Mettler-Toledo International Inc (MTD) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Mettler-Toledo International Earnings Conference Call. My name is Erica, and I will be your audio coordinator for today. (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.

Thank you, Erica, and good evening, everyone. I'm Mary Finnegan. I am the Treasurer, and I'm responsible for Investor Relations at Mettler-Toledo. I'm happy that you're joining us this evening. I'm joined by Olivier Filliol, our CEO; and Bill Donnelly, our Executive Vice President.

I need to cover just a couple administrative matters. This call is being webcast and is available out for replay on our website. A copy of the press release and the presentation that we refer to is also on our website. Let me summarize the safe harbor language, which is outlined on Slide 2 of the presentation.

Statements in this presentation which are not historical facts constitute forward-looking statements within the meanings 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, level 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 the discussion in our recent Form 8-K. All of 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 and Results of Operations in our Form 10-K.

Just one last item. On today's call, we may use non-GAAP financial measures. More detailed information with respect to the use of and differences between the non-GAAP financial measure and the most directly comparable GAAP measure is provided in the Form 8-K. I will now turn the call over to Olivier.

Thank you, Mary, and welcome to everyone on the call. I will start with a summary of the quarter and then Bill will provide details on our financial results. We will also provide an update of our guidance for this year. I will have some additional comments, and we will then open the lines for Q&A.

The highlights for the quarter are on Page 3 of the presentation. We are pleased with our fourth quarter results and the strong finish to the year. Local currency sales growth of 6% came in as expected. We are especially pleased with the strong broad-based growth in our laboratory business. Overall, demand in our markets remains favorable, and we are executing well. Our productivity initiatives continue to generate positive results, which drove another quarter of strong adjusted EPS growth. We are increasing our guidance for 2018 and believe we are well positioned for further market share gains in 2018 and beyond. Let me turn it to Bill to provide more details on the financial results.

Thanks, Olivier. Hello, everybody. Sales were $778 million in the quarter, that's an increase of 6% in local currency. Our acquisition of Biotix, which we completed in Q3, contributed about 1% to sales growth. On a dollar basis, sales increased by 10% as currencies increased sales growth by 4% in the quarter.

On Slide #4, we show local currency sales growth by region. Sales grew 9% in the Americas; 1% in Europe; and 7% in Asia/Rest of World. Biotix contribute approximately 2% to the Americas growth. Sales growth in China increased by 13% in the quarter.

On the next slide, we show full year sales growth. Local currency sales grew by 8% in 2017, of which 1% was due to acquisitions. In the Americas we grew by 8%; in Europe, 5%; and Asia/Rest of World grew by 11% in 2017. Americas growth benefited by about 2% from acquisitions.

On Slide 6, we outlined sales growth by product line. In the quarter, lab grew 11%, of which 9% is organic; Industrial sales growth was 1% as solid growth in core industrial was offset, as expected, by a decline in our product inspection business, which had a strong prior year quarter. Food retailing declined 3% in the quarter.

The next slide shows full year sales growth by product line. Laboratory grew by 10%; Industrial increased 8%; and Food Retailing declined by 4% for the full year. Acquisitions benefited lab by about 2%. All comparisons, again, were in local currency and all were versus the prior year.

Now let's turn to Slide #8, let me walk you through the key items on our P&L for the quarter. Gross margins were 58.5%, that's a 50 basis point decline from the prior year. On a constant currency basis, however, our gross margins actually increased by 20 basis points, reflecting a 70 basis point headwind from currencies. We continue to benefit from good pricing, while mix was a headwind in the quarter.

R&D amounted to $32.5 million, that's a 5% increase in local currency, while SG&A amounted to $204.9 million, and that was an increase of 6% in local currency. Variable compensation, investment in field resources and employee benefit costs contributed to the increase.

Our adjusted operating income amounted to $217.8 million in the quarter, and that's a 9% increase over the prior year amount of $200.2 million. Adjusted operating margins were 28%, a 20 basis point decline from the prior year. On a constant currency basis, adjusted operating margins were up by 20 basis points over the prior year amount.

A couple of final comments on the P&L. Amortization was $11.7 million in the quarter; interest expense was $8.6 million.

