Q4 2019 Earnings Call
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Ladies and gentlemen, and welcome to the fourth quarter 2019, Mettler Toledo International earnings Conference call.
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<unk> advice of today's conference is being recorded if we acquire any further assistance. Please press star zero I would now like to turn or presentation over to your hosts for today's call Ms. Mary.
And again.
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Thank you and good evening, everyone I'm married.
And again in responsible for Investor Relations and Mettler, Toledo, and a happy that you're joining us I'm joined here today by living with Olivier Filliol, Our CEO, John Dibella, Our Chief Financial Officer, I want to cover just a couple administrative matters.
Call is being webcast and is available for replay on or what.
Hi, a copy of the press release in the presentation is also available on the website.
Let me summarize safe Harbor language, which is on page two of the presentation.
<unk> presentation, which are not historical facts constitute forward looking statement.
Within the meaning of the Euro U.S. securities.
Backed up 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 my any forward looking statements.
For discussion of these risks and uncertainties. Please see our form 10-K.
Oh the forward looking statements are qualified in their entirety by reference to the factors discussed under the caption factors affecting our future operating results and in the business and management discussion and analysis of financial condition.
The results of operations in our form 10-K, well another 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 measure and the most directly comparable GAAP measure is provided in the.
8-K, I will now turn the call over to Olivier.
Thank you Barry good evening, everyone I will start with a summary of the quarter I've been shown we provide details what else can actually results.
They did guidance for Twentytwenty.
I will then have some additional Coleman and we will open the lines for queuing it.
The highlights.
For the quarter all paid the off the presentation.
Sales growth in the quarter came in better than expected an was quite good given the excellent 8% growth in the prior year portal.
Local local currency sales growth in the quarter was 4% growth in the Americas on China was strong we again faced.
Meaningful headwinds in the quarter due to adverse currency or the impact of parts.
The benefit of our productivity of Martin initiatives were able to overcome this strong interest of delivered strong growth in operating margins on EPS growth.
For the full year 2019, we.
Ceded $3 billion himself or the cheap 5% growth in local currency.
Do we feel was down significantly 29 team. Excluding this business, we have 6% growth in local currency sales, we achieved a strong improvement in operating margins and the 12% increase in.
Earnings per share given the material headwinds we faced in 29 team. We're quite pleased with this performance one final comment on full year 2019, we generated more than 530 million in free cash flow a very strong level.
Let me make some comments upfront.
On the Corona virus that is impacting China.
To date, we have had no help impact to our employees in China for which we are grateful we're working with the team of contingency and backup plans due to travel back to work with friction that the government has imposed.
Before these actions were undertaken we have taken steps so to the eliminating our animal salesforce meeting other non critical travel to reduce the risk to our employees.
We expect the corridor virus to significantly impact sales in China into first quarter due to loss of selling days.
At this time, we would expect to recover the sales later in Twentytwenty and therefore have made no adjustments for full year sales growth for the Corona viral.
I wanted to mention this approach so that you can put it into perspective.
Bodyweight I will result, and updated guidance for 22.
20.
In terms of to full year I would view on Twentytwenty has not changed significantly since we last spoke we continue to remain confident in our gross margin and productivity initiatives.
We believe we can continue to gain market share and drive earnings growth.
Excluding food retail.
On the near term impact of the Corona virus demand and our markets remained solid although we're cautious on the macroeconomic environment as uncertainty does exist and there are pockets of weakness in certain end markets.
We will continue to invest for growth, but remain agile if.
If conditions change.
Based on market conditions today, we believe we are well positioned to generate solid sales growth and strong earnings growth for twentytwenty.
Let me now turn it to Sean to cover the financials and guidance.
So let me a sales were 844 million in the quarter increase.
4% in local currency on a U.S. dollar basis total sales increased 3% is currencies reduced sales growth by approximately 1% in the quarter.
On slide number four we show sales growth by region local currency sales grew 6% in the Americas, 1% in Europe and 5% in Asia.
The World, China had growth of 8% a little bit better than what we expected last time, we spoke.
The next slide shows year to date results local currency sales for the year grew 5% in it as Olivier mentioned, excluding food retail local currency sales growth was 6% in 2019.
By region for the year sales increased 6% in the Americas, 3% in Europe, and 6% in Asia rest of World.
On slide number six we outlined local currency sales growth by product area for the fourth quarter Laboratory sales grew 6% industrial increased 2% with.
Industrial up 4%, while product inspection was flat.
Food retail declined 2% in the quarter.
The next slide shows full year sales growth by product in 2019 laboratory sales grew 7% in local currency industrial grew 4% with core industrial.
6% and product inspection up 2%.
Food retailing declined 8% in 2019.
Overall total sales in 2019 were up 5% in local currency and 6% if we exclude food retailing.
Let me now moved to the rest of the PNM for the quarter, which is summarized.
On slide number eight.
Gross margin in the quarter was 59% 60 basis point increase over the prior year level of 58.4%.
Sterndrive initiatives on material cost and productivity in pricing were strong contributors to margin growth.
Partly offsetting these positives.
For terrorists from the U.S., China trade dispute.
R&D amounted to $35.3 million, which represents a 2% decline in local currency.
This decline was impacted by timing of activity in the 15% local currency growth in R&D in the prior year.
As DNA.
I wanted to 206 million 0.7, $206.7 million, a 3% increase in local currency over the prior year. The increase was driven by investments in our field force and growth initiatives and higher variable compensation offset impart by cost savings initiatives.
Adjusted operating.
Operating profit amounted to $256.3 million in the quarter, which represents a 7% increase over the prior year amount of $239.7 million.
We estimate currency reduced operating income by approximately $3.5 million. We also estimate tariffs were a gross headwind to operating.
Net income by approximately two and a half million dollars.
Absent adverse currency in the gross impact of tariffs operating income would have increased 9% in the quarter.
Operating margins reached 30.4% in the quarter. The first time, we cross 30% and represented a 110.
10 basis point increase from the prior year, we're quite pleased with this increase in the quarter.
A couple of final items on the PML amortization amounted to $12.8 million in the quarter interest expense was $9.6 million in the quarter other income amounted to $1.9 million.
Our effective tax rate in the quarter was 20% before discrete tax items and adjust for the timing of stock option exercises.
Moving to fully diluted shares which amounted to $24.6 million in the quarter and as a 3.5% decline from the prior year, reflecting the impact of our share repurchase.
Program.
Adjusted EPS for the quarter was $7.78, a 14% increase over the prior year amount of $6 in 85 cents.
Absent currency and the gross impact of terrorists are adjusted EPS growth would have been 16% in the quarter a level we are very.
We're pleased that.
On a reported basis in the quarter EPS was $7, an 84 cents as compared to $7, an 11 cents in the prior year.
Reported EPS in 2019 includes 11 cents of purchased intangible asset amortization 15 cents of restructuring in the 32.
Two cents difference between our quarterly and annual tax rate due to the timing of stock option exercises.
In the quarter, we also incurred a onetime noncash deferred tax gain of 64 cents related to changes in Swiss tax law, we expect our effective tax rate to remain.
At 20%.
One final point on reported EPS in Q4 of last year 2018, we recorded a onetime noncash acquisition gain of 75 cents.
The next slide shows our full year PML, we're very pleased with our 2019.
Results, we achieved 5% growth in local currency sales 100 basis points improvement in operating margin and 12% growth and adjusted earnings per share, we're particularly pleased we're able to overcome to a degree the headwinds from adverse currency and tariff costs.
That is it for the PML.
I will now cover cash flow in the quarter adjusted free cash flow amounted to $186.2 million, a 23% increase over the prior year on a per share basis.
Our working capital statistics remain solid with Dsos at 40 days and IPO at 4.5 times.
For the.
Year, adjusted free cash flow amounted to $531.3 million as compared with $455.9 million in the prior year.
This represents a 20%.
20% increase on a per share basis in represents a net income conversion of approximately 95%.
We're very pleased with this level and believe we can continue to further improve net income conversion in the future.
Now, let me turn to guidance.
As you heard from Olivier, we're not making any changes to our full year outlook for 2020.
We continue to feel confident about our ability to execute on our growth.
Productivity initiatives.
We believe we are well positioned to continue to gain share regardless of the macro environment.
We also believe we can continue to expand operating margins through our ongoing productivity and pricing programs.
We remain cautious on the macroeconomic environment as certain indicators are weak.
While we believe our businesses less susceptible to an economic downturn than in the past, we don't believe where immune to economic cycles. We will remain in the investment mode, but keep agile to adapt if market conditions necessitate.
Now let me cover the specifics we continue to expect local currency sales.
Growth in 2020 will be approximately 4%.
While the total sales growth is the same we now expect food retail to be modestly down for the year in a double digit decline in the first quarter.
The last time, we spoke we had expected food retail to be up low single digits for the year.
And to be down in the first quarter, but not in the double digit range.
Our sales guidance for 2020 remains unchanged and we are also maintaining our full year adjusted EPS guidance in the range of $24.85 to $25.10, which reflects a growth rate of.
9% to 10%.
While we have incorporated our Q4 beat currencies have deteriorated since the last time.
In total for 2020, we expect currency in the gross impact of tariffs to reduce our EPS growth by 2%.
Absent currency and tariffs are.
EPS growth of 11% to 12% is the same as what we provided in November.
Some further comments on 2020 guidance, we expect interest expense to be approximately $42 million in 2020 and amortization to be $53 million.
Other income.
In 2020 will be approximately $7 million you will note. This is higher than the last guidance and it is related to pension accounting that is offset to a degree by higher pension costs that are above the line and included in operating profit.
Now, let me make some comments on Q1.
Based on market.
Additions today, we expect local currency sales growth to be approximately zero to 1%.
We recognize this is not a level you were expecting so let me walk you through a few factors that are impacting our Q1 sales growth.
First.
Q1 will be our toughest sales growth comparison for the year.
As we had 7% growth in the first quarter of last year.
Second we expect food retail to be down double digits in the quarter, which impacts sales growth by approximately 1%.
And third as Olivier mentioned earlier, we expect the Corona virus to have an impact on our sales in the quarter, but.
For the full year in Q1, we would expect sales in China to be down mid to high single digits, which impacts our sales growth in the quarter by approximately 2%.
The impact from the Corona virus is of course difficult to estimate and reflects our current view of the situation, which is based on the.
Assumption that people returned to work on February 10th.
For the full year, we continue to believe that China will have sales growth in the mid single digit range. The same level that we communicated last quarter.
Let me summarize what this means to Q1 sales growth excluding the impact of the retail.
Okay, and adjusting our guidance for the estimated Corona virus impact we would have expected sales growth in Q1 to be in the range of 3% to 4%.
On a two year stack basis. This would have been growth in the 10% to 11% range, which were pleased with.
I realize we're providing you a lot of numbers, but.
Thought it would be helpful to put the Q1 sales guidance into perspective.
We would expect that adjusted EPS in the first quarter to be in the range of $4 in 20 cents to $4 in 30 cents a growth rate of 2% to 5%.
Absent currency and tariffs adjusted EPS growth in the first.
Quarter would be 7% to 10%.
In terms of free cash flow, we expect approximately $560 million, which is a 10% increase on a per share basis.
We plan to repurchase shares of approximately $800 million in 2020, which includes an incremental.
As we target and net debt to EBITDA leverage ratio of one and a half times.
As in the past, we will buy shares evenly throughout the year.
Some final details with respect to the impact of currency on sales growth, we expect currency to reduced sales by approximately 100 basis points in the first.
First quarter, we would expect currency to reduced sales by 160 basis points.
Thats it from my side and on now like to turn it back to Olivier. Thank you Phil Let me start by providing some additional coleman's although operating results.
Our lab business continues to perform very well with 6% local currency sales growth in the.
Quarter.
Most product lines did well, particularly if you look at it on a two year basis.
Sales growth in Americas in China was particularly strong our laboratory business is well positioned to continue to gain share.
We're very pleased with our robust product portfolio, we expect more could.
Demands to remain favorable, especially in pharma life Sciences.
We also sell our lab instruments into auto end markets and see some pockets of weakness in certain end markets. Overall, we expect good growth in our laboratory business at Twentytwenty, Although we faced more challenging comparisons off the several years.
Okay very strong growth.
In terms of our industrial business product inspection was flat during the quarter inline with our expectations. We continue to believe this business will grow low to mid single digits in Twentytwenty as we've discussed last quarter, we have not yet seen the loss.
Food manufacturers, we turn to full investment mode, particularly with respect to global Rollouts. We believe this is a matter of timing of are well positioned to capture growth. Once these food companies, we tone to investment mode.
Core industrial did great into fourth quarter, increasing 4%.
Against 13% growth in the prior year. This was better than we had expected at we're very pleased with the performance.
We're executing well in core industrial of this business continues to gain traction with a spinnaker sales and marketing initiatives.
Core industrial is also.
Benefiting from innovation.
Underlying market demand is good and all we can capture growth given the diversity of our quality customers end markets and geographies.
Finally, food retail was down 2% during the quarter pretty much on target with what we had expected.
However.
Our outlook for this business has to.
Since the last time, we spoke we expected to be down double digits in the fourth quarter will be down for the yield.
Underlying market demand this week and although we have easy comparisons we don't expect meaningful improvement until late two.
In the late to part of the yield.
We had assumed last time, we spoke but given the lower level of project activity. In 2019, we would have some we talked very twentytwenty based on our outlook for Q1, we don't see this happening until later in the year as a reminder, we're managing this business.
For profitability, which also makes for costing sales a bit challenging.
We have impacted cost reduction actions over the last year in light of the challenging conditions.
Now, let me make so my vision call month by geography.
I will start with Europe, which was up low single digits lop.
Growth, while core industrial product inspection were down against very strong growth in the prior year period.
We continue if you think this business will be up low single digits for the year, we would expect a modest decline into first quarter, principally due to significant decline in food retail as well as the 9% growth.
In Q1 0.29 key.
America's continues to do very well with 6% growth in the quarter Lob on core industrial had strong growth, we expect market conditions to remain favorable and expect solid growth in 2020, but this region will be.
Active by prior year comparisons.
Finally, Asia, our western World have solid growth with most business lines doing well, except for food retail China had strong growth in the quarter with double digit lab growth on high single digit industrial gold.
Excluding the temporary.
Part of the core Ono virus outlook for this region remains favorable but they will continue to face strong multi year composites.
I want to point out that in Q1 last year, China grew 13% the strongest quarter off the year.
Drew to be tough.
Comparisons on the impact of the virus. We discussed earlier, we now expect Q1 sales in China to be down mid to high single digits.
Our full year sales growth in China remained unchanged from our previous level of growth in the mid single digit range for the full year, principally due to strong multi year.
Comparisons on a slightly more challenging industrial environment.
One final comment on the business service in consumable together, we presented at about one third of our sales growth on both grew 7% in 29 team.
Very happy with the strong accomplishment.
That.
Includes my comments on the different pieces of the bit.
We often speak to you about how we view, our spinnaker sales and marketing programs as key differentiates us in the market.
Another important differentiator is the strength and breadth of our product offering.
Let me give you some of these.
Usually insights starting with our laboratory offering.
We can provide more than 40% of the instruments that a scientist or chemists use this daily in a typical analytical lab.
These instruments ranged from balances on pipettes analytical.
So trust ph meters tied to a disk anew visvis.
And finally to our automated chemistry solutions, which kind of help Indra process development.
We compete against different places across these product categories. No. One has the breadth of leadership of venture instruments.
But we do.
I will allow back software can link these instruments and provide connectivity to a limbs or laboratory information system.
This is very powerful.
This is a very powerful competitive advantage as non of our direct competitors has anything close to this capability.
More important than the number of instruments. We can provide is the value. These instruments provides to our customers.
Across the portfolio of instruments, we focus on three important value commit dimensions first is automation.
I will instruments provide great efficiency highest sample throughput.
Unless errors in daily laboratory talks and analysis.
Second is inflammation.
Our instruments can perform complex analytics, often with one click off of Boston and also can ensure the integrity and trace ability of the data.
This is especially critical.
In regulated environment.
The final dimension is measurement quality.
We provide services such as calibration and good management practices to support the quality of our customer processes.
We refer to the value outlined in these dimensions.
The power of the bench.
Our focus is to leverage and response to global trends that our customers face so truck demand for greater productivity and digitalization and data management needs.
Our lab solutions ensure compliance some data integrity and.
The real advantages in terms of automation and productivity.
We have additional product launches and R&D developments in Twentytwenty that we'll continue to reinforce the strength of these value dimensions.
Likewise on the industrial side, our product offering is very strong and we continue to this.
Distance ourselves from competition with the breadth of feel free.
Our industrial customers are constantly striving to improve their productivity and streamline data management.
We are launching several highly innovative products and applications to help with these challenges for example.
Envision is our breakthrough innovation for Manuel work places, where weighing counting and packaging costs have high aero potential.
In region uses machine learning and combined Wang technology on camera recognition for failsafe parts identification in merely.
Second.
Guided working steps optimistic optimistic based on capital and process verification significantly increases production quality and Walker efficiency.
The instruments directly connects to the customers production and ERP systems, providing full data.
His ability and visual pools of order fulfillment.
We expect customers could achieve productivity improvements of up to 30% with decent were dilution we product.
This is just one example of money you product developments underway, whether combination of multiple sensor technologies.
Other use of machine learning of fiscal intelligence enables us to develop breakthrough innovation.
With unique new value propositions. Furthermore, by utilizing different R&D expertise throughout the world. We can evolve these products advance short time period.
These are just a few examples of the strength of our R&D innovation that continues to be an important component of our market share gains.
That concludes our prepared call, but we're very pleased with our results in the fourth quarter on full year 2019.
While uncertainty exists in the global economy.
We believe we're well positioned to gain share of deliver good earnings growth and solid cash flow generation in twentytwenty.
Now I want to ask the operator to open the lines for questions.
As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question Chris.
<unk>.
Please stand by only compiled acuity roster.
Your first question comes from Brendan.
Jefferies. Your line is open.
Hey, Thanks, good afternoon.
Number in home Olivia Ashantis, we sort of thing about China and the virus impact on.
The first quarter, which.
Cements would be more impacted than others see lab versus industrial would you expect to recoup most of that into Q2 or more over the balance of the year and would you remind us how much of the China manufacturing.
For the export market versus domestic consumption.
Okay.
So.
Referring to the the segments with the biggest impact.
First I want to start.
The fact that offices are closed here for additional base has an impact across the business. The second impact that I want to highlight is the restrictions of the field sales force in terms of traveling.
Again, that's quite.
Broad base.
On that latter part however, we can take mitigation measures we are flex up a very active already this week in.
Rolling out a broad training program.
To our own salesforce as well as our indirect channel partners.
To be more effective in telesales.
In the past, we did telesales with a full cost team now we want to make sure also that failed salespeople are.
Experts in telesales and leveraging that now.
This is kind of.
The short term impact now were too when we think about segments, we need to think.
Also.
The demand side that will be impacted here in Q1 and has the next approved one that we expect to be most impacted is the retail business the retail.
Yes.
Is impacted because the.
Chinese consumers behave differently at this stage.
That will.
Feel in is.
Quite throw away.
The lot business I would expect to be thanks, very much less impacted.
There might be even some upside later in the year.
Now.
In terms of how far off.
This comes back we do expect the pent up demand we do also expect that.
From a Chinese government standpoint that might be some stimulus that will help.
I would hope that which is already some of that in Q2, but certainly expect that it's going to take Q3 on Q4 to fully recover so certainly not the full recovery in Q2, absolutely adult.
Then in terms of.
The.
Hi chain, you are asking how much of the products we produce in China. So.
And then export to the west.
I would first say we have a parts.
When we produced in China, but of course, we also source components and that's quite significant but on the good news is.
We are very close on this whole supply chain impact.
The low who local Chinese team has done a fantastic job in assessing the impact on picking mitigation factors have also my global supply chain team.
Very actively on.
We have for example of contacted all our suppliers.
And all our Chinese suppliers, so far have given us green lights, we feel comfortable we have also taken a mitigation factors.
At this stage, we do not expect.
Any.
Second the impact on our global global supply chain.
No I don't expect any significant delivery issues coming out of that.
But this is also assuming that operations will come back on February 10.
If there are no.
But I.
I still feel mitigation factors will help but of course it called lost four weeks.
Thanks, and just will more than the core industrial business is pretty remarkable given the tough comp in the fourth quarter two sources to elaborate on some of the drivers there. If there was any perhaps fourth quarter budget flush dynamic and.
Maybe speak to some of the some of the innovation and maybe new products that might be supporting.
The strength thanks.
So in indeed, very happy about the results did also exceed expectations.
I really feel this is a reflection of very good execute machine by the team survey.
Around the world because the end user markets that we serve with core industrial when not particularly strong.
As mentioned that we even saw some pockets of weakness is nevertheless, we did your very well.
The.
A field.
Core industrial.
It's from things that we shared with you at previous occasions in the context of Spinnaker sales force guidance. For example helps really I'm a very nicely in the core industrial because it helps us to guide the salespeople to the industry segments that are the most relevant and most interesting for US we had four so.
Particular focus on life science industry and pharma industry for core industrial.
To help.
So.
On one hand this whole how the go to market dynamic of the marketing that was strong and then we had a good product portfolio Delaware.
