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Waters Corporation (NYSE:WAT)
Q4 2019 Earnings Call
Feb 4, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to the Waters Corporation Fourth Quarter 2019 Financial Results Conference Call. All participants are in a listen-only mode until the question-and-answer session of the conference call. This conference call is being recorded. If anyone has any 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 results of the company for the first quarter and full year 2020. We caution you that all such statements are only our present expectations, 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 the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018; and 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 intend to update any of its predictions or projections, except during our regularly scheduled quarterly earnings release conference calls and webcasts, or as otherwise required by law. The next earnings release call and webcast is currently planned for April 28, 2020.

During today's call we will 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 our earnings release issued this morning, and available on the company's website. In our discussions of the results of operations, we may refer to non-GAAP results, which exclude the impact of items, such as those outlined in our schedule titled Reconciliation of GAAP to adjusted non-GAAP financials, included in this morning's press release.

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

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

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 2019 operating results, as well as some broader commentary on our business. Sherry will then review our financial results in detail and summarize our first quarter and full year 2020 financial outlook. We will then open up the phone lines to take your questions.

Briefly reviewing our operating results for the fourth quarter, revenue grew 1% and adjusted earnings per share grew 11%. The fourth quarter played out generally as we expected, with mixed market conditions, similar to those we experienced throughout 2019, but also with encouraging progress on key growth initiatives, particularly, the positive impact of our new products.

In the quarter, growth in large molecule pharma and biomedical research applications, driven by our new product offerings, was largely offset by market conditions in our industrial markets, China and continued capital spending softness in small molecule pharmaceutical applications.

Looking at the full year 2019 in total, revenue grew 1% and adjusted earnings per share grew 8%. Macro factors led to a more variable set of end market conditions that we had expected entering the year. Customers in key markets we serve were more cautious in their capital purchasing throughout 2019, and more willing to delay spending.

I'd like to review the three areas, where we were most impacted by this dynamic. First, government policy changes in China affected the food and pharmaceutical markets. As a reminder, China represents 18% of our global revenue and continues to be a key growth priority for the company. Our business mix in China is unique within our global portfolio, as well as within the industry, with a higher concentration of our business coming from pharma and food testing.

In 2019 China revenues were flat year-over-year, following double-digit growth in nine of the prior 10 years. In 2020, our initial view on China coming into the year is to expect stable end market conditions relative to 2019 driven by cautious, but steady pharma and industrial spending moderate academic spending and stabilization in the food market. That said, we are closely monitoring the coronavirus outbreak, and it's too early to understand what impact this rapidly evolving situation will have on our business. Therefore, no impact is included in our 2020 guidance. As always the health and safety of our employees, their families and our customers is our top priority, and we are taking appropriate caution in terms of employee travel and activities.

Second, the global market for small molecule pharmaceutical LC applications where waters has unique focus and capability, has been in a slower growth environment. In 2019, our small molecule pharmaceutical business was down modestly, in line with the overall market. Looking ahead to 2020, our assumptions assume stable market conditions relative to 2019. Meanwhile, we remain confident in the underlying secular growth drivers of the small molecule LC market, including steadily increasing prescription volumes, as patient access to therapeutic medications rises around the world, as well as increase in quality and safety requirements in all markets. We continue to invest in advancing our LC instrument portfolio, and are well positioned to benefit when demand normalizes.

And third, Europe was flat in 2019 as industrial market headwinds offset academic and governmental strength. Looking ahead, we're encouraged that clarity around Brexit could help stabilize the European macro environment. This stabilization contributed to our fourth quarter improvement, and supports our confidence in modestly better conditions within the region in 2020.

Market dynamics aside, we remain sharply focused on our core growth strategy of organic innovation, and are excited about the significant uptick in meaningful new product launches during 2019. We are pleased with our market development activities to date, and particularly encouraged by the increasing contribution of new products in Q4. Most notably the BioAccord, Cyclic IMS, SYNAPT XS and our two new tandem quad mass spectrometers, all contributed more meaningfully to our growth in the quarter, and we expect that this new product contribution will continue to ramp in 2020. We remain very excited about our technology roadmap, and believe that we are not only at the front end of a major new product cycle, but also a durable improvement in R&D productivity, and therefore a more sustainable new product cadence into the future.

Taking a closer look at the business, starting with a review of our market categories at the corporate level; sales to our broadly defined pharmaceutical category were flat for the quarter. Geographic strength in Europe and India was offset by a decline in sales into clinical applications, as well as softness in our China pharmaceutical business, which is partly attributable to the difficult comparable quarter a year ago. The global large molecule market and our performance within it, remained robust, supported by our focused investments in this category across LC, mass spec and chemistries. Conversely, the global market for small molecule pharmaceutical applications remained softer than historical levels, with flat revenue in the quarter. For the full year, our pharmaceutical category sales were up 2%.

Sales to our worldwide industrial category, which includes the material science, food and environmental markets, were down 1% in the quarter, with strength in food testing markets during Q4, offset by weakness in materials characterization. For the full year, our worldwide industrial category sales were down 2%.

Sales to our academic and governmental categories were up 10% in the fourth quarter, driven by the impact of our new technology, serving the pharmaceutical and biomedical research categories, particularly in the U.S. and Europe. For the full year, our academic and governmental category sales were up 3%.