Let me now cover taxes. First, for purposes of adjusted EPS, in Q4, we're excluding the impact of the new tax legislation, which I'll cover shortly. Also, as we've done in prior quarters, we reflect our annual effective rate -- tax rate of 22% in our adjusted EPS number.

In Q4, our reported tax rate for the quarter was 23%, with the difference due to the timing of stock option exercises.

Moving to fully diluted shares. They were 26.2 million in the quarter, which is a 1.5% decline from the prior year, reflecting the impact of the share repurchase program, offset in part by higher shares outstanding due to the accounting change related to stock option exercises.

Adjusted EPS for the quarter was $5.97 per share, that's a 13% increase over the prior year amount of $5.28 per share.

Now let me make some comments on the new tax legislation that was finalized at the end of last year. A couple of factors are important for us. First, as expected, we do not foresee a meaningful change in our effective tax rate of 22% in the near term. While we benefit from the lower U.S. statutory rate, this is offset by limitations on certain deductions.

Second, we view the legislation favorably as it will reduce the complexity of repatriating cash to the United States. It's long been our strategy to move cash to the United States to fund our share repurchase program, and this legislation will make that process easier.

Third, we're subject to a onetime tax in conjunction with this new legislation. We've incurred a charge of $72 million in the fourth quarter, of which $59 million represents taxes on unrepatriated foreign earnings that will need to be paid over an 8-year period, and the remaining $13 million is a noncash charge.

On a reported basis, our EPS was $2.93 as compared to $5.17 in the prior year. Reported EPS included the $2.74 charge related to the tax legislation we described above, $0.12 of restructuring and $0.09 of purchased intangibles, and finally, $0.09 of higher reported tax due to the timing of stock option exercises.

On the next slide, we show our full year results. We are very happy with the year in which we achieved local currency sales growth of 8%, our operating income increase of 13% and adjusted earnings per share growth of 19%. Okay, that's it for the P&L, and now we'll cover cash flow.

In the quarter, free cash flow was $130.7 million, our working capital statistics remains solid, with DSO at 41 days and ITO at 4.5x. Full year free cash flow was $415 million, this compares to $346.5 million in the prior period. We have some nonrecurring facility expansions going on, and last year included the purchase of pipette manufacturing facility. Excluding these items, free cash flow per share increased by 14% over the prior year.

Now let me turn to guidance. A few comments here. First, the economic environment continues to be favorable, with good conditions in the Americas, in Europe and a positive environment in China as well. I would say we don't see a change in economic conditions as compared to last time, we spoke. As in the past, our guidance assumes market conditions remain consistent to the present environment.

Now second, we feel that very good about our growth strategies and our ability to execute them. We're pleased with our performance in 2017. And we believe we have good initiatives in place to gain further share, as well as continued margin and productivity enhancement initiatives, which should help us drive solid operating profit growth.

Third and final point, comparisons matter. We'll have some tough comparisons this year in China in our product inspection business, particularly in the early part of the year. And with this backdrop, let me cover some specifics.

We continue to believe that local currency sales growth in 2018 will be approximately 6%. Principally driven by a more favorable currency environment, we now expect adjusted EPS to be in the range of $19.95 per share to $20.15 per share, that's a growth rate in the 14% to 15% range. This compares to previous guidance of $19.65 to $19.85.

As we look at the first quarter, we would expect local currency sales growth to be in the 5% range. As a reminder, in Q1 of last year, we had 11% organic growth, so it was our most challenging comparison. Based on this sales growth, we would expect adjusted EPS to be in the range of $3.65 to $3.70, a growth rate of 9% to 11%. This is modestly higher than what we discussed last quarter, principally due to a more favorable currency environment.

In terms of currency impact on sales growth. We would expect currencies to increase sales by approximately 3.5% for the full year 2018. And in the first quarter, we would expect that benefit to be about 5.5%.

In terms of cash flow. Our free cash flow should be approximately $450 million, and we'll repurchase approximately $475 million of shares.

