Mettler-Toledo International Inc (MTD) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our First Quarter 2018 Mettler-Toledo International Earnings Conference Call. My name is Scott, and I will be your audio coordinator for today. (Operator Instructions)

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

Thanks, Scott, and good evening, everyone. I'm Mary Finnegan. I handle Treasury and Investor Relations at Mettler-Toledo. I'm glad 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 of administrative matters before we start. This call is being webcast and is available for replay on our website. A copy of the press release and the presentation we refer to are also on our website.

Let me summarize the safe harbor language that you see on Page 2. Statements in this presentation, which are not historical facts, constitute forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. For a discussion of these risks and uncertainties, please see our recent Form 10-K. All forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions Factors Affecting Our Operating Results and in the Business and Management Discussion 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 the differences between the non-GAAP financial measure and the most directly comparable GAAP measure is provided in our 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 and an update to our guidance. I will then 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. Local currency sales growth of 5% came in pretty much as we expected and was impacted by the excellent growth in the prior year. As a reminder, in the first quarter of 2017, we had local currency sales growth of 12%. China did very well in the quarter, with a strong base sales growth. Our overall solid top line growth drove another quarter of strong adjusted EPS growth. Demand in our markets remained solid, and we believe we are well positioned for further market share gains.

Let me turn it to Bill to provide additional details on the financial and our updated guidance for the year. Bill?

Thanks, Olivier, and hello, everybody.

Sales were $660.8 million in the quarter, and that's a 5% increase in local currency. The Biotix acquisition contributed approximately 1.5% sales growth. On a U.S. dollar basis, total sales increased 11% as currencies increased sales growth by 6% in the quarter.

On Slide #4, we show local currency sales growth by region. Sales grew 5% in the Americas, 10% in Asia/Rest of World. Sales growth in China was specifically up 15% in the quarter, while sales declined by 1% in Europe. Sales in Europe were impacted by the timing of the Easter holiday, and as a reminder, we had local currency sales growth of 13% in the same period last year.

On Slide #5, we outline local currency sales growth by product line. In the quarter, our lab business grew by 10%. Industrial sales declined by 1%, as growth in core industrial was offset by a decline in our product inspection business. Olivier will have some additional comments on product inspection later in the quarter. Our food retailing business was flat in the quarter. I know some of you have questions on the Q1 organic sales growth and the impact of Easter and other onetime topics. One way I gained confidence is by looking at our April year-to-date organic sales growth. Through April, organic sales growth is a healthy mid-single digits despite a very strong prior year comparison.

Now turning to Slide #6. Let me walk you through the key items in our P&L for the quarter. One comment to start, as we mentioned last quarter, there's a new accounting rule that went into effect at the beginning of the year, which moves a portion of our pension income from operating profit to other expense. This is actually different for Mettler-Toledo than it is for other companies who actually improved their operating profit due to the re-class. That's because our pension plan in Switzerland is overfunded. Although it's not a huge impact to us, you'll note that we restated last year's results so that they're on a comparable basis.

Gross margins were 56.7% in the quarter, and that compares to 57.8% in the prior year. We have a couple of factors impacting gross margins this quarter. First, pricing continues to be a strong contributor. However, this was offset by the impact of currency, some negative mix and initial costs associated with the consolidation of the product inspection facilities currently underway in the United States.

R&D amounted to $34.7 million, and that's a 5% increase in local currency. SG&A amounted to $200.7 million. That's an increase of 2% in local currency. Investment in field resources were somewhat offset by a decline in variable comp. Adjusted operating income amounted to $139.5 million in the quarter, which represents a 10% increase over the prior year amount of $126.5 million. Adjusted operating margin was 21.1%, and on constant currency, our margins were up by 10 basis points.

A couple of final comments on the P&L. Amortization was $11.7 million in the quarter, while interest expense was $8.4 million in the quarter. Other income amounted to $2.4 million, and this includes the $1.6 million of pension income, that re-class that I previously described. As you adjust your models for the year, you'll want to reflect this quarterly amount for the remainder of this year.

Our tax rate was 22%. In our adjusted EPS in the quarter, our reported effective tax rate is 21%, with the difference due to the timing of stock option exercises.

Moving to fully diluted shares. They were 26.1 million in the quarter. That's a 2% decline from the prior year, reflecting the impact of our share repurchase program.

Adjusted EPS for the quarter was $3.74. That's a 12% increase over the prior year amount of $3.34 per share. I think it's interesting to note, on a 2-year basis, that's more than a 50% increase, about as good as I've ever seen us do. And as a reminder, it's basically organic EPS growth.

On a reported basis in the quarter, EPS was $3.58, and that compares to $3.48 in the prior year. Reported EPS includes $0.13 of restructuring and 10% of purchased intangible amortization. It also excludes $0.07 benefit of the lower reported tax rate, which, as already mentioned, is due to the timing of stock option exercises.