Next, I will review our sales performance by geography at the corporate level. Asia, our largest region in terms of revenue was flat in the fourth quarter. China declined 3%, as pharmaceutical growth declined modestly in the quarter on a difficult comp, partially offset by stabilization in food markets. Looking specifically at the China generic pharmaceutical market, the second round of the GPO process previously referred to as the 4 plus 7 program, played out as we expected. And the third round is now under way. Our customers are maintaining a pragmatic tone through this process, and we continue to see those customers, notably, local big pharma companies and some multinationals win tenders, due to the program's increasingly stringent quality requirements and their benefits of scale. We are also seeing strong demand for our chemistry offerings from this customer base, which we expect to continue, as the GPO process supports rising generic prescription volume in China, bolstering our confidence that we will see increasing instrument demand over time.

In India, solid growth was driven by the continuing recovery in the pharmaceutical market, partially offset by food softness. For the full year, Asia grew 3% driven by solid growth in India, Japan and Korea, while China was flat.

Turning to the U.S., revenue was flat in the fourth quarter, as strength in large molecule pharma, food and biomedical research was offset by weakness in small molecule pharma, material science and clinical applications. Overall, the Americas declined 1% in the fourth quarter, driven in part by expected weakness in Latin America, due to the ongoing political instability in both Mexico and Brazil. For the full year, the U.S. grew 1%, while total Americas revenue was flat.

In Europe, sales grew 5% in the quarter, a result of solid year-end budget spending by certain large pharma customers, and continued strength in academic and governmental, partially offset by a modest decline in industrial. We saw particular strength in demand for our new mass spec instruments from both academic and pharmaceutical customers. For the full year, sales in Europe were flat.

Finally, I will review product line dynamics within our Waters and TA brands. Waters branded instrument sales declined 1% in the quarter and 2% for the year. LC Instruments declined moderately, consistent with broader market LC trends that we spoke about earlier. Market dynamics aside, we are confident that we can leverage our strong LC installed base and expanding product portfolio to support improving growth, when customer LC spending patterns recover.

In mass spec growth in Q4 was driven by our rich portfolio of new products, as well as solid demand in the global food business. Momentum continues to build for the BioAccord, as market development activities progressed well across all geographies, producing a strong fourth quarter and furthering our confidence in a multi-year revenue ramp. The new Cyclic IMS and SYNAPT XS made meaningful contributions to the fourth quarter, and were a key reason for the strong academic and governmental growth.

Lastly, the addition of two new tandem quads strengthened our overall portfolio, positioning us to benefit from any pickup we see in the global food and applied markets. To attest to the enthusiastic reception of our new products, we have already received one major award for the Synapt XS and two awards for the BioAccord, including SelectScience's Scientists' Choice Award for the Best New Drug Discovery and Development product for 2019; and Frost & Sullivan's 2019 Global New Product Innovation Award.

Waters branded recurring revenues, which reflect the combination of service and precision chemistries, grew 6% in the quarter and 5% for the year. Chemistry strength was driven by our pharmaceutical business. We saw solid growth across our chemistry portfolio, including HPLC columns, application kits, UPLC columns, and bio separation columns.

Turning to our TA product line; sales declined 8% in the fourth quarter, with TA instrument system sales down 12% and service sales up 3%. The weakness was largely due to reduced spending levels by our largest polymer and chemicals customers, which was broad based across our instrument portfolio and geographies. For the full year. our TA product line sales declined 3%, with TA instrument system sales down 5%, and service sales up 3%. Despite the challenging market conditions we faced in 2019, we have strong confidence in our TA Instruments team and product portfolio, and expect to return to growth in 2020.

To recap 2019, challenges in the global macroeconomic environment impacted our customers, who were more cautious in their capital purchasing throughout the year than we expected. Returning to the big picture, we remain steadfastly focused on executing on our five point value creation model. As we have consistently communicated, we aim to create shareholder value by one, holding a leading specialty position in structurally attractive markets. Two, executing a focused growth strategy, driven by organic innovation. Three, seeking opportunities for continuous operational improvement in innovation, channel and operations. Four, maintaining capital discipline. And five, operating with a performance oriented culture and management team.

Our goal remains to deliver strong sustainable long-term growth. We are confident in the durability of the growth opportunity in our end markets, as well as our consistent corporate strategy that is highlighted by innovation. Accelerated R&D investments over the past several years, which along with a more disciplined approach to project selection and portfolio management, is resulting in meaningful improvements in R&D productivity.

Looking ahead to 2020, we expect to realize further benefit of our recently launched products. Furthermore, we seek to supplement our organic innovation and growth by more actively deploying capital to purposeful M&A. Over the past two years, we have strengthened our internal capabilities and built a robust acquisition in minority investment pipeline. Last month we announced the acquisition of Andrew Alliance, broadening our technology portfolio to include advanced robotics and software, that will positively impact our customer's workflows across pharmaceuticals, life sciences, and material science markets.

With that, I'd like to pass the call over to Sherry Buck for a review of our Q4 and 2019 financials, and our outlook for 2020. 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 $716 million, an increase of approximately 1% in constant currency. Currency translation decreased sales growth by approximately 1% resulting in flat sales as reported. For the full year, sales grew about 1% before currency translation, which decreased sales growth by approximately 2%, resulting in a full year sales decline of approximately 1% on a reported basis.

