Good afternoon. I'm Sherry Buck, and I'm the CFO of Waters Corporation, and we're really happy to be here today as part of the Deutsche Conference. We've had a really busy morning, getting a chance to talk to many of you, and look forward to sharing with you some more about our Waters story. I'd like to introduce who's here with me today. I'm happy to have Mike Harrington, our Senior Vice President of Global Markets, Bryan Brokmeier, who's our Head of Investor Relations, and Jon Lynch, our Corporate Treasurer, so next I'd just like to point out to everyone the standard cautionary language. I'm not going to read everything on this slide, and our forward-looking statements and risk factors that are further detailed in our SEC filings. For those of you who may be newer to the Waters story, I'd like to share a broad overview of the company.
On Slide three, based on 2017 financial results, provides a great perspective. Waters is a very strong global company. We're global in terms of where our sales are, where our employees are, and where our R&D and manufacturing facilities are located. We compete in markets of well over $10 billion, and I'll break that down for you a little bit further in the presentation. Waters has annual sales of over $2 billion and strong financial characteristics in terms of free cash flow, industry-leading margins, and top quartile return on invested capital. We have about 7,000 employees worldwide and about 15 operating facilities around the world. We are active in over 100 countries, and more than half of our employee base is directly in the field serving our customers. Waters is also a company that attracts people for the long- term.
Nearly 40% of our employees have over 10 years of experience in the company, and it's not uncommon to meet people who've worked at Waters for 20, 30, or even 40 years, which really underscores the passion and the commitment of our employees to deliver benefit for all of our stakeholders. Waters is a purpose-driven company and is oriented towards advancing human health and well-being. If you speak to some of our customers within life sciences, food sciences, or material sciences, we're proud to be deeply embedded in some of the key workflows and the challenging questions that our customers are facing in order to advance health, quality, and safety in just about every aspect of life.
While it's nearly impossible to show you on a single page how our technologies are used, some of the diversity of our problems are shown here to help solve our customers' problems across a very broad spectrum of businesses. Whether it's a coffee company testing to see if their coffee meets EU standards to sell, or an aircraft manufacturer trying to understand the mechanical properties of new composites that increase the efficiency of the planes, and of course, the pharma customer in discovery development or QC to better understand their product. I think it's safe to say that with a high level of confidence that probably everyone in this room has been impacted in some way as a result of what our technologies and our products do.
So that was a real quick overview of Waters and what we do, and now I'd like to frame my remaining comments this afternoon against our five-point long-term value creation model that we shared during our Investor Day held in New York early last year. Number one is the unique strategic position that our company holds in structurally attractive markets. Second is we have a clear growth strategy largely driven by organic innovation. And third, we believe we have opportunity to continuously improve our operations. Fourth, we also believe that being a judicious allocator of capital is an important philosophy in the company. We've had a strong track record as it relates to capital deployment. And finally, Waters operates with a performance-oriented culture and management team. There's a real passion for the purpose and vision in the employee base and very focused on our customers and delivering results.
I'll start with the first pillar of our value creation model, which is our strong strategic position. The life science tools industry is about a $57 billion market overall. Waters selectively participates in about 20% of that market, or about $13 billion. On average, the markets that we choose to participate in are growing about one point faster than the tools market overall. The selectivity about where we participate and the focus on the company is really a starting point in terms of our strategy. From a technology standpoint, we focus on high-value technologies that offer the most sophisticated, high-precision, specialty measurement techniques and methods for life material and food sciences.
Our portfolio is highlighted by offerings in Liquid Chromatography and Mass Spectrometry, the software operating systems that drive those technologies and support regulatory compliance, such as Empower, and precision chemistries and professional services that go along with these technologies. On the materials science side, our portfolio includes thermal analysis, rheology, and microcalorimetry. All of these technology categories are marked by strong economics in terms of growth and margin profile. Moving on to the business mix slide on Slide eight, we look across this on several dimensions, including in-market, type of revenue, and by geography, and I'll make a few comments on each one of these dimensions. On the in-market side, from a trade class perspective, pharma represents almost 60% of our total business.