Okay, that's it for the P&L. And I now want to cover cash flow. In the quarter, cash flow was $56.5 million, in line with the prior year. Our working capital statistics remain solid, with DSO at 43.5 days and ITO at 4.5x.

Now let me make a couple of comments on the potential tariff situation as it relates to our business and manufacturing in China. One upfront comment. We do not have any greater insight than you with respect to what ultimately will play out. However, we're preparing diligently so we can be ready to react if necessary. We're looking at the tariffs in 2 ways.

First, with respect to our business in China. We don't envision a significant impact as we import into China from the U.S. only a very small percentage of our product sales in China. We do import into China many higher-end products from Switzerland, Germany and the U.K., but we don't expect these countries to be involved at this stage.

With respect to the possible slowdown in our Chinese business because of tariffs impacting our customers there, it's hard to determine at this point. Our exposure to raw materials and industries likely to be most impacted has declined over the last several years, but the remaining business may have some impact. We'll monitor the environment in China closely but at this point, see no change to demand.

In terms of our exports out of China in the United States, we have limited steel and aluminum imports. But we already see some commodity price increases due to the proposed Section 232 legislation. The impact before any corresponding actions from our side to mitigate is in the range of $2 million to $3 million. We also import some instruments and parts for instruments from China. Based on the current list of possible tariffs under Section 301, we estimate the potential impact to be something in the area of $8 million.

For both of these items, we prepared supply chain and pricing strategy initiatives, which would largely impact the mitigate -- impact the -- sorry, largely mitigate the impact should the tariffs be implemented. We fully acknowledge there's a lot of unknowns and uncertainty with respect to how this might work out. We're monitoring it closely, and we'll react quickly if necessary.

Now let me turn to guidance. A few comments. First, the economic environment continues to be favorable, with good conditions in the Americas and Europe and a very positive environment in China. However, we do acknowledge there is more uncertainty in the global economy versus the last time we spoke. In particular, uncertainty surrounding, for example, the impact of tariffs, which I mentioned earlier. Our guidance assumes that market conditions remain largely consistent with the current environment. Second, we feel very good about our growth strategy and execution right now, and we think that can continue into second half of the year. Third, and I know I've said this before, but it's important to highlight, comparisons do matter. In particular, we face some challenging comparisons in China and in our product inspection business during the next 2 quarters.

With this as a backdrop, let me cover the specifics. We continue to believe that local currency sales growth in '18 will be approximately 6%. With this sales assumption, we now assume an adjusted EPS to be in the range of $2.10 per share to $2.25 per share (sic) [$20.10 per share to $20.25 per share], which reflects a growth rate of 14% to 15%, and this compares to our previous guidance of $19.95 to $20.15.

With respect to the second quarter, we would expect local currency sales growth to be in the 6% range. Based on this sales growth, we would expect adjusted EPS to be in the range of $4.55 per share to $4.60 per share, and that's a growth rate of 16% to 17%.

In terms of currency and sales growth, we would expect currency to increase sales by approximately 2.5% for the quarter -- sorry, for the full year. And for the second quarter, we expect it to benefit sales by approximately 3%. In terms of cash flow, we expect free cash flow to be approximately $450 million this year, and our share repurchases remain -- estimate remains in the $475 million range.

Okay, that's it from my side. And I now want to turn it back to Olivier.

Thank you, Bill. I will cover the business in some more detail this quarter.

Let me start with our lab business, which continues to perform well despite strong growth in the prior year. Lab benefited from some acquisition revenue from Biotix. However, our organic growth in lab was up nicely over the prior year. All product categories continue to do well. Balances, AutoChem and Process Analytics have particular strong growth in the quarter. Analytical Instruments and pipettes have good growth but face tougher comparisons due to excellent growth in the same period last year.

For lab in general, we continue to lead the market with technology. We have many examples throughout the business. One recent example is our new unique handheld density meters. It can provide automatic digital measurements in an easy-to-use portable instrument, and its proprietary software assists with data management. It has the look and the feel of our Rainin electronic pipette, which reinforces our commitment to provide reliable but simple-to-operate lab instruments. This is a small product line, but I thought it was a good example to share with you to highlight the focus of technology that we are making throughout our product portfolio. We combine this strong product pipeline with our proven Spinnaker sales and marketing strategies and investments in the field resources via Field Turbo program.

Lab, we see a disproportionate share of both R&D, marketing and field investment resources. I'm optimistic about the lab business for the rest of the year and into the future. I'm convinced we are well positioned and can continue to incrementally gain market share.

One last comment on lab, and this is looking at it from a geographic focus. Asia, in particular China, did very well in lab. Europe's lab growth was more moderate, principally due to the very strong growth in the [same prior year] and was impacted by Easter. Americas' organic growth in lab was solid.

Now turning to industrial. As you heard from Bill, the overall industrial business declined 1% in the quarter. Our industrial includes 2 pieces: core industrial and product inspection. We have factors impacting both businesses this quarter.

