Yahoo Finance Waters Corporation (WAT) Q1 2019 Earnings Call Transcript
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Waters Corporation (NYSE: WAT)
Q1 2019 Earnings Call
April 23, 2019, 8:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning. Welcome to the Waters Corporation First Quarter 2019 Financial Results Conference Call. All participants will be in listen-only mode until the question-and-answer session of the conference call begins. This conference call is being recorded. If anyone 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 first quarter earnings conference call.
Before we begin, I will cover the cautionary language. During the course of this conference call, we'll make various forward-looking statements regarding future events or future financial performance of the Company. In particular, we'll provide guidance regarding possible future income statement results of the -- for the -- of the Company for the second quarter and full year 2019. We caution you that all such statements are only predictions, and that actual events or results may differ materially. For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see our Annual Report on Form 10-K for the fiscal year ended December 31st, 2018, in Part 1 under the caption Risk Factors and the cautionary language included in this morning's press release and 8-K.
We further caution you that the Company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding possible future income statement results, except during our regularly scheduled quarterly earnings release conference calls and webcasts. The next earnings release call and webcast is currently planned for July 30th, 2019.
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. In our discussions of the results of operations, we may refer to pro forma results which exclude the impact of items such as those outlined in our schedule titled Reconciliation of GAAP to Adjusted non-GAAP Financials, included in this morning's press release.
Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2018. In addition, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call are given on a comparable constant currency basis.
Now I'd like to turn the call over to Chris O'Connell, Waters' Chairman and Chief Executive Officer. Chris?
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 first quarter operating results as well as some broader commentary on our markets and business. Sherry will then review our financial results in detail and provide comments on our second quarter and full year 2019 financial outlook. We will then open up the phone lines to take your questions.
Sales in the first quarter fell well short of our expectations. Total revenue was flat, which drove adjusted earnings-per-share growth of 1%. This result was unexpected, given the momentum we saw in Q4 of 2018 and reflected greater than expected macro impacts in China and Europe as well as a slow release of budgets by key pharmaceutical and industrial customers.
To give you a bit more color on the first quarter's challenges, I'd like to comment on the three factors that constituted the majority of our shortfall against our expectations: China, Europe and TA Instruments.
Starting with China. I'd like to first give some important context for our business in that country. China is 18% of our global business, and has reliably delivered strong double digit growth for an extended period of time. Our business mix in China is unique within our global portfolio as well as the industry, with pharma representing approximately 50% of our revenue and food testing representing over 15%. In the first quarter, our business in China declined 4%, which was primarily the result of the ongoing restructure of the government's food safety infrastructure as well as the 4+7 policy impacting our generic pharmaceutical customers' capital purchasing. While we were aware of the policy changes referenced, we had not seen an adverse impact from them in 2018, and their Q1 2019 impact was more pronounced than we expected.
On the positive side, Chinese customer utilization remained strong, and we expect end market improvement throughout the year and a return to growth. Furthermore, we continue to view China as a sustainable growth driver for the Company and remain confident in our strong market position. The government reforms that I mentioned are intended to strengthen economic growth as China transforms from a manufacturing export economy into a local innovation economy, where the food and pharmaceutical industries will be key beneficiaries. As such, we expect to benefit from these reforms, even if we experience short-term volatility during these implementation phases.
Turning to Europe. Our business declined 5% in the quarter as customers were cautious in their Q1 purchasing decisions amid uncertainty with macroeconomic conditions, including the ongoing Brexit political stalemate. This caution negatively impacted capital spending decisions by our largest pharma and industrial customers, particularly in Western Europe.
On a positive note, our academic and governmental category in Europe saw continued strength. Despite the Q1 capital purchasing dynamics, our pharmaceutical demo and quoting activity are strong, which indicate that demand in our European pharmaceutical business should improve over the course of the year.
Third, our TA product line experienced a soft start to the year, with sales down 8% in the quarter compared to the first quarter of 2018. TA's purchasing weakness was seen across most geographies and product categories but most notably felt in Europe due largely to the macroeconomic headwinds I referenced earlier. Despite the slow start to 2019, we anticipate that TA will return to growth as customers' budgets are released over the course of the year and we are confident in our strong global TA team. Additionally, we expect to continue to benefit from our robust TA product position as we are relatively early in the broader commercialization cycle of our Discovery line of thermal analyzers and growing line of accessories.
Turning briefly to a few high level comments on the income statement. Our modest earnings-per-share growth reflected the lower than anticipated first quarter sales. We were pleased with our disciplined operating expense control, while continuing to invest in our key growth initiatives. Notably, our cash flow conversion remained at historically high levels, evidencing our robust business model and supporting our capital deployment plans.
Taking a closer look at the business, starting with a review of our market categories at the corporate level.
Sales to our broadly defined pharmaceutical category were flat in the quarter. Demand from customers in large molecule applications and biomedical research was strong, offset by slower than expected budget releases by our largest pharmaceutical customers as well as by generic manufacturers in China and the US. We continue to feel good about our strong positioning in targeted LC-MS and biopharmaceutical analytical solutions as well as the durability of our franchise in small molecule testing. Additionally, we are encouraged by our return to growth in India as the generic pharmaceutical customer base showed improving sentiment.
Sales to our worldwide industrial category, which includes the material science, food and environmental markets, declined 2% during the quarter. This decline was most notable in the material science and food markets, reflecting the previously described macro conditions in China and Europe. Despite softer than expected growth during the quarter, we remain confident in our industrial product positions and pipeline as well as the breadth of opportunities across material science, food safety and environmental applications.
Looking at our academic and governmental categories. Sales grew 4% in the first quarter, with strong growth in the US and Europe, partially offset by the earlier described weakness in the China food sector. Our recent success in this category reflects a continuing healthy pace of global innovation, particularly in pharmaceutical discovery.
Next, I will -- we'll review our sales performance by geography at the corporate level.
Asia, our largest region in terms of growth -- in terms of revenue, excuse me, grew 2% in the first quarter as our aforementioned weakness in China offset solid growth in India, Japan and Korea. We are encouraged by the mid single digit Q1 growth in India and remain cautiously optimistic about improving trends.
Turning to the Americas. Overall sales were flat in the quarter, while sales in the US grew 2%. Solid growth in both our US industrial and academic and governmental categories offset softness in pharma, which was largely due to slower than expected release of capital budgets by our largest customers. Despite the slower start in the quarter, we believe the US pharmaceutical environment remains healthy and we've seen this Q1 dynamic before.
In Europe, sales were down 5% in the quarter. In particular, the industrial category was a drag on the region, while academic and governmental demand remained robust. Within pharma, we saw strength in large molecule applications, offset by weaker demand in small molecule applications in our large pharma customers.
Finally, I will review product line dynamics within our Waters and TA brands.
Waters branded instrument sales were down 4% in the first quarter as a result of the previously mentioned headwinds in China and Europe. LC reflected the aforementioned weakness in generic demand in China and the slower budget releases in the US and Europe, partially offset by encouraging strength of our LC business in India. We remain confident in our global LC franchise, which is characterized by instrument and chemistry leadership, a strong installed base and the industry standard chromatography data system.
Looking to mass spectrometry. Our business in Q1 faced modest pressure, but we're seeing improved demand for our high resolution mass spec portfolio. Additionally, we are pleased with the BioAccord launch process and early market development activity. This simple robust fit for purpose LC-MS solution is the first mover in a new biopharmaceutical category that will change the way customers characterize and monitor large molecule therapeutics. Since our launch in January, we've seen a high level of interest from both existing and new customers, systems have been shipped and we are building a robust demo and quoting pipeline. I look forward to updating you further on BioAccord as we progress through the year.
Waters branded recurring revenues, which reflect the combination of service and precision chemistries, grew 4% in the quarter. Recurring revenues were driven by the stability of our large and established installed base of instruments as well as the global strength in our service plans, ACQUITY UPLC columns, bioseparation columns and chemistry application kits.
Turning to our TA product line. We experienced a slow start to 2019 across most geographies and product categories, particularly in Europe due to a very slow Q1 budget release. Earlier this year at Pittcon, we introduced a number of new TA products, including the Discovery thermomechanical analyzer, TMA 450, which is setting a new industry standard by providing information about a material's coefficient of linear thermal expansion, shrinkage, softening and glass transition temperatures.
Returning to the big picture. We remain steadfastly focused on executing against our five point value creation model. As we consistently communicate, we aim to create shareholder value by first holding a leading position -- a specialty position in structurally attractive markets; number two, executing a focused growth strategy, driven by organic innovation; third, seeking opportunities for continuous operational improvement in innovation, channel and operations; fourth, maintaining capital discipline as we shift from being a capital accumulator to a capital deployer; and fifth, operating with a performance oriented culture and management team.
I would like to thank everyone who attended our biennial Investor Day held in February. For those who were not able to attend, I'd like to highlight three key takeaways from that meeting. First, Waters has a very unique global franchise defined by our specialty positioning. Second, the increased investment and product development progress that we've made in the past few years now places us squarely in front of an exciting multi-year product cycle. And third, US tax reform enabled a paradigm shift for Waters in giving us access to our significant global cash flow, and therefore, we will deploy more capital more assertively to growth initiatives, achieve a more optimal capital structure and return more capital to shareholders.
Furthermore, during the meeting, we introduced a couple of additional members of our management team which reinforce the confidence I have in the great depth and quality of our leadership and talent pipeline.
In summary, sales in the first quarter fell well short of our expectations. This result was unexpected, given the momentum we saw in Q4 of 2018 and reflected greater than expected macro impacts in China and Europe as well as the slow release of budgets by key pharmaceutical and industrial customers. For context, Q1 is traditionally our smallest quarter and not necessarily predictive of how the year will shape up. As such, while our guidance now reflects a more cautious view of the macro environment, we do expect improving growth over the course of 2019.
We remain confident in our strong market position, underlying customer activity and the contribution of new product introductions across our portfolio already under way and planned for 2019.
Longer-term, our key growth drivers remain intact, including a global pharmaceutical demand, strength in our Asian markets and an overall robust business model that includes consistent and highly profitable recurring revenues.
With that, I'd like to pass the call over to Sherry for a deeper review of our first quarter financials. Sherry?
Sherry L. Buck -- Senior Vice President and Chief Financial Officer
Thank you, Chris, and good morning, everyone.
In the first quarter, we recorded net sales of $514 million, which was flat against the prior year in constant currency. Currency translation decreased sales growth by approximately 3%, resulting in a 3% decline as reported. During the quarter, sales into our pharmaceutical markets were flat, our industrial category declined 2% and sales into our academic and governmental category grew 4%.
Looking at product line growth. Our recurring revenue, which represents the combination of service and precision chemistries, grew 4% in the quarter, while instrument sales declined 6%. As we noted on our last earnings call, recurring sales during the first quarter of 2019 were impacted by one less calendar day in the quarter, which resulted in a slight reduction in recurring revenues. Looking ahead, there is no year-over-year difference in the number of calendar days during the second or third quarters, but there is one additional calendar day in the fourth quarter of 2019 compared to 2018.
Breaking first quarter product sales down further. Sales related to Waters branded products and services grew 1%, while sales of TA branded products and services declined 8%. Combined LC and LC-MS instrument platform sales declined by 4% and TA's instrument sales declined by 12%.
Looking at our growth rates in the first quarter geographically and on a constant currency basis. Sales in Asia were up 2%, despite a 4% decline in China, while sales in the Americas were flat, with 2% growth in the US. And European sales were down 5%.
Now I'd like to comment on our first quarter non-GAAP financial performance versus the prior year. Gross margin for the quarter was 57% compared to 58.3% in the first quarter of 2018. The lower gross margin relative to the prior year quarter was driven by mix and lower fixed cost absorption.
Moving down the first quarter P&L. Operating expenses increased by approximately 2% on a constant currency basis, and foreign currency translation decreased operating expense growth by approximately 4% on a reported basis. In the quarter, our effective operating tax rate was about 11%, consistent with prior year. Net interest expense was $3.2 million, down about $1 million from the prior year, benefiting from reduced debt levels. Our average share count came in at 72.4 million shares, a share count reduction of approximately 9% or about 7 million shares lower than in the first quarter of last year. This is the net effect of our ongoing share repurchase program.
Our non-GAAP earnings per fully diluted share for the first quarter increased to $1.60 in comparison to $1.59 last year. On a GAAP basis, our earnings per fully diluted share increased to $1.51 compared to $1.40 last year. A reconciliation of our GAAP to non-GAAP earnings is attached to the press release issued this morning.
Turning to free cash flow, capital deployment and our balance sheet. I'd like to summarize our first quarter results and activities. We define free cash flow as cash from operations less capital expenditures and excluding special items. In the first quarter of 2019, free cash flow came in at $158 million after funding $16 million of capital expenditures. Excluded from free cash flow was $7 million related to the investment in our Taunton precision chemistry operation. In the first quarter, this resulted in $0.31 of each $1 of sales converted into free cash flow.
Now I'd like to provide an update on our first quarter activities related to capital deployment, which we categorize into three areas: investing for growth, balance sheet strength and flexibility and the return of capital to shareholders. During the quarter, R&D grew 4% on a constant currency basis. In terms of returning capital to shareholders, we repurchased 3.3 million shares of our common stock for $745 million in the first quarter. These capital allocation activities, along with our free cash flow, resulted in cash and short-term investments of $1.2 billion and debt of $1.2 billion on our balance sheet at the end of the quarter, resulting in a roughly net neutral cash position.
Looking ahead, we remain committed to deploying capital against these three priorities and continue working toward a near-term capital structure of up to 2.5 times net debt to EBITDA ratio. Our current plans are to repurchase approximately $600 million in shares during the second quarter, and consistent with our previous communications, about $2.5 billion for the full year. These assumptions are reflected in our 2019 guidance. We'll evaluate our share repurchase plans over the course of the year and provide quarterly updates.
Turning to working capital. Accounts receivable days sales outstanding stood at 88 days this quarter, up slightly compared to the first quarter of last year due to the timing of sales and currency translation. In the quarter, inventories increased by $33 million in comparison to the prior-year quarter, which reflects some anticipated inventory build due to Brexit related contingency planning and lower than expected sales in the quarter.
As we look forward to the balance of the year, I'd like to comment on our full year 2019 guidance. While we are confident in our market position and new product pipeline, we are tempering this with appropriate caution due to the factors that affected the first quarter. As a result, we are reducing our full year 2019 guidance for constant currency sales growth to a range of 2% to 4% from our prior guidance range of 4% to 6%. At current rates, currency translation is assumed to decrease 2019 sales growth by 1 to 2 percentage points.
Gross margin -- margin guidance for the full year is 58.5% to 59% from our prior guidance of approximately 59%. Our other key assumptions for full year guidance are unchanged: operating expense growth at a rate that is below our sales growth rate; net interest expense of $30 million to $35 million; full year effective tax rate of 14% to 15%.
We anticipate the better than expected tax rate in the first quarter will be offset by higher rates of the remaining quarters of the year. And lastly, an average diluted share count of 68.5 million to 69 million shares outstanding. Rolling all this together and on a non-GAAP basis, full year 2019 earnings per fully diluted share are now projected in the range of $9.05 to $9.25, a decrease from our prior range of $9.20 to $9.45. At current rates, the negative currency impact on full year earnings-per-share growth is expected to be 1 to 2 percentage points.
Looking at the second quarter of 2019. We expect 2% to 4% constant currency sales growth. At today's rates, currency translation is expected to decrease second quarter sales growth by 1 to 2 percentage points. Combining these top line factors with the moderate increase in expenses, we estimate second quarter non-GAAP earnings per fully diluted share in the range of $2.05 to $2.15. At current rates, the negative currency impact on second quarter earnings-per-share growth is expected to be 1 to 2 percentage points.
Now I'd like to turn the call back to Chris for some summary comments. Chris?
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Thank you, Sherry.
As we move through 2019, we will stay focused on our innovation strategy and commercial execution across the business. As I stated before, we did not meet our expectations in the first quarter. We understand the causes and are focused on delivering improved growth over the course of the year.
With that, we will now begin the question-and-answer session. As we are not always able to get to everyone's questions, please limit yourself to one question and one follow-up. And if you have additional questions, please contact the Waters' Investor Relations team after the call. Operator?
Questions and Answers:
Operator
Yes. The first question in the queue is from Ross Muken with Evercore ISI. Your line is now open.
Ross Muken -- Evercore ISI -- Analyst
Good morning, guys. I'd love to dig a little bit more into the China side of things. I mean -- I know you call that the generic piece. Obviously, we know about the -- the major restructuring there. I guess, as you get a sense on timing, how long do you think that will take to kind of unwind itself? And then, relative to the food side as well, one of your key competitors there has talked about sort of disruption for the better part of the last several quarters. (inaudible) obviously you saw a bit of weakness. But I guess how are you thinking about also remit (ph) unwind in that, given sort of the long-term trends still should be pretty favorable in that business?