Any smaller innovations, but all together they make a difference we had.
Hardware products, but we had also sofmap products that we have introduced over the last two years that benefited.
At the previous occasions, I have shared with you for its up revenue.
Portfolio for the floor scales.
But also.
In the area of counting scales and so on so good good product and on the prepared remarks earlier I just highlighted the product in vision.
The backlog also feel is.
Approve of of.
Strong leadership and innovation.
Now none of these products will be important enough to really make a difference to through the topline the group sales, but an aggregation together they make a difference on the sometimes help us to open new doors on sale.
No significant solutions to key accounts.
Okay. Thank you.
Your next question comes from.
Bank of America. Your line is open.
Great. Thanks for putting the early before.
The question guys.
Just quick one.
You mentioned some softness in the lab business some pockets of softness could you elaborate on that when I would assume some that could be or thermal analysis portfolio.
Yes, well or let let me quickly jump in with.
We are talking about certain end markets that have which does not okay. So it's really end markets.
When I talk about end markets and this wasn't just lap. This this is kind of overall if you think a third of our revenue roughly comes from pharma lifestyle.
And the order today.
Come from 90 different industries, and we have industry end user industry like medical plastic electronics.
And even some chemical industry that wasn't particularly strong and it depends a little bit by region, but frankly.
A couple in Europe, you have the automotive industry that is really weak now automotive itself is not an important segment to us, but there are suppliers to the automotive industry that are relevant for us plastique.
But also again components at all and so we have these end user markets now.
You will say hey, that's more relevant for industrial no actually for lop too because we haven't lot of instruments that go in quality lapse and until we saw so for example, someone hollysys would go and be relevant there also weighing and so.
Even that when you look at the whole product category for us.
We did well, but when we analyze it by end user segments. We saw some pockets of weakness and that was what I tried to highlight kind of also say in trying to say hey, we have you on economic environment that is good and off for us, but that doesn't mean that every end user.
It is as strong as lifestyle.
Got it that's really helpful and and I guess, just sort of looking at those pockets or just looking about those saying that there's I mean.
You know do you think there's when that when those segments do recovery. There is pent up demand in those segments I mean, given that they're sort of like outside in the life Sciences there.
Doug I think for de segments.
We are raw, though.
Late cycle and and in that sense I think.
Right now we are in that situation. We saw it in Q4, we soil. We will also see it in Q1.
But that's it I think actually there is upside on that one I I rather think.
We see it also in certain PMI studies against all that these segments should actually start to recover but.
But let's be deals are cautious the overall global economy is.
Okay.
Yes.
Great and then just one follow up obviously tariffs that had been a headwind for you and we've got this.
Trade deal on the horizon between the U.S. and China can you sort of talk about your expectations sort of for near the trade outcomes or like how that get impacted if things get resolved.
So.
The deal that took place.
Doesn't have a direct benefit to us so the types.
That we are impacted on our still in place and I don't think there is.
Anything near term here that could change. However, the fact that there was a deal between us and China helps the overall economy helps confidence in China and that's good for us.
Again, I do not expect.
That type situation will change here in the near term and so we are assuming four times the status quo and that means we still have headwinds.
From types for an outdoor or two quarters, yes, so just to be clear, we're going to have had.
Wins for Q1 of about 2%. It was the gross impact the tariffs and then we'll have a little bit impacting Q2.
Great.
And just one final question, Sean what's the embedded.
A number for operating margin expansion in the near 2020 Guy.
Excluding the.
Impact of currency, we're probably looking at about 70 basis point impact improvement in 2020.
But currency will will probably right now we're looking at it could it could have a headwind of up to 20 basis points.
Great. Thank you very much.
Your next question comes.
Patrick Donnelly with Citi. Your line is open.
Great. Thanks, guys.
Olivier maybe just on the guidance since the last update last quarter. We now have the headwinds from food retail turning negative for 2020, a little bit uncertainty around corona virus bit of a headwind in one Q at a minimum just trying to think through how it seems like a few things.
Again, you guys, yet you're maintaining that overall guide was there just enough conservatism in the original number you're able to absorb these headwinds maintain the guidance maybe it's it's more fair now there's a little bit of a cushion removed or to other things in the portfolio improve a bit to allow you guys maintain that number.
I would highlight two things.
First.
We did better than expected in Q4 on that gave us confidence even more confidence in our execution shows that our programs are really going well and until that played a role and the second one is you.
You mentioned here a few things that we.
We are more concern now, but then I would highlight core industrial that I feel better and I I highlighted we had really a very good we spent a.
Well results here in Q4 on we have better confidence for the full year. So I think that that's a combination of things.
Net net I feel a as comfortable about the guys.
But for this year as I was in November and that's really why we keep the full year guidance, even that we see here for Q1, I'd be Qatar and as we mentioned in the past two one of the big questions. We had a quarter ago is.
What is going to be like when we start to lap some of these tough comparisons in core industrial I mean, we just lap 13% last year and we have one quarter behind us in that regard and now it gives us a little bit more confidence in the momentum in that business.
That's helpful. And then just on the recovery of the sales later in 2020 in China specifically.
We can you just talked through what gives you the golf since those are going to come back and then on top of that just any metrics you can help us think about if this headwind does keep going as China is shut down a little bit longer than February 10th how sensitive is a business to another week. Another two weeks et cetera. So you can provide would be helpful. There.
So.