I will start with product inspection, which represents 42% of the total Industrial business or a little less than 20% of total sales. Product inspection is focused principally on food manufacturers and also pharmaceutical and consumer goods companies. Our offering consists of checkweighers, metal detectors, X-ray vision and sterilization solutions to help ensure the integrity and quality of packaged items. We have the broadest product offering in the market and are a clear market leader in every major region, except for Japan.

Our extensive service network is a very important competitive advantage for us as manufacturing productivity and uptime is critical for our customers. Growth drivers for product inspection are attractive, principally driven by concerns on product safety, brand protection and manufacturing productivity. We have seen a trend over the last few years of global food companies looking to standardize globally their product inspection instruments. Our global presence and service network provides us a unique advantage here.

We achieved high single-digit growth in both 2016 and 2017 in product inspection, in part due to these trends I just mentioned. Given these comparisons, our outlook for 2018 is for more moderate growth. In Q1, product inspection was down mid-single digits. There are a number of factors that impacted these results, primary of which is tough comparisons as local currency sales were up 15% in the prior period.

A couple other factors also impacted the results to a lesser degree. These included the move of our largest U.S. product inspection unit in Tampa, Florida at the end of the quarter. We will have some additional smaller ones in the coming months as we consolidate all the U.S. product inspection operations into this new state-of-the-art facility. As I mentioned last quarter, you will have a chance to see this facility later this year when we hold an Investor Meeting there on November 12.

In addition to the move, the German product inspection operations were implementing the new ERP system in the first quarter. The investments coming from our facility consolidation and new ERP system will have a very good return in the coming years as they will further strengthen our franchise.

Similar to Bill's comments on the group, through April, our product inspection business is close to flat with double-digit 2-year growth rate. We will have a solid second quarter for product inspection. Longer term, this remains one of our strongest franchises, with attractive growth prospects.

The other piece of our industrial business is core industrial, which was up low single digits in the quarter. We had strong growth in China in core industrial as we are benefiting from improved economic conditions. Growth in Europe and Americas in core industrial was solid on a 2-year basis. The business was also impacted in Q1 by our transportation and logistics business, which is project-based and often lumpy. Last year, we had a couple larger T&L orders in the first quarter, which impacted comparisons for this year. Sales were also impacted by Easter because of our large core industrial service business in the West.

The final piece of our company is the retail business, which was basically flat in the quarter. This business is also project-based and relatively lumpy. This quarter, we had a large increase in the U.S., which was offset by a large decrease in Europe. Our focus for this business is profitability over growth. I would expect low single-digit sales growth for the second quarter and full year.

I think that gives you some more insights into our business, both the first quarter results as well as the outlook. That concludes our prepared remarks. We are pleased with the solid results for the first quarter. Assuming market conditions remain stable, we are well positioned to deliver a year of strong sales and earnings growth.

I want to now ask the operator to open the line for questions.

(Operator Instructions) Your first question comes from the line of Dan Arias with Citigroup.

Bill, on China, when you talk about the uncertainty that exists there, does that at all refer to what you're seeing in the order book or the visibility that you have? Or are you kind of just calling out what you're seeing in terms of the headlines? Just trying to understand the relative confidence that you have in that region at this point just given the quarter.

Yes. So I think the -- for us, I think one of the uncertainties is the less the Chinese market and more of the impact of tariffs potentially leading towards downturn in the global economy. As we've mentioned on several occasions, the global economy is great, right? There's a lot of good stuff going around in the world, and so we're more concerned if there could be disruption to that, and that's what I meant by uncertainty. I think this -- the heightened uncertainty comes largely from the current tariff discussions going back and forth. With regard to our current Chinese business, it's performing great. Everything we've seen through April looked great. But I would comment that it's a tough comp. They grew quite a bit in the second and third quarter of last year. I'm just pulling up some numbers now. So China was up, as a reminder, 22% in Q2 of last year and 28% in Q3. So I -- us putting up growth numbers on top of that would be -- is a sign that things are really, really going pretty well down there.

Do you have a full year outlook for China at this point that's updated? Is that any different than what we are looking at last quarter? I think it was 5 to 10.

Yes, it's still in that range but probably creeped up closer to the top of that range than the bottom.

Okay. And then if I could just ask one more. How are you feeling about Europe at this point? I mean, it looks like some of the macro data points are sliding a bit, but they're still pretty good at relative levels. And it sounds like there was a bit of seasonality for you this quarter with Easter. So what does the outlook for Europe look like? I think the comp next quarter gets much easier for you.

So it does get easier. Just as a reminder, Q1 last year, we had a big benefit due to the legislation around that retail labeling topic as well as Easter timing benefited us in Q1 last year. So if I look, just to give you a feeling, the whole -- just looking at year-to-date through April for Europe, the number is -- looks already much better, just adjusting for the Easter timing. I think we're more in kind of the range we would expect for the full year, and that's despite having the tough comp anyways. So just adjusting for Easter, and we're looking much better April year-to-date. So we are well positioned there. Strategically, we've made some investments in Olivier's Field Turbo programs and other topics. So our growth rate will be much better in Europe the coming 3 quarters.