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Yeah. Thanks, Ross. I appreciate the question, and I agree with your last comment there that the long-term trend in both the food and the pharma businesses is structurally attractive. And we certainly have seen gyration in these markets in the past although as you know China has been a very, very steady contributor to Waters. In fact, nine of the last 10 years here at Waters, China has been a double digit grower. In terms of the unwind, those two factors -- starting with the food side, Asia recall from other market activity, the restructuring of the food, government process is -- is something that really began in the earlier part of last year and had about a one year life cycle. During the course of 2018, we saw relatively stable demand because a lot of the capital purchases on the food side that had been committed at the beginning of the year, we saw mostly hold through the year, and so this particular initiative didn't really affect us that much in 2018 but clearly affected us in the first quarter. We do see the evolution of that process maturing in the first or second quarter here. We do expect some ongoing caution, but over time that's a really important priority for the Chinese government to invest in food safety testing and, as you pointed out, is a market that we all expect to return to growth. From the standpoint of the pharma situation with the 4+7 initiative, which is really a centralized bulk purchasing pilot process, we have seen early in this years some meaningful hold on capital spending, but I will point out that underlying activity remains reasonably robust. We actually had a strong growth in chemistry during the quarter that reflects the underlying testing activity among pharma and generic pharma type of companies that are in particular affected by the 4+7 policy. So all in all, these macro factors definitely hit us harder than we expected, and as a result of that, we have lowered expectations as reflected in our guidance. But we do expect that to moderate over the course of the year, expect modest improvement and a return to growth, albeit more modest growth in China than we're typically accustomed to in this fiscal year, but certainly have a lot of faith in the strength of our team and our market share position that has been always a source of strength, and we expect will continue to be so looking forward.
Ross Muken -- Evercore ISI -- Analyst
And then maybe just in terms of like the execution cadence, I mean -- looking at kind of Q4 now, knowing Q1 -- I mean, it was obviously a pretty substantial outperformance of some businesses. TA had huge sequential uptick in Q4 from Q3 and then obviously we saw it down-tick in Q1, and a bit of that also in the Waters instrument business. I guess as you just think about sort of whether we had any pull-forwards or just how the sort of the seasonality of the business is shifting over time, I guess two years in a row we've had this kind of strong Q4, weak Q1 dynamic. It's happened before in the past for Waters. But I guess how much of that is sort of in your control, how much is out of your control, how much -- when you saw the numbers, as you looked at it, did you sort of stare and say, wow, this happened once again, I mean, how much can we control of it. I'm just trying to get a sense of what's in your hands versus what's out of your hands and then and how this business is kind of performing on at least a sequential basis.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Yeah. Thanks. A fair question. And certainly as you point out, we saw a lot of strength across the board in Q4 and frankly based on that confidence and an assumption of more stable market conditions heading into the year, had -- had kind of a normal outlook for the first quarter. And we did see the down-tick, as you point out, the seasonality effect and this pattern of a slow start to the quarter, in particular as it relates to the release of budget by pharma companies and industrial companies is something we've seen and in the example of last year and even in 2017, we saw strength at the end of the year. And so at this point, as we look out over the course of the year, we certainly expect that the budget release cycle will lighten up and we'll get the benefit of expected planned customer spending, particularly in pharmaceuticals and in major industrial customers. And I guess the other major controllable from our standpoint is just the -- the great progress we're making in product development and the increasing impact we expect from the product launches that we have new in the market and that are coming over the course of the year on the Waters' side that is headlined by the -- by the BioAccord launch which as I pointed out in my prepared remarks, is going well, in its early stages, from the standpoint of training and demoing and market development. And then there's a lot more coming on the Waters' side, including new entrants in the high resolution mass spec technology category, more LC technology and more MS technology as well. And on the TA side, we're really in a sweet spot relative to the product cycle on thermal. We have more technology coming on rheology and we have a wave of accessorization which often is a great complement to the core instrument development. So I think we feel about as good as we can possibly feel about where we sit in front of the product cycle still. And certainly the macro effects of Q1 are disappointing and were unexpected, but they do not diminish in any way our enthusiasm for what's happening on the innovation side here.
Ross Muken -- Evercore ISI -- Analyst
Thanks, Chris. Appreciate the color.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Thanks, Ross.
Operator
Next question is from Doug Schenkel with Cowen & Company. Your line is now open.
Doug Schenkel -- Cowen & Company -- Analyst
Hey, good morning. I want to start with a high level, but I think a really important question. For many years you guys have been running what was the premium growth name in the tools group. Waters consistently delivered above peer group growth. But in the last 18 months, Waters has delivered below peer growth -- peer group growth and management -- your ability to forecast has not been as solid as it was in the previous few years. What's your diagnosis for this at this point and what's being done to remedy this? Because, yes, it was a disappointing quarter, but beyond that, this is the first quarter where we've been disappointed at the top line over the last 18 months. So I'm just wondering what you're doing to improve visibility and what your diagnosis is of what's been below peer growth over the last several quarters.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Sure, Doug. Thanks for the question. Appreciate it. I think, stepping back and looking at the big picture, this is a great franchise. Waters is a very well established and very durable business, and really a lot of the factors we've seen in a couple of individual quarters, of course, including Q1, are very unique to the particular mix of our business. The China business, for example, is 18% of our worldwide revenue, and as you know, the mix within China is uniquely focused on pharma, with an over index on generic pharma and food. And so some of the -- some of the macro effects, given that we're a more specialty oriented company, certainly have the potential to hit us in a unique way. Relative to product cycle, I think that's been a big area of focus for me. Personally, it's really my number one area of focus, and there's some aspects of the portfolio that we weren't where we needed to be, and we've invested a lot and worked hard in product development to shore that up. And as I mentioned in the previous question, we're excited about what's ahead relative to the product cycle. So we really feel like in that way we control our destiny and there are better things to come as that product cycle matures. And obviously, we're doing all we can to gain visibility into some of these end market macro factors to improve the forecasting, to make sure that we can see with reasonable certainty what's ahead. But like I said, Q1 was -- was an outlier for us. It was -- it was something that coming off the end of the year last year was not something we expected to see and so we're just reacting to the changing environment and making sure that we stay very, very focused on delivering on our product pipeline and delivering on our sales execution. And as I sort of alluded to before, yes, Q1 was soft, but it's certainly not deferred -- that deferred focus or the conviction in the great opportunities that lie ahead for Waters.
