about you guys are posting 4% organic growth this year in 2018 and you're guiding to 46% outlook for -- for 2019. I was curious as to kind of -- is it mostly attributable to the end market general outlook that you guys have or is it more due to new product launches. I'm just curious as to kind of slight improvement potentially in the outlook for the year?

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

Yeah. Thank you, Sung Ji. I think that's correct. I think we're -- to me the end market outlook is more of a baseline. And as certainly, as we experienced this year, you always make assumptions and those assumptions can change and so we try to make sort of risk-based assumptions coming into a year and not assuming everything goes right. But for the most part in general sense, we feel that the end markets are reasonably stable. And certainly, if there is some incremental growth this year, it -- it is based on a better product position. We -- we certainly don't have a crystal ball if you will that's any -- better than anybody else's, as it relates to the macro conditions. But in terms of what we can control and what is different, Waters' heading into this year is the product position in terms of the the new launches both in 2018, as well as the ones that I have alluded to and mentioned in '19.

I guess, I furthermore I'd say the other thing, we've done alongside of the market peppery -- on market preparation relative to these launches is we've really invested in our commercial operations. I'm very pleased with a number of things we're doing across the board in our commercial operations around the world in terms of we built a new sales operations function, where we have a new sales enablement process so that by the time technology hits the market, our teams are really ready to go and furthermore, we've supplemented headcount in our field operation on both the sales and service side, as we've talked about in the past. And so it's really a total team effort and a 360 degree process of getting ready for this type of -- for this type of new launch cadence, and -- and I think that's probably what's -- probably what would explain better growth in '18 versus, sorry '19 versus '18. And Sherry, go ahead?

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

Yeah. Sung Ji, maybe just to put a little bit macro perspective around it. When you think about our business, our recurring revenues represent about 50% and our recurring revenues grew this year 6%. So if you think about our guide range of the 4% to 6% that gets you halfway there. And so then the other levers that Chris talked about then would be improvement in some of the geographies that we saw momentum toward the end of the year and the continued solid market dynamics, and then the impact of new product introductions that might give you some parameters to think about.

Bryan Brokmeier -- Senior Director, Investor Relations

Great. Thank you. Next question, please?

Operator

Next question is from Dan Leonard with Deutsche Bank. Your line is now open.

Daniel Leonard -- Deutsche Bank -- Analyst

Thank you. Question for Sherry. Sherry the -- on capital deployment, so 2.5 times net debt-to -EBITDA that -- that's not a 2019 target correct? That -- that's a target over two years?

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

Dan, the way we look at our capital allocation, as you know that US tax reform is a real game changer for us, as we got access to our cash and this year, we started ramping up our share repurchases, and we've talked about this year working toward the 2.5 times net debt-to-EBITDA leverage ratio. Our guidance for the full year, we've assumed about $2.5 billion, so that wouldn't get you to that kind of leverage at -- at this guidance point. So what we're going to do is, we're going to evaluate throughout the course of the year because there's lots of dynamics here. So we've given you guidance also for Q1, and as the year unfolds, as we look at our performance, what our investment needs are and opportunities are, macro factors et cetera, we will kind of adjust it accordingly.

Daniel Leonard -- Deutsche Bank -- Analyst

Okay. Thanks. Just want to confirm and then my follow-up question. Can you help me think about the sources of operating leverage in 2019 a year, where you're investing in sales and marketing ahead of some new product launches, you've been growing R&D at -- at twice the rate of -- of revenue and I think, gross margins tend to be kind of flat? Can you help me think about the -- the drivers?

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

Yeah. Sure. So I probably characterize first, just kind of overall operating margin leverage as we look at it, and I'd say, we really look at kind of the two big factors is our top line growth goals that we have, and then what are our needs to invest in the business to drive that top line growth. And then, there is -- there is obviously other factors, such as whatever FX fall through throughout the course of the year and offsetting inflation et cetera. And so, as we've said our -- our plan for this year of the 4% to 6% revenue guide and then our EPS growth, we look to be able to deliver modest operating margin improvement.

If you look at our 2018 results, where we ended the year with about 4% constant currency growth. We were still able to deliver about 50 basis points of operating income improvement. So those are kind of the factors that we look at because as we learned from 2018 there's a lot of moving part. So we're really set out to -- within our revenue guide just to have some modest operating leverage, as we look at the different levers we have to pull.

Daniel Leonard -- Deutsche Bank -- Analyst

Okay. Thank you.

Operator

Brandon Couillard with Jefferies. Your line is now open.

Brandon Couillard -- Jefferies -- Analyst

Yes. Good morning. Just a quick one for Sherry. If you could tell us, what you're penciling in for free cash flow for the year, as well as CapEx. And if there's any added spill over from the Taunton expansion in the CapEx number for the year? Thanks.

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

Yeah. So it's a great question. So we have a big investment that's a five year project with the -- the Taunton chemistry operation. This year, we'll probably spend about $11 million, which is related to that from CapEx, but it's a five year program and would be $200 million over the five year period. Next year, we probably expect spending about $90 million on the Taunton facility. However, we are calling that out as an adjustment from our cash flow, so really looking at it as a major facility investment, as we've done with some of our other major facilities, for example, in Wilmslow and -- and other areas.

So if you kind of strip that out and really look at it, as we look at our cash flow in general, we look to grow our cash flow in line with our -- with our top line, and our depreciation historically has run 2% to 2.5% of sales and -- and I'd say we'd expect that kind of operating CapEx probably toward the higher end of that in 2019.

Daniel Leonard -- Deutsche Bank -- Analyst

Very good. Thank you.

