Mettler-Toledo International Inc (MTD) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our Second Quarter 2018 Mettler-Toledo International Earnings Conference Call. My name is Emoni, 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, Emoni, 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 am joined by Olivier Filliol, our CEO; Bill Donnelly, our Executive Vice President; and Shawn Vadala, our Chief Financial Officer. I need to cover just a couple of administrative matters.

The call is being webcast and is available on our website. A copy of the press release and the presentation we refer to is also available on the website.

Let me summarize the safe harbor language, which is outlined on Page 2 of the presentation. Statements in the 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, uncertainty 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 statement. 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 future operating results and the business and management discussion and analysis of financial condition and results of operation in our Form 10-K.

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

Let me now turn the call over to Olivier.

Thank you, Mary, and welcome to everyone on the call, which we are doing from Switzerland this evening, which is why we started earlier than usual.

I will start with a summary of the quarter, Bill will provide details on our second quarter results, and Shawn will provide 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. Sales growth in the quarter was 7% in local currency, which is very good, given the excellent 10% growth in the prior year period. China has particular strong growth in the quarter. This strong sales growth, combined with our continued focus on margin and cost savings measures, drove a 19% increase in adjusted EPS. This is particularly impressive given the 22% adjusted EPS growth we achieved in the second quarter of last year.

All in all, we are quite pleased with the second quarter and our first half results this year. Demand in our markets continued to remain solid and assuming no change in the market conditions, we believe we are well positioned to continue to gain share and drive further earnings growth in the remainder of 2018 and beyond.

Let me now turn it to Bill to provide additional details on the quarter. Bill?

Thanks, Olivier, and hello, everybody. Sales were $722 million in the quarter. That's an increase of 7% in local currency. The Biotix acquisition contributed approximately 1.5% to sales growth. On a U.S. dollar basis, total sales growth increased 10%, as currencies increased sales growth by 3% in the quarter.

On Slide #4, we show our sales growth by region. Local currency sales grew 4% in the Americas, 7% in Europe and 9% in Asia/Rest of World. Sales growth in China increased 15% in the quarter and our sales growth there was broad-based.

Slide #5 shows sales growth for the first half of the year. Local currency sales growth has increased by 5% in the Americas, 3% in Europe and 10% in Asia/Rest of World for the 6 months.

Slide #6. We outline local currency sales growth by product line. In the quarter, laboratory sales grew 10%, industrial sales increased by 3% and retail grew 6%. Within industrial, our core industrial business had good growth of 7%, offset in part by a 3% decline in product inspection. As a reminder, product inspection had an excellent growth of 20% in the year earlier period.

Turning to the next slide. We have year-to-date sales growth by product line. Laboratory sales grew by 10%, industrial grew 1% and retail 3% for the 6-month period. All these numbers, again, are in local currency.

On Slide #8, we've got a P&L for the quarter. Our gross margins were 57.2%. That compared to 57.5% in the prior year. Pricing continued to be a strong contributor to gross margin. Pricing wasn't offset by the impact of currency, some negative mix and lower margin in our product inspection business, in part explained by the U.S. facility consolidation we described last quarter. On a constant currency basis and adjusted for acquisitions, margins were up about 30 basis points in the quarter.

R&D amounted to $35.3 million, and that's a 6% increase in local currency. SG&A was $208 million, and that's a 3% increase in local currency versus the prior year. Increase principally related to additional investments in our field resources offset to a certain degree by cost-saving initiatives.

Our adjusted operating income was $169.3 million in the quarter, which represents a 15% increase over the prior year amount of $147.4 million.

Adjusted operating margin was 23.4%, and that's an 80 basis point improvement over the prior year. Currencies did not impact our operating margin in the quarter.

A couple of final comments on the P&L. Amortization amounted to $12 million in the quarter, while interest expense was $8.3 million in the quarter. Our other income was $1.9 million and it includes $1.5 million of pension income. As a reminder, and as we mentioned last quarter, the new accounting rules require us to show this below operating profit. We restated last year to make it comparable.