Doug Schenkel -- Cowen & Company -- Analyst
Okay. Thanks for that, Chris. And maybe just more of a near-term timing question. Recognizing you've walked through what happened in the quarter a couple of times here, just to go back to the point you made about some of this being a function of delays and the release of capital budgets at biopharma and industrial customers. It doesn't seem like your Q2 guidance treat these delays and the release of capital budgets as a transitory issue where you recover some of that lost Q1 revenue in Q2 just because of timing. Is that right? And if so why? I mean, essentially what I'm trying to get at is if this was a transitory issue whether or not you've seen a recapture of at least some of that revenue three weeks into the second quarter.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Yeah. Certainly -- certainly, Doug. We're not -- we don't give updates on a weekly or monthly basis, but I would just say that the philosophy on the Q2 guide is that we don't expect all the factors that affected us in the Q1 to just spring back right as we get into April that, that these budget release cycle dynamics can take time to play out, that the macro environment which we're watching closely and studying and learning more about again doesn't just spring back in one quarter. So I think the Q2 guide really reflects that moderated outlook that we've made for the rest of the year. And obviously it's our job to do the very best to deliver the most we can within that.
Doug Schenkel -- Cowen & Company -- Analyst
Okay. All right. Thanks, again.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Thanks, Doug.
Operator
Next question is from Tycho Peterson with JPMorgan. Your line is now open.
Tycho Peterson -- JPMorgan -- Analyst
Hey, thanks. I want to start with capital deployment and maybe following up on Doug's question earlier about some of the volatility you are seeing. As you talked about you repurchased 3.2 million shares during the quarter, can you just talk to the thought process here given the underlying volatility, maybe the lack of visibility, why is this the right time to be buying back stock? Why not wait until this stabilizes a bit? And then can you also talk to the degree with the tempered outlook if you're considering any cost actions this year?
Sherry L. Buck -- Senior Vice President and Chief Financial Officer
Yeah. Hi. I'll start off on this question. As far as our capital deployment, maybe just to put some context around it, it's really going back to our strategy around our capital structure after tax reform where we had access to all of our global cash. And so from a capital structure standpoint, we are working toward 2.5 times net debt to EBITDA leverage ratio, and during the first quarter redeployed about $750 million and our guide for Q2 is about $600 million. And as we -- as we look at this, we look at our capital deployment opportunities in three buckets: investing in the business and our balance sheet management and then return to shareholders. And we have the capacity and flexibility to return capital to shareholders while still investing in our business at the appropriate levels and for other opportunities that may come along. So despite the weaker Q1, we are committed to continuing on our capital allocation path. And I think the other question you had, Tycho, was around our operating expenses. I think as you look at Waters, we have been very disciplined historically around managing our expenses. But again, this is a point in the quarter and we will still continue to invest in R&D and other critical areas of growth for us and balance our different capital allocation levers. But during the quarter, we're also maintaining costs and we'll continue to do that as we manage through the year.
Tycho Peterson -- JPMorgan -- Analyst
Okay. And then one for Chris. You touched on a number of the pharma components. I'm just curious if you can disaggregate how much of the softness was the China generic impact versus kind of the global pharma budget release dynamic. And to be clear, can you just clarify what your expectations are for pharma for the remainder of the year? Do you expect them to get back to kind of low single digit or mid single digit growth?
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Yeah. I think our confidence in the pharma business for the year is still positive and we expect to work our way back into what might be more traditionally normal type growth rates over the course of the year. As I've mentioned in the prepared remarks, the biopharma business was strong in the quarter and that continued the pattern that we've been seeing. We've been executing well in biopharma and we continue to benefit from all the innovation in that space and obviously we've made incremental investments in that space ourselves. The hit in the quarter on pharma was really around the small molecule business, and generics is an important part of that. We're a leader in LC based testing for QA/QC. As you know, the vast majority of our pharma revenue is oriented to late stage development in QA/QC, and so when a sector like generic gets hit, we tend to feel the effects. And as I mentioned, China is a slightly bigger mix of generic and its pharma business than -- than our global average and so we saw a particular effect there. The thing that we realize in this business is that that small molecule business, particularly generics business, that's where market share is the stickiest and it's where also we have sort of a good read on the ongoing activity in that installed base based on our chemistry business which remains solid. So I think we have confidence that -- that capital purchasing will come back over time over the course of the year, both within China as well as in -- within other parts of the business. Our top pharma accounts in Western Europe and in the US were soft in the first quarter based on the kind of budget release cycle. But that's something that traditionally does come back over the course of the year. So we feel generally that the pharma trends outside of those specific situations are intact, and so we're just staying very, very focused on taking advantage of those growth opportunities here over the course of the year.
Tycho Peterson -- JPMorgan -- Analyst
Okay. Thank you.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Thanks, Tycho.
Operator
Next question is from Derik De Bruin from Bank of America Merrill Lynch. Your line is now open.
Mike Ryskin -- Bank of America Merrill Lynch -- Analyst
Hey, thanks for taking the question. It's Mike Ryskin on for Derek. I want to follow up on something that was brought up earlier regarding the volatility in the quarter. Just given some of the optimism and the tone at your Analyst Day in late February, it seems like there were a few surprises across their business. Is there anything that's changed in the underlying fundamentals of any of these markets where there's reduced visibility now versus prior levels? And then I got to follow-up.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Yeah, thanks, Mike. Just in terms of the volatility in the quarter and the Investor Day comment you made, our focus at the Investor Day was certainly on the bigger picture and the overall strategy of the Company, particularly the innovation story and the strength of our management team, and really that we were clear at the meeting that those were the issues we were focusing on. And certainly, as you know, our quarters tend to be back-weighted. We generate approximately half of our sales in the last month of the quarter. And so certainly March was unexpectedly soft, and some of the volatility we saw related to some of the macro and budget release factors was particularly pronounced in the month of March. And so when we look at the overall pattern of the quarter and some of those factors, we really don't think there are fundamental underlying changes in the attractiveness of the market segments we participate in or in the strength of our franchise. And we're just trying to stay very steady and focused to understand these unique factors to manage through them and to continue to keep our focus on our strong conviction of the growth that's ahead of us in these areas.
Mike Ryskin -- Bank of America Merrill Lynch -- Analyst
Appreciate that. Thanks. That was going to be one of my follow-ups, so some of the pacing or the progression through the quarter. One last quick one was, any change in sort of your expectations for contributions from new products over the course of the year? I mean, typically you think you'd want to launch into strong or at least improving end markets, and given some of the choppiness you called out and the macro and then China, does that change your outlook at all?
Christopher J. O'Connell -- Chairman and Chief Executive Officer
I think the contribution for new products is definitely a hallmark of 2019, and certainly, as we've thought about this from the very beginning, has always been something we saw developing over the course of the year, strengthening in the back half of the year, reflecting that technology that's already in the market -- new technology like BioAccord is more of a market development game and it takes time especially with a big ticket purchase that needs to be worked through budgets. But also we have incremental technology coming in in the second and third quarters that will also help create that effect. And so I think -- I think our new product contribution story is still very much the way we thought it would look as we -- as we came into the year and something that gets greater and greater traction through the year and then into the future.
Mike Ryskin -- Bank of America Merrill Lynch -- Analyst
All right. Thanks, Chris.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Thanks, Mike.
Operator
Next question is from Brandon Couillard with Jefferies. Your line is now open.
Brandon Couillard -- Jefferies -- Analyst
Thanks. Good morning. Chris and Sherry, I want to come back to the 2Q guide if we can, and it would be great if you could just elaborate on whether or not you expect Europe and China specifically to return to growth in the second quarter especially given this is kind of the third quarter in a row now I think where Europe's been down. And then it would also be great if you could help us with kind of what you're expecting for out of Europe for the full year.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Yeah, I'll just make a quick comment and then let Sherry add to it. I think we've taken a more cautious guide outlook for sure. And -- but with that, we do expect modest improvements in both those -- both those markets. We think Europe and China remain structurally strong and notwithstanding some of the macro headwinds, are focused on some of that underlying activity. Certainly not forecasting it to be where we thought it would be coming into the year, but we are expecting stepping back toward growth over the course of the year. So Sherry, I don't know if you want to say more about the guide.
Sherry L. Buck -- Senior Vice President and Chief Financial Officer
Yeah. I think you covered that as part of the geographies, Chris.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Great.
Brandon Couillard -- Jefferies -- Analyst
Thanks. Then, maybe for Sherry, how much of the guidance reset in terms of the organic growth for the year was TA versus Waters specifically? And then could you speak to exactly how orders trended in the first quarter? I know you kind of spoke qualitatively to demo and quote activity, but would be curious if the book to bill was north of 1 (ph) actually in the first quarter.
Sherry L. Buck -- Senior Vice President and Chief Financial Officer
So as far as our full year guide, as we looked at the factors that impacted us in Q1 and our results, the lowering of our guide was mainly due to our overall lower volume and lower expected revenue as well as our miss in Q1. Probably won't get as specific as breaking it down between Waters and TA. We've really looked at it kind of as our whole portfolio as we put the guidance together. And do you want to comment on the orders, Chris?
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Yeah, I would just -- we don't want to get into too much detail on -- on the order book versus sales, but would comment that we did carry some incremental backlog into the second quarter.
Brandon Couillard -- Jefferies -- Analyst
Okay. Thanks.
Operator
Next question is from Daniel Brennan from UBS. Your line is now open.
Daniel Brennan -- UBS -- Analyst
Great. Thank you. Chris, first question, I wanted to go back to China. Could you just elaborate on the 4+7 policy, maybe its impact on your business and how long you think this change in how China is operating will persist?
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Yeah, just a little bit more on the 4+7. This is something that we and the market became more aware of later in the year. It was really kind of in October, November, December kind of awareness of this particular pilot program for more centralized bulk purchasing of generic medicines within four major cities and seven other provincial type cities. As I sort of alluded to earlier in the call, this particular initiative did not affect our sales in 2018. We saw a very typical year end type purchasing that reflected more of a status quo type situation. Certainly, as we got into the quarter, it became more clear that even though the underlying utilization of the installed base was there -- as I spoke of earlier, we had strong chemistry sales in China in the quarter, that capital purchasing was being put on hold much like many of the capital investments that the companies affected by this particular initiative were experiencing. So I think we don't have perfect visibility into how quickly we can recoup some of that capital investment, and that's why we've moderated our guidance for the quarter and for the year. As -- as I've alluded to earlier, we have a really strong market position and a really strong team in China that's consistently delivered in a variety of operating environments, and so while we have lowered our expectations, we do expect some modest improvements over the course of the year.