We from experience we have seen that if you have if we have a significant slowdown we have the pent up coming back and and that's just based on experience and we have every reason to.
To feel the same way here.
As.
As mentioned before I do expect that the government will also support the economy and and then we will benefit and there are certain areas, where we probably going to see a more investments, particularly in the reality of life science.
I saw an outcome of.
Yes.
The second question.
It's not an easy one to 200 to be honest, we Oh, we have.
Spent significant time to we view here with our local team the.
No.
For this February 10, we stopped.
I think you will mostly depend what kind of actions the government takes.
If the government would suddenly extend.
Bruce.
The block peers for.
For Oh price that people would not allowed to go back to the facility or so that's one but they order one they might restrict travel.
And.
I can't be give you good numbers here for all the difference than ours.
Scenarios.
From two days perspective, I'm, not particularly concerned about the supply chain I think we can monster dot and we have reasonable contingency. Even if this takes a few extra days I don't see that as a b.
Problem.
So the bigger question is actually how our customers will react in that situation. That's the big one I think to what we can manage things. We you heard me, saying before we have contingency plan. When we think about alternatives, we have to family channel that we can activate.
Great and all that stuff, but it's difficult to anticipate what the customers will be.
We have so many different customers in China. You know you have international customers you have to local once you have food you have like sense.
So.
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Every expansion will impact our numbers no question.
But I think with our guidance that we gave you on the details. We gave you. We gave you already quite some indication that this extra days of closing has a significant impact on our numbers.
And if this is extended by one or two weeks then you need to assume that our numbers will be worse than what we are guiding you right now in Q1.
I appreciate the color Libya.
Your next question comes from.
Oh Peterson with JP Morgan Your line is open.
Hi, Thanks.
On the cost side of things you know you had flagged some cost reduction actions.
Last year I felt like they may be over in the first part of this year, but it seems like there was programs are continuing is that correct assumption I know you accelerating any cost actions on the.
Food business in light of you know, what's now a lack of recovery there yeah. It's a we we initiated a bit torrent cost actions, there where cost actions related to the food retail business decrease were executed throughout last year Sun, We gonna have.
The.
It also.
Ongoing late here, they're well also cost actions that we did in the area.
I see a back office and so on.
This well executed mostly in Q3, yet and so we have you more benefits.
Coming in this year, so yeah different things, we have benefits in twentytwenty coming from not done rebuild it in in our guidance and then and talk to that of course, we have our ongoing programs under the Sterndrive umbrella that we're constantly doing as well too.
And then Sean on.
Can you quantify the price contribution in the fourth quarter and and you know you had to question before on on tariffs, but as we think about you know those eventually kind of getting unwound just your your latest thinking on on ability on the capture price.
Yes, sure so on and the price in pricing, we're very pleased with the quarter. It came in very much as we expected just.
Just slightly under 2.5%, which kind of puts us right at that same kind of number on a full year basis and then in terms of terrorists you know on an annualized basis.
The gross had one is about $25 million as we've kind of communicated in the past if it if at all went away you know.
Some of the mitigation actions would also go away.
We've kind of mentioned in the past that we would see probably an EPS growth benefit of 1% to 1.5% I'd, probably say sitting here today, it's maybe closer to one of the half percent kind of benefit on an annualized basis.
Okay, and then just lastly, given the unchanged China outlook, you know settings.
Aside the krona virus impact are you factoring in any government stimulus versus the macro slowdown there and the base business.
We haven.
I mean, it's not like we have a formula where where it's so so micro but I mean, certainly it's in our thinking and to give us confidence that we can still.
Meet the midyear I mean I'm sorry the.
The the mid single digit sales growth guidance for the full year for China.
It's kind of Olivier kind of already mentioned with the expected recovery in the second half of the here, but certainly you know that could be an upside that we could see in the latter parts of this year.
Okay.
Thanks.
Your next question comes from Dan Leonard with Wells Fargo. Your line is open.
Oh, Thank you circling to China again can you elaborate on the fourth quarter performance you came in better than than we were looking for where did you achieve plan in some of the other.
Ladies and analytical instruments talked about some weakness in China in Q4 in towards year end, apparently you didn't see that can you discuss maybe what the differential trends you were you were saying.
Yeah, we were very pleased with China. It came in a little bit better than we expected 8% growth.
On the laboratory side, we were.
Double digit growth. So we're very pleased with that given the stack comps that we talk to you about in the past.
But equally very happy with the industrial business I mean, our industrial business was up high single digits very strong high single digits. So we're very pleased with with that type of growth as well to offsetting that as we had I'll.
Weaker results in the local retail business, there, but it otherwise very pleased with what we saw in the quarter and and frankly, we're feeling very good entering 2020 before the Corona virus situation.
Hey, I I would attribute its two really good execution by the team I think the team does a.
Caustic job I'm, they are very effective in implementing spinnaker and they.
They are really good.
Going off to the industry segments that have the best opportunities and that was very helpful and in that environment.
We experienced hearing in China last year.
And then my follow up how are you thinking about Europe into 2020, you you're coming off three quarters here, where we're growth was just barely above flat you have a tough comp in Q1, so that'll be four quarters. That's ever resolved how are you thinking about the outlook for that region looking forward. Thank you.
And we expect to get us to us a slower start there as you mentioned, we have our toughest comp there with a 9% growth in the prior year.
Europe will also have a little bit a retail effect you now in the first quarter as well.
But right now or you know we continue to feel like the economy.
Has been good enough there, but we're very much aware of where PM ice has been over the last year. We continue to monitor closely but as we always say as long as customer stick to the replacement cycles, we feel pretty good and similar to China. We also have a very strong execution by our sales and marketing organization in Europe in.
Given that it's our largest direct business you know, we often get the most impact from a lot of our spinnaker sales and marketing initiatives there.
Okay. Thank you.
Your next question comes from Dan.
Stifel. Your line is open.
Afternoon, guys. Thanks Olivier on the.
Food business it sounds like this one to being a pretty prolong period of.
Just challenging conditions by the time, our son said and done I guess I'm wondering once you've recovered a bit do you think there might be some new marketshare opportunities does that in a picture is the competitive landscape pretty saddled with a with a bunch of big players in it.
I think the competitive landscape.
It is quite simple because we are not running the food retail business.
For market share, we we really run this business for profitability.
We are focusing.
Particular on larger accounts.
We are focusing on the most attractive countries.
And they're not since we have we find always try to GE on executing that strategy.
We'll stick with it even when the market will.
We cover.
Yes, yes, I think we we are really we want to be very disciplined on.
On on that business and you know we have to be running this strategy for quite a few weeks.
Irrs and its of course, it's it it hurts when we see that impact our top line, but this resource shifting that we are doing in the organization helps us to grow money businesses with excellent profitability with.
Excellent long term.
Growth opportunities.
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The food retail business, we did less of that.
And as a consequence, it became more in percentage of the total business today food retail is about 7% of a revenue.
This is much less than what did was a couple of years ago and I feel this is the right strategy, so I'm not irritated.
By this temporary challenges but of course it hurts no question.
Yeah, I got you, Okay, and then Sean I guess, maybe this is a housekeeping question, but anything.
Thing from a pacing perspective across the quarters of 2020 that look either different or.
Earlier than they did back in October aside from the obvious what the virus and food factors.
I mean, I will take longer fundamentals.
Yeah, No I mean, you know have course, the recovery from the kroner viruses now.
Like the topic thats going to impact Q2 versus Q3, but yeah.
Nothing really standing out from my mind, when I look at the rest of the or at this point in time.
Okay. Thanks much.
Your next question comes from Jack Meehan with Barclays. Your line is open.
Hi, this is.
Andrew Walt on for Jack I'm, turning to product inspection can you walk us through some of your customer segments in the trends and spending.
Okay.
Two biggest category is packaged food.
That's the biggest one but you would also.
For example, cosmetics industry I've also little bit of pharma and you also have.
A meat.
Which can be on package meat. So these are kind of two different categories.
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Our typically.
Beats companies.
Many of them.
Global operations.
Yes, that's would characterize kind of the key and user segments.
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D. this packaged food companies the branded packaged food companies.
I have.
Okay.
Difficult period, they are new market trends.
From consumers that impact things.
You have.
Channel topics that they face is branded consumer package companies.
You see that also kind of <unk> overall performance of these companies are markets about cops and so on and.
That has an impact on that.
Vestas behavior.
And we feel that.
That's great. Thank you and in Europe have you seen any impact from stocking related to Brexit.
No no no the whole Brexit topic.
Has not been a particular relevant one for US now we had our contingency plans in case it would have been a hard Brexit.
I'm now things are really call on process and of course, if at the end of the year.
This hard Brexit becomes again.
Probability than we are contingency plan will be very relevant.
But I want also to remind.
The UK is.
About 3% of our revenue so even if it breaks it would have some demand implications it it's not so.
Relevant for the group level.
Your next question comes from the Jake.
Evercore ISI your line is open.
Hey, guys. Thanks for taking my question now what do they just maybe up a big picture.
You know I'm on the revenue site.
And I appreciate all the macro comments, but if you just look at over the last few years.
You know lab products, it's run a pretty pretty hot it did slow down in 19.
In 19, you also had a food which was severe or any head.
Yes, which were incremental.
Right, if the macro really hasn't changed I'm, just I'm like whereas the data coming in when you look at where since 19 were says 20.
Right and I think you know put putting all the piece together I think you're trying to say macro hasn't changed.
But we're trying to be prudent so maybe just walk us through on something where you think I could.
Be the plus and minus.
Yeah, let me have shown to respond to your just made to clarify a few things and then I come back yeah. So VJ, maybe one thing is that in 2018, if you're comparing it to growth in 18 included a little bit of acquisition growth. So I think if you look at 19, an 18 on an organic.
Says, we're both Annabel I think it was 7% him in both years. So from our perspective, we don't feel like there was any difference or slowdown and especially when you look at our growth on our multiyear stack basis, we feel very good about the business and the momentum and if you look at inside the business what was I think particularly.
This year as you saw very very strong growth across many of the product categories and so it just shows you the breadth of the portfolio really working the robustness of the portfolio lots of new products coming out in the last few years and of course lab benefits disproportionately from our spinnaker initiatives just given the end markets.
And a lot of the focus so I'm. So we we actually felt very good about lab entering this year recognizing people might have.
Wanted us to to guide higher than mid single digit, but really it was very much just related to the multiyear stack comp.
No I think I leave it was.
Totally agree and and that's.
Since I don't think there is a particular effect here that's <unk>, we need to highlight.
Understood and then maybe one last one then Sean maybe I missed this but the pricing assumption for 20 is that consistent with the with 19 and not anything on the tax line plus or minus four acrtwenty versus.
19.