Our projected annual effective tax rate is 22%, which we reflect in our quarterly adjusted EPS. In the second quarter, our reported effective tax rate is 22.4%, with the difference due to the timing of stock option exercises.

Moving to fully diluted shares. They amount to $25.9 million in the quarter, which is a 2% decline from the prior year, reflecting the impact of our share repurchase program.

Adjusted EPS for the quarter was $4.65, and that was a 19% increase over the prior year amount of $3.92. On a 2-year combined basis, adjusted EPS has increased by more than 40%. We're very pleased with this growth level, which, I remind you, is organic.

On a reported basis, in the quarter, EPS was $4.31 as compared to $3.84 in the prior year. Reported EPS included $0.22 of restructuring, principally related to the consolidation of our product inspection facilities in United States. It also includes $0.10 of purchased intangibles and $0.02 related to the higher reported tax rate.

The next slide provides results for the first half of the year. As Olivier mentioned, we are very pleased with these results. Local currency sales have increased by 6%, our operating profit by 13% and our EPS is up 16% in the 6-month period.

That's it for the P&L. And now a little about cash flow.

In the quarter, adjusted free cash flow was $120.8 million, which compared to $113.2 million in the prior period. Our working capital statistics remained solid with DSO at 39 and ITO at 4.5x. For the first half, adjusted free cash flow was $177.3 million, and we remained comfortable with our full year target of $450 million.

Now let me turn it over to Shawn to provide an update on our guidance.

Thanks, Bill, and hello, everyone. Let me start with a couple upfront comments on guidance before covering the specifics. First, the China tariff situation. On our last call, we estimated the potential negative impact to operating profit from the tariffs was approximately $10 million or $0.30 per share on a full year basis. We believe we can largely offset this impact with price increases and some supply chain adjustments. For the second half of this year, we will not be able to fully offset the estimated 2018 headwind of $0.15 to $0.20 per share. We estimate the net headwind during the second half of the year is in the range of $0.05 to $0.10 per share. In mid-July, another round of tariffs were announced. We estimate that if these additional tariffs are implemented the negative impact on operating profit would be another $6 million. We have not built this into our guidance at this time as they are still under review and timing has not been finalized. Similar to the first round, we would seek to offset over time but could face some headwind in the short term if they are implemented. We will continue to monitor the situation closely.

Second, foreign exchange has moved against us since the last time we provided guidance, principally from being driven by the weakening of the CNY versus the dollar and the strengthening of the Swiss franc versus the euro. Specifically, currencies in the second half have deteriorated $0.25 to $0.30 per share since our last call. It is also worth pointing out that currency will also be a bit of a headwind during the first half of 2019 if rates stay where they are.

On the positive side, we feel very good about our business. Underlying demand is solid, and we believe we are executing extremely well. Our growth strategies continued to yield tangible results and we believe we can continue to gain share and drive our earnings growth. With that as a backdrop, let me cover the details.

We continue to believe that local currency sales growth in 2018 will be approximately 6%. As a reminder, this includes approximately 1% from the Biotix acquisition. We are leaving our adjusted EPS guidance range unchanged from $20.10 to $20.25, which represents a growth rate of 14% to 15%. We have had -- we have the benefit of the Q2B, but some work to do to offset the nearly $0.50 per share headwind from tariffs and unfavorable currency just mentioned.

With respect to the third quarter, we expect local currency sales growth to be in the 6% range, which includes approximately 1% from Biotix. Based on this sales growth, we would expect adjusted EPS to be in the range of $4.97 to $5.02, a growth rate of 14% to 15%. Our EPS estimate includes the Q3 impact of the announced tariffs in currency headwind.

In terms of currency on sales growth, we expect currency to decrease sales growth by approximately 1.5% in the third quarter. For the full year, we expect currency to benefit sales growth by just under 2%.