We like the breadth and the dynamics of pharma industry and believe it's an attractive market where we can serve these customers with a rich portfolio of our technologies. We also have a strong position in the industrial categories, which is about 30% of our mix. Government and academic comprises a smaller part of about 13% of our overall mix. Moving to the middle of the slide, our revenues are split fairly evenly between recurring revenues and our instruments with informatics. If we were to take out the informatics portion of our instruments, the pure instrument mix of our business would be about 40%. We continue to mix towards recurring revenues, which has favorable financial characteristics in terms of growth and margin. From a geographic standpoint, we're fairly balanced, but we see a strong growth in our emerging markets.
In fact, at the end of 2017, Asia now represents a slightly higher percent of our mix than our Americas business, and we anticipate that Asia will continue to be an important factor to our global growth. As you can see, 10 years ago, Asia represented about 26% of our geographic mix and has grown to 37% at the end of 2017. The European region, just under 30% of our mix, has also been a good source of growth for the company as well. Moving on to our second pillar of organic innovation, I'd like to highlight key trends in the market that shape our strategy and innovation focus. These market trends clearly support our value creation model because we see the expansion of patient access to medicines, particularly in the emerging markets.
There's been an increasing complexity of molecular structure in new and innovative drugs and rising standards of performance and quality in both materials and food science. All of these trends point to changing customer needs, and we believe that we are well positioned to support these trends through our focus on innovation. All of this leads to our vision and our overall corporate strategy. Our vision is to be the world's leading specialty measurement company in the life materials and food sciences, very much driven by innovation. Our strategy is to enhance our core pharma business, which we believe has continued growth for opportunity for growth, particularly driven by key global trends that support further innovation in drug discovery. We also believe that there's untapped opportunity in our other vertical markets of materials science, food, and environmental, clinical diagnostics, and medical research.
As we scale these businesses over time and drive our technology to be the standard of measurement in each of these areas, we believe that it can contribute to our overall growth goals of the company. We will continue to compete on the basis of focused innovation and the quality of our total customer experience. Organic innovation has been at the core of Waters historically, and we've increased that focus in the past few years. We've been able to increase our R&D spending faster than the rate of our sales over the last couple of years, all the while getting leverage in other parts of our P&L and delivering good operating leverage. We do have some structure around our innovation process, and we look at that in three parts, and it really helps balance our resources, the risk, and the rewards.
Innovation to drive the core is aimed at the near-term product portfolio, and it's very focused and disciplined with a reasonable amount of certainty around it, and it's really innovation that helps remain to keep us competitive. Transformational engineering is where we redefine the way we look at innovation to develop next-generation systems that meet changing customer needs and is strongly informed by our strategy, and this is innovation that will change the basis of our competition, and finally, breakthrough innovation is where we have to think differently as we harness the almost limitless potential of Mass Spectrometry. We believe it is almost limitless in terms of what it can do to advance measurement and science, and we only place a few big bets here, but this is the innovation that we think will one day change the world. Our innovation efforts are ultimately for the benefit of our customers.
On Page 12 is a summary of our overall business strategy. While I've talked about the technologies and we do focus on technology, all of the business strategies are driven by the specific needs of our individual customer groups. I've already spoken a little bit about the importance of our pharma business. It's our largest business and our core business today. We have a leading position, and our strategy is to fortify our core and win in the ever-changing game of biopharma. Material Science is our second biggest business, and we have a very interesting portfolio of technologies between Waters Technologies and TA Technologies, and we're focused on leveraging both of these strong brands more than ever before. There's a lot of innovation that's happening in materials of all types, such as metals, polymers, multilayer composites, and all of these require an increase in the use of analytical capabilities.
And so we're excited about opportunities for growth in this area as well. Food and environmental is a market development opportunity for the company as we develop more food-focused consumables and workflows. In clinical diagnostics, we have a basic offering in general use, IVD. We plan to nurture the intended use IVD innovations, but this isn't a driving strategy for the company in the short- term. This will take a little bit longer to play out, and we see it more as an opportunistic strategy for the future. And finally, in biomedical research, it's a smaller business, primarily driven by academic and government purchasing cycles, and we believe that we have a competitive advantage, particularly in the area of metabolomics. Shifting over to the third pillar of our value creation model, we have the ability to generate ongoing operational improvement.
One of the things about Waters that people sometimes don't realize is that we still have opportunities in our margin structure. We believe that our current operating margins are more of a function of the choices that management has made over time and the focus that we've had, and so where our unique product mix comes in is that only 40% of our mix is derived from instruments. The remaining 60% is comprised of service, chemistry, and informatics, and all of these have strong profit profiles. Beyond the product, our margin structure also reflects an attractive mix in geographies and our end markets. Our track record of continuing to get leverage in the business is strong. This is a 10-year look at where we've pretty consistently delivered over time mid-single-digit revenue growth with 200 basis points of leverage on operating income.
The 10-year cumulative average growth rate represents 5% revenue growth, 7% operating income growth, and 11% EPS growth. We measure this both year- to- year and over longer periods of time, and we try to focus on striking a balance between the growth, investment, and our operating leverage. A little more color on our operating margins. The chart on page 15 shows our 2017 operating margins at 30.5%, which represents a cumulative average growth rate over the last 10 years of 7%. It's important to note that during this time period, we also absorbed about 200 basis points of FX headwinds on the operating margin line, and to be able to realize improvements in operating margins with this kind of headwind highlights our ability to execute and focus on operating leverage.
We have a fairly broad set of drivers and programs around optimizing the business mix, continued focus on efficiencies and disciplined expense management, and all of this gives us confidence in being able to generate incremental improvements over time. Moving on to capital allocation is the fourth point of our value creation model. Waters has historically been a very judicious allocator of capital, and we look at allocation of capital in three buckets. Number one is to invest in the business. Number two is to enhance our balance sheet strength and flexibility, and three is return of capital to shareholders. With the passage of U.S. tax reform at the end of last year, we now have a tax-efficient access to our overseas global free cash flow, which provides us with greater flexibility. We see opportunities in all three areas.
In terms of investing in the business, there's an opportunity to invest in the U.S. at a lower cost of capital where we can deploy our cash alongside our innovation process and our supply chain operations, and a great example of this is our recently announced investment in our precision chemistry operation in Taunton, Massachusetts. This investment will create an even more impactful precision chemistry center of excellence that will support growth and customer demand and innovation capabilities and support its operating efficiency gains. We remain focused on a strong and flexible balance sheet as part of our capital allocation framework as well. As a result of U.S. tax reform, we now have access to our cash outside of the U.S., which was about $3.4 billion at the end of December 2017.
During Q1, we used a portion of that balance to pay down our bank revolver and a note by $750 million. And in terms of returning capital to shareholders, we communicated during our Q1 earnings call that our Board of Directors authorized an additional $3 billion share repurchase program targeted to be completed over a three-year period. This is incremental to the remaining that we had on our prior authorization of $526 million. And this new authorization, we believe, underscores our commitment to return capital to our shareholders in a disciplined fashion over a longer period of time. Our fifth value creation point is focused on our performance-oriented culture and management team. There's a very strong set of values at Waters, which was instilled by our founder, Jim Waters. He not only built the company, but created a great culture oriented around delivering benefit.
And delivering benefit is delivering it to our customers, to our employees, to our shareholders, and to society. This set of values has created a culture within the company with a focus on results, the success of our customers, science and innovation, and a sense of optimism about what we can accomplish. These values, combined with our vision to be the world's leading specialty measurement company, results in our purpose of improving human health and well-being, and makes Waters a really special place that I'm proud to be a part of. Over the last few years, we've built more rigor around some of our core management processes, including strategy development, linkage of our strategic objectives to our annual operating plans, and building a deeper and more robust talent process that helps us to execute our strategies.
We're looking forward to continuing to further develop and enhance some of these core management processes. So before I wrap up, I'd like to make a quick comment on summarizing our Q1 2018 financial results. Revenues grew on a constant currency basis of about 2%, which was weaker than we had anticipated due to a couple of factors. We saw a slower start in our mass spec product line, particularly in biomedical research, and a softer-than-expected market in India as our customers delayed some purchases in India as a result of their fiscal year-end being in March. But however, during the quarter, our TA business performed very well, growing 6% in constant currency, and that reflects really the underlying strength we see in industrial demand. Our Pharma business also remained strong, growing 6%, excluding the impact of the softness in India.
Looking at our total performance, we were pleased with the earnings per share growth of about 9%, despite the weaker-than-expected top-line growth. We demonstrated disciplined operating expense controls that helped drive margin expansion and helped to enable us to exceed our earnings per share growth. We understand the drivers underlying our Q1 performance and believe they are transient in nature. Our key growth drivers remain intact, including global pharma demand, China market strength, and an overall robust business model that supports our growth in 2018. In summary, I hope this has given you a broad perspective about Waters and our five-point value creation model regarding our strategic positioning, our focus on organic innovation, our continuous operational improvement opportunities, and a commitment of judicious allocation of capital. We thank you for your time today, and I think we have a few minutes to take some Q&A.
All right, this will be open Q&A, so feel free to raise your hand if you have a question. Sure. Thanks for running this by you as we spoke on the side about the first quarter results. So as you now look back at the first quarter, all your peers have reported, a number of them reported strength in mass spec. Do you interpret your results any differently after seeing what the results have been around the peer universe with regards to share, with regards to market exposure, anything you could offer?
Yeah, so great question. So I'd say I'll make a few comments here and pass it to my colleague, Mike, who's our commercial leader. But I'd say we saw our competitors' results, and interesting, but I don't think it's really changed anything for us around how we're thinking about the quarter or our performance. We had a few things, speed bumps that we had within the quarter, and particularly in the MS area, it's kind of difficult sometimes to compare us against other competitors because, as I talked about in the comments around our specialty positioning and where we compete at is different than where some of our competitors compete. So the MS business can be kind of lumpy, particularly when you start off in the first part of the quarter, coming in and out of the quarters.
Based upon some of the underlying trends, we feel like over the course of the year, this will come back. I'll let Mike provide a little bit more color.
Yeah, I just add to Sherry's comments and say that when we look at our competitors, there's no direct overlap in terms of the mass spec portfolio. So for example, one competitor may be strong in the high-resolution end of the MS business, where we're strong in areas like tandem quad. So there's no real direct overlap. And as we look at strength in certain market subsegments, so for example, if there was strength in NIH funding in biomedical research, that could offer some advantage to our competitors relative to Waters, where we're strong in the quantitative MS, where changes in dynamics in areas like pain management or food safety could impact our business to the good or to the negative. So it doesn't change our perspective on where we were in the quarter. We were disappointed with some of the results that we saw.
On the other hand, we also had a strong comparable with a strong mass spec business in Q1 last year. That's not something that our competitors will often reveal. So I don't think we think any differently about our business. We see some rebound coming in the remainder of the year, and we think we'll get back to more normal sort of rates for 2018 as an aggregate, as opposed to looking at any single quarter.
Okay. Please.
I was curious to know if you have any plans to go into CyTOF as a Mass Spectrometry flow cytometry, mass spec flow cytometry?
No, not any specific plans to go into that arena, but we've recently hired a new corporate development senior vice president. So again, looking at all opportunities to look at potentials for new markets, new business areas.
Just looking at the margins that you've reported up there from 2007- 2012, a very strong period. If you just take the average in, we're now 17% from those five years, and then it dropped down to a gain of just under 4% for the next five years. Are we thinking that margins are perhaps getting towards the top of your range? Do you think you can push them significantly further, or is it more of a top-line story?