In the quarter, sales into our pharmaceutical category were flat. Sales into our industrial category were down 1%, our academic and governmental category grew 10%. For the full year, the pharmaceutical market category grew 2%. Our industrial market category declined 2%, and our academic and governmental category was up 3%

Looking at product line growth; our recurring revenue, which represents a combination of precision chemistry products and service revenue, grew 6% in the quarter, but instrument sales declined 3%. For the full year, recurring revenue grew 5%, while sales per instrument product groups declined 3%. 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 two additional calendar days in the fourth quarter of 2020, compared to 2019. Breaking fourth quarter product sales down further, sales related to Waters branded products and services grew 2%, while sales of TA branded products and services declined 8%. Combined LC and LCMS instrument platform sales were down 1%, and instrument sales were down 12% for TA.

Looking at our growth rates in the fourth quarter geographically; sales in Asia were flat, with China declining 3%. Sales in Americas were down 1%, with the US flat, and European sales were up 5%. For the year. Asia sales were up 3%, with China sales flat. Sales in the America were flat, with the U.S. up 1% and Europe sales were flat.

Now I'd like to comment on our fourth quarter and full year non-GAAP financial performance versus the prior year. Gross margin for the quarter was 58.2%, as compared to 59.9% in the fourth quarter of 2018. On a full year basis, gross margin was 58%, compared to 59% in the prior year. The lower gross margin relative to the prior year in both the quarter and the year, was driven by foreign exchange rates, lower fixed cost absorption, and mix.

Moving down the fourth quarter P&L, operating expenses were 3% lower in the quarter and 1% lower for the year on a constant currency basis. This was a result of lower variable expenses and disciplined spending controls throughout the year. In the quarter, our effective operating tax rate was about 11% versus 12% in the prior year quarter. For the full year, our effective operating tax rate was about 13%, which is flat against the prior year. The lower tax rate versus our expectation is the result of the mix of profits in our tax jurisdictions, and discrete items in the quarter.

Net interest expense was $10 million, an increase of about $9 million from the prior year as anticipated, as we shifted to a net debt position over the course of the year. Our average share count came in at 64.3 million shares, a share count reduction of approximately 15% or about 11 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 fully diluted share for the fourth quarter increased to $3.20 in comparison to $2.87 last year, an increase of 11%. On a GAAP basis, our earnings per fully diluted share increased to $3.12 compared to $2.46 last year. For the full year, our non-GAAP earnings per fully diluted share were up 8% to $8.99 per share, versus $8.29 last year. Overall, the non-GAAP earnings per fully diluted share growth for the quarter and the year was a result of lower expenses and our ongoing share repurchase program. On a GAAP basis, full year earnings per share were $8.69 versus $7.65 in 2018. A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning.

Turning to free cash flow, capital deployment and our balance sheet, I'd like to summarize our 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 2019, free cash flow came in at $158 million after funding $54 million of capital expenditures. Excluded from free cash flow was $19 million related to the investment in our new Taunton chemistry facility. In the fourth quarter, this resulted in $0.22 of each dollar of sales converted into free cash flow and $0.24 for the full year.

Now I'd like to provide an update on our fourth quarter activities related to capital deployment, which we categorize into three areas; investing for growth, balance sheet strength and flexibility, and return of capital to shareholders. In terms of returning capital to shareholders, we repurchased 2.5 million shares of our common stock for $560 million in the fourth quarter. These capital allocation activities, along with our free cash flow, resulted in cash and short-term investments of $337 million and debt of $1.7 billion on our balance sheet at the end of the quarter. This resulted in a net debt position of $1.3 billion, and a net debt to EBITDA ratio of about 1.7 times at the end of the year.

Looking ahead, we remain committed to deploying capital in the context of our three priorities, and we'll continue working toward a capital structure of approximately 2.5 times net debt-to-EBITDA. As a result, our full year guidance reflects about $800 million of share repurchases, with approximately $200 million of shares during the first quarter. Over the course of the year, we will evaluate our share repurchase program and provide updates as appropriate.

Turning to working capital; accounts receivable days sales outstanding came in at 77 days this quarter, up slightly compared to the fourth quarter of last year. In the quarter, inventories increased by $29 million in comparison to the prior year quarter, driven by planned inventory build related to both Brexit contingency planning and to support the continued ramp of our new products.

As we look forward to the year ahead, I'd like to provide some broader context on our full-year 2020 guidance. To summarize several points that Chris mentioned earlier, we expect increasing benefits from our recent new product introduction, TA Instruments returning to growth; stable conditions and the LC pharma market, and stability in China. But note that potential impacts from the coronavirus outbreak have not been factored into our guidance.

These dynamics support full year 2020 guidance for constant currency sales growth of 1% to 3%. At current rates, currency translation is assumed to be approximately neutral to 2020 sales growth. Gross margin guidance for the full year is expected to be in a range of 58% to 58.5%. Every year, we look to balance growth investment and profitability. Accordingly, we expect 2020 operating margins of approximately 30%, based on a combination of growth investments, normalization of variable expenses, and disciplined expense controls.

Moving below the operating income line, other key assumptions for full year guidance are; net interest expense of $50 million to $52 million. Full year effective tax rate of 14% to 15%, and average diluted share count of approximately 62.5 million shares outstanding. And lastly, modest dilution from the acquisition of Andrew Alliance. Rolling all of this together and on a non-GAAP basis, full year 2020 earnings per fully and diluted share are projected in the range of $9.15 to $9.40, which assumes a negative currency impact on full year earnings-per-share growth of approximately one percentage point.

Looking at the first quarter of 2020, we expect constant currency sales growth to be flat to 2%. At today's rate, currency translation is expected to decrease first quarter sales growth by less than 1 percentage point. First quarter non-GAAP earnings per fully diluted share is estimated to be in the range of $1.55 to $1.65. At current rates, the negative currency impact on first quarter earnings-per-share growth is expected to be approximately one percentage point.

Chris will now make a few summary comments. Chris?

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

Great. Thank you, Sherry. In summary, our fourth quarter played out largely as we expected, with a continuation of macro headwinds, similar to what we saw throughout 2019. That said, we saw an encouraging uptick of sales in our newly released products in the fourth quarter. As we look to 2020, our focus is on execution to deliver improving growth and balancing our industry-leading profitability, with the right investments to support our innovation strategy and long-term growth, as well as a consistent return of capital to shareholders.

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 of Waters' Investor Relations team after the call. Operator?

Questions and Answers:

Operator

The first question is coming from Vijay Kumar, Evercore ISI. Your line is open.

Vijay Kumar -- Evercore ISI -- Analyst

Hey guys, thanks for taking my question. Chris, just one on -- appreciate all the colors on end markets, on the guidance, know, especially when you look at the end markets, right, pharma, industrial, what are you assuming for 2020? Are you assuming pharma, some of the weakness we saw in North America customers, is some of that coming back? Industrial, any thoughts on how that segment is that going to shake out? Ikea [Phonetic] did decline? And then I had one follow-up please?

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

Sure. Thanks for the question, Vijay. As you know, we had a really variable set of market conditions throughout 2019, and certainly the business mix we have was particularly impacted, in part by some of the geographic considerations in China. The large mix we have in LC, small pharma, and some of the industrial categories.

As we turn the page to 2020, our starting point is really just a carry-over of market conditions from 2019. We're not assuming an acceleration until we see clear change in the market. Within each geography and category, we're looking to balance both the opportunities and the risks.

With regard to pharma, as you point out, our assumptions and include continued robust performance in the large molecule pharma market, which is about 30% of our mix overall, and continued softness in the small molecule market, which is 70% of our mix, and that's why we have a -- kind of a moderate view of the pharma market at this point.

From an industrial standpoint, the biggest impacts we saw and you referenced TA, were in large polymer and chemicals companies. If you look at our top 20 accounts, say within TA, those are the big global industrial polymers and chemicals companies. They were really soft through the year, and particularly in the fourth quarter. Interestingly enough in TA, we actually added more new accounts last year than we ever have, to try to make up for that. But when the very large companies are down, it's challenging to overcome that. And I would also say that, we do support those same customers through our Waters branded products as well, and we saw the same exact phenomenon on the Waters side, as we saw in TA, in that industrial polymers and chemicals.

So again, our assumption there is, we're not assuming a major rebound, but we are assuming stable conditions. And so, until we see some different conditions, where we thought it was prudent to just assume a continuation of some of the conditions we saw in '19, into the early part of '20, and we will update as we go along.

Vijay Kumar -- Evercore ISI -- Analyst

That's helpful. And Sherry, just on the EPS guidance here. It looks like you're assuming a step down in margins here. I'm just curious, is this a continuation of the gross margin dynamic that we saw in '19 or is this a step-up in maybe some of the commercial activities to support the new product launches? And why would tax rates step up? Thank you.

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

Yeah. So you've got a couple of questions buried in there Vijay, so I'll try to cover them all. We look at our gross margins and really our operating margins. The lower gross margin guide, I'd say overall is really a function of our top line growth. Peeling back down a little bit, we think about our gross margin. The two biggest levers on our gross margin are volume leverage and FX. And in years when we've had higher gross margins in the 59% range, we had mid single-digit plus growth. So I'd say the gross margin is really a function of our top line guide.

And similarly with our operating margin and our operating expenses coming into 2020, we're really trying to strike a balance between growth, investment and profitability. And so we're continuing to invest in R&D and commercial capabilities. But we also have some headwind coming into 2020, with normalization of our variable costs and some expenses for Andrew Alliance. So that's our inputs for our guide, a 30% operating margin.

Moving on to the tax rate that you asked about, we ended the quarter -- fourth quarter tax rate more favorable than we were expecting. That was due to some discrete items in the quarter, as well as the mix of our profits in our tax jurisdictions. And we're not expecting that to repeat in 2020. So after we came out of tax reform, we're really looking at our tax rate for the business to be in that range of 14% to 15%.

Vijay Kumar -- Evercore ISI -- Analyst

Thanks guys.

Operator

The next question is coming from Tycho Peterson, JP Morgan. Your line is open.

Tycho Peterson -- JP Morgan -- Analyst

Thanks. Chris, I'll start with the guide. If I go back to our conference couple of weeks ago, you were highlighting mid single digits. I know that's maybe a longer-term target, but if I think about the drivers here, you've got new products, you did highlight easy comps. Can you maybe just, in your view, talk about what it takes to get this business back to mid single digit, and how much you're expecting from new products this year? In other words, is the portfolio declining, if you back out some of these new product launches? And then also on gross margins, is there any pricing headwind in there? I know you called out FX and fixed costs, but was there any pricing sensitivity as well?

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

Sure. Thanks Tycho. Appreciate the question. Yeah, absolutely. We think the underlying market dynamics are -- and fundamentals over the long term are really strong. The underlying secular demand drivers. Our unique competitive position and our strategy would, over time, under more normal market condition scenario, continue to support a mid single-digit kind of long-range target, and and that's exactly what we were talking about at your conferences, is our belief and our confidence in the underlying fundamentals of the market on a long-term basis, and and clearly the difference between that and our immediate near-term outlook is simply a function of some of the challenges that we faced in the markets where we're particularly exposed. And to be -- to not assume that those change overnight that, as I mentioned before, that the starting point is more of a carryover from the conditions that we saw.