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

I guess first off, on the new Tampa facility, is it possible to quantify the savings you expect to achieve by consolidating your product ID business -- or I'm sorry, your product identification business down in Tampa?

So it's single-digit million would be the first comment. But maybe, Dan, the bigger thing we needed to do there, and that's just how much infrastructure we're taking out, less building cost, things like that. But I think the biggest benefit we have there is we just outgrew our Tampa facility. So I think I've mentioned it on calls in the past. Our team would literally have to move inventory in and out of the plant in the morning just to make room for production to take place. We are -- one of the best stories inside the company in the last 5 years has been the growth of our X-ray and metal detection business in Tampa. So they will -- it's a little bit more difficult to quantify, but you can imagine, if you think about a lean supply chain layout in a new facility, where we're not doing silly things, like having to move inventory around just to do production, is going to help. And we've never really been able to -- even try to quantify, but we knew it was the right answer to make that investment.

And maybe on top of that, beyond just the operations benefit, we're bringing in the teams here together. So we're going to have the checkweighing business with the X-ray, with the metal detection business. And the latest decision is also to add the vision inspection business, all into the Tampa facility. This brings the teams together. Cross-selling is supported. But you can imagine also, for customers, this is very attractive. The new facility offers great ways for us for demo programs, for tests -- customer test programs. I think this is going to be extremely powerful going forward to -- for us to further grow the business and totally underlines that we have here a leadership position that we can further leverage. So that's a powerful investment in the future, and it's certainly not just about cost savings opportunities. In contrary, I expect that this is preliminarily an investment in the franchise.

And Olivier, I think you commented that you like the long-term trends in product inspection during your prepared remarks. Could you talk -- once you lap these difficult comparisons, how do you look at the growth rate of the product inspection business? Is it something that grows faster than the corporate average, at the corporate average? And what would be some of the macros that would drive that?

So it's definitely one of the businesses that should grow above the group average. The market offers these opportunities. And certainly, the way also we are managing, allocating resource, all that stuff, supports that approach. There are different factors. So first of all, I would stress the point that we have the most attractive portfolio of the different technologies, and we have leadership positions in the different technologies. We -- this played very well also to the needs of our customers. Then we have an excellent service network that is very much appreciated by our customers. And then for certain technologies, there is still an adoption rate opportunity. This is particularly true for X-ray, and that's another driver for additional growth. This -- what I just said applies across the world, but then you can imagine, there is, on top of that, the emerging markets opportunities. Packaged food consumption is growing over proportionally in emerging markets, and brand protection, quality is a key driver. And so the combination of that offers additional growth opportunities. So yes, all in all, I definitely expect to have above group average but do also recognize that within product inspection, we have a certain project-based aspect of our certain lumpiness. If you have a global key account that is rolling out a big project across the world, this can have an impact on a quarter-to-quarter comparisons. But all in all, should be very nice growth.

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

Bill, any chance you can break down, within China, the lab versus industrial growth rate in the first quarter? And could you sort of talk about the sustainability of the lab business being double digits there? I think that's 8 straight quarters in a row it's grown over 10%. Give us some details on that.

Yes. And so first comment on lab is that it is 8 straight quarters. It's -- probably the average is around -- kind of eyeballing, it's probably 20% during that period. We were in the 20% range again this past quarter in lab. Our industrial business was up low double digits, and retail was actually flat. So the business is performing well. We're doing quite well with this new focus that we implemented a couple of years ago on priority segments, and we're very happy with the performance.

I was actually visiting [Greifensee] 3 weeks ago. I had a chance to visit also the new facilities and do a very broad-based business review. One thing that I really particularly liked is the resource shifting that we have done over the years to follow the market opportunities really played very well. And Bill just shared with you the lab growth. This is not a coincidence. We really recognized early on that lab has promising end user markets. We continue to invest in these. As on the industrial part, we did actually reuse resources to certain industry segments that we felt have no long-term -- or attractive long-term prospects. And seeing how that played out was really powerful. I could say a similar thing also about the regional presence. So we -- for example, in the times where China wasn't growing so well, we did revisit our local office setup that we have. We had, in the old time, many local offices across China, and we recognize today that there's not the same necessity for that because you have just much better infrastructure. Mobility is better. Phones are better education of people are better. We have an ERP system that is better and so on. So the team really leverage these opportunities, and we allocated resources to drive more growth. And that's what we see in our current numbers. And I certainly expect that this will continue to help us to outgrow this market.