So great question. I'd say to the end part, is it more of a top-line story? I would say that is the focus for Waters. It's all about our top-line and organic innovation, and that's what drives our business. That's what drives our P&L. And as we continue to see growth on the top line, we'll be able to get some further leverage on volume. But in addition to that, we've put in place several different programs that we think will help us get some continuous improvement. These things are not silver bullets that are going to happen overnight or have a significant impact immediately. They're more continuous incremental improvements. So some of those things we've talked about, an opportunity, what we call is DFX, which is design for manufacturability, design for serviceability, designing in quality.
So we have a rich history and a deep bench of R&D and experts, technical experts. And as we've developed products over our rich history, we've not always thought about, as we're developing this great product, is it easy to manufacture? Is it efficient to manufacture? Is it easy to service, etc.? So it's a program where we're looking at bringing some of those capabilities further upstream into the R&D process. And the other area I'd just highlight is in manufacturing, continuing to look at just ongoing productivity opportunities.
And then if you think about some of our back office opportunities in finance, HR, IT, we're really looking at how can we be more efficient, opportunities to scale as the company has grown over the last 60 years, what can we get as far as efficiencies and better automation that, again, will be some incremental improvements that we may drop to the bottom line or we may use to reinvest in the business. So I think that we have opportunities, and we're continuously looking at how we can improve our business so that we can either invest for growth or let it fall to the bottom line.
I would also add that recently we've been spending more on R&D than we have historically. We're spending about 8.5% of product revenues on R&D up from 7.5% five years ago, and over time, we expect that to contribute to the introduction of new products, such as our planned BioAccord introduction, as well as the recent introduction of the products on the LC side.
Sherry, I think you may have described the most recent performance as a transient matter. Could you just describe what you're now seeing in the marketplace that may lead you to kind of make that statement? Are you seeing things in the marketplace from customers and prospects that are leading you to believe that things are correcting in your favor?
Yeah. So I'll start and ask my colleague to add some more color. But so we described it in the Q1 call transient because we don't see any underlying changes in the fundamentals or strength of our business overall. So the areas we identified were India and fiscal year-end quarter closing. We do have visibility to orders, and we've seen this kind of pattern of behavior in India over the years. This isn't the first time we've seen some of these kinds of things. So really, our businesses, if you look at our end markets, we really need to view them on a whole kind of calendar year basis or rolling 12-month basis because there can be kind of fits and starts, if you will, over the course of the year. So Mike and his team are very watching the orders and the trends there.
I'd say the other thing that still gives us confidence is kind of pulling back from some of the one-off things here in the quarter is kind of the core part of our business that drives a lot of our growth was very strong in the quarter. Our pharma business ex India was 6%. The pharma fundamentals are still very strong. Our TA business grew 6%. Industrial is, I think, represents very strong fundamentals. Our service and recurring revenues was growing 6%-7%. All three of those are really big drivers of our core business, and we're diluted by some of these things that we think will come back over the balance of the year. I'll let Mike get some color.
I think you pretty much covered everything I was going to say. I think as I talk to customers, I visit India, China a lot. I'm in India in a couple of weeks' time. As we talk to the senior leaders there, they talk to us about their capital investment plans. We have good exposure to that. We see that in our pipeline, in our quote rate. So we have confidence that there's no major changes in the dynamics of that marketplace, and this is purely a temporary measure to help them to basically optimize their financial results and their balance sheets. On the Mass Spec side, because we're so focused and concentrated, unlike maybe some of our competitors, small changes, some of the Mass Spectrometry systems that we sell are $500,000 and multiple units.
If some of those shift from one quarter to another, you can easily see the types of fluctuations that we've seen between one quarter and another. But underlying dynamics, we're very confident are fundamentally still sound.
Thank you for that, first of all. The next one, Sherry, you mentioned about bringing forward DFX and DFM earlier into the process. So if you do pull that forward, have you kind of assessed an impact to the business in terms of what you might see in terms of either cost takeout or efficiency getting to market and what that would mean for the business?
Yeah. So we're early in that process. Really, it started a little bit last year as we brought together, we had a reorganization bringing together an entire global product group, our informatics, and our product group together so that they're working more closely. And we're in early stages of what that looks like. But as we look at our activities, we know we spend time kind of looking at, quote, "the cost of poor quality," how much service calls we have to make, how much warranty there is, etc. So we know there's some opportunity. And then I just think as we look at manufacturing, that there are opportunities to improve. So we haven't quantified it yet, and we're in early stages.
Mike, I wanted to circle back to one of the comments you made earlier in terms of thinking about where your exposure might be different than peers. So Waters, I believe, is the only company that flagged India so far this earnings season. One more company still needs to report, but flagged India so far this earnings season. Is the reason why it might impact you more than others if you just have a higher share in the analytical chemistry market in India than others do?
Yeah, I think that's a great question. I think two things. One is we did get into India very early, earlier than a lot of our competitors. So we do have higher market share in India, especially in the Liquid Chromatography and networked software arena. I think the other factor is we're so heavily concentrated in pharma. So if one segment within India, which was really the generic pharma segment, slows down purchases, I think that has a much bigger effect on us than our peers. We know because we monitor the import statistics pretty closely. There's no indigenous manufacturer of LC or chromatography software in India, so all systems are imported. We have the import data for the first three months of the year, and it indicates an overall reduction in the level of imports of chromatography products commensurate with the type of performance that we saw.
So we know that there's no market share play here. This is a market, a specific India pharmaceutical generic market depression. Some of our competitors are more broad-based. They're selling glassware or lab consumables or gloves or pipette tips. We don't have that in our portfolio. What we do know is that our consumables and our service business in India in Q1 was solid. So this is purely a capital equipment, pharmaceutical, generic manufacturing. And we believe it's a one-quarter dynamic that will really normalize over the course of the remainder of the year. So we're pretty confident about that and the comparables with some of our peers in the industry.
Okay. And then another comment you made earlier about segmenting the mass spec business. You said some people are strong in high-res and you're very strong in tandem quad. So the comparisons aren't apples to apples. One of your competitors is strong in tandem quad. Two, but maybe the difference in that dynamic might be they're very strong in tandem quad and biopharma, and you're very strong in food and applied markets. Is that the right way to think about it without putting words into your mouth?
Yep. I don't feel you put words in my mouth. I think that's probably a fairly accurate depiction. I think that that particular competitor is also strong in areas like regulated bioanalysis, so clinical trials. So if that business is strong, then they could be strong. Whereas, on the other hand, if there's significant investment in food safety, then we will be strong. There's also emerging areas like pain management, so measurement of opioids. There was a big surge a year or so, a couple of years ago, in the number of labs opening up in the U.S. to measure opioids in blood to monitor patients taking pain medication. And that market has been very up and down, and that was a market that we were extremely strong in. So I think it's micro market dynamics that cause some of those differences that you see.
I think over a 13-week cycle, some of those things show more than they would over a longer- time frame. So I think you'll see that normalize over the course of the remainder of the year.
Okay. In that pain management, do you feel like we've lapped the difficult comparisons in that market as a result of reimbursement pressure, or is that something that might come up in future quarters?
I think that's a good question. I think the reimbursement really had a negative impact on some of the players in the marketplace. We are starting to see a little bit of a return in that, but it's so unpredictable that it's difficult to know. From a reimbursement perspective, I think the reimbursement levels went down. Now they've releveled them at a different level that's not as good as they were initially. So I think we'll see a sort of a normalizing of that marketplace, and it won't be so lumpy going forward and be a bit more predictable going forward.
Okay. Maybe final question as the shot clock is running down, Sherry. You mentioned a couple of efforts that sound like they're targeted towards improving the gross margin profile of your products. Is there anything, as you look down the P&L, anything to be unpacked on the operating expense side where you see room for improvement as you've done your analysis?
Yeah. So as we look at opportunities further down in operating expenses, some of the back office opportunities I talked about would fall into your SG&A and fall into the operating expenses there. Yeah, that would be the main area.
Okay. Great. Well, with that, we're out of time. Sherry, Mike, Bryan, Jon, thank you for joining us.
Thank you.
Thank you.