Just 2 final comments on our 2018 financial results. There are 2 new accounting rules being implemented. The first is on revenue recognition, which we do not expect to impact our results. The second is related to pension accounting, which will move approximately $6.5 million of pension income from operating profit to other income. As we report our quarterly results, we'll restate the prior year, so it's apples-to-apples comparisons but want to mention it now. Okay, that's it from my side, let me turn it back to Olivier.

Thank you, Bill. Let me start with summary comments on business conditions. Lab had a great quarter, and great year overall. Virtually all product lines performed well. Our investments in new product development, Field Turbo resources and our Spinnaker sales marketing programs are yielding tangible results. We expect current market conditions to remain but acknowledge that we will face tougher comparisons this year in lab.

Turning to Industrial. Core industrial business was up a very solid mid-single digits in the quarter and high single digits for the full year. The fourth quarter growth in core industrial was broad-based across all major regions of the world. As expected, in the fourth quarter, product inspection was down modestly, but ended the year with a high single-digit growth. We continue to be very well positioned in product inspection in terms of product offering, market presence and marketing strategies. We are coming off 2 strong years of growth, so we'll face tougher comparisons in 2018.

Finally, retail was down 3% in the quarter and 4% for the year. Although we had a sales decline, we are satisfied with this business as we continue to prioritize profit growth and return on invested capital rather than sales growth.

Now let me make some additional comments by geography. Sales growth in the Americas was very good, with strong growth in Laboratory and solid growth in Industrial. Retail was down slightly.

Sales growth in Europe was impacted by declines in retail and product inspection, both of which have challenging comparisons with the prior year. Lab had good growth and core Industrial solid growth. Asia/Rest of World had solid growth, driven by very strong growth in China. For the year, China sales grew 19%. We expect China to have a solid first quarter but they will then face more challenging comparisons in the second and third quarters.

Finally, service increased 7% for the year. That concludes my comments on the business.

Supported by favorable global economy, but driven by diligent execution of our growth initiatives, we had an excellent performance in 2017. We're also benefiting from our growth investments in recent years. As we look to this year, we believe we are well positioned for further growth and share gains.

Let me remind you of the key drivers of our growth initiatives, starting with our long-running Spinnaker sales and marketing platform, and our big data techniques. You have heard about Spinnaker for many years, and it is a great reflection of our continuous improvement mentality within the organization. We're continually strengthening Spinnaker with new techniques and adjusting priorities based on potential. Our current focus area is key account management, which allows us to capitalize on our broad product and service offering to further penetrate customers. We are using data analytics to optimize our Salesforce activity by identifying and prioritizing sales opportunities and helping us to customize value messages that can best resonate with customers.

Our Field Turbo addition to the Salesforce represent our largest investments for growth to date. As a reminder, we are a leader in the vast majority of our markets, yet our average market share is in 25% range. We believe additional front-end investments can accelerate share gains and plan to add another 150 resources in the current wave.

Service is a growth contributor and key competitive advantage for us. We are focused on increasing the percentage of our installed base on the service contract and continue to make investments in training and tools for our 2,700 service technicians. We're also mining our installed base data to identify more service sales opportunity and increasing telesales resources to pursue these opportunities.

Underpinning our sales and service growth initiative is our excellent product pipeline. We continue to distance ourselves from competition, which helps to accelerate the replacement cycle. We're also expanding our solutions by adding software, measurement parameters and automation to provide more benefits to customers. For example, in the Lab, we are further automating the Lab bench by connecting our high-powered automated sampler to key Analytical Instruments, such as our [typewriters] and UV/VIS. This is driving quicker analysis and increased throughput in the Lab.

We are also increasing our offerings to support data integrity, which is important to customers in the regulated industries, such as Pharma. We have also expanded our LabX software to encompass more Analytical Instruments and added predictive or smart analysis, such as our IC software suite for our AutoChem offering. The IC software fully controls critical chemical and biological process development workflows while capturing critical analytical information. It is generally recognized as the standard in the industry.

In addition to our initiatives to drive sales growth, we're also focused on margin and productivity measures to drive operating profit growth and also provide us with capacity for investments for Q2 growth. We continue to use sophisticated data analytical tools to give us insights to further refine our pricing strategies and processes. We have identified many improvement projects with the launch of Stern Drive program last year.

Stern Drive encompasses continuous improvement efforts with our supply chain, manufacturing and back-office operations. We have also introduced a new e-shop portal to increase the efficiency of our automated sales transaction. The success of these various productivity programs are dependent on strong execution, which I'm confident that the organization will continue to deliver.

One final comment on 2018. We will soon open our new product inspection facility in Tampa, Florida. This facility provides for growth in this business and allows us to consolidate all our U.S. checkweighing, metal detection and X-ray businesses in one location. You will have an opportunity to see this location and learn more about our leadership and capabilities and product inspection at an investor meeting we are planning to hold in Tampa on Monday, November 12. I know this is ways off, but wanted to mention it now. Mark it in your calendars and we will be back with additional details in due time.

That concludes our prepared remarks. We are very pleased with the excellent results generated in 2017. Assuming market conditions remain stable, our outlook for 2018 remains positive, and we believe we are well positioned to continue to gain share and deliver strong operating result. I want to now ask the operator to open the line for questions.

(Operator Instructions) And your first question comes from Ross Muken with Evercore ISI.

How would you sort of tease out kind of as you'd have expected the order trends? I mean there's a lot of moving parts there and you got some tough comps and pieces. But given all of the economic data is quite good, are there subsegments or subindustries where you're seeing any differential or is it pretty uniform? And is really just sort of a product inspection question, just in terms of like Industrial overall?

A couple of thoughts there. So as you've correctly point out, Ross, comps matter, so and the toughest comps we have coming in food. I think we do see good order trends in Industrial, pretty globally and we do see good order trends with our Industrial customers that buy lab instruments. The one area I think it's always tough to dissect, how much is tough comps. You also read at some of the food companies, packaged food companies have some CapEx and it'll be interesting to see what type of growth we can do. We've been conservative, I think, relative to past growth rates for that in 2018, but I think it'll take a little bit of time to observe that. Absent maybe this foods comment about packaging, where it might be a little cautious, I think we see great economic environment. We are talking about it today with our board, where it's hard for Olivier and I remember a point in time where so many parts of the world were performing well and we see that in -- across our industrial customer base.

I guess, just building off that, Bill. Just as you'd think about the growth cadence for the year, like what proportion of the business, in terms of thinking we've got this kind of unique synchronized global expansion, what proportion of the business do you feel like highly confident. As we think about the second half of '18 versus where do you think we have sort of maybe a little bit of wiggle room or macro, just given kind of how elevated we are? And maybe some other geographies that, historically, haven't always been this sustainably strong, I guess?

I'm going to try to answer your question, Ross, but maybe come back if you don't think I understood it completely. So we would tend to say, historically, that many parts of the business, particularly Industrial piece, might be a little late cycle. So we tend to do okay in the latter part of that cycle. I think where we feel 2 unusual things is in China in 2017, we clearly benefited from some of the pent-up demand for holdbacks in that part of the world on capital investment in kind of that '15, '16 time frame. And then in the product inspection business, there is -- we're currently, the Q4 2017, we're going up against 15% comp, which led to what we had here in the fourth quarter. And I think we have another double-digit comp in Q1. So we would tend to think that if the economy stays relatively at this level, even with maybe some modest leveling off here and there, the second half would seem pretty solid relative to our current guidance.

And your next question comes from Jack Meehan from Barclays.

I think versus our model, look like lab was the greatest area of strength in the quarter. Can you maybe just tease out what's performing better there and sound like it was pretty broad-based, but just the outlook for 2018?

It was actually really broad-based. Indeed, very happy how the lab team performed. It's across the geographies, certainly, China contributed very nicely. In just real estate in China, we have the seventh quarter here in row where we had very good double-digit growth in lab. But we saw really good momentum also in Europe and U.S. I think it's a reflection of the economy, but also very much that we had a very strong product pipelines. We had -- we did highlight that about a year ago when we -- I shared with you that I said, I had never so much confidence in our new products and the differentiation that we configure. That certainly translates in good results. And then all the sales and marketing initiatives certainly contribute nicely in lab, where the Field Turbos are contributing, as well as all the additional innovations that we have to engage new customers. So it's a combination, but definitely happy and I expect also '18 to continue to be good.

Great. That's helpful. And could you give us an update just in terms of pricing growth in the quarter. And we've seen some big moves on the FX front. Are there any opportunities or risks you're looking at there?

So on the pricing, we were up about 280 bps in the fourth quarter, which was modestly above and we did push in 1 or 2 areas a little bit some of this inflationary pressure that you'll hear described. So some of that. And we did experience some of that inflation, by the way, in material cost structure, so it's not that all 280 bps fell to the bottom line. But we had another good quarter and really a good year and we feel pretty good about our pricing processes entering '18 as well.

And your next question comes from Paul Knight from Janney.

Olivier, can you talk a little geographic on the European market, up 1% in 4Q, what's going on there? And obviously, a great year in Asia, China specifically. Can you talk about your thoughts on China in 2018?

Okay. Let me start with Europe -- over all piece with the numbers and generally in line with our expectations. As expected, retail was down a double digits, but was very much impacted also by previous year comparisons. If absent of retail, Europe grew 3% in the quarter. Again, solid growth already in the previous year. So that's why we said hey, it came out as expected. But actually, also in a good way. In terms of countries, we had France and the Nordic region that did, for example, particularly well. And we had also good growth in Eastern Europe. Lab had also particularly good growth in Europe. So all in all, actually, a good picture. If we go to Asia, and in particular, China. China certainly had a very strong quarter, as well as the full 2017, and expect it -- also clearly my expectation. We did not expect that China would develop so well when we entered the year. And certainly, we also, when we entered Q4, we didn't expect these kind of results. Very happy the market environment is very, very strong, very good. And we benefit also from this pent-up demand that Bill mentioned that was certainly the case mid last year, Q4, maybe a little less hope but still. This was particularly true for industry. Lab, we experienced multiple quarters, as I mentioned before, 7 quarters in a row with double-digit growth. I expect that to continue. As, for example, industry, we will not continue to experience the same growth rates. Here, we're going to face tougher comparisons than we'll certainly play than in the second part of this year.

And Bill, could I ask last question would be the net tax effect seems to be a little higher on your tax rate from '17. And what all the moving parts mean for share repurchase? Any change in plan there?

So I might need to take it offline. So our tax rate of 22% came kind of right in where we -- our adjusted EPS is in line with what we expected for the full year, the tax rate for adjusted EPS, we did take a charge related to the new law. The charge was, round figures, about 80% cash related, 20% noncash. And we would expect that we can maintain this 22% rate going forward. And probably, longer term, we have actually, a much easier repatriation process than we would have otherwise. In terms of the share repurchase plan, I would expect us to purchase $475 million next year, which is our current -- sorry this year, which is our current estimate for free cash flow plus option proceeds.

And your next question comes from Tycho Peterson from JPMorgan.

Olivier, just curious. I know you talked about China a fair amount, can you maybe talk on what drove the upside in the quarter for you guys in China? I mean, in your last quarter guidance for a single-digit growth for the year, obviously, you're trending above that. So where are you seeing upside from a demand side?

So I think the main thing was we are a little cautious about how much orders got pulled from Q4 into Q3 in connection with the party conference. So we finished -- we probably just did a little bit better in that regard or a little bit too conservative. And I would say the order trend was good, the start to the year was pretty good. I think that the one thing we're monitoring is the timing of the Chinese New Year was a little different, so while January was very strong, I think we'll have to see how that plays out by the time we get to the end of the first quarter. But I was down there last week. Olivier was down there in the fourth quarter, and I think both of us feel very good about how the business is positioned there. And the Chinese team is pretty optimistic about their growth prospects and share gain prospects there, but it is realistically a tough comp because there's pent-up demand topic we keep referring to.

Okay. And then back to the lab strength, just curious are you willing to comment on January trends? Just wondering to what degree there was a little bit of a budget flush dynamic in the fourth quarter?

I would say if I -- the best one to look at is you guys are usually asking that question in terms of biopharma. And we clearly had a very nice growth in pipettes as well as in our AutoChem business in the fourth quarter, but it's -- they're going to have a decent first quarter as well. So I would have said that we had a nice budget flush, but not a huge surprise either.

And lastly, on Stern Drive can you quantify I know you've talked in the past about what you expect in terms of benefit from that. Can just remind us what you're expecting for the year on Stern Drive?

The Stern Drive is really a program that allows us to continue to expand the margins similar to what we did -- had in the past. It touches different topics, it touches productivity topics, it touches on material cost savings. And in that sense, you shouldn't look at it as being an incremental program, it's more supporting the margin expansion that we have also pursued in the past, but it makes it more sophisticated now, it makes it more global and it's basically the next wave of excellence that we bring to operations.

And your next question comes from Dan Arias from Citigroup.

Bill, just an outlook question. What are you looking for at this point, for growth in Asia/Rest of World if you exclude China?

High single digits, kind of in that 7% range.

Okay. And then maybe just on the margin. Can you talk about the impact of mix on margins this year in the context of both your European business and then also what you do in the retail business? I know those are 2 things that can kind of move the number around a little bit?

Sure. So the decline in retail certainly helped. We probably heard of it was the decline in our European business. You'll remember that Europe is the part of the world where we have the highest percentage of direct sales, so in terms of the gross profit margin, that makes a difference. We also had -- because of the strong growth coming out of China and the disproportionate amount of Industrial business we have there versus lab as compared to the rest of the world. While China is accretive at the OP line, it tends to be a little bit dilutive at the gross profit margin line. So if I look out at our growth rates next year, we certainly have the retail business growing below the corporate average, but pretty solid growth in all product categories, maybe up a slightly less in Europe than the rest of the globe. But of course, we'll get some benefit from Stern Drive. I think in terms of looking towards maybe recent trends in what we might expect to see in '18, I think the biggest difference is that currency is going to tend to inflate sales and inflate cost in a way that will reduce our gross margin as a percent, but actually, benefit it in terms of dollars of gross profit we'll be able to deliver. So currency will help us more in '18 than it did in '17, and way more than it did in the previous 10 years. So in that sense, it's helpful, but it will tend to dilute a little bit the percent.

And your next question comes from Patrick Donnelly from Goldman Sachs.

Bill, maybe one on Industrial. How should we be thinking about core industrial and product inspection growth rates to trend in 2018 here? And then specifically on core industrial, any geographies still lagging on that front that you expect to maybe show some turnaround in the near term?

So we should be able to put up a mid-single-digit growth in our core industrial business. And we did a little bit better than that in '17, but that's largely due to the China Industrial business, is -- its going to -- it grew so much in 2017, and we see that one area now -- how good we are in measuring that pent-up demand impact could be upside or downside to our guidance in this regard. But maybe kind of connecting to our answer to our first question from Ross, I think we feel pretty good about the Industrial environment in the Western world. We feel actually good about it globally, with maybe some comparison concerns when it comes to China. Was there -- I think I forgot -- I think you had a second part, Patrick, and I apologize I forgot.

It was just about if any geographies are still lacking on the core Industrial side, but it doesn't sound like it.

No. I think it's just this question of how well are we're guesstimating the impact of pent-up demand on the China numbers. That's the hardest one to predict.

And then maybe one on the Field Turbo side and obviously investments there been at elevated level for a couple of years here. Can you just talk through how long it may take to turn profitable? And if there's any inflection point expected in 2018 from some of those earlier investments?

What's important to know, every Field Turbo is different, and it's -- the payback period can make a change radically by geography and by type of business that we are focused on. So to illustrate it on a telesales person, a telesales salesperson might have reached a breakeven point after 6 months. But if we add a person for automated chemistry it might take 2 years to build up the pipeline. So it varies. And the different ways that we're pursuing here have sometimes different emphasis. Like 2 years ago, we had a strong emphasis on telesales. At this point, we have more emphasis on -- more sophisticated instrument sales people, and so we might have a little bit of longer payback period. But a good assumption is that up to 1 to 2 years, they reach to breakeven point. And so we definitely have a situation now where we are benefiting in terms of growth, but also on profitability, from the investments that we did 1, 2 years ago.

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

A couple of questions. First one, what's the pacing in terms of the FX upon the top line benefit over the next couple of quarters?

I'll let Mary give the answer on that one.

Sure. So Derik, we're assuming up for the top line about a 3.5% benefit for the full year. And you're going to see it start off about 5.5% in the first quarter, and then about 4% and then down to 2% for the second half of the year.

Great. And I'm just curious, have you seen any -- I mean, your business is certainly uniquely positioned within the life sciences market that we cover and I'm just wondering if you've seen any signs that -- or any indication from any of your customers in the U.S. that they're going to reinvest any money from tax reform into -- do your businesses and doing a sort of CapEx projects in any the Food Retailers, planning on using the windfall for investing in new equipment or they all typically getting to Amazoned?

I think I will start and say our instruments typically are not that expensive and not so CapEx relevant. And so I would be cautious to see a direct impact here from the tax changes in U.S. I think what we might see more medium to long term that there might be more investments in new labs, for example, in U.S., and we might benefit from that. But on the short-term base, I don't think so. And if you talk about retail, actually, the retail is probably more impacted about the overall nervousness on the profit pool. And that actually would rather impact or slow down their commitment to new investments in store upgrades and so on. So in a nutshell, I don't see a big impact here.

Great. And then just one final question. You did a couple of acquisitions last year, the last couple of years, can you sort of talk about how those are trending, if there's anything else that sort of is catching around the horizon?

Yes. So the 2 acquisitions that you referred to, one is Troemner that we did about a year ago, and Biotix that we did a few months ago. Happy on both, actually, Troemner had its first full year and exceeded our expectations, we're really happy. And Biotix had the first and last quarter here, a very good performance, too. So from a financial standpoint, I'm happy about how things are growing. And in terms of integration or assimilation, also very happy. Good retention of the teams, good commitments of the team. And Biotix team, which is a little bit newer to us, we are very pleased by the talent pool that we have seen there, and there -- kind of how we are talking about shared strategies going forward, how we can leverage the global franchise and so on. So a promising start. When you refer to about the pipeline for further deals, the strategy remains the same. Of course, I'm happy that we could close here 2 attractive deals in the last 12 months. We had a period where we were not closing any deals, and this is unpredictable. And going forward, we're going to pursue the same approaches, bolt-on acquisitions with good synergy potential, but the availability of deals is difficult to predict. But hopefully, one or the other deal will materialize.

And just one final one. Just, Bill, on the op margin target for 2018, how much are you embedding your model for expansion?

So plus 50 bps, and currency adjusted, a little bit more.

And the currency hits mostly on that gross margin line?

Yes, I -- I guess, if we look at our table, I'm struggling to give you -- think through the logic on why that is. But yes, if you look at our model, which is bottoms up, the short answer is yes.

And you next question comes from Brandon Couillard from Jefferies.

Olivier, did you give the service growth rate for the fourth quarter? And then at a higher level, do you have any difference in the growth between sort of the core contract business versus the parts business?

So service core growth in the quarter was 5%. And yes, for the full year, it was 7%. And the contract business is doing actually really well. I don't know the number for Q4 separate, but I would be surprised if it wouldn't be actually double digit because early in the year, we looked at it and we talked about it to you guys and we had really very good numbers. And it's the part that we're also more focused on. The contract business is also outgrowing the spares business because we -- the quality of our products get better and better, and we shared with you that this is one of the things why we push the contract business. The break/fix business, including spares us, we don't know it's going to have the same growth dynamic, and that's certainly a reason why we -- in the overall number, it's difficult to see, but your contract business would completely outgrow this 5% or 7% that we have for the year.

Bill, are you still thinking about the ASPs being up about 150 basis points for the year?

Realistically, it's probably going to be a little bit more than that as -- but realistically, our material costs are going to be a little bit higher as well than we originally forecasted.

And we have reached the end of our Q&A. Ms. Mary Finnegan your closing remarks, please.

Thanks, everyone, for joining us tonight. And of course, as always, if you have any questions, just give us a call or shoot us an email. Take care, and good night.

And this concludes today's conference call. You may now disconnect.