That's helpful. And then one more for you, Olivier. I think in your prepared comments with respect to the product inspection business, I think you mentioned an ERP rollout in the first quarter that may have been disruptive. What exactly was that? And then at a higher level, on Blue Ocean, could you remind us where you are in terms of the status of the rollout and implementation and what the magnitude of the CapEx roll-off is, which I think, should fall in 2019, if I'm right, Bill?

I'll take the first part, and then hand over to Bill. So the first part is the Blue Ocean or ERP rollout was for our checkweighing business in Germany. And that was quite an important but also demanding rollout, because in the product inspection business, we have a lot of engineered solutions, and that requires some new functionality in our template. And in essence, our checkweighing business was, here, the start for it. And as you can imagine, such a roll-in takes always a lot of attention of the management. You have always, in the first few weeks, sometimes also months, some learning curve to go down and some fine-tuning. And that's the impact that we saw in first quarter. I have already seen that we are -- we called up most of it already in April, and the remainder will happen in the next few months. So feel good about that. And in that sense, not different to what we experienced in all the other roll-ins that we have. I think that's just a natural thing. We highlighted here on the call because it has a certain impact within 1 quarter. In terms of where we stand, we have rolled -- or we have implemented Blue Ocean pretty much on all the significant producing organization. There is one important one left that is actually in Tampa. So the one that we just moved facility, this is something that will follow. But otherwise, we are very advanced. And when it comes to the market organization, we are also very advanced. But there are more countries to come, and so we will continue on that journey certainly for a couple of more quarters. But if I look for the whole group, I think in the meantime, we are far beyond 80% of the users that are already on the system. And I think that gives you the flavor that we are very, very advanced on the whole program. Bill, maybe on the CapEx one?

Yes. I think you'll see CapEx -- maybe to not get it confused between maybe CapEx in total, you'll see going down already some next year and in 2020 further. I think that you'll see our cash flow conversion, which is already pretty good, get even better in the coming years.

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

Bill, in your prepared remarks, on gross margins, you called out a few considerations there for the year-on-year trend. I think there was mix, the PI issue that we've touched on here a little bit. Can you quantify any of those?

Sure, and maybe I'll cover the biggest topics and then kind of maybe in a quantitative way and give you some qualitative on the other item. So I think the biggest single item was actually a benefit from our price increases. So our price increases in the quarter were about 230 basis points, and that translated to about 100 basis point benefit to our gross margin. The biggest negative item was that we had currencies going against us by about 60 basis points, okay, and then there were a series of kind of smaller items that added up a little bit. I would say one is, of course, there were some volume effect partly explained by the Easter movement between the year, so a little bit of volume. In the product inspection business, we had, as Olivier mentioned, on the one hand, the startup of the Tampa facility. So they weren't running at full capacity, I think, for a 2- to 3-week period there. And when we ramped up the engineer to order part of the garments business in Germany that Olivier referred to, there was -- that first month there, I think, their output was roughly 60% of what a normal thing was. That's frankly a planned startup when we were doing that business. So the other interesting item that didn't really have an impact, but I think it's good for you guys to focus on a bit, is material costs were basically flat in the quarter. And I do expect that, that's going to get tougher as the rest of the year plays out. I think we will be able to address that with better price increases, but I think if you look that material line, our current index, kind of an inflation index that we measure our year-on-year buying, is running almost exactly 100 right now. And I would expect that by the end of the year, that'll probably be closer to 101. Did I answer your question?

Yes. It's a lot of moving parts, Bill, but I really appreciate that. And then the follow-up that I wanted to...

Hey Steve, if I could interrupt you, maybe back to -- when you say a lot of moving parts, I realize I could easily be confusing. Maybe kind of getting to the bottom line because I think one thing is to analyze the pieces of what happened this quarter, but maybe if I could give you some comments about the remainder of the year. So sitting here today, I continue to think that on a constant currency basis, our gross margins will be up 40 to 50 basis points for the full year, which actually in this most recent quarter, let me get the right sheet in front of me, on a constant currency basis, our gross profit was down by 42 for some of these reasons we covered. And so you can imagine then, it gets better going forward. And then because of currency, you'll continue to see headwind down the line. But that's a little bit cosmetic. I think the best way to look at it is in constant currency, to measure it from a performance point of view. But by the time we get through the full year, I think what you'll see is the constant currency improvement in our gross margin will be offset by currency. So year-on-year, for the full year, I think our gross profit margin will be pretty close to flat.

That's perfect.

Hopefully, I didn't give you more moving parts, Steve. So what was your second question?

The second was actually on China. And in a scenario where the tariff issue does become real, I can appreciate that for the team, it would be a pretty substantial operational challenge. But given that you guys have mitigation plans, maybe it would just be helpful to understand those mitigation plans a little bit more deeply, alternative sourcing import/export dynamics there. What I'm wondering is -- while I really appreciate the quantification of the potential impacts of a tariff scenario, what I'm wondering is given the implementation or offset programs that you have in mind, is there a scenario where this does become real in terms of the financial impact? Or can we really work around it very effectively?

