Q3 2019 Earnings Call
The conference call. This conference call is being recorded if anyone has any objections you may disconnect at this time and it's now my pleasure to turn the call over to Mr. Bryan Brokmeier head of Investor Relations. Please go ahead Sir.
Thank you operator, good morning, everyone and welcome to the Waters Corporation third quarter earnings Conference call before we begin I will cover the cautionary language. During the course of this conference call. We will make various forward looking statements regarding future events or future financial performance of the company.
In particular, we will provide guidance regarding possible future results of the company for the fourth quarter and full year 2019.
We caution you that all.
Such that they.
Events are only our present expectation.
And that actual events or results may differ materially more 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 30.
Onest 2018 in part one under the caption risk factors and the cautionary language included in this mornings press release and 8-K.
We further caution you that the company does not intend to update its or any of its predictions or per 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 February .
Fourth 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.
And 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 mornings press release.
Unless stated otherwise references to quarterly results, increasing or decreasing our in comparison to the third 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 our 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.
Thanks, Brian and good morning, everyone. Thank you for joining us today, along with Brian Brockmeyer, joining me on this morning's call as Sherry Buck waters, Chief Financial Officer.
During today's call I will provide an overview of our third quarter operating results as well as some broader commentary on our business.
Sherry will then review our financial results in detail and provide comments on our fourth quarter and full year 2019 financial outlook.
We will then open up the phone lines to take your questions.
Briefly reviewing our operating results for the third quarter revenue grew 1%, while adjusted earnings per share grew 11%.
With one meaningful exception the third quarter played out largely as we expected that exception was the U.S., where we saw unanticipated late quarter softness, which led to a shortfall against our overall revenue expectations for Q3.
At the time of our last earnings call the strength of our US performance in Q2 as well as the growth. We saw during the first month of Q3 reinforced our prior expectation that we would see positive second half trends in the U.S market.
However that momentum yielded to a more cautious tone from our us pharmaceutical customers as the quarter developed resulting in inconsistent capital purchasing in the second half for the quarter.
Outside of the US Q3 played out largely as we expected with a continuation of mixed market conditions in China, and Europe that we've seen throughout the year.
Stepping back to look at 2019 through the first three quarters. It is clear the challenges in the global macroeconomic environment, including market effects of government policy changes in China lingering European political uncertainties and mix sentiment in the us have led to a more variable set of end market.
Conditions than we expected coming into the year.
Customers in key markets, we serve has simply been more cautious in their capital purchasing during 2019 and more willing to delay spending quarter to quarter.
One particular market impacted by these global macroeconomic challenges during 2019 has been small molecule pharmaceutical LC applications.
This market, where waters has unique focus appears to be in a slower growth environment.
With ongoing stability and recurring revenue, while simultaneously seeing modest pressure in instruments system sales.
Certainly recent trends in India, and China play a central role in this dynamic.
As does use and European volatility in recent quarters.
That said, we're confident in our leading technology portfolio and strong market position as well as the long term growth prospects of the small molecule LC market.
Aside from the macro environment waters has been diligently focused in 2019 on an exciting series of new product introductions that is positioning the company for a robust multiyear product cycle.
While the impact of these new products has not been highly visible on the revenue line yet market development activities are progressing well and we're very pleased with early customer reactions.
Ill cord made solid incremental progress in Q3 relative to demo quoting in sales pipelines.
In the third quarter launches of the cyclic imus snapped excess and our two new tandem quad mass spectrometer years have all been very well received.
We expect to see an increasing sales contribution from all of these key products in Q4, 2020 and beyond.
We remain very positive on the long term attractiveness and durability of the markets. We serve in particular, our recurring revenue consisting of precision chemistries and servicing of our instruments as remained steady.
Indicating consistent underlying utilization of our install our strong installed base of instruments.
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 increased 3% for the quarter and year to date with strong growth in China, and India, partially offset by weakness in the us in Europe .
As I stated earlier, the global market for small molecule pharmaceutical applications is currently experiencing a more modest growth environment.
Conversely, the global large molecule market remained robust in Q3 and year to date and we have sustained consistently positive results supported by our focused investments in this category Cross L.C.L. CMS and Chemistries.
Sales to our worldwide industrial category, which includes the materials science food and environmental markets were flat in the quarter with strength in material science offset by global weakness in food testing markets.
Furthermore, our industrial category remains solid in the us but soft in Europe .
Year to date, our worldwide industrial category sales were down 2%.
Sales to our academic and governmental category were down 3% in Q3 is strong growth in European Biomedical research and materials research applications was offset by weakness in the Americas in China markets, most notably the China Foods segment.
Year to date, our academic and governmental category was flat as growth in Europe , and the US has been offset by declines in China.
Next I will review our sales performance by geography at the corporate level.
Asia, our largest region in terms of revenue grew 7% in the third quarter.
China grew 2%, which as I noted earlier was driven by strong pharmaceutical growth, partially offset by food market weakness and has been further influenced by the broader economic slowdown in China.
Looking specifically at the China pharmaceutical market generic customers were cautious at the beginning of the year, while they digested the impact of the four plus seven program.
However, this caution is given way to a return of capital investment.