And so in terms of what it would take to get back up into the mid-single digit plus, is really a normalization in demand in a couple of key market segments, notably the small molecule pharma segment, certainly general conditions within China, returning to reasonable growth and and a stabilization of the industrial markets. We don't have to get huge growth out of the industrial markets. We have to get modest growth out of the industrial markets, and then more of a historic norm in terms of the pharma business.

As I mentioned before, the large molecule pharma space has continued to stay robust for the market and for Waters, through this whole period, and so it's really about that small molecule space perking up, and certainly with some of the deferred investment in that space, we do see pent-up demand building. But until we see a comeback into the market, we will continue to remain cautious.

As it relates to pricing, there is nothing unusual in terms of pricing in our assumptions. We have seen quite stable pricing on the instrument side. We continue to put small increases through on the recurring revenue side and despite the gross margin dynamic, Sherry talked about in FX and all these other things, we've seen no deterioration in our trade margin.

So anyway that's how I'd summarize all of that.

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

Maybe just to add on -- I'd just like to add, on the gross margin for the quarter, just to break that down a little bit. Gross margin in the quarter was impacted by about 90 basis points of FX, and the remainder of that lowered gross margin year-over-year was fixed cost absorption and mix.

Tycho Peterson -- JP Morgan -- Analyst

Okay. And then just to flesh out a couple of pressure points you highlighted, for China is your assumption, for 4 plus 7, that round three doesn't present an incremental headwind? And then any budget delay issues we heard about that, in the high-end market from some of your peers? And then Chris separately, you flagged clinical soft, I'm just wondering if you can elaborate on that issue? Thanks.

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

Yeah, let me try to cover those Tycho. In terms of round 3 on the GPO, the 4 plus 7. Let me just quickly summarize, it was about a year ago that we were coming to grips and the market was coming to grips, with what was really a pilot phase of the 4 plus 7, 25 drugs in 11 cities. The second round extended that same set of 25 drugs to 27 provinces, more widespread and accounted for multiple winners per -- the third round bidding has been completed. There are 33 drugs that have been bid, and this is across 32 provinces and so, I think as I said in my prepared remarks, we've seen a pragmatic response from our customers in this, clearly there is a shift in the market under way from a market that was more purely focused on generic drugs, to a market that's being encouraged to scale in that way, maybe in a more price-competitive way to bend the cost curve on generic drugs, while encouraging investment in the innovation sector. And actually, a lot of our customers are quite excited about that possibility, and there is a couple of other regulations coming into the market that should support that, including the 2020 CHP or Chinese Pharmacopoeia modernization of QC methods, as well as a revised Drug Administration law, which encourages more R&D.

So I think taking all that into account, our assumption is for stability, but not necessarily a big bounce back. But we think the foundations are being put in place for a sustainable growth picture in the future, and we're investing to take advantage of that where it comes. I think you asked about high-end capital purchases as well, if I understood the question correctly.

Towards the end of the year, we actually saw a nice improvement in our high-res mass spec sales, because of our new product launches. The Cyclic IMS and the SYNAPT XS in the high resolution category, finished the year on a strong note. Those were back half product introductions, and we're excited about a reestablished leading position in that space, and think there is opportunity this year. But we also saw a lot of encouraging activity on the BioAccord, which continued to ramp through the year. In fact, we sold more units in Q4 of BioAccord than we sold in the first three quarters combined. So we think we have a good momentum there, and baking that all in, we're assuming about a point of new product increment in terms of our results into 2020.

Your last point, I think was on clinical, that tends to be a fairly lumpy business, it's a smaller part of our business overall, about 6% of our revenue. It does get baked into our trade class reporting number on pharma. So it was a slight detriment to pharma. We've grown over more rolling periods, couple of three year periods, the clinical business pretty consistently and pretty well, and clinical business remains a priority for the company. And we think there is going to be ramping demand over time for mass spec based assays, particularly in newborn screening and therapeutic drug monitoring. So it tends to be a lumpier business, but we stay very focused on building our technology portfolio there.

Operator

The next question is coming from Dan Brennan, UBS. Your line is open.

Daniel Brennan -- UBS -- Analyst

Great, thanks. Thanks for taking the questions. Chris, I wanted to address kind of the LC small molecule market, where you have obviously highlighted that you're feeling the pain more than peers. Could you just discuss a little bit about market conditions versus share loss, anything on the relative market share trends? And then importantly, kind of what drives the improvement here, what are the signposts toward like, why this market kind of will recover, I know you talk about pill count in generic and population growth, which sounds great, but it's really hard for us to distill that back to the model, particularly there is all this excitement over burgeoning biologic pipelines? Thanks.

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

Sure. Thanks Dan. I mean I think as we look at the overall market, we've seen consistent feedback from a lot of different sources, that the small mall market has been, in a tougher growth environment, recently and what's most different about Waters, is that we have such a large exposure there, with pharma being about 55% of our revenue overall, and small mall being 70% of that. We're simply more exposed. As you know, we have a unique mix that's in our LC business that's pharma heavy and is QC heavy, and so where we play and what we see our share as very stable. We are expecting to the majority of workflows and within our installed base, the purchasing can come and go with capital purchasing cycles. But we see the underlying utilization very clearly with our service in our chemistry business.