So let me take the first part. Operationally, it wouldn't be too disruptive to us in the sense that one of the key mitigation factor is pricing. And we have already started to do all this analysis. We know how to implement these things, and that would certainly work well. And then on the supply chain itself, yes, there is some parts that are supplier-related, where you do assembling and all that stuff. That is not that major. And in that sense, we feel this is absolutely manageable. I think the part that would be much bigger for us in terms of the impact is if it's -- if it influences the world economy. That's really the bigger part. But the other part, as Bill described in the prepared remarks, in terms of million dollars, it's not so huge. And we have this mitigating factor that we feel actually our plans are already quite solid, and we would know how to do it.

Maybe one addition to Olivier's comments would be is that I think in the course of a full year, we probably could largely offset what would happen. But maybe in the first quarter or 2 quarters, Steve, there might be a little bit of catch-up.

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

Bill, I appreciate all the color you gave on margins. Just as we think about the sequential progression here, should we expect 2Q margins to be up or down, I guess, in light of the facility consolidation in ERP and some of these other transient issues?

Let me get my favorite cheat sheet in front of me. So in Q2, we would say margin should be flattish, which would be approaching 30 to 40 basis point improvement in a constant currency basis.

Got it. Okay. And then on guidance, you're raising by $0.10, you beat by $0.01. Can you maybe just -- obviously, you touched on margins earlier, but is the rest of that from buybacks?

I think the biggest thing when we're kind of looking at what would be appropriate guidance, I think for us is if we look at where we expect to be at the midpoint of the year, we're ahead of where we thought we would be 3 months ago. And so we adjusted our guidance accordingly. There's always a little bit of speculation, Tycho, for what the second half of the year can bring. But at this stage, we see no reason to change our assumptions for the second half of the year. So it's kind of this combination of the beat, which we described here in the current quarter, and then how we view the full first half of the year compared to maybe what we felt 3 months ago.

Got it, okay. And then I guess lastly on lab. Obviously, that's continued to perform well. Early days on the NIH increase, but are you starting to see any benefit from that yet here in the U.S.?

I mean, the part of our business that has the most impact from NIH budgets would be our pipette businesses. What I can tell you that given everything kind of going on in those 2 businesses right now, we're very happy with their performance. But it would be tough for us to specifically link it to NIH, and I didn't really look at April year-to-date by segment.

I would say our whole bio life science business in U.S. did very well. Typically, that's the Rainin and the AutoChem business that has particular exposure to that. Both businesses did very well on that one. But the NIH, we are not so much exposed. The pipette business is really the one the most. So that's a little bit why I answered here, bio life science in general.

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

This is Charlie on for Patrick. Just curious, as we kind of trend through the year, putting into our models kind of for the lab and industrial business, it looks like lab was -- this is probably the toughest comp of the year. So are we in a position to think that, that business might actually accelerate as we actually go throughout the rest of the year?

So understood the question. I think at this point, we're largely seeing maybe next quarter not as much, but it could be in Q3 and Q4 we see some modest increases there, yes.

Got it. Makes sense. And then just on pricing, I think when you're answering Steve's question, you said that pricing in the quarter was up 230 bps. I think that was probably a little above where we were modeling. So just kind of any update on pricing expectations for the year.

Well, some of that reflects, Charlie, that we started to see some inflation. So we did see some moves there and started to implement some things in response to it. We do see higher wage growth, for example, in some other areas. What I would say is that Shawn Vadala and his team are working on some midyear pricing topics. I think we haven't fully finalized what that's going to be in part because we want to see how the tariff situation plays out. But I feel reasonably confident that we can do something that brings net dollars hopefully to the second half of the year.

Your next question comes from the line of Richard Eastman with Baird.

Olivier, could you kind of speak, maybe for a minute or 2, just to -- when we talk about China industrial, I'm curious how developed and how much scale there is to the PI business versus the core industrial business. And maybe we could just start there, but I'm curious how each of those 2 pieces did relative to Bill's low double-digit growth rate for the quarter.

Yes. So I would start to say that our mix that we have in China is different to the global mix that we have. If I look to the West and in particular in the U.S., we have a very high share of product inspection versus core industrial. And in China, it's still the reverse. Core industrial is much bigger than product inspection. And that's historically driven. You will always see that more mature markets have more demand for product inspection equipment because it's very much quality-driven. It's very much about automated packaging, and even the industry structure is different. We, in that sense, have benefited heavily in the past for this industrial business. Our product inspection business in China has been growing nicely in the last couple of years, but it is still represented -- underrepresented. And in that sense, I do expect that the product inspection is outgrowing the -- our core industrial business, in particular also China. This has not always been the case every quarter, but in the long term, should be that way. To be specific, on a group level, product inspection is roughly 17%. As in China, it is 5% of total sales. That alone gives you a clear indication how much upside we have when China starts to further mature and has an industry structure similar to what we have in the West.