Bidding in the second phase of the four plus seven program occurred in September and work closely following the subsequent developments.
We continue to be encouraged by the pragmatic tone of our customers through this process as well as the programs increasingly stringent quality requirements, which together support our initial observations that the larger pharma companies with higher market shares will be the most likely to benefit from four plus seven.
Furthermore, we are well positioned in this regard because within the Chinese generic pharmaceutical market, we have a higher concentration of sales to these larger companies than we do to smaller companies.
As mentioned last quarter, we believe that four plus seven will result in rising generic prescription volume in China overtime, creating a positive tailwind for instrument demand.
In India solid growth was driven by the continued strength in the pharmaceutical market, partially offset by industrial softness elsewhere in Asia. We continue to be pleased with our business in Japan, and Korea, where we expect ongoing stability.
Turning to the US we're disappointed with the 4% decline in the third quarter.
US pharma reverse the improving trend we saw in Q2, as our largest pharmaceutical customers as well as generics companies slowed spending across both LC and LC CMS instruments during the second half of the third quarter.
On the other hand, Q3 sales to our us industrial customers grew 5% year over year.
Overall, the Americas declined 5% in the third quarter, including expected weakness in Latin America due to the ongoing political instability in both Mek, Mexico and Brazil.
Year to date, the US grew 2% slightly ahead of 2018 Q3 year to date results, while total Americas in 2019 year to date have been flat.
Influenced by weakness, we've seen in Latin America throughout the year as well.
In Europe sales were flat in the quarter with a nice rebound in eastern Europe that we expected offsetting a slight decline in western Europe overall European results continued to be impacted by cautious big pharma capital spending as well as weakness in food and environmental markets.
Finally, I will review product line dynamics within our waters in PA brands.
Waters branded instrument sales declined 5% in the quarter LC instruments declined slightly consistent with broader market LC trends that we spoke about earlier in our commentary.
In L.C.M.S., our Q3 business was impacted by the week Chinese food market as this market has a high concentration of our tandem quad L. CMS systems.
Outside of the China food market.
Our tandem quad portfolio performed well in Biopharma R&D followed following the early third quarter launch of our Zibo TQS Kronos and a next generation version of the popular Zibo TQS micro.
We're also off to a good start with the launch of our cyclic Imus and scenario excess systems.
Commercialization of our bio court system continues to track positively as market development activities support a meaningful multiyear revenue ramp.
Overall in L. CMS systems, we are excited about our investments over the past several years in new instruments, Chemistries and informatics targeting high growth applications such as Biopharma.
And we believe that we're now poised for improving results driven by our enhanced and extended portfolio.
Waters branded recurring revenues, which reflect the combination of service and precision Chemistries grew 5% in the quarter.
Chemistry strengthen our pharmaceutical business was partially offset by softness in our industrial and academic and governmental categories.
In particular growth is strong and consistent within our application hits, you plc columns and bio separation columns and we're seeing good uptake of our focus branded H. plc columns.
Turning to our Ta product line sales grew 5% in the third quarter with T.K. instrument system sales up 7% in service sales up 1%.
We are encouraged by solid ongoing growth in our thermal and micro Keller imagery product lines.
Im proud of our team, which has maintained great focus through a period of leadership transition our new president of Ta John Pratt is bought as broad great New energy and leadership that will enable ta to build on its historic success to make even more significant contributions to waters overtime.
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 to executing a focus growth strategy driven by organic innovation.
Three seeking opportunities for continuous operational improvement in innovation channel and operations.
For maintaining capital discipline, as we have shifted from being a capital accumulator to a capital deployment.
In five operating with the performance oriented culture and management team.
To recap the third quarter, our assumptions in China, and Europe played out as we expected while we experienced volatility in the us, particularly among our largest pharma customers.
While the macro environment in 2019 has been more challenging than we expected our concerted investment in new product development is yielding a strong cadence of new products that should increasingly contribute to results over the coming quarters in years.
Looking to the fourth quarter, while we continue to focus on improving our sales growth and are prepared to fulfill higher demand. We are modeling our fourth quarter consistent with year to date trends Sherry will cover the details of our guidance during her remarks.
With that I'd like to pass the call over to Sherry Buck for a deeper review of the third quarter financials and our outlook Sherry.
Thank you, Chris and good morning, everyone.
And then third quarter, we recorded net sales of $577 million, an increase of approximately 1% and constant currency.
Currency translation decreased sales growth by approximately 1%, resulting in flat sales as reported.
In the quarter sales in fact pharmaceutical market grew 3%.
Sales and to our industrial market were flat well academic and governmental markets declined 3%.
Looking at product line growth I recurring revenue, which represents the combination of precision chemistry product and service revenue grew 5% in the quarter instrument sales declined 3%.
As we noted last quarter, there was no year over year difference and the number calendar days during the third quarter, but there is one additional calendar day in the fourth quarter at 2019 compared to 2018.
Breaking third quarter product sales down further sales related to waters branded products and services were flat.
Sales of TV branded products and services grew 5%.
Combined LC and LC Amat instrument platform sales were down 5% 98 instrumentation system sales were up 7%.
Okay, and our growth rates in the third quarter geographically and on a constant currency basis sales in Asia were up 7%, China growing at 2%.