That is it from my side. I now want to turn it to Olivier.

Thanks, Shawn. Let me start by providing some additional comments on the second quarter. Our lab business continues to perform well. Lab benefited from some acquisition revenue from Biotix. However, our organic growth in lab had good growth over the prior year. Balances continue to do quite well, and Analytical Instruments and pipettes also had good growth, particularly if you look at it on a 2-year basis.

Process Analytics had excellent growth in the quarter, and I will provide an update on this business shortly. The continued strong lab growth reflects our excellent product portfolio, investment in field resources and our Spinnaker sales and marketing initiatives.

Turning now to industrials. Let me cover this in 2 parts, starting with core industrial, which had sales growth of 7% in the quarter. Very good growth, particularly given the very solid growth in the prior year period. Asia had a strong growth, driven by excellent results in China. Europe also had strong growth in core industrial, while Americas also have growth.

The other part of industrial is product inspection, which was down modestly in the quarter. The results were principally driven by the very strong 20% sales growth achieved in the second quarter of last year, which Bill mentioned earlier.

The final piece of our company is the retail business, which was up 6% in the quarter, a little better than we expected, given some project activity in United States.

Now let me make some additional comments by geography. Europe had good growth in the quarter, with industrial particular strong, but also good growth in lab. Retail was down in Europe. In the Americas, lab and core industrial have solid growth. As anticipated, product inspection was down against excellent growth in the year earlier period. Retail in the Americas was strong due to project activity just mentioned.

Finally, Asia/Rest of the World had strong growth with excellent growth in lab and good growth in industrial. Retail was up modestly in Asia/Rest of World. China had very strong growth across most product lines.

That concludes my comments on the business. Let me also provide an update to our service business, which have growth of 6% in the first half and 10% in the second quarter. As a reminder, service represents approximately 23% of total sales and is a unique competitive advantage for us as well as an important platform for revenue growth. We have a service force of approximately 2,800 people, which is by far larger than any direct competitor.

Central to our service growth strategy is increasing the percentage of our installed base under service contract. With more service contract business, we can enhance the productivity of our technicians and create more customer value through supporting regulatory compliance and enhancing equipment uptime through preventive maintenance.

Our current service growth initiatives are centered on our installed base of instruments. With more than 10 million installed instruments, our iBase provides ample opportunities to further penetrate existing accounts for service opportunities. We have prioritized biopharma and packaged food, as our global service offering has the highest value to customers in regulated industries. Of utmost importance to them is ensuring they are in compliance with their standard operating procedures as well as ensuring uptime in their manufacturing operations.

Big data analytics is giving us tools to identify service opportunities within our installed base.

We can isolate potential opportunities by the age of the instrument and by past instrument performance. This allows us to do specific targeted marketing most appropriate for that part of the product lifecycle. Big Data is also allowing us to further penetrate existing accounts by identifying cross-selling opportunities within large global key accounts, where service decisions are made at a local level. We have invested in service telesales resources to follow up on leads and develop specific targeted sales messages based on customer's actual data. We are encouraged by the results and believe this will allow us to continue to grow the service contract revenue above the company average.

In addition to growth initiatives in service, we also have initiatives to further improve operating margins. Although these margins are well above the company average, we see further opportunities to increase our field force efficiency and improve pricing realization.

One additional update I want to provide today is on our Process Analytics business, which had a strong first half and has a great track record of technology innovation. It has a sizable percentage of its revenue from consumables and service, approximately 40%, and has achieved above-market growth for numerous years. It represents about 10% of total sales and generates above group average profitability. Process Analytics provides in-line and real-time measurement of key analytical parameters for industrial liquids, which helps pharma, biotech and chemical companies to monitor and optimize their production processes. While the total market is large, we are a leader in industrial applications for pH, TOC, conductivity and dissolved oxygen measurement in production processes as well as auxiliary processes like ultrapure water monitoring.

Our solutions combine sensor technologies for specific measurements, transmitters and services. