Mettler-Toledo International Inc

NYSE:MTD

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to our Fourth Quarter 2018 Mettler Toledo International Earnings Conference Call. My name is Catherine, and I will be your audio coordinator for today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions]

I would now like to turn our presentation over to your hostess for today's call, Ms. Mary Finnegan. Please proceed, ma'am.

[Mary Finnegan, Treasurer]

Thanks, Catherine, and good evening everyone. I'm Mary Finnegan. I'm Treasurer and responsible for Investor Relations at Mettler Toledo. I'm happy that you're joining us this evening. I am joined by Olivier Filliol our CEO and Shawn Vadala our Chief Financial Officer.

I need to cover just a couple of administrative matters. This call is being webcast and is available for replay on our Web site. A copy of the press release and the presentation that we refer to is also available on the Web site.

Let me summarize the safe harbor language which you see on Page 2 of the presentation. Statements in this presentation which are not historical facts constitute forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. For a discussion of these risks and uncertainties please see our recent Form 10-K.

All the forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions Factors Affecting Our Future Operating Results and in the Business and MD&A of Financial Condition and Results of Operations in our Form 10-K.

Just one other item, on today's call we may use non-GAAP financial measures. More detailed information with respect to the use of and the differences between the non-GAAP financial measures and the most directly comparable GAAP measures is provided in our Form 8-K.

I will now turn the call over to Olivier.

[Olivier Filliol, CEO]

Thank you, Mary, and welcome to everyone on the call which we are doing from Switzerland this quarter, which is why we started a little earlier than we normally do. I will start with a summary of the quarter and then Shawn will provide details on our financial results and guidance. I will then have some additional comments, and we will open the lines for Q&A.

The highlights for the quarter are on page three of the presentation. We are very pleased with the strong finish to the year with our fourth quarter results. Local currency sales growth was better than expected as demand in our markets remained favorable and we continued to execute very well. Total local currency sales grew 8% in the quarter. We had strong broad-based growth in most of our laboratory and industrial product lines.

China had another quarter of excellent growth. Our sales growth combined with results from our margin and productivity measures drove very strong improvements in operating margins. And despite a 5% headwind due to adverse currency and high tariff costs, we achieved a 15% increase in adjusted EPS in the quarter. All around, these are strong results.

Our outlook for 2019 remains positive, but similar to our comments to you last quarter, we remain concerned about the global economy. We do not see evidence of a downturn in our markets today, but Marko [ph] data and rhetoric surrounding international trade disputes make us cautious. We remain focused on execution of our growth initiatives and believe we are well-positioned to continue to gain share regardless of market conditions. Assuming market conditions remained favorable we believe we can generate good earnings growth in 2019.

Let me now turn it to Shawn to cover the financials and guidance and I will come back later with additional comments on our business.

[Shawn Vadala, CFO]

Thanks, Olivier, and hello everybody. Sales were $817.9 million in the quarter, an increase of 8% in local currency. All growth is organic and we have owned Biotix for more than a year now. On a U.S. dollar basis total sales increased 5% as currencies reduced sales growth by approximately 3% in the quarter.

On slide number four, we show sales growth by region. Local currency sales grew 7% in the Americas, 6% in Europe and 10% in Asia/Rest of World. Sales growth in China increased 12% in the quarter and strong in both laboratory and industrial products. Slide number 5 shows sales growth for the full-year. Local currency sales increased 5% in the Americas, 4% in Europe, and 10% in Asia/Rest of the world. Biotix benefited Americas' growth by approximately 1% for the full-year.

On slide number six, we outlined local currency sales growth by product line. In the quarter, Laboratory sales grew 7%, Industrial increased 10%, while Retail decreased 6%. Within Industrial, product inspection increased 7%, while core industrial grew 13%.

Turning to the next slide, we show sales growth for the full-year by product line. Laboratory sales grew 9%, Industrial grew 3% and Retail grew 3% in 2018. Biotix benefited lab sales by approximately 2%. All sales growth is in local currency.

Slide number 8 provides the P&L for the quarter. Gross margin in the quarter was 58.4% as compared to 58.6% in the prior year. Pricing continues to be a strong contributor to gross margins but we had headwinds from tariffs mix and some additional costs associated with our product inspection business and new product launches.

R&D amounted to $36.2 million, which represents a 15% increase in local currency. SG&A amounted to $201.7 million, a decrease of 1% in local currency over the prior year. Increased investments in our field force were offset by cost savings and productivity initiatives as well as lower variable compensation.

Adjusted operating income amounted to $239.7 million in the quarter, which represents an 11% increase over the prior year amount of $216.9 million. We estimate currency reduced operating profit by approximately $5 million. We also estimate tariffs where gross headwind to operating income by an estimated $5 million. Despite these meaningful headwinds, our operating margin was 29.3% which is a 140 basis point improvement over the prior year.

A couple of final comments on the P&L. Amortization amounted to $12 million in the quarter. Interest expense was $8.8 million in the quarter. Other income, excluding the onetime items I will cover shortly amounted to $340,000 compared to income of $1.2 million last year.

Our effective tax rate was approximately 21.5% in the quarter, moving to fully diluted shares which amounted to $25.5 million in the quarter and is 3% decline from the prior year reflecting the impact of our share repurchase program. Adjusted EPS for the quarter was $6.85, a 15% increase over the prior year amount of $5.97. On a reported basis in the quarter, EPS was $7.11 as compared to $2.93 in the prior year.

Reported EPS included a $0.75 acquisition gain related to our earn-out accrual with Biotix. As background, when recording an acquisition with an earn-out provision, the initial amount accrued in goodwill is recorded is based upon a Monte Carlo simulation of all possible outcomes. The Biotix acquisition was structured with the large potential earn-out component, while we are very pleased with the Biotix acquisition and expect their operating profit to grow by more than 35% in the first two years they fall short of the earn-out level. As a result, we recorded a onetime non-cash gain to reverse a significant portion of the original amount.

Other one-time items in EPS include $0.10 of purchased intangible amortization, $0.14 of restructuring, $0.14 of a true up of the transition tax associated with last year's new tax regulations related to the most current guidance that was published in December, $0.09 of litigation cost and a $0.02 difference between our quarterly and annual rate due to timing of stock option exercises.

The next slide provides full-year results for 2018. Local currency sales increased 6%, operating profit increased 12%, operating margins improved 100 basis points and adjusted EPS was up 16%. We are very pleased with these results. That is it for the P&L.

Now I will cover cash flow. In the quarter, adjusted free cash flow was $157.2 million as compared with $130.7 million in the prior year period. Our working capital statistics remain solid with DSO at 39 days and ITO of 4.5 times. For the full-year, our free cash flow was $455.9 million which represents a 12% increase on a per share basis. We are very happy with this achievement.

Let me now turn to guidance. First, we continue to feel very good about the things we can control namely our growth and productivity initiatives, we have spoken to you often about our spinnaker sales and marketing initiatives, our new product launches and our stern drive productivity programs.

We're confident in the effectiveness of these initiatives and our ability to execute them. Our guidance for 2019 assumes market conditions remain unchanged while we ended the year on a strong note as Olivier mentioned we are cautious on the global economy, some economic data points have further moderated over the past few months but we have not seen an impact on our business today.

We also continue to acknowledge risks associated with the potential impact on the Chinese in overall global economy due to trade and tariff disputes. We will continue to monitor the global economy closely and remain agile to adapt to conditions necessitate.

Next tariffs, based on the situation today, we expect a gross negative impact of tariffs of approximately $25 million on an annual basis. This assumes the full 25% tariff rates which we assume will be fully implemented in March. We estimate tariffs will be a gross headwind to EPS of approximately 3% in 2019 and will have a greater impact in the first half of the year versus the second half.

We expect to be able to negate much of the impact of tariffs through price increases and some internal supply chain adjustments, one question you may ask is what happens if the tariffs go away, we would estimate a positive impact to full-year EPS growth of approximately 1% if the tariffs were eliminated and this would be on a full-year basis. We would not recoup the entire 3% as some pricing in the internal supply chain process changes are tied directly to the tariffs and therefore would go away if the tariffs are eliminated.

In addition to tariffs, currency also continues to be a headwind to earnings in 2019 particularly in the first half of the year, for the full-year we would have - we would expect adverse currency to reduce EPS growth by approximately 1.4%. However in the first half, it will reduce EPS growth by approximately 3%.

Finally, our tax rate, when we provided guidance in November, we had assumed a tax rate of 21% for 2019. Based on our current expected mix of income, we now expect the effective tax rate for 2019 will be 20% to 25%.

Let me now cover the specifics, we continue to expect local currency sales growth in 2019 to be approximately 5%. We are increasing our adjusted EPS guidance to $22.50 to $22.70 which is a growth rate of 11% to 12%. This compares to previous adjusted EPS guidance of $22.40 to $22.60. With respect to the first quarter, we would expect local currency sales growth to be approximately 5.5% and adjusted EPS to be in the range of $4 to $4.05, a growth rate of approximately 7% to 8%. We would expect the headwind from tariffs and currency to approximate 7% in the first quarter and the first half of the year.

Let me also comment on cash flow for 2019, we expect cash flow of approximately $510 million in 2019, this represents a growth of 16% per share. In terms of share repurchases as we mentioned on our last call, we intend to modestly increase our leverage over the next two years through share repurchases and our acquisitions. We currently expect share repurchases to be approximately $745 million in 2019, some final comments on guidance as you update your models.

Other income, which is below adjusted operating profit will be approximately $3.5 million, as compared to income of $6 million last year. This line includes pension income which we expect will be lower this year, we would expect shares outstanding to be approximately $24.9 million, interest expense is expected to be approximately $40 million, total amortization will be approximately $52 million which includes approximately $13 million of purchased intangible and amortization or $0.40 per share which we exclude from adjusted EPS.

In terms of currency and sales, we expect currency to reduce sales growth by approximately 2.5% in 2019. For the first quarter, we expect currency to reduce sales growth by approximately 4.5%. We will provide Q2 guidance on our next call, but wanted to point out given the expected impact of tariffs and currency in the first half of the year as compared to the second half, we would expect EPS growth in the second quarter to be high single digits.

That is it from my side. I'll now turn it back to Olivier.

[Olivier Filliol, CEO]

Thanks, Shawn. Let me start by providing some additional comments on our operating results, Our lot business continues to perform very well with 7% sales growth in the quarter, which was again excellent growth in the prior year, almost all product lines have good growth with analytical instruments, pipettes, and process analytics particularly strong.

We are executing well in this business as we've benefited from a robust product portfolio, continued investments in field resources and our spin on sales and marketing initiatives. Last we will have tougher comparisons in 2019, but we expect good growth nonetheless. I will have some additional comments on lab shortly but let me cover other business.

With respect to industrial, we ended the year with strong sales growth in both core industrial and product inspection. Core industrial had an impressive growth of 13% with all three regions and most product lines showing very good growth. These results reflect solid market demand and good execution. Product inspection had good growth in the fourth quarter with 7% local currency growth. This business have been under some pressure for most of 2018 due to very tough comparisons and reduced spending by large package food companies.

We expect growth in 2019 in the mid-single-digit range which is below our long-term outlook for this business as we think it will take some additional time for packaged food companies to return to full investment mode. The final piece of our company is the retail business which was down 6% in the quarter based up on the timing of customer activity. Although negative we are not overly concerned given that we manage this business profitability not sales growth. We also expect a sales decline in the first quarter but expect for the full-year that this business is relatively flat.

Now let me make some additional comments by geography. Europe ended the year with strong local currency sales despite the declining food retailing. Lab had solid growth while industrial both core industrial and product inspection were up strongly. In the Americas lab had excellent growth product inspection was flat while core industrial was up strongly. Retail was flat.

Finally Asia and rest of the world had another quarter of excellent growth. Lab and industrial did very well while retail down. China had very strong growth in lab and industrial. One final comment on the business in the fourth quarter is service which was up 9% for the quarter. We had a growth in both lab and industrial reflecting traction on our growth initiatives surrounding service. That concludes my comments on different pieces of the business for the fourth quarter. We are very pleased with how we ended the year.

Let me comment in some more detail on our lab business, which have had strong organic growth over the last three years. And now we present just over 50% of our business we are benefiting from a very robust product pipeline. Lab received a disproportionate amount of our R&D and our recent and upcoming launches are yielding very tangible results. Our Spinnaker sales and marketing approach has worked particular well for this business as we very much leverage cross and value selling and innovative marketing that drives leads growth. There are also some market dynamics of our base table to our offering to the market.

One example in the area of data integrity and specifically how our instrument control software LabX is helping customers ensure compliance and data integrity. Data integrity is one of the most critical topics in the pharmaceutical industry today and has become a hot button issue with the FDA. In particular the focus is on bench-top instruments such as balances, Ph meters and typewriter that do not store data electronically. Such instruments typically use printout as data records which of course can be subject to manipulation y. This risk has gotten the attention of the FDA.

Our answer to this challenge is LabX our instrument control and data management software to control bench-top instruments. LabX supports all of our lab instruments, which represents approximately 40% of the instrument on a typical chemist bench-top. LabX through well-designed workflows, standardization of validation methodologies and strong data management capabilities can help customers achieve the data integrity objectives. LabX can also be fully integrated in a lymph system.

LabX as a fully compliant FDA 21 CFR Part 11 platform addresses the FDA concerns for providing controlled user access, for data traceability and secure data handling across all of these very commonly used product line in the analytical testing and QA/QC in the pharmaceutical industry. In addition customers enjoy significant productivity improvement as a training burden is reduced as LabX can be standardized across many of these critical bench-top instruments. Most of our balance and analytical instruments are used routinely in the QA/QC or testing lab. With LabX data analysis and management are seamlessly integrated into one compliant software solution.

One additional market dynamic is productivity and efficiency in the lab and on our one-click approach that allows customers to simplify lab processes and ensure they are being done correctly all with a simple click. The one click technology incorporates short cuts methodologies and sophisticated analytics into an instrument so workflows can be executed easily and effectively by combining our one-click approach with our LabX software our regulated customers can ensure proper method operation and data integrity.

Over the last three years, we have expanded our one-click concept to all of our analytical instruments. We are now taking the concept to our AutoChem instruments. By pairing one-click analytics with our IC software we are able to use artificial intelligence to provide high quality information from large amounts of data with limited user interaction. One benefit is a customer can analyze a reaction in approximately two minutes instead of the two hours it traditionally would have taken.

LabX and One Click are just two examples of the value that our lab offering provides to customers. We believe our laboratory business is well positioned and we will continue to focus on five key customers values, safe result, solid compliance, simple operation, sustainable value and seamless integrated processes. We have been incorporating these values into our products for sometimes and while these are simple concepts we believe they resonate well with customers and provide a compass for our development teams to ensure they bring real value not just technology to customers. That concludes my comments on the lab business.

In summary, we feel very good about how we finished 2018 and our outlook for this year. Assuming market conditions remain stable we believe are well-positioned to generate good sales growth, capital market share and deliver strong earnings growth.

That concludes our prepared remarks, and I want to ask the operator to open the line for questions.

[Operator]

Yes, sir. [Operator Instructions] Your first question comes from the line of Ross Muken with Evercore ISI.

[Ross Muken, Evercore ISI]

Hi. Good afternoon, guys. So, maybe just turning to sort of the industrial piece, obviously a fantastic quarter, China put that in sort of the context of what we've seen on the PMI side. I'm sure you're watching as well, as well as maybe some of peers in China, I guess how are you thinking about kind of that core industrial market, and it doesn't seem from the reports we've seen for many companies so far at least in this space this quarter did anyone see any change, but I guess as you look at sort of what's happening on the macro, particularly in Europe, maybe lesser in China, how are you sort of putting that full picture together to kind of get a feel for how that business will play out over the year?

[Olivier Filliol, CEO]

If I look we did in Q4, we really saw very good growth across all the regions. It reflects still good market conditions, but very much also the strong execution of the team. We have invested quite some effort to go off to the attractive segments of the markets. We have done some resource shifting in certain counties, but if I also look at our marketing spending, our sales force guidance, we really support that our focus goes to the industrial segments that are most promising, and here I would name pharma, chemical, and food, and less so the more discrete by factoring kind of the material plastic electronics components markets, and that gives me also confidence that in 2019 we still will have good growth, even that maybe there is a certain slowdown in the global economy. Our business today is a different one than that we had in the downturn - in the last downturn, and that's particularly also true for industrial.

[Ross Muken, Evercore ISI]

That's helpful. And maybe specifically on China, obviously some noise today out of the government, but feels like there's still just a lot of posturing, but we'll eventually sort of get the tariff issue behind us. I guess, as you look at your business there, any discernable change in sort of growth rates for any of the sub segments in the region? And how are you thinking about sort of the comps in that business over the balance of the year?

[Olivier Filliol, CEO]

So far we don't see a slowdown in China. We delivered very strong results in Q4. We have great momentum in most of the industry segments. But what I said before for industrial worldwide applies also to China. There are industrial segments that do better than others. Again, pharma, for example, would do very well. But we would have the material - or the discrete manufacturing sectors that are certainly impacted in China, and that - at market that today is less relevant for us than it was 10 years ago. We talked a lot about our Chinese market business mix that changed. We have today a situation where the lab business is significantly bigger than it was a couple of years ago. And even within the industrial business we succeeded to grow the PI business to become more significant.

So, I feel like we have a more healthy business mix. We have a team very focused on capturing the growth that comes from the industry segments that are growing in China, and that are benefiting from the five-year plans of the Chinese government. Looking forward, I don't expect the same growth rates out of China as we had, rather would see a mid to high single-digit growth in China. Here I would see lab to be particular strong. Kind of expect from lab in China high single-digit, as probably on the industry it's more the low single-digit range, and then reflecting basically also a slowdown of the Chinese economy, not the same in every segment.

[Ross Muken, Evercore ISI]

Excellent. Thank you.

[Operator]

Your next question comes from the line of Patrick Donnelly with Goldman Sachs.

[Patrick Donnelly, Goldman Sachs]

Great, thanks guys. Maybe just on the service side, another nice quarter of high single-digit growth there, can you just help us think about the durability of the growth? I know it's been a big focus internally around things like driving higher attach rate. Can you just help us think where we are on that progression, how much room is left on that front?

[Olivier Filliol, CEO]

Indeed, I was very pleased about the Q4 results here on service. It's a good reflection of what we did. I want to highlight maybe also for the full-year I was very happy with service because we did talk to you at the investor conference that our products become better and better, and therefore we sell less spare parts, we have less break/fix. And the decline in the break/fix we compensate with higher penetrations for contract business. And we have seen that happening throughout the year, definitely also in Q4. I see also that for some lab service business is doing particularly well, all these things. So, the trends in our service business are all point to the right direction, and it's a result of the many initiatives that we have.

I would also highlight that the service in percentage of total business has been grown over all these years. As I include consumables to it, it's today almost a third of our total business, so a very attractive mix and I'm happy to see that our internal initiatives are actually delivering this.

[Patrick Donnelly, Goldman Sachs]

Okay. And then you mentioned the investor day, obviously you guys spent a lot of time there on the product inspection business, nice to see that bounce back to the kind of high single-digit growth. I guess on the go-forward mid single-digit growth in 2019 why couldn't there be upside there? I know you guys talked a lot about the competitive advantages you have, the opportunity in front of you at the investor day. So, is it just the market slowing on the food segment, could you just talk through the growth outlook, again a little lower than we've seen historically?

[Olivier Filliol, CEO]

It's also related to timing of projects. The process inspection business has also deals that are bigger. And then it's a timing question of things how they come together. Then the second factor is the packaged foods industry overall and their investment commitments. We had seen in 2017, for example, very good large orders, global rollouts. '18 was then slower on that one, and we had certainly also a comparison challenge. And in '19, I just don't see it yet that the large packaged food companies are coming back in the same degree with the large global rollouts. And that's the reason why we are here a little bit more cautious for the year, but when I think about mid to long-term, I certainly the product inspection business to come back with very good growth numbers.

Particularly we have a very good competitive position. We have the leading positions. And so I really see this as a very attractive business in the long-term. But then short-term, and again 2019 it will be a little bit more challenging. And yes, in that sense I'm happy how we delivered in Q4, but just because we had a good Q4 doesn't make the 2019 an easy year.

[Operator]

Your next question comes from the line of Steve Beuchaw with Morgan Stanley.

[Steve Beuchaw, Morgan Stanley]

Hi. Thanks for the time here. Just a few cleanup questions, I guess one, I wonder if you could just spike out or maybe tell us that you have no need to spike out anything in the quarter as it relates to timing items or projects, anything that affected the revenue progression 3Q, 4Q, 1Q?

[Shawn Vadala, CFO]

No, I mean - Steve, this is Shawn. No, I mean the question first of all was - we're particularly happy to see broad based growth throughout most of the businesses, not only by products but by regions. Probably the two things that stood out on the positive side from the trend perspective is we had a strong finish to the year in product inspection that Olivier was just talking about. And then we also had a very strong year in core industrial, which was especially nice to see in each region of the world. I mean, each region really ended the year on a strong note there. And then on the other side of that, our retail business, as expected, was down in the quarter based upon the timing of project activity.

[Steve Beuchaw, Morgan Stanley]

Okay, got it. And then just a couple of housekeeping ones, one is, any change to the way you're thinking about the margin impact in '19 from the work that you guys have done on the facility consolidations in Switzerland and around Tampa. And then - and sorry, just I wonder if you could give me a sense for how to think about one other issue and it's, you mentioned in the prepared remarks, and thank you for the detail, in a scenario where the tariffs are resolved that the guidance would change, it would go higher. And again, thank you for the granularity. But I'm just a little confused about how to think about that when at the same time you mentioned that you assume that the end market conditions are very stable relative to what you've seen in 4Q. And exiting 2018, at least so far, we haven't seen an impact to the tariffs.

So I wonder if you could just help me sort of parse that out. Is there potentially some impact from the tariffs that you found ways to offset, and so those kind of net out? Thanks a bunch.

[Shawn Vadala, CFO]

Yes, maybe I'll start with the second part of your question, Steve. So, just to be clear, when we talk about the impact with the tariffs, we're not talking about the potential impact on the global economy. And so that's yes that's what we're referring to when we talked about in the prepared comments that the gross impact is about 3% of direct costs, but if that went away the net benefit of going away would be more like 1%.

In the first part of your question in terms of product inspection were you referring to operating margins or gross margin I wasn't sure what you meant by that.

[Steve Beuchaw, Morgan Stanley]

I was actually more focused on operating margins, but both would be well? Thank you.

[Olivier Filliol, CEO]

Yes, sure. So, on the operating margin side we're looking at a 100 basis point improvement for 2019. I think that's a strong guide from our perspective that certainly factors in some of the benefits we would see from some of the synergies and benefits we would have from the new facility in consolidating the plants. Similar story on 2019 gross margin we would see gross margin increasing in the range of about 50 basis points. Of course there's different puts and takes to that with favorable benefit from currency I mean I'm sorry from pricing which we would expect to be similar to what I guided last quarter in the 2%ish kind of arrange. Offset by the cost of the tariffs and kind of the rest is probably noise at that point.

[Steve Beuchaw, Morgan Stanley]

Thanks so much.

[Olivier Filliol, CEO]

Yes.

[Operator]

Your next question comes from the line of Brandon Couillard with Jefferies.

[Brandon Couillard, Jefferies]

Thanks good afternoon or evening. Olivier just back on the core industrial business the 13% feels a lot more early cycle then base cycle, were there any specific discrete sort of projects that happened to fall in the fourth quarter that sort of contributed to that?

[Olivier Filliol, CEO]

No, no, particular, and it was broad-based, it was across geographies and so nothing particular that I would highlight and that would explain it.

[Brandon Couillard, Jefferies]

Fair enough and then just one on the R&D line the 15% spike in R&D spending in the fourth quarter so a bit of jump. Just curious how you think about the new product pipeline for 2019 and what segments do you feel like you got sort of the strongest lineup? Thank you.

[Olivier Filliol, CEO]

Yes hey so yes we are investing heavily in the business. There's a lot of different great projects that we're excited about. How we see stuff in each area of the business but if we probably disproportionally in the laboratory side we have some really exciting things on the analytical instrument business as an example, but nothing I would highlight in particular. As we have a pretty diversified portfolio so no one new product introduction or upgrade moves the needle in isolation. It's just kind of our constant DNA of continuously having these things coming out.

[Operator]

Your next question comes from the line of Tycho Peterson with JPMorgan.

[Tycho Peterson, JPMorgan]

Hey, thanks, a couple follow-ups on margin, I appreciate the commentary on some of the facility initiatives. As we think about some of other things you've talk about supply chain adjustment and then also Blue Ocean kind of being harvest mode. Can you maybe just talk about the impact from those two dynamics over the course of the year?

[Olivier Filliol, CEO]

For 2019, you mean, Tycho?

[Tycho Peterson, JPMorgan]

Correct yes.

[Shawn Vadala, CFO]

Yes. Hey, I mean it's not like we have a model that says this basis point is for one thing versus the other, but as we have a lot of really I'd say exciting initiatives to expand the margins. The pipeline of initiatives is strong as ever as Olivier mentioned before we feel really good about the execution in terms of our teams on the different programs. But I would say all areas whether its pricing had a particularly good fourth quarter and I feel good about the program entering the year. Stern Drive, as you heard at the Investor Day over 300 projects with lots of good things going on there. And then on the Blue Ocean program has a lot of really interesting things that we're working on at the moment that I think also positions us even better for the longer term.

[Tycho Peterson, JPMorgan]

All right, and then I guess going back to the industrial commentary I appreciate the fact you didn't have any meaningful projects in the fourth quarter Olivier are you able to talk it all about kind of order book actually in January or actually in the quarter and then January trends at all?

[Olivier Filliol, CEO]

Not particular about January I think the guidance that we provided you before reflects different early indicators that we have and you heard Shawn talk about those are the business mix that we expect in Q1 and I think remains very healthy across all the businesses. So I think that supports the strong industrial number in Q4 wasn't just a spike. We in general feel good about that momentum. But of course we recognized that industrial overall is more exposed to an economic environment and that's also the reason that for the full-year I expect a better performance than from lab then I would say from industrial, but industrial will continue to do well.

[Shawn Vadala, CFO]

Yes, and just to be clear, we start the year with a good backlog in industrial and expect a good first quarter there.

[Operator]

Your next question comes from the line of Derik De Bruin with Bank of America.

[Derik De Bruin, Bank of America Merrill Lynch]

Hi, good evening everyone.

[Olivier Filliol, CEO]

Hi, Derik.

[Derik De Bruin, Bank of America Merrill Lynch]

So, I have to ask another Q4 question on this one just because some of the other industrial focus companies have mentioned it. Did you see any sort of pull forward in demand in Q4 just from customers in the industrial side you were potentially worried about tariffs and trade issues?

[Olivier Filliol, CEO]

No, actually you have a transaction size for us is not that high that customers would change their behavior just because of tariffs or anticipated price increases. Also we did communicate special price increases early on now I don't see a connection between the two things and as Shawn highlighted did the backlog indications for Q1 remain solid so.

[Derik De Bruin, Bank of America Merrill Lynch]

Great, and so, just one follow-up on this one, one of your life sciences tools peers when they gave 2019 guidance they basically said the same thing everything looks good. They flagged actually in their comments some concerns over potential Europe can you also talk about the European market and what's going on I mean obviously there is some political uncertainty and the point might now and just would love some of your feedback since your local there?

[Olivier Filliol, CEO]

Yes. Yes, hey, yes of course Europe is certainly a region that we look at in more cautious way they are certain countries where the economic forecast were downgraded in the last couple of weeks. But that doesn't always mean that it's going to directly impact us and I strongly feel that for example the pharma-chem industry is still doing very well. We have a very big share of replacement business that is not directly linked to the economic environment. I always say to our team we don't need that strong of a GDP growth that we can actually deliver good growth ourselves. And we are very much in that mode we are still in an investment mode, we are in an offensive mode across the world including Europe and it's up to us to compensate maybe some slowdown in the economy and still deliver good results and so far all the indications support the statement.

[Operator]

Your next question comes from the line of Daniel Arias with Citigroup.

[Daniel Arias, Citigroup]

Good afternoon guys, thanks, Olivier, maybe on the other side, can you just expand on the Americas in a bit it sounds like things are pretty good there. And I think Shawn's previous outlook was for growth in the low to mid-singles. How likely do you think a 3% or 4% scenario is at this point you did five of an 8% year so coming back to five is a comp seems fairly favorable?

[Olivier Filliol, CEO]

First of all, the environment looks healthy for us good, I am very happy with the results the team has been delivering. I'm very optimistic that we will continue to execute very well. We have some comparisons topics where we need to be a little realistic and we have the retail business that we already called out before we expect a decline. But absent of that I actually really feel good about the Americas and I expect again particular lab to do very well also in Americas.

[Daniel Arias, Citigroup]

Okay, retail was actually my second question I mean I certainly understand your point and what you're trying to do there in terms of profitability. I am just curious if you do have a view on when you think that business might return to growth?

[Olivier Filliol, CEO]

Ooh, I am not going to focus too much on that one, because I will focus really on the profitability, and with that we remain very selective with projects we pursue. It's also a lumpy business, and that's why we feel actually that we should deliver flat sales for the full-year, but for example, earlier in the year, we expect we're going to be down. And it's not a business that I'm going to say, okay, we're going to drive it to low to mid-single growth. As long as we grow profitability I'm fine. You need also to know we shift resources. We try to shift resources towards the lab business and industrial business because we see there sustainable long-term growth opportunity, we see good profitability and when you shift resources away from a business like the retail business, I want to be cautious and to expect growth mid or long-term. So yes, I hope this is giving you the necessary flavor.

[Operator]

Your next question comes from the line of Jack Meehan with Barclays.

[Jack Meehan, Barclays Capital]

Thanks, good evening. I was hoping if you could start just within the Lab segment if you could give us an update on the pharma customer class. You know, 2018 was a strong funding year, so what the outlook there is for that customer group and how - historically how quickly some of the funding gets deployed within that group?

[Olivier Filliol, CEO]

So let me - if I take the big picture, I would split pharma and biopharma. Biopharma goes very well. We see a lot of investment in biopharma that benefits our core lab, but also process analytics very much. We have, for example, the pipette business that is very much also in biopharma. We see very, very good momentum there.

If we look at the other pharma business, so small molecules business for example, we still have very good momentum, we grow very nicely, but I would also recognize that maybe the investments are not in the same degree as biopharma, but here we need also to differentiate by geography, you for example, have to fill in the emerging markets, China in particular a good underlying growth rate in pharma very much so. And so, on a global scale, I feel good about pharma and biopharma going forward.

[Jack Meehan, Barclays Capital]

And you know just was hoping you could also give us an update on the deal landscape given some of the macro uncertainty that you talked about. Has there been any change in activity in the funnel and as it comes to leverage just the size of things that you would entertain?

[Shawn Vadala, CFO]

Yes, hey, there's no change in our status. I mean, our pipeline is the same as it's been. We still continue to look at things, but things also have to be available but no change in our status or our approach.

[Jack Meehan, Barclays Capital]

Thank you, Shawn.

[Shawn Vadala, CFO]

Yes, you're welcome.

[Operator]

Your next question comes from the line of Dan Leonard with Deutsche Bank.

[Dan Leonard, Deutsche Bank]

Thank you. Just a couple of quick ones for Shaw; Shawn, first off, on gross margins in the fourth quarter, they were a little lighter than we were expecting given the outperformance on the revenue line, I know foreign currency and tariffs were the headwinds. Was there anything else to explain the bridge on why gross margins were lighter year-on-year, was there a mix issue or anything else?

[Shawn Vadala, CFO]

Yes, I mean, we still - you know, there's a couple of things Dan. So we're still experiencing some of these initial startup costs in the product inspection business that we've talked to you about over the last couple of quarters as well as some related new product introductions that we've also spoke to you about as well. But one thing that stood out a little bit more in the fourth quarter is we did have some negative mix as we kind of dug into that one. And it was kind of just a mix that was granular within businesses. It wasn't like this division versus that division. It was really something at a more micro level, but as you kind of look at some of those topics, maybe the silver lining is that at the operating margin level, those product categories or those businesses actually performed quite well.

[Dan Leonard, Deutsche Bank]

Okay. And then just a clarification, for the tax rate in 2019, did you say 20.5 or 21.5?

[Shawn Vadala, CFO]

20.5.

[Dan Leonard, Deutsche Bank]

20.5, thank you.

[Shawn Vadala, CFO]

Yes.

[Operator]

Thank you. Our next question comes from the line of Daniel Brennan with UBS.

[Daniel Brennan, UBS]

Great. Thank you for taking the question here. I guess, I wanted to go back to China if you would and with this - I think 17% of revenues - and I'm just wondering, given the exposure you have core industrial in China could you just help us think about like what's in that business in China and what the economic sensitivity of it is, because I think so far Lab's doing great and mostly your peers have discussed really not seeing any impact from slowing economic growth there, but I think the uncertainty, if you will, is just kind of that core industrial business. So if you can help us think about the exposure there and the sensitivity that you're baking into that business? Thank you.