Sales and Americans were down 5%.
Down, 4% and European sales were flat.
Now I'd like to comment on our third quarter non-GAAP financial performance versus the prior year.
Gross margin for the quarter with 58.2% about flat compared to 58.3% and the third quarter 2018.
Moving down the third quarter piano operating expenses were about flat year over year on a constant currency basis and benefited from lower variable expenses as compared to the prior year.
In addition, foreign currency translation decreased operating expense growth by approximately 2% on a reported basis.
And the quarter, our effective operating tax rate was about 16%.
Year to date, the tax rate is approximately 15%, which is inline with our full year guidance.
Net interest expense was $8 million and increased about $6 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 66.8 million shares share count reduction of approximately 13%.
Got 10 million shares lower than in the third quarter of last year.
The net effect of our ongoing share repurchase program.
Our non-GAAP earnings per fully diluted share for the third quarter increased to $2 in 13 cents comparison to $1.92 last year and increase of about 11% driven by our ongoing share repurchase program and lower variable expenses as compared to prior year.
On a GAAP basis, our earnings per fully diluted share increased to $2.07 compared to $1.83 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 third quarter results in activity.
We define free cash flow as cash from operations less capital expenditures and excluding special items.
And the third quarter of 2019 free cash flow came in at a 124 million after funding $24 million at capital expenditures.
Excluded from free cash flow was $21 million related investment and our Taunton precision chemistry operation.
In the third quarter. This resulted in 22 cents at each dollar sales converted into free cash flow and 25 cents year to date.
Now I'd like to provide an update on record quarterly activities related to capital deployment, which we categorized 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 2.7 million shares of our common stock for $580 million and the third quarter.
These capital allocation activity, along with our free cash flow resulted in cash and short term investments at $405 million and that of 1.4 billion on our balance sheet at the ended the quarter, resulting in a net debt position of $951 million.
Looking ahead, we remain committed to deploying capital against these three priorities.
Our current plans and repurchased approximately $600 million in shares during the fourth quarter and consistent with our previous communications about $2.5 billion for the full year.
These assumptions are reflected in our full year 2019 guidance.
Turning to working capital accounts receivable days sales outstanding came in at 80 days this quarter, a slightly compared to the third quarter of last year.
In the quarter inventories increased by $55 million and compressed air comparison to the prior quarter.
And by planned inventory build related to Brexit contingency planning and new product launches.
So our quarterly sales volumes also impacted inventory balances.
As we look forward to the remainder of the year I'd like to provide some broader contact on our Q4 and full year 2019 guidance.
Given dynamics through the first three quarters of the year were expecting ongoing mix and market conditions in China and Europe .
Improvement in the U.S. versus Q3.
And increasing benefits from new product launches.
Our guide does not assume large ended the year budget spending by pharmaceutical customers.
As a result, we expect constant currency sales growth in the fourth quarter to be in the range of flat to 2%.
At today's rates currency translation is expected to decrease fourth quarter sales growth by by about one percentage point.
Fourth quarter non-GAAP earnings per fully diluted share at estimated to be in the range at $2, a 95 cents to $3.05.
At current rates and negative currency impact on fourth quarter earnings per share growth is expected to be two to three percentage point.
Looking to the full year, assuming we perform within the guidance range for the fourth quarter that would result in full year 2019 constant currency sales growth guidance at about 1%.
Compared to our prior guidance range of 1% to 3%.
At current rates currency translation is assumed to decrease 2019 sales growth I wanted to two percentage point.
Gross margin guidance for the full year is now expected to be about 58.5% at the lower end at our prior guidance range, 58.5% to 59%.
You did less fixed cost absorption on the lower forecasted sales volumes.
We will continue to exercise disciplined expense controls to the balance in the year.
Our other key assumptions for full year guidance are unchanged that interest expense of $30 million to $32 million.
Full year effective tax rate at 14% to 15%.
And lastly, and average diluted share count at 68.5 to 69 million shares outstanding.
Rolling all this together and on a non-GAAP basis.
A year 2019 earnings per fully diluted share now projected in the range at $8.73 to $8.83.
A decrease from our prior range of $8, a 95 cents $9.10.
At current rates the negative currency impact on full year earnings per share growth expected to be two to three percentage point.
Chris I will not make a few summary comments Chris.
Thank you Sherry.
In summary, our third quarter saw a continuation of market conditions influenced by a challenged global me macro economic environment, we remain very positive on the ongoing durability in potential of our chosen market categories and we are excited about our increasing new product cadence for which our management team is focused on successful launch execute.
Brian .
With that we will now begin good question and answer session is we're 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.
Thank you first question is from Doug Schenkel Cowen Your line is open.
Hi, good morning, and thank you for taking the questions. So so Chris.
Over the last five years waters Division recurring revenue has gone from over 8% in 2015 to now tracking to 5% or below this year.
And the time, we've been tracking waters, which goes back to the early two thousands.
We can't find anything that resembles this trend.
And I can't find an annual recurring revenue growth number for the division as low as the one you're tracking to this year or other than in 2009.
I think we can all understand why there might be periods, where capital demands flows but at the core of an investment in waters has always been the belief that recurring revenue growth would be steady.
We put this is your five of ongoing declines in this metric and this year is the worst taller than the great recession and this is in the midst of what it's been one of the Golden periods for tools. So that this begs a number of questions I'll limited to three.
One what can you point to that would demonstrate that there are not structural issues at waters that are different from a peer group.
To have competitive dynamics intensified leading to share loss that you would now acknowledge and three why is a continuation of the share buyback, which has arguably depleted the company's rainy day fund with shares at historically high multiples the best use of capital moving forward.
Given after mentioned trends and amid concerns about structural and competitive dynamic issuers. Thank you.
Thanks, Doug Good morning, Okay. You asked a three questions. There so I will I'll try to take them in order.
You know in terms of the recurring revenue in a reflection of the overall.
You know structure of of our company relative to our peers.
Of course waters as you know is is more concentrated in the pharmaceutical category, particularly the small molecule category and as I.
You mentioned on the call we have seen a a lengthening of.
Equipment purchasing dynamics in that sector. You know, we're currently in environment very much driven by macro and to some degree other noise. That's a that's in the environment that has affected the small molecule.
Business of our overall pharma business or small molecule business, which which is LLC intensive is about 70% of our overall pharma business and I'm. You know currently that's experiencing more modest growth and certainly there is some impact of a recurring revenues you know that follow from.
From the overall instrument sales.
This this particular market, which again, we do have unique concentration in Doug as you know has been.
Has been steady over time, and while it's hard to tease out individual cycles, I think you theres no, arguing that it's in the softer phase right now for for a number of those reasons that are affecting participants whether it's on the generic side.
Or the large large pharma side, our pharma revenue or pharma recurring growth, while we don't break that out what strong in Q3 and has also been strong.
Throughout this year and last year and certainly some of the recurring revenues on the industrial side of the business that some.
You know.
I've been in a difficult period with global macro has has certainly explain that.
And as it relates to competitive differentiation you know our of our strongest competitive differentiation is in the pharma sector, particularly in the regulated laboratory environment in late stage development and Q, a QC and so.
There have been periods you know.
Over time, when the when that particular market segment has has done very well and grown above the average of tool tool other tool categories and at this point in time that sector. The market is growing below the average, but I think because of that we do see the some evidence of pent up demand building.
And have confidence in that end market over the long term you know relative to share loss send your second question. We've we've certainly seen over an extended period of time pressure on our mass spec market share and that's why we've invested so heavily to reverse that trend and we think we're really on up at a bit of a pivot.
I think relative to the new technology Thats come into the market at both the high end of mass spec as well as in the core tandem quad portfolio and with a a totally new white space opportunity with bio cord to really.
Improve the the mass spec market share position.
On the LC side, we've seen generally stable conditions overtime and.
Deferred different dynamics within new plc age plc, and new age plc, but.
As I mentioned earlier the.
The strong concentration of waters and regulated laboratories has been an advantage in stabilizing in keeping that share stable and we continue to.
Invest against that and in other product categories that that you didn't mention Ta instruments chemistry, informatics and service, we've seen stable share trends as well so.
Overall, we're very focused on competing in a in a market that is very competitive certainly acknowledged strong strong competition, but unlike the position we have relative to the buyback.
You know as you know with with the Us tax reform.
That came through a year and a half ago or so.
We had a onetime opportunity to really reset our balance sheet and work towards an appropriate.
Capital structure that Uh huh.
Gives us flexibility, but also optimizes, our balance sheet and our overall weighted average cost of capital and and certainly feel like we have enough flexibility to make the investments we want to make both capital investments as well as M&A.
Next question please.
Thank you. Our next question is from Tyco Peterson with JP Morgan.
Thanks, Chris I want to follow up in the U.S. headwinds because obviously last quarter you were up 7% pharma up mid single digit. So this is a pretty decent reversal. It seems like it caught up with you late in the quarter can you just give a little more color on how much was pharma how much was generics what really does give you confidence in the fourth quarter recovery is that the order book.
Just curious as to what with the drivers of the reversion here aren't in particular versus some of the comments.
Yeah. Thank you Tyco, yeah, but just to confirm your the first part of your question. This was a effect that happened quite late in the quarter as you know more than half of our business comes in the third month of the quarter.
As a just to give some color on on where our head was at a quarter ago. We did comment on the fact that you know coming out of the shoot in the beginning of the quarter. We saw the continuation of trends we'd seen in Q2.
Which as I mentioned in my prepared remarks reinforce the view we had on the us.
You know August is always a little bit variable with with vacation periods in September .
Ended up being a lot weaker than we expected and really the only thing I can point to in general is just a lot of noise in the market right now whether its.
Industry litigation or M&A or.
Certainly other generic side.
For the of effects later in the government year on the on on the generic user fee increase there's just a bunch of different factors that make for a more noisy market than as expected.
You know I've had the chance to personally with the team evaluate a number of the large orders that we.
Expected that we had forecast internally within the third quarter and Im confident that those orders, which come from a well known customers strong customers have been delayed and not lost or canceled and so.
You know that that.
Has given us confidence to suggest that the U.S. ought to be better in Q4 than it was in Q3 and and year to date, but.
We're certainly also being pragmatic and cautious in assuming overall trends.
For the year continue and therefore art assumptions for Q4 do not include a large budget flush certainly have a large budget flush where to materialize as it has in the past that would represent upside to.
Through our numbers, but we're not forecasting that at this point.
Alright, and then for the follow up I want to hone in a little bit on the China dynamics can you give us some color on how much China pharma grew and then as we think about 4.7, you talked about the bidding process. Beginning in September you know, we've heard anecdotally, maybe a third of the labs will go away. So how do we get comfortable this isn't a bit about a false bottom here and then also it seems like some of the Indian generic companies are now.
Depending and 4.7 I think Dr. Reddys wanted tenders. So just curious how do you think about the tradeoff in growth between China local generic in India pharma.
Yeah.
We are certainly learn I'm learning as we go it's it's a it's an interesting environment. There you know as we as we know Q1 really than what the market went on hold and it came back in Q2 in Q3 was solid as well we had we had double digit growth in China pharma in third quarter.
And what we've seen there is that even as four plus seven extends to a broader part of the market. The for the second phase of bidding in September was.
The same 25 drugs that we had seen in phase one extending to 27 provinces.
About 60% of the participants in the phase two tender where the same companies that participated in the first round of the tender.
And about 40% were new.
But just about all of the.
The major bidders in the process were companies that you would consider to be in the top 100 within China.
To your point about foreign participation.
The first phase was almost entirely local China companies larger trying to companies and that larger category in the second phase we did see an increased participation of the.
Non Chinese companies a it was about an 85 15.
Mix between China, and then non Chinese companies so.
For example, the Indian company you referenced.
Is an example of the type of companies that are making up that that 15% in the second phase.
You know like Weve stated before.
The the.
The Big picture here is that.
This effort is being done to enhance the overall access of medications to the population and therefore volumes will be increasing and so.
These are long term positive. These initiatives are long term positive for volume in the market and testing volume.
And.
You know and it does also lead to some change in the market.
Some of the companies for example that have not one some of these tenders.
Don't necessarily leave the industry altogether, they have focused on other things. So front, we have some examples of generic companies, leaving the generic space and getting involved in new drug development. For example, so it's still a dynamic situation playing out but.
At least a you know in the in the two quarters. We've just reported most recently Q2 in Q3, we've seen a stable is stabilization of that demand.
Thank you [noise].
Thank you and our next question some Derek Gibran Bank of America. Your line is open.
Hi, good morning.
Good morning dark.
So a couple of questions. The first of all I wanted to follow I'm, hoping that Doug so in the.
We still see.
The market.
Five to eight year life cycle White sand and then as the.
The upgrade cycle of western healthy ended in 2017.
Clearly we're getting some.
Changes in terms of the Jeremy.
Hi.
Hi, good roughly please go ahead business essentially I guess, what gives you confidence that we see a rebound LC instruments in 2020.
It is so the first question.
Yes, thanks, Thanks, a lot Derek.
I want to you know do as much as I can to provide color on some of the market dynamic that we've seen year to date and other were through three quarters, but I also want to balance that with the fact that fourth quarter is our biggest quarter and a lot can play out in fourth quarter and so before we put too fine a point on the trends in the market that would undertake.
Score our guidance for 2020.
We want to see the fourth quarter play out as you know in some markets. This business LC business in particular has become pretty back end weighted.
And we've seen in some years a significant increase in business in the fourth quarter that you know that.
You know creates an overall story for OLED kind of a rolling analysis, and so we want to see that play out.
Like I said earlier, we're not assuming a big flush at the end of the quarter and that's why we put the guidance where it is just for caution and conservatism purposes, but we do want to see it play out.
Before we before we.
Say too much about what we expect out of LC instruments in 2020, but like I like I mentioned earlier.
The L.C. the small LC market has been reliable historically.
We are currently seeing more modest growth and you know believe that to some extent demand is building.
For for investment in that area as as we step into the next several years. So we're watching it closely we want to see what fourth quarter trends look like and you know also keep in mind that when you think about the LC business and the increase of focus on mass.
Spec based workflows.
But we're seeing in the market, particularly in large molecule that Lcs earn an important component and with just about every mass spec system, we sell Lcs come along with it. So you know we're looking at LLC in both the Standalone LC optical.
Market, if you will as well as the L. CMS market.
Great. Okay can you talk a little bit about European market.
Just maybe products that Easter is versus western Europe , good environment like in government, just little bit more color there.
Just a question Andy is how much uncertainty eating breakfast and coffee across the European markets. Thank you.
Sure.
Thanks, Yeah, Europe has been a fairly challenging operating environment. This year just to recap the numbers overall for Europe . It was flat in the quarter and is down.
2% for the year that's.
That includes an overall European pharma number that is 1% up in the quarter and 1% up year to date with actually a pretty decent academic and government market up double digits, both quarter to date and year to date offsetting.
A a similar range of declines for the industrial market and some of the trends we've seen year to date quarter to date was actually a little better in Europe industrial.
At a mid single digit declined versus a double digit decline for the year to date. So so even though the numbers are still negative in European industrial there they have gotten incrementally better.
In the third quarter.
That's really a kind of a combination of the chemical materials market in T.A. being in flatter.
And the food and environmental market being down.
Overall.
In terms of the in terms of the overall environment Theres enough economic data, including PMI that shows a you know of kind of a flat to contracting economic growth environment, and certainly Brexit delays as you mentioned, our front of mind and we've we felt that through the Brexit process much.
Sentiment is on hold.
And we do believe that in that process. There is some pent up demand building.
Particularly in the UK in the northern parts of Europe , and so you know, we're we're really trying to look ahead and see when we might see an improving picture, but its europe's been a kind of flattish scenario all year long and.
That said, we're super confident in our competitive position throughout Europe , and believe that the concentrations we have in certain.
Sectors are really.
Provide the right context for what's happening there, but believe we're poised to protect with our new product flow to take advantage of improving market conditions when they come.
Okay next question please.
Thank you. Our next question is from Daniel Brennan do you B.S. Your line is open.
Great. Thanks, Thanks for taking the questions.
Of course, I want until just look at China could could you provide some color within China regarding food versus industrial Versapharm you made some comments in your prepared remarks, I think signaling China macros, having an impact and I know food has been a bigger drag view. So anyway. If you could just separate out your key areas within China, you kind of how they did in kind of what.
Are you expecting going forward.
Sure. Thanks, Dan So China was up 2% for the quarter and it's up 1% year to date and the year to date, obviously incorporates the decline we saw in Q1 with I'm a bit more stability in Q2 in Q3, particularly on the pharma side.
And you know like I mentioned earlier, the the pharma.
Business was up double digits in China.
And has solidified.
In the as the four plus seven program as we talked about as as matured a little bit at least and has that has more visibility and really the the rest of the business is is flattish on the industrial side. It was flat in the quarter and as you know down 1% for the year and then on the academic and government side as well.
We've actually seen much more of the pressure, which is down double digits and and that's really a function of the food market you know as you know.
The bulk of our food testing business has been in government oriented labs, and that's as the market makes a transition.
From the.
Government focus on food testing, where the government labs are.
Doing the bulk of the testing to one where they are in more of a supervisory role.
That particular.
Market has been somewhat disruptive.
We do see a number of dynamics there even though the.
Demand has been soft on the government side, we expect a you know an increase in growth in the future on the private side and.
And even to some degree of privatization of would previously were government labs, and so that process of privatization within the government testing environment as well as the uptake in the up in the third party testing lab sector.
Has has caused this disruption and to your point food as the years played out as provided most of the.
Most of the pressure in our business there while pharma has recovered.
The industrial environment is a bit muted.
Based on.
The.
Based on the.
Overall economic conditions, but but it's really been in that government area in the food testing I will say in the food area. You know another important comment, though just looking at the market, it's a pretty mass spec heavy.
Market with a focus on tandem quads, and we've really strengthened our portfolio in tandem quads. This year with the introduction of the Kronos and the TQS micro.
And that gives us a lot more flexibility, particularly in the mid and lower tiers of tandem quad testing.
And I think we could argue that we have across the board the strongest or one of the strongest tandem quad portfolios in the industry and feel very good about our ability to compete in that market and to serve the different segments of the market as they develop.
So we're glad with the investments we've made on the mass spec side and that will show through particularly the 10 quad business.
And obviously were.
Working as hard as we can to to understand where and when that demand might return and how to make sure we're well positioned to to win a lot of it.
Sorry, Great and then and then just as a follow on the new products I of course, I know in your prepared remarks, you talked about meaningful revenue contribution I know, you're not going to give us a number right now but at least could you just discussed for the fourth quarter kind of what we what you've assumed from new products and then is there any way to just kind of categorize how to think about.
What the potential of all these new products that you're rolling out could be since it's such a critical part.
Think of kind of your story and kind of the strategy shift that you've made a waters. Thank you.
Yeah. Thanks, Thanks, Dan and absolutely job one at waters as new product innovation and we're in the midst of a significant transformation of our R&D efforts and really the the is the continued the achievement of innovation leadership I think a lot of those efforts are going really well we're extremely encouraged by.
The products that have come through the pipeline already with a pretty heavy focus on mass spec given the growth opportunities in the mass spec markets as well as you know competitive position that we needed to improve that was clearly the case, but you know kind of Furthermore, and on the innovation side with the increases in investment we've built.
A really robust five year product roadmap that we have more clarity than we've ever had at waters in terms of a cadence of new product introductions across instruments Chemistries and of course, we'll be talking a lot of model a lot more about informatics and the years to comes with in the years to come with the waters connect platform.
Just a couple of quick notes on the on the products. We've launched a you know there are different type of products of course, we've made a number of different key line extensions on the LC side that are maybe a little bit below the radar screen, but really enhance our industry, leading LC portfolio, particularly on the biocide with arc bio and age class bio and the binary pump and.
A number of other products, we put into the market this year.
Certainly the Chemistries that go along with the L.C. portfolio.
I mentioned, a new a family of each plc chemistries the focus family.
And of course, everything we're doing and bio separations, but mass spec has really been the headline this year bio cord is a game changer. It is a.
Really white space opportunity in the sense of bringing highly usable high quality very easy to use time of flight mass spectrometry into the regulated laboratory space in late development and ultimately cubic you see I've had a chance to personally visited three or four customers. This quarter, who have bought bio cord and the feedback is very positive so.
We're encouraged there you know the activities in the third quarter did not have as big of an impact in the third quarter I'm should have a bigger impact in Q4, the tandem quads, I mentioned Kronos and micro, but we did sell and encouraging number of the cyclic Imus is in the quarter and have an even bigger order book for Q4 and then.
The snapped excess.
System, which we announced the launch of in in.
In the in the third quarter, we did not ship in the quarter and Weve communicated that we did communicate that to our customers and so.
You know, we certainly have a bigger opportunity in Q4 than we had in Q3 relative to the high rise portfolio and the we expect this snapped excess which is a dramatic enhancement in our in our well accepted us inept Q Tof platform. We we certainly have an opportunity to ship that.
With that product this quarter that we didnt have last quarter. So that's some more color on all the new product launches and you know again I don't want to put too fine a point on a specific contribution in the fourth quarter, but we certainly expected to to increasingly be visible and you know as we roll into next year, you know with these launches under our belt.
I think we'll be in a position as we guide for 2020 to to put some more specificity around that.
Great. Thank you. Thanks, Dan next question please.
[laughter].
Operator is there another question in the Q.
Next question, Steve Beuchaw with Wolfe research.
Hi, good morning, and thanks for the time here good morning, Steve.
First I actually want to follow up on a point that the Doug alluded to and has to do with capital deployment, if I think back to the beginning of the year.
You will actually goes even into the fourth quarter. The prior year you made a commitment to not just doing the 2.5, but also to getting to a leverage target. The implies that you continue to buy back stock beyond 2019 are used to committed to going to that leverage target.
Yeah I see this is Jerry and so yes, I'll just add go back a little bit they've now that if our cash as a result of tax reform I you know weve done a lot of working analysis and I wanted to touch our balance sheet to work and we communicated our share buyback program for the year that 2.5 billion and we're working towards that.
As reflected in our guide and then as we look at overall capital structure and optimizing that capital structure at 2.5 times net debt to EBITDA ratio is it still at a near term goal and I would say as we end the year, we'll probably be about two times on with our guidance around the share by.
Back so well look at our 2020 plans and get some more details around our specific guidance is for next year, but that is.
Working towards but not obviously are this year.
Okay, Perfect and then Chris.
Opened the door in a different kind of way there's been a lot a really good questions asked here in the queue and I would people focusing on customer demands competitive demands R&D macro. These are these are all important parts of a sort of broader conversation around what is what do you own when you own waters is a stock right. If I talk to an investor who owns waters their Jan.
We're really talking to me about how much appeal, they see because of the the likely sustainability of the growth of pill count and that that should mean that you get to mid single digit growth I'm sure you're gonna get questions on this topic from a lot of investors in coming weeks and months. So I guess now that we're at this point in the year and we've learned a future.
Things you know if he thinks he didn't know even six months ago. How do you. How do you talked to then investor about that path back the mid single digit growth is at the right away right way to think about thanks. Thanks much.
Sure Yeah, no I'm of course, all efforts Steve are focused on.
Returning to better much better growth and you know, we've certainly seen a better growth in different him different instruments cycles within these specific.
Categories, We focus and you know at the end of the day.
So I think a lot about the markets we participate in and you don't want to make sure waters is well positioned in structurally attractive markets.
And you know, even putting aside cycles and different macroeconomic conditions. You know, we still fundamentally believe that the attractiveness of the pharma bio pharma space is very high and Furthermore, that there's an accelerating innovation.
Story in material science, and food safety testing and some of the other markets. We're in so we're really focused on the fundamentals of those those markets and believe that some of the things you mentioned around the sustainability of the.
Pill count in prescription prescription volume and patient access to medication on the small molecule in the generic side and also the innovation on the large molecule side are all very very good.
Markets to participate in and.
You know our ability proven overtime and we believe we're in a new phase of proving it all over again in terms of the ability to lead the market with meaningful innovation in these spaces.
Which will then have a downstream impact on a strong recurring.
Revenue stream with consumables and and services is a great place to be as a company and can generate very high returns on invested capital and a over different cycles market, leading organic growth.
<unk> the incremental opportunity we have since tax reform is to add to that with deploying capital to.
You know growth activities.
Whether it's a faster pace of capital investment in the company or tuck in M&A as we see it weve certainly been active in the in the M&A space in the recent in the recent past and while we have not gone forward given our level of discipline and.
Focus on on things that will make the biggest difference or you know that will be over time, and an added opportunity to generate returns of our capital.
That we that we generate in the business. So that's how I think about it and.
Ultimately, making sure we we make the right investments a allocate our capital both internally and externally.
To to earn the type returns that water so consistently delivered overtime.
Thank you. Our next question is from Steve Willoughby Cleveland Research.
Hi, good morning, Thanks for taking my questions.
I guess.
Two things first Chris if you could just I guess asking about new products a different way.
Yeah.