Got you. And then can I just back the question up? And when I look at industrial for the full year in '18, for calendar '18, is both PI and core industrial, are both of those businesses expected to be kind of plus mid-singles? I mean, is that kind of order magnitude? Should they both grow about in parity?

Sorry, just to make sure I got your question, we weren't sure if you were asking about China industrial or total industrial.

I left China. Sorry, I left China. Back up to the corporate level. Just curious, given the start here in the first quarter, and I realize the comps and things, but I'm curious, do both pieces of Industrial kind of grow at the maybe Mettler average core growth rate?

I think you'll see them both finish the year at about the same growth rate. But I think you'll see the product inspection business growing faster on average for the remainder of this year.

Okay, okay. And then just maybe the last question. And maybe to direct us back to Olivier. Could you just kind of update us a little bit on the Field Turbo program? And maybe are we on track through April here for full year investments there and maybe where they're slanted, where they're weighted?

Yes. So the program is very much ongoing. We do these in waves. And I always said I would continue with the programs as long as I feel the market offers growth opportunities, and I definitely feel that way. And I see -- continue to see very good results on it. I have seen that last year, when I had detailed business reviews with the countries. I mentioned before I was in China, but I also spent quite some time in Southeast Asia, was excited about seeing the impact of Field Turbos in Indonesia, Vietnam and so on. So my commitment to continue with the program is ongoing. In terms of waves, we certainly had an important wave, review wave, end of the year, where I committed to quite a lot of additional headcount. And there's another one upcoming here, more in the summer. And from a regional perspective, that might be the just the last one. And I expect also the next one is certainly more weighted now to the emerging markets. As when I looked a few years ago, we were more focused also in Western markets. So that changes a little bit in terms of business mix. That's kind of unchanged, still very much laboratory and product inspection business that benefits from it.

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

One of my questions have been asked, but just some cleanup. Can you -- anything that we need to watch out on like the interest income line? Obviously, rates are moving up and just sort of wondering what sort of -- how you look at net interest expense for the full year.

Mary has got everything locked down, Derik, would be the short answer. We're highly fixed right now and have been for a few quarters.

I think we're modeling about $36 million for the year in net interest expense. Is that about right?

Derik, I'd be closer to about 33, 34 for interest. And then, of course, we have -- the other income is income of about 6.5 million.

That's everything.

No, that's -- yes. Does that make sense?

Yes. And the 1.6 million for the pension continues on in the other income line?

That's correct.

Correct.

Okay. That's helpful. And for the full year, for the Biotix acquisition, is that still tracking at about 1%? It looks it was a little bit -- it was a tad below where we had modeled it for the quarter. Is that still a good way to look at it, somewhere in the 0.5 to 1 range?

It will be 1% for the full year but without really any impact on the fourth quarter. So that's somewhat above 1% for the first 3 quarters of the year.

Your next question from the line of Ross Muken with Evercore ISI.

Just trying to put together the picture here. It's sort of interesting economic environment, right? You talked about inflation ticking up and pricing being maybe a bit better or accelerating, and the material cost accelerating. And yet we've got industrial here. Yes, it's tough comps that we're sort of flat to down. And growth in general seems good, but then PMIs have ticked down. I guess just trying to think through like this environment versus environments you've seen in the past, I guess it seems like an odd picture a bit comparative to what we would sort of expect at this part of the cycle. And so as you just start planning and thinking, I mean, what are the sorts of things you're keyed in on or looking at? And do you sort of agree with the idea that the PMIs, while they're slower, are still kind of elevated and suggesting that growth will be quite good for a while? Is it really just a question then in your mind of duration given how long we're sort of into this cycle?

Ross, actually, yes. But I would also say that when I look at our early indicators, leads generation and so on, we have no signals of slowdown at all. And we still feel that the world economy is very strong. We know that we are facing these comparison topics, and that's certainly true for China, but there are no clouds out there that worry us. But of course, we want to stay agile if something happens. But you hear me talking before about Field Turbo. The same is true in investments in marketing, investments overall. We are very much in a growth mode, and we will adjust our plans if need be. But at this stage, we are in growth mode.

I would kind of add to that. We've talked about in the past, Ross, that yes, we prefer higher GDP growth than lower, but we don't need a huge GDP growth. We need people to stick to their replacement cycles. When they do that, we take our piece of that. We take a little bit of share, and we can do well in that type of environment. So yes, that would be my addition.

Your next question comes from the line of Steve Willoughby with Cleveland Research.

Couple of quick questions for you. Bill, I just wondering, first, if you could comment on the product inspection business here in the quarter. I mean, I apologize if you had already commented on this, as I'm jumping on late. But how much of the softer trends were related to the internal disruptions you referenced versus what you think is going on in the market? And then I have a follow-up.

Okay. So we were down 5% in the quarter, to put one number on it. And if you look at the prior year comp, we were plus 15. And so the biggest single reason is we're -- we had a tough comp. The second, we had 2 then kind of what I would describe as operational issues where we had expected reductions in our capacity capability, for lack of a better expression. One related to we were moving a very large facility in Tampa and are -- took a few weeks for our guys to get fully ramped up there. And then the second was we went live with a new ERP system in the middle of the quarter in our German checkweighing business, that business in April, its output was back to normal. But in the month of February, when they went live, it was -- they were producing at a lower-than-historical level. So those 2 items were probably the -- maybe had a little bit of an additional impact. And I guess to a certain extent, there's probably some Easter impact for our European PI business, but it would be tough to quantify the last 3. The biggest item is the tough comp. And by the way, we also have a tough comp in product inspection next quarter. But I think if I remember right, Olivier commented about if you look already at April year-to-date, I believe our business was already caught up to flattish or so.

As I said, the quarter came in as expected. You might recall that last time on the call, we did already anticipate that this will be a tough quarter because the comparisons and the operational topics. We did anticipate that. This wasn't a surprise.

And then the follow-up for Olivier. I saw in your press release you made a reference to new products, which I know historically, new products have not been a major driver to overall reported growth. So just wondering if there's anything different with new products overall.

No, no. It's a constant enhancement of new products, so not at all. On the prepared remarks, I had one example. But throughout the quarter, we had multiple new products, but none that would really move the needle.

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

I was hoping you could just update us on growth in aftermarket revenue, service, consumables and what are some of the initiatives you're working on there to drive growth?

Okay. Let me take -- so first of all, we continue to experience here good progress, operational progress, but also all the sales and marketing programs that we have around service, I'm very happy how that goes. This is true particularly also for the contract -- service contract business. There is a part in the rest of service. When you look at our numbers, we always need to outgrow with service contracts because our break/fix business is more challenged. Our products last longer. They're better. And so we compensate that actually with having more labor content in our service offering, more preemptive maintenance programs and so on. So that's all going well. When Bill, after which, shares with you the Q1 numbers, please keep in mind that for service, actually Eastern has a much bigger impact. And in that sense, we got a one-off. We report to you the Q numbers really have a good picture for how the momentum is for the year. But Bill, maybe quickly comment on the numbers.

So we grew 3% in the quarter. Just as a reminder, last year, for the full year, we grew 7% or just short -- shy of 7%. And in the first quarter of last year, we grew by just short of 11%. So if you look at it on a 2-year basis in Q1, we're just north of 7%, and that's kind of in line with what we grew last year. So we feel service business, as Olivier mentioned, key strategic focus and execution seems to go well there.

Yes, that's great. And sorry if I missed it, but did you quantify how much specifically you thought Easter impacted the overall results and the [year-over-year] results specifically?

I think it's tough to do specifically, but I think if you look, for example, at service, last year, we grew 7%. In the first quarter, we grew 11% of that 7%. And then if I look at the Q1 of this year, we grew 3%. So our 2-year growth rate is basically right in line with our -- what we achieved last year. So somehow in the area of service, because it's labor-intensive, it's a bigger impact than it is on product, but you see it also on our product business. And I guess, Jack, maybe one more thing is I made a point in the script to say that April year-to-date, we were a healthy mid-single digit, which, of course, speaks to kind of where we are if you throw out Easter effects.

Your next question comes from line of Jason Rodgers with Great Lakes Review.

Pretty much everything's been asked. But I did want to ask about Stern Drive and some of the progress you're making with initiatives there.

Very happy about how that's going. Recall, we launched that last year, and one of the countries that actually is the pilot for here and the most advanced is China. And when I was down there, I could visit our 4 facilities there, and I was really very, very happy to see how this caused momentum. We see it on the floor. We see it in all the training, communication and activities of our teams. And I start to clearly see it also in the numbers, in the KPIs that we have. So very pleased. The program proves that it's scalable. That's always the key success factor. And I definitely compare Stern Drive also to Spinnaker in the sense that we recognize that it's a journey. And we get more sophisticated every year or every wave. And one of the key success factor is that we are doing that with our teams, with our employees. This is not just top-down toolboxes or methodologies, no. This is very much with an inclusion of the teams, and that helps us actually to get this continuous improvement. So bottom line, very happy. In terms of quantification, the way you need to look at it, this is feeding our margin expansion. You see Stern Drive impacting material costs, but it definitely also impacts productivity and so the whole margin expansion program.

All right. Sounds good. And, Bill, do you happen to have the number of shares that were purchased in the quarter?

Mary's going to look that one up for you.

Sure. Jason, we repurchased 187,900 shares in the quarter.

There are no further questions at this time. Ms. Finnegan, I will turn the call back over to you.

Thanks, Scott. Thank you, and hey, thanks, everyone, for joining us this evening. As always, if you have any questions, don't hesitate to reach out. Take care, and have a good night, everyone.

This concludes today's conference call. You may now disconnect.