Yeah. So on the on the pricing side, you know, we had kind of previously guided between a 150 basis points to 200 basis points, Hey, acknowledging that you know the last few years, we've been in that 200 plus basis point range, but I think it's also fair to say in the last few years, we've also been able to take.
Advantage of some inflationary situations or the tariff situation.
We kind of entered 2020 with a lower inflation environment around the world. So I I think we probably will see you know something more in though the 150 to 200 basis point range.
And then in terms of the tax rate no.
No change to 2020.
We expect to be a 20% before discrete items I'm in a in 2020.
Thanks, guys.
Thanks.
Your next question comes from <unk>.
Research Your line is open.
Hi, Thanks for squeezing me in here I guess first Olivier.
Based on the feedback you're hearing from you know either internally or externally. How confident are you at this point that things get going again next Monday in China.
[noise] from today's perspective.
Every thing points out today.
But honestly things have changed a lot every day we have.
We haven't been on the on the phone and email exchanges every day and that was always news.
I think.
That's center.
I am confident with being formation, there I have but I have also seen that individual providences.
Make their own decisions and that can also influence us. This can they can be travel restrictions specific to.
Open seasons Wong.
But again from today's perspective, we do expect that we can we launch I will prices.
Okay. Thank you and then just a follow up on that are you expecting any in terms of the the revenue headwind from this.
Kind of extended holiday does it impact the segments equally or would you know he's one of the segments impacted more in the near term here.
I'd like to covert early on.
We first we are impacted now just by the fact that recalled.
Meet our customers and that calls really take orders or initiate quotes and only six that sure I would say Joe independent across all the industry segments, but then they're our industry segments that will be.
Impact it in terms of demand in Q1, I was highlighting that fix of retail will probably be more impacted then life science fall more customers, maybe even packaged food companies. So there will be differences.
Very good Sean just one quick one if I.
I have my notes correctly from a quarter ago I had written down that you were thinking about 90 basis points of margin expansion. This year, one back it out FX and I think as you said 70 basis points now just wanted to clarify that yeah. We you know, we we were a little bit more optimistic on the margin maybe three months ago one of the.
Things kind of mitigating that was.
Higher pension service costs, so there's a benefit but beyond that for the non service parts <unk> service part is the Buffalo piece. So they kind of you know largely offset each other in terms of vps, but it's a little bit more of a drag on on okay.
Okay. Thank you.
Your next question comes from Brendan.
Yes. Your line is open.
Great. Thank you thanks for taking the questions Olivier on what's going on in terms of the 2020 kind of making up a the temporary shortfall here in Q1 does that work equally for both consumables and instruments or would it.
<unk>, Yeah, you likely kind of make goes up but I've figured consumables.
Whatever research isn't done or whatever you know things aren't done in Q1, probably get lost so can you speak a little bit too I know you're more instrument happy, but how do you characterize kind of your ability to make up both instrument consumable.
Whatever's loss in Q1.
Helms consumable topic.
Most of our consumable is actually related around at least liquid handling pipettes I actually the pipette business could be one that has some upside from the whole thing you can imagine, but piping is very important and I wouldn't be surprised that we saw.
Transform will will be intensified, it's even an area that we use right now see in our Chinese business. So I don't think that we will lose on the consumable business for the full year and even the auto parts of the consumable I don't think.
Be much impacted.
This the consumable piece is impacted by the research activities and in the area of production for example, when I think about process analytics and so on I don't think that demand would be impacted for the full year.
Yeah, we might see something and.
Service, but but that's a smaller part of the Chinese business versus our global average.
Great and then and then I know you addressed this earlier, but I wasn't kind of wasn't clear maybe I just missed it or are you assuming in your full year guide that the government does produce some additional stimulus or would that Sean I think you may have actually sit takers.
And that would actually could lead to upside I just want a clarification on that.
Hey, we it's part of the.
Pent up recovery that we were mentioning before it's not huge but we have it adds a bit operation yes.
Got it and then this might be hard to do but given Kronos I was just kind of you know attracting a lot of things outside of China, but is it possible take on a step back from corner virus and say you know you even pretty consistent since last year flagging. These uncertainties in some pockets of weakness, but yeah, we have seen CMI pickup.
A little bit here is it possible look as you know kind of.
Separate Corona lives from what you're seeing globally and I think as you look back over the last couple of quarters things looking any better it's stable worse, because you know the language seems somewhat I just want to see how you characterize the global environments your businesses.
It didn't change too much I think well I was highlighting.
Before that I felt better about our execution in Q4.
Particularly where I was wincor industrial, but also overall effect or better on that piece what came in weaker is food we tell.
Certainly we have no certainly a global economy.
But I wouldn't give too much weight on that so net net I feel the same.
And then maybe one more just on on product inspection, what what could we look for in terms of visibility or are you kind of environment getting better is it.
Packaged food Capex are there any are there any are there any trends.
We can watch ourselves just to kind of see or get ahead of when this market could begin to recover and <unk> and you kind of see then investment spending habits.
Oh packaged food Capex is certainly a good indicator for that disease any indication how much investment is going in a packaging <unk>.
Equipment and.
All these things that's that is and.
In general when I would say when these.
Consumer packaged food consumer package goods companies.
We covering we will see invest going back into it.
Great.
Thank you.
There are no further questions at this time I don't know turn the call back over to the presenters.
Thank you and thanks, everyone for joining us this evening as always if you have any question. Please don't hesitate to reach out take care and have a good night everyone.
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This concludes today's conference call you may now disconnect.
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