<unk> companies had to guide down organic growth three times, so far this year and I'm just trying to get a feel for what were you expecting a the impact or contribution from new products. This year at the beginning of the year as compared to now that I've a follow up for Sherry.
Yes, Steve I think we were a we always had modest expectations and that's why we didnt put too fine a point on on a number certainly we expected.
Towards the back half the year to see more of an impact on that and obviously with a our largest quarter ahead of us a you know Q4 accounts for 30% of the year in terms of our historical averages of the third quarter.
You know we want to make sure we see fourth quarter play out and do expect to see a bigger impact, but overall for the year, we expected of a a modest impact and so in terms of whats played out you know I don't think there's any question that the muted capital purchasing environment and some of the macro dynamics, we've spoken about it probably had.
Somewhat of a moderating effect on that impact, but that's why we focus on some of those underlying metrics of market development that I've continuously alluded to.
To gauge our progress and you know ideally what that adds up to hear is strengthening or you know in the in the fourth quarter and setting the stage for an even bigger impact in 2020.
Thank you and our next question is from VJ Kumar of Evercore. Your line is open.
Hey, guys. Thanks for taking my question I had no one in a China question, one not guidance, maybe I'll start with China Christmas maybe you know you mentioned some comments on food.
No. It is that is that end market, you know maybe stabilizing improving or.
Worsen and I'm also curious up you know we you know we fear noise on this round through a for my seven should we think of status.
As incremental or is this already being you know Hum is this already being accounted by my customers given that they knew the second run was coming.
Yeah, Thanks, BJ I'm happy to take those in a and welcome to coverage of the name a I know you're out you're you're not new to the space overall, but new to us So welcome.
And you know in terms of China, you know, it's a it's hard to say where to to call. The current short term trend right now and we want to see another quarter or too you know I don't think we have any expectation that food is going to jump back you know this quarter.
You know, there's a there's a transition going on in the market.
If you look at the trying to food market from a bigger picture perspective, food had a really great run in China in the sort of 15 to 17 timeframe, but you know in the relative recent past and you know it's a market that as I mentioned before it's been very oriented to government laboratories, that's changing.
Changing for the right reasons, because a lot of the testing infrastructure is being pushed out into the community.
And there will be a privatization process underway, there, which we think is ultimately going to lead to a return of really favorable growth conditions and.
As I mentioned before you know are improving tandem quad portfolio is going to.
Be well timed for when that comes back, but but again, it's don't have enough visibility to call a rebound in the immediate immediate future here.
And you know just a small point on four plus seven that'll lightly you ask your Sherry question since were.
Running a little low on time, but.
The we do learn more incrementally we do have a pretty good feel for what the second phase has broad and we see I'm confident sort of part of the largest companies that are participating and doing well in those tenders and.
And as.
As I believe Tyco asked earlier I'm beginning to see the participation of some major global companies as well in the process, but again that that that process is all about growth and.
Managing price to these tenders in a way that that gives the government confidence that can support the growth that's being demanded by their population.
Was there a financial thank you.
But I think we have time for one last question.
Thank you and our last question is some Jack Meehan with Barclays. Your line is open.
Thank you good morning.
Chris I guess, just given some of the recent growth trends I wanted to provide a little bit more on capital deployment.
I talked a couple of times about tuck in M&A just curious in earlier. This year you change the credit agreement to allow for increased leverage for deals over 400 million.
If you did a deal that size would you consider that additive to the buyback plan.
And you are you looking at assets of that size I'm, just curious if theres any additional color you can give around the pipeline being sure yeah. Jack Let me take a thanks for question and let me take the first part of that and have shared comment as well yeah. We've we've been investing internally in a capability for M&A or two or two.
To add some to add to our portfolio in advanced in adjacent technologies.
With a very rigorous strategic financial and execution.
Framework and I would characterize the the assets were looking at is more in the us small to mid size or more in the tuck in a category. You know is is we certainly have a lot of flexibility in our balance sheet to do everything we're looking at and you know obviously want to make.
Sure that we can be opportunistic where.
Where its appropriate but I've shared comment a little further on the on the covenants and so forth right now so and we updated some of our agreements and with recent offering that we made it was just bringing all of them in line with language that we already had as far as what our leverage ratios are so maybe just a little bit of housekeeping on that but.
As far as our overall capital structure, you know we've talked about working through a near term leverage ratio of two and a half times and certainly if theres a REIT asset that makes sense for us for my our strategic goals and our strategy I'm, we'd be willing and have the flexibility as Chris mentioned set to lever up and we've got the covenant someplace to cover that.
Good.
Thanks, Sherry and thanks, everybody for your participation in questions, we're going to wrap up the call now.
Just to note of conclusion here, despite the more challenging capital purchasing dynamics that we've talked about this year. A 2019 has been an important year for waters and setting the stage for an exciting multiyear product cycle. We've begun to see the early outputs of our significant recent investment in R&D and are encouraged by early customer response.
We expect to see increasing sales contribution from our newly commercialized products as well as though still to come over the coming quarters in years.
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 Q4 2019 call, which we currently anticipate holding on February 4th 2020.
Thank you and have a great day.
And thank you. This does conclude today's conference call you may disconnect your lines and we appreciate.
Your business. Thank you.