And our chemistry business by the way in pharma has remained very solid through this cycle, chemistry is in pharma -- on a global basis is consistently up in the mid to high single digits, which underscores the stability of that installed base. And so our focus is, is simply to continue to serve our customers and position ourselves to take advantage of when demand returns. Certainly, there have been some unique factors in the pharma LC market, the tailwinds, if you will, in the middle part of the decade, particularly in China and India yielded to some headwinds, as we got to the end of the decade, with China and India, and on top of that the U.S. generic market has been a tougher environment in the last year, with with a spike in user fees and some litigation noise in the environment.

So I think we understand it all very well. We think the market is fundamentally attractive as you point out in your question. We've continued to invest in our portfolio, and we're expanding our technology portfolio and LC, and we're excited for a rebound of that market when it occurs.

Daniel Brennan -- UBS -- Analyst

Okay. Great, Chris. And then maybe just one follow-up to Tycho's question just on new products. I know you've talked about a point contribution, it still seems pretty modest, given the number of new products and the time spent highlighting the unique features here. So could you just flesh out some details, maybe a little bit -- I know you don't want to get in -- too far in the weeds on the math behind that, but why can't the impact be larger and what should we look for as kind of signpost toward the success of these new products?

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

Sure. But we're committed to continuing to update these on a quarter-to-quarter basis. And like I said, the product launches, particularly on the mass spec side last year, were spread across the year. The larger systems geared toward the back half of the year, while the BioAccord came in earlier and was a market development process that really began to bear some meaningful fruit by the end of the year.

I'd say in very simple terms. Dan, the overall impact of the new products is somewhat impacted by the market conditions that we face in our business. You can see segments where those products have a more prominent impact, have done better, such as the governmental and academic category, the large molecule category. And so, as as market conditions improve, we should see a bigger impact of new products. But like I said at the top of the call, the prudent assumption heading into the year is a starting point that's more of a carryover of those market conditions until we see the change clearly in our business.

And so we have taken, I think a pragmatic approach to forecasting the impact of the new products. But continue to be very-very excited about them, and certainly the innovation strategy, generally and the gains in R&D productivity we're achieving inside, are really motivating the team and making us excited for what's ahead, as market conditions stabilize.

Operator

The next question is coming from Derek Brown, Bank of America. Your line is open.

Derek Brown -- Bank of America Merrill Lynch -- Analyst

Hi, good morning.

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

Good morning.

Derek Brown -- Bank of America Merrill Lynch -- Analyst

Hey, a couple of questions. So first one is -- and they're interrelated. The first one is the contribution from the Andrew that's sort of embedded into your M&A for revenue contribution in 2020. And then, just sort of looking at the guidance you've given for the share buyback, roughly $800 million for the full year, $200 million in the first quarter, by our math, is we to take you about two times levered by the end of the year, sort of being $400 million to $500 million out there? And going back to the first comment on the M&A, is that, is that $400 million to $500 million slug money on the table for potential deal activity, to sort of get to the 2.5 times or is the 2.5 times, somewhere in the future. Just sort of general thoughts on sort of what's involved in the math?

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

Thanks Derek. Appreciate it. Let me make a couple of quick comments on Andrew, and then Sherry can talk a little about buyback program and the leverage targets and so forth, and I'm happy to add to it as well. But Andrew Alliance, we are super excited about that technology. One of the most consistent things that I've heard from customers as I go around regularly as the pressure point on sample preparation and sample automation on the front end of a lot of analysis and Andrew is truly a next generation technology platform in robotics, but also in a cloud ready software, to tie it all together into automate and replicate experiments in a much more effective way.

We're not going to break out revenue at this point, it's fairly modest in the big scheme of the world, and we're also trying to get a handle on the opportunity, not just to sell Andrew products, but the beneficial impact that will have on pulling through Waters instruments, which is a big part of our logic.

The integration is going really well. In fact, the Andrew teams in town and I had a chance to sit down with them yesterday, and the people within our chemistry organization that are leading the charge, as well as the Andrew people, couldn't be more excited. Everybody from the organization is staying and working very closely together to take advantage of the opportunity. So we'll give updates as we move along, and look forward to sharing some more of that technology with the investment community.

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

Yeah. And Derek, just to follow-up on capital allocation question. As you know, after we came out of tax reform, we started working toward a more optimal capital structure, and we've been executing against that plan over the last couple of years with the higher return of capital through share buybacks. So as we look at going into 2020, there is a variety of factors that we look at. Our priorities from a business standpoint, our performance, etc, and really looking at repurchases this year of about $800 million, and that would put us based upon our guide we gave today, in the low two times leverage ratio, and so the factors that could increase us toward our kind of near term goal of 2.5 times, could be M&A opportunities. So we just look at all the different factors and this is where we set our guide for the full year, and we'll look at it each quarter and make adjustments or updates as we go through the year.

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

Yeah. Derek, as you know, it's hard to forecast that. While we do have a good pipeline, we are very-very selective. We have been involved in a number of different situations and chosen to move forward, just very selectively. But it is purposeful and it is proactive, and we'll just have to take it as it comes. But continue to focus on those investments, in terms of what they can do for our growth, what they can do for the accretion of EPS over time, as well as the returns on invested capital, which are key metrics there/

Operator

The next question is coming from Doug Schenkel, Cowen. Your line is open.