Operator

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

Steve Willoughby -- Cleveland Research -- Analyst

Hi, good morning. Couple of questions for you. First, I guess just on SG&A. In the last few quarters, it's been running a little bit below at least to our expectations. Just wondering, if you could comment there on what you're doing to hold in SG&A and if that's sustainable going forward. And then I guess secondly, for Sherry maybe, your guidance here for the first quarter at the midpoint looks like about 7% earnings growth compared to the full year of 12% to 13% earnings growth. Just given the somewhat easier comparison in the first quarter, just wondering how you're thinking about kind of the back half weighting, so to speak for your overall EPS guidance? Thank you.

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

Yeah, maybe I'll take -- thanks, Steve. I'll take a quick one on SG&A and Sherry can certainly add to that plus talk about the guide a little bit. If you -- if you look at the overall body of work in 2018, I think we managed the P&L very well to gain some modest operating leverage, while investing heavily in R&D. And as we go into the fourth quarter, in part given some variable expense dynamics, as well as the investment pre-market, if you will ahead of the BioAccord launch that ticked up a little bit.

But we have a number of levers to pull relative to cost initiatives, and we're doing more than ever before in the Company now in our third year of -- of kind of a new type of budgeting cycle to really make sure, we're pivoting resources and allocating resources to the things that -- that give us the best chance for growth. And so I think we're -- we're comfortable that we'll continue to manage our P&L, our SG&A well in -- over any reasonable rolling period like we saw in '18 get that balance right. So Sherry, I don't know, if you want to say more about that plus the guide.

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

Yeah. So I'll -- I'll address your -- your question on the guide for Q1. I'd say there's a couple of factors in Q1 that is impacting overall EPS growth, a comment I -- I talked about is the tax rate. So just to put the tax rate in perspective last year is our first year coming out of tax reform, we guided to 13% to 15% tax rate. As you know with our current results, we ended at the low end of that range with a variety of factors around evolving, clarification on tax reform, some discrete items and kind of the mix of our business. So for full year next year, we're guiding to a full year tax rate in the range of 14% to 15%, just kind of narrowing that.

But in the first quarter kind of that range of the tax rate has a bigger effect in Q1 because last year, where we had an exceptionally low tax rate, it is about 11%. So as you look at the flow of our EPS from Q1 and then look at that in contrast to the full year, the -- the tax rate is definitely has a bigger impact in Q1. And then I'd say the second item in Q1 would be that's the impact of FX. It's about a 3% headwind in the first quarter and kind of overall you're seeing more impact in the first half on the FX than in the full year. So I'd say those would be the two big factors.

Bryan Brokmeier -- Senior Director, Investor Relations

And operator, we have time for just one more question.

Operator

Dan Brennan with UBS. Your line is now open.

Daniel Brennan -- UBS -- Analyst

Great. Thank you. So Chris could you just give us color on specifically what you are trying to do actually in the quarter, I know, I think you mentioned strong double digits. And how did this break out across your kind of customer groups, I think you said it was broadly healthy, but is there any more color there. And then finally, what's kind of baked in for China growth, as we move into 2019?

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

Sure. Thank you Dan and we'll finish with the question on China there. So China for the quarter Dan, grew about 15%. So that was a really solid result on a -- on a similar result a year ago. So like we've commented on China was pretty solid, very solid all year long. And -- and that growth was really led by pharma, which was north of that growth rate. And also the academic and government sector within China, which certainly represents a number of things within the portfolio, material science, food testing and that happens in the academic and government labs. The industrial business was a little bit softer in China relative to the overall growth rate, but very much led by pharma and academic and in -- in government.

In terms of the -- the year ahead, I would just reemphasize kind of our typical approach here, and as I alluded to earlier we -- our Chinese geography has outperformed in recent years, and we always ended (ph) the year with -- with numbers that are a little more modest than we've ended up with, and obviously, it's a dynamic environment. Like I said earlier, we don't have any incremental new information on impact of trade or tariffs relative to what we've been seeing all along. So we follow news, as closely as we can, but -- but really try to stick to what we can control and that's investing in our people, it's investing in our training, it's investing in our demo -- demo labs, and I think that market has shown an appetite for growth and innovation.

In fact, one of the first units of BioAccord, we shipped was actually over to China, and -- and so that market is attuned to the technology that is coming out and is needed to progress all the innovation that's happening there. So we just try to follow the -- the strong pace of innovation and because there's a lot of innovation in China, we're continuing to invest in that market. So thanks for that question. And let me all -- let me wrap up then, in the interest of time and just say, thank you for all your questions. I enjoyed engaging with all of you.

In conclusion all of us at Waters are focused on an exciting year of growth and innovation in 2019. As we discussed on the call, our top line expectations are grounded in what appear to be stable market conditions and are headlined by a compelling new product cycle that has resulted from our diligent investments in R&D. As always we're also focused on continuing to deliver on reliable earnings performance based on our organic growth and supported by our enhanced capital deployment program.

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 seeing many of you at our Investor Day on February 28th. And then to further update you on our progress during our first quarter conference call, which we currently anticipate holding on April 23rd, 2019. Thank you very much and have a great day.

Duration: 64 minutes

Call participants:

Bryan Brokmeier -- Senior Director, Investor Relations

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

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

Stephen Beuchaw -- Morgan Stanley -- Analyst

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

Ross Muken -- Evercore ISI -- Analyst

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Doug Schenkel -- Cowen & Company -- Analyst

Sung Ji Nam -- BTIG -- Analyst

Daniel Leonard -- Deutsche Bank -- Analyst

Brandon Couillard -- Jefferies -- Analyst

Steve Willoughby -- Cleveland Research -- Analyst

Daniel Brennan -- UBS -- Analyst

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