[Olivier Filliol, CEO]

Yes. So, if I look at the mix today, in China we have about 45% that comes from Lab, and then you have Industrial which is roughly 47%, but interestingly that's quite a change versus 10 years ago, particularly if I look at core industrial. Core industrial 10 years ago would have been more like 60%, as today it is about 40%. And if I look at this 40% of core industrial, the end-user segment would also be different to what we had in the past. Namely today pharma, chemical, and food are really dominant end-user industries that we are serving. And as you can imagine these are the industries that are more sustainable. They should offer very good mid and long-term growth. And I would expect them to be much less exposed to any tariffs or trade impact.

And that's actually one of the reasons why we feel actually more comfortable that whatever the Chinese economy will do we will not see the same volatility as we have seen, for example, in 2015 [ph] where there was a significant downturn in China and we were heavily impacted in our industrial business. Lab had reasonable growth at that time, but the Industrial was very impacted, but as I described before our Industrial businesses today different, and feel more comfortable going forward on this.

[Shawn Vadala, CFO]

Yes. And if you were to take our Laboratory business in China and add the faster growth segments of Industrial, it's about two thirds of our total Chinese business.

[Dan Leonard, Deutsche Bank]

Great. And then this is a follow-up, I'm sorry, it's another kind of macro question if you don't mind, but just given your comments, Olivier, they haven't seen any impact to date, but you know continuing to look at a lot of the tea leaves that are out there and kind of highlight the cautiousness that potentially could occur so are we to take that your guidance for mid single-digit growth this year and look at what IMF is forecasting, who knows if the economists can even come close to being right, but I think IMF and even our firm is forecasting that maybe 0.2, 0.3 percentage point decline in economic growth - is that what's kind of baked in? I know it's probably not that granular, but is that the level of what's baked in through mid single-digit, or is your cautiousness you know saying something even potentially worse? Thank you.

[Olivier Filliol, CEO]

No, it doesn't imply something abruptly worse. It is rather a steady situation and it implies that we continue to execute well in this steady environment and we continue to take market shares. If the economy would take a downturn from the current steady state, I would still expect us to gain market share, but we would probably have a hard time to deliver this kind of growth that we are guiding you. But we don't see, in our numbers, any early negative indicators and with what forecasts are out, right now, from the economists we feel comfortable with our guidance.

[Operator]

So, our final question comes from the line of Steve Willoughby with Cleveland Research.

[Steve Willoughby, Cleveland Research]

Hi, good evening, thanks for taking my questions. I think two things for you, first, Shawn, you commented about tariffs earlier, can you just walk us through some of the moving pieces if tariffs stay at 10%? I know you're assuming that they'll go to 25%, but you talked about if they want to weigh, what happens in terms of the impact or flow-through if they stay at the current 10%?

[Shawn Vadala, CFO]

Yes. Thanks Steve for the question. And just to clarify, there's two tranches of tariffs, the first tranche is at 25%, it's the second tranche that started at 10, and is still at 10. If we look at that and kind of model out what if it stays at 10, the benefit to EPS on a full-year basis would be approximately half a percent of EPS as opposed to the 1% if they all went away.

[Steve Willoughby, Cleveland Research]

Okay. So following up on that, and just trying to think through the changes in your EPS guidance, based on my math it looks like less worse FX is about $0.10. You're guiding to slightly lower tax rate, which is about maybe $0.15. And then you previously assumed that the tariffs would jump to 25% as of January 1, which obviously hasn't happened yet. So that's some extra earnings here in the first quarter versus what you might have been thinking three months ago, so just trying to put those pieces together and then get to the only $0.10 increase in the full-year guidance?

[Shawn Vadala, CFO]

Yes, sure. No. I understand the question. Probably I mean maybe I'll start with maybe the simplest way to think about the guide, and then I'll kind of acknowledge some of the puts and takes. So probably the easiest way to look at it is we maintained our growth rate of 11% to 12%. In terms of like kind of some of the puts and takes, we had our beat for Q4. Yes, we had the tax benefit that you mentioned. On the other side, we also had less pension income for 2019. That's largely related to the lower asset return that was impacted by global equity markets in the fourth quarter, particularly in the month of December that kind of went the other way on us.

In terms of your comment on tariff delay, I mean keep in mind that is only January and February that's maybe two to three pennies, so it wasn't a significant consideration for us. And then in terms of currency, the currency, you're right, there's probably modest benefit today if we looked at where currencies were three months ago, but a lot of that has been volatility that's evolved over the last couple of weeks, and at this point in time we just think it's prudent to be a little bit cautious on that one, and we just kind of see how the currencies play out here and then we kind of update accordingly as we kind of get into the first - after we get into the first quarter.

[Steve Willoughby, Cleveland Research]

Okay, thank you very much.

[Shawn Vadala, CFO]

Thank you.

[Operator]

And there are no further questions at this time.

[Mary Finnegan, Treasurer]

Thanks, Catherine, and thanks everyone for joining us tonight. As usual, if you have any questions, don't hesitate to reach out. We are in Switzerland. So please send us an e-mail, we're happy to get back to you. Take care. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.