Doug Schenkel -- Cowen and Company -- Analyst

All right. Good morning. Thank you for taking our questions guys. I just want to start on margins, and then, I just want to ask a couple of clarification questions, as we think about the outlook for growth in 2020. So starting on margins, as I'm sure you guys appreciate, a key pillar to the bear thesis on waters over good times and bad, has been the argument that you're pretty close to peak operating margin, and I can see where your guidance for 2020 feeds into this a bit, especially given I think this would translate into year four of operating margin coming in between 30% and 31%. How would you address that argument and building off of this, how would you like investors to measure the success of your planned 2020 investments, and over what timeframe? And I guess the third part of this is, for 2020 specifically, and this is really just a cleanup, how much of an impact does Andrew Alliance have on operating margins?

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

Yeah, hi Doug, this is Sherry. I'll start off maybe with the last question there about Andrew Alliance. We didn't to break out all the detail line items specifically, but there is some impact on operating margin, operating margins and operating expenses, and we gave in our guide that it's slightly dilutive to our overall EPS. So a modest amount there.

And when you think about our margins -- the 30% margin, one of the things we have in 2020 here is some normalization of prior year variable costs, that's a headwind for us. But as we look at our overall operating margins and getting beyond the 30%, it's really a function of our top line growth. So as we get back to our goal of being mid single digits or above, that's when we have opportunity for higher operating margins and expansion. And so that's kind of the factor around that. As far as measuring some of the investments we're making, I'd say two key areas where we're investing for growth is, continuing to invest in our R&D pipeline, and that's really continuing to keep our product pipeline robust and bringing new products to market and that will play out in the top line growth, and also we're investing in commercial capabilities. So tools for our sales force -- our salesforce.com, it again should play out in top line growth metrics. So that's kind of how we're looking at the investments we're making in the business.

Doug Schenkel -- Cowen and Company -- Analyst

Okay, that's helpful. And in terms of 2020 growth, you're targeting 2% total revenue growth, I think you talked about new products giving you about a point. You noted that LC is expected to be stable and TA is expected to return to growth. I think just by process of elimination, this leads us to conclude that you're expecting another year of moderating growth for Waters' recurring revenue. I just want to make sure we're not missing something out here, and I guess cutting to the chase, do you expect Waters Division recurring revenue to get up into the 4% to 5% range, or right now, are you embedding an assumption that it's going to be a little bit lower than that?

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

Yeah, let me, let me take a comment on that, Doug and Sherry can add to it as well. I see how you're piecing apart the math and certainly, as we've said we -- our assumption coming into the year, is just stable conditions, nothing really better from the standpoint of the type of conditions we saw until it actually comes through in the business, plus some benefit of new products. And actually our recurring revenue assumption is very consistent in the coming year with where we've been. We saw solid recurring revenue performance in 2019, with some improvement over the course of the year, some steady improvement over the course of the year and a really solid Q4, but all in, the recurring revenue assumption stays about the same. And really that does imply an instrument assumption that is flat to maybe slightly down at the midpoint. But we think that's prudent and consistent with what we saw in the prior year, before the effect of new products. So I think a very balanced outlook that balances opportunity and risk and obviously looking forward to updating that over the course of the year.

Operator

The next question is coming from Dan Arias, Stifel. Your line is open.

Daniel Arias -- Stifel -- Analyst

Good morning guys. Thanks for the questions. Chris, just following up on the BioAccord, obviously 1Q can be a choppy spending quarter in pharma, just given the budget situation. So are you expecting bio a performance to be up sequentially? Do you think that the new product momentum has placements or were contributions up quarter-over-quarter, or is the 4Q to 1Q spending dynamic the bigger factor there?

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

Yeah. Thanks Dan. Thanks for the question. Yeah, BioAccord we thought was a good story over the course of the year, a lot of excellent foundational work to get as many customers exposure to it as we could, to work into some budget cycles for potential year end money, and we saw a nice benefit there. Like I mentioned, we sold more BioAccords in Q4, than we sold in Q1, Q3 combined. As it relates to Q1, we've seen quite a stable or modest purchasing dynamic in Q1 on a fairly regular basis. And so, we're not making any huge assumptions for Q1, as you know from our topline guide of of flat to 2%. We're expecting a modest quarter in Q1, consistent with sort of prior year experience. So we're not necessarily expecting a sequential move on BioAccord from Q4 to Q1, but certainly we're expecting a nice sequential move from '19 to '20 for the year overall, to be very positive for BioAccord.

Daniel Arias -- Stifel -- Analyst

Okay. And then Sherry, maybe just staying with profitability. This could be a little bit of a tough one. But if you just look at the combined margin profile of the BioAccord, the Cyclic IMS and the SYNAPT XS. Is that any different than the corporate average? I'm just trying to understand if there is a benefit to be had there, as new product introduction -- as your new product contributions pick up?

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

I'd say as we look at our new products, obviously, when we're bringing new products to market, we are looking at our customer demands and and have financial hurdles for those business cases. And so I'd say that, the operating margins on the -- particularly some of these mass spec products, are at or a little bit above our company average.

Daniel Arias -- Stifel -- Analyst

Okay, thanks so much.

Operator

Our next question is coming from Paul Knight of Janney. Your line is open.

Paul Knight -- Janney Montgomery -- Analyst

Hey Chris, you had mentioned in your comments that you see the more sustainable market introduction or a more sustainable, new product introduction cadence. Can you talk to that statement? Is there -- obviously BioAccord seems to be pacing well, what else is different that you make that comment?