Daniel Brennan -- UBS -- Analyst
Great. And then -- and then maybe kind of more of a big picture question. I know (inaudible) comparing and stronger results from some of your peers, and obviously you have a different mix of business. But can you just speak to the strategy -- part of your five point strategy, being like a leader in your strategically focused but narrower markets. Does that -- is that opening up Waters to any share loss toward larger players that could use maybe their breadth to bundle and kind of how you think about that in terms of your strategy toward investment and cap deployment? Thank you.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Yeah. In terms of the question of focus versus breadth, I think we -- we sort of have a high level of conviction in our focused specialty oriented strategy and we don't really see any evidence that we have difficulty competing based on a more limited product line. We think that Waters is better served with a focus on depth of application expertise in more narrowly focused areas within biopharma and pharma and small molecule pharmaceuticals as we talked in depth at the Investor Day. We've made significant investments in the -- in the biopharm side of the business over time and we've actually gained share steadily over the last 10 or 15 years and reference you to those charts that we presented at our Investor Day. And of course on the small molecule side, which is the one that experienced the volatility in the quarter because certainly in the large molecule side we had another strong quarter. On the small molecule side, we think that those factors are a little more specific in nature related to the macro factors that that we outlined and we, looking at our market share data, particularly in LC, we see a very strong and stable and sticky market share position and I think as everyone knows, certainly one quarter -- that type of situation doesn't move around a lot. So we're confident that the effect we saw on the small mole business in particular in Q1 are really related to these market factors and we're just very, very focused on continuing to invest in our technology position and our application science to be the very best company in the specialty manner that we set out to be.
Daniel Brennan -- UBS -- Analyst
Great. Thank you.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Thank you, Dan.
Operator
Next question is from Sung Ji Nam from BTIG. Your line is now open.
Sung Ji Nam -- BTIG -- Analyst
Hi. Thanks for taking my question. Just a two-part question on your -- on the Waters instruments. So for BioAccord, you talked about strong early market development activity. Would you be able to speak to kind of where you're seeing that? Is that global or is that in certain geographic regions? And then secondly, would you be able to break out kind of what your outlook is for Waters instrument growth this year and how much of that contingent on new product sales -- the new product cycle versus the existing portfolio benefiting from improving end market outlook? Thank you.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Sure. Thanks, Sung Ji. Yeah. So the BioAccord launch has been really -- really exciting. We officially launched the product at the well characterized pharmaceutical conference and really a lot of the early activity we saw was in some of the developed markets, US and Western Europe, in particular. But one of the things that happened more mid-quarter was we had a significant launch in China and a -- hundreds -- literally hundreds of customers attend a really robust and kind of high energy launch event that led to a variety of customer relationship developments and getting people into demo type situations. I used the word market development because this is a -- this is really a new category for regulated laboratories for high resolution mass spectrometry and a compliant package to really lead us into a method/process development and ultimately QA/QC for large molecules in the MAM space. And that's obviously kind of a new direction for the market. We continue to do all the right things to develop that market. We obviously have taken orders and shipped some units, although we never really expected to do all that much of that in the earlier part of the year. And so I'm really looking at metrics around MQMLs or marketing qualified leads as well as the demoing activity. Another key aspect of our launch readiness is to place -- is to forward place the BioAccord system in our own demonstration labs at an accelerated pace compared to what we've done historically with other systems and that's been really effective because it's brought many more customers into the demo phase which can ultimately accelerate quoting and ordering. And so where it's all -- it's all systems go, and we continue to -- we continue to press on that opportunity and then by the way we've always thought along -- along with the launch, it creates an opportunity for our sales folks to have a broader conversation about Waters and the collateral positive impacts of having new technology and how that affects the rest of our product line. Interestingly enough, it's had a positive effect on our overall high resolution mass spectrometry portfolio. So -- anyway, that's just one platform and certainly there are others coming, and as you allude to, something that will have a positive effect on our instrument performance over the course of the year are those new product launches. So I don't want to get into too many specifics around the exact dollar amount or percentage increment that we expect from new products over the course of the year. But we do expect that contribution to strengthen over the course of 2019.
Sung Ji Nam -- BTIG -- Analyst
Great. Thank you.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
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. Two questions for you. First Chris, you've talked quite a bit about end markets and geographies. I was wondering if you could -- if you had any thoughts as it relates to share and your share and if you're seeing any impact on your share in addition to impact from the markets. Do you think you're gaining or potentially losing any more share than maybe you have been over the last several quarters? And then just following up on some earlier questions, can you explain to me again what gets better in the second quarter versus the first quarter as obviously you're going to get a little bit more difficult comps in 2Q? But it sounds like that the pressures in China -- I mean, Europe are expected to largely continue. So I'm trying to still figure out what exactly gets you to the 2% to 4% organic growth versus the flat here in the first quarter. Thank you so much.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Sure, Steve. Thanks. Yeah. From the standpoint of market share, on the first part of your question I -- as I sort of alluded to before, when you break it down into the various technology categories where we have good market share data, we feel that our market share in our core LC business, our core TA business is very solid, and certainly all the data coming out of the 2018 market calculations reinforce that and backed up as well by import data in countries that capture that kind of information. We've acknowledged here for some time we've had some pressure on the mass spec side of the business, which is why we've invested in differential strategies because we do believe in the growth and the potential of the mass spec product line and are excited about what's in our portfolio. So really from a market share standpoint, I don't have any new information from the quarter other than what the data said at the end of -- at the end of last year and the overall confidence in the durability of our market share franchise in those categories. In terms of what gets better in Q2, some of the factors that I alluded to -- we do expect a softening of some of the restrictive factors on budget release, particularly in the pharmaceutical sector, to take place over the course of the year and have some impact in Q2. We certainly expect to increase the impact of some of the new product launches that we have in Q2 versus Q1. And certainly, there are, while we don't expect something a country like China to completely bounce back in one quarter, we are looking to improve upon our performance in China. And there are some small incremental positives such as the lowering of the VAT tax that's happening this month in China, which -- which ought to create some additional incentives for capital purchases among key customers. So really it's -- it's a composition of a number of those factors, and we're looking to improve upon every one of the factors that affected us in Q1 and then continue to improve over the course of the year.