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

Sure. Absolutely Paul. Thanks. We've done a significant amount of work in the R&D function across the company and are really excited about our platform strategy. So we've done a ton of work in the last four years to establish next-generation system components, that can really serve as the foundation for systems -- more of a systems architecture with our products, where we effectively move from a -- kind of a spot innovation model of one instrument at a time to families and value streams of instruments that can be -- produce more repeatable cadence into the future and BioAccord is a really good example of that. So the fundamental architecture of BioAccord, which has a common system controller, a new software and firmware architecture and new hardware components that are durable over time, can be spun on a routine basis to bring more capability into the market. The original BioAccord launch of a little about a year ago now, carried three core applications of protein peptides and Glycans, we successfully launched a new application in December at the end of the year for oligonucleotides, which is a really significant need in the marketplace, and has been very well received by our customers and the BioAccord platform will spend again sometime this year. And so, as I've commented before, BioAccord as a family, as a value stream is a platform that we can -- we will spend five to seven to eight to 10 different versions over the coming years, depending on customer needs. But to bring new capability in the marketplace on a routine basis, you can certainly apply that same thinking for systems architecture to our other value streams and see where we may be going. And in addition to that, we've had the chance to largely complete development and to begin the early commercialization process on Waters Connect, which is our next-generation software platform.

So we've done a lot of the foundational work to move toward a more sustainable cadence of new product introductions based on more of a systems philosophy, and excited about what that will yield.

Bryan Brokmeier -- Senior Director, Investor Relations

I think we have time for one more question.

Operator

The next question is coming from Steve Beuchaw, Wolfe Research. Your line is open.

Steve Beuchaw -- Wolfe Research -- Analyst

Hi, thanks for squeezing me in here. I was going to ask you, Chris, one about the topline and then I had a couple of margin questions for Sherry, if we have time for that. On Chris, I wonder if you could put a little bit more color around the trends in TA, did -- the dynamics that you saw in the quarter with some of your larger chemical customers, were those in line with expectations, whether there was a surprise and how do you expect that to play into the first half of 2020?

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

Sure. Like I mentioned, Steve, the trends in TA were very much dominated by large polymer and chemicals companies. About two-thirds of our revenue in TA is sold into the polymers and chemicals world and as you might imagine, we've got some large accounts in that space. I would say it was softer than we expected, coming into the quarter. But directionally consistent. We saw those trends really all year long among those top customers, and that's why I made the comment earlier, that we spent a fair amount of time actually creating new accounts and that's actually exciting for the future, because we've opened up some new ground. But some of the newer, smaller accounts that were added in greater number than ever before, just can't make up for the big large customers, which we expected to be soft at the end of the year, but ended up being a lot softer than even our forecast.

I think when we step back and look at the big picture, those customers are still great customers. We have a very strong leading market share position in all these technologies, very strong and stable team. And so, looking at the year ahead, we expect those type of market conditions to stabilize. And as I mentioned also we did see a lot of the same patterns in our advanced polymer characterization product line, and some of the other things we do on the water side and LCMS in some of those similar types of accounts. So I think we understand the picture pretty well and we're just focused on returning that. The other thing we're going to benefit from TA this coming year, is we've got some exciting new product launches that we'll talk more about, as we get into the year.

Steve Beuchaw -- Wolfe Research -- Analyst

Okay, thank you for that. And then Sherry, as we're all trying to get to underlying margin and spend trends, I wonder if you might take a stab at, just speaking to the underlying ex-currency operating expense growth, if it was, hey, we didn't have Andrew added in the year, would operating expenses accelerate and by how much? And then just for those who are wondering about mix dynamics, can you just remind us what the mix spread is at the gross or EBIT line between the TA business and the Waters business? Thanks so much.

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

Yeah, just maybe to peel back a little bit your question on the operating expenses over the course of the year. Andrew -- without Andrew Alliance, it has a modest impact. So really the bigger drivers as we look at the increase in our operating expenses and related to our operating margin guide, is really investments we're making in new business, both R&D and commercial capabilities, and then normalization of variable expenses from 2019, are the bigger drivers on operating expense and operating margin. And then could you repeat your second question?

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

I think we, I think we might be finishing the call here. So I think we're a little bit over time and maybe Steve's microphone is not live there. So let me just wrap up the call and Steve, we can certainly follow-up on your question offline here, as well as everybody else. But I want to thank everyone for your participation and questions. Despite the more challenging, capital purchasing dynamics in 2019, we remain focused on executing on our innovation strategy, and we are excited with our early progress. While our end markets have shown some near-term volatility, we are confident in the long-term growth potential and continue to invest for growth in R&D, commercial operations and purposeful acquisitions.

So on behalf of our entire management team, I'd like to thank you for your continued support and interest in Waters. We look forward to updating you on our progress during our Q1 2020 call, which we currently anticipate holding on April 28, 2020. Thank you and have a great day.

Operator

[Operator Closing Remarks].

Duration: 62 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

Vijay Kumar -- Evercore ISI -- Analyst

Tycho Peterson -- JP Morgan -- Analyst

Daniel Brennan -- UBS -- Analyst

Derek Brown -- Bank of America Merrill Lynch -- Analyst

Doug Schenkel -- Cowen and Company -- Analyst

Daniel Arias -- Stifel -- Analyst

Paul Knight -- Janney Montgomery -- Analyst

Steve Beuchaw -- Wolfe Research -- Analyst

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