Steve Willoughby -- Cleveland Research -- Analyst
Good. Chris, can I sneak one more question in there? I appreciate that answer. You commented you won't -- don't want to get into the impacts this year from new products. But maybe you could just give us some context since the BioAccord is now out there. You alluded to a number of other new products coming this year. While I'm sure you don't want to launch those new products on today's conference call, can you just give us some feel or perspective on the other products you have come in and their potential significance versus the potential significance of the BioAccord, meaning, are the other products you're going to launch later on this year potentially a bigger deal or a smaller deal relative to the BioAccord?
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Yeah. Fair question. And I would just say BioAccord has been the headliner simply because of the timing and also the strategic importance of that platform and both the market segment is targeted at as well as the conviction we have in solution. The other one that we haven't specifically mentioned but you're well aware of, Steve, is the cyclic ion mobility high resolution mass spectrometer that we continue to expect to launch at the ASMS meeting coming up here shortly. So we're really excited about that, and obviously we are going to get a benefit of that in the second half of the year. And what I'll just say on the other product launches that will provide details on as we move along is that there are a number of what I might call more iterative technologies -- if BioAccord and cyclic IMS are new platform technologies, then we have a variety of other iterative technologies in both our LC and our mass spec portfolio, which will benefit us in particular because those technology categories and product families are well accepted platforms in the market that can -- they can benefit from the refresh as we have them. So I'd rather stop there from the standpoint of describing the new product introductions, but everything we said at Investor Day relative to the number of launches and the excitement we have around the launches is very much in front of us here.
Steve Willoughby -- Cleveland Research -- Analyst
Thanks very much.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
I think we probably have time -- we're at the hour, but we'll take one more final question and then wrap it up?
Operator
Okay. The final question for today is from Jack Meehan with Barclays. Your line is now open.
Jack Meehan -- Barclays -- Analyst
Yeah, thank you. Chris, I just want to go back to Europe. I appreciate with Brexit, maybe there was some forward-purchasing. But logically what was the feedback you were hearing from customers related to that? It's just -- the reason I ask is it's not something that we've heard from a couple of your peers and I think the prevailing logic was there might be actually some stocking related to Brexit. So just -- again, the feedback you're hearing from customers would be helpful.
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Yeah. I mean, related to Brexit, we certainly didn't see any unusual stocking activity whether it was over the course of last year or early this year. And obviously, the Brexit still made has been kicked down the road to the October time frame and we continue to develop our contingency plans for the eventuality -- the potential eventuality of a hard Brexit. But I think what we saw in our business was a softer demand in particularly northern Europe in and around the UK and in countries that are the most active trading partners with the UK. And a lot of that really related to just the general caution of budgets in a new year where some of those macro clouds continue to hang. We obviously see different dynamics in different parts of Europe and actually saw better performance in southern Europe and some other parts that were maybe a little bit away from the Northern European area. So Europe's been a very strong market for us historically. It's gone through some -- some bumps here in the last quarter and the last year but we have a lot of confidence that the customers in those areas will be there for the long term, and we're just trying to stay very focused on the underlying activity which as I mentioned in my prepared remarks is actually positive relative to demoing and quoting type of activities particularly in pharma. So -- anyway, we're just going to stay very focused on trying to get that business back and return Europe to a growth profile over the course of the year.
Jack Meehan -- Barclays -- Analyst
Okay. And then just as a final -- what was growth in India in the quarter? And can you talk about the economic activity that you're seeing there?
Christopher J. O'Connell -- Chairman and Chief Executive Officer
Sure, yeah. For a final comment, that's a good -- a good place, again, because India was obviously a very dynamic situation over the last year. But India -- we're seeing all the signs that we hoped and expected to see coming into the year of stabilizing business. As I alluded to in my comments, India grew solidly in the mid single digits and had even better performance in LC and in pharma. So we actually saw strength in pharma and strengthen in LC in India, and that's -- that is on the heels of what was actually a pretty good fourth quarter as well. The fourth quarter of 2018 was our second highest quarter ever in India and had a tough comp, but we rolled into this year with continuing steady demand returning on the instrument side to complement the business on the chemistry and service side. Obviously, India is not out of the woods yet as it relates to political questions. As you know, the election cycle is under way and while most people expect the stability of a Modi government and that's certainly our hope as well, we're just being appropriately cautious as we kind of work through that. But the fundamental underlying health of the pharma sector and of our business appears to be on the rebound there in India and we're gratified by that. So thank you very much for that question and thanks for all of your questions today. In conclusion, we are focused on delivering improved growth over the course of 2019, headlined by improving instrument purchasing dynamics, continued growth in our recurring revenue and the growing contribution from new products. As always, we are committed to delivering reliable earnings performance based on organic growth and supported by our enhanced capital deployment program. On behalf of our entire management team, I'd like to thank you for your continued support and interest in Waters. We look forward to updating you on our progress during our second quarter 2019 call, which we currently anticipate holding on July 30th, 2019. Thank you, and have a great day.
Operator
This concludes today's call. Thank you for your participation. You may disconnect at this time.
Duration: 67 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
Ross Muken -- Evercore ISI -- Analyst
Doug Schenkel -- Cowen & Company -- Analyst
Tycho Peterson -- JPMorgan -- Analyst
Mike Ryskin -- Bank of America Merrill Lynch -- Analyst
Brandon Couillard -- Jefferies -- Analyst
Daniel Brennan -- UBS -- Analyst
Sung Ji Nam -- BTIG -- Analyst
Steve Willoughby -- Cleveland Research -- Analyst
Jack Meehan -- Barclays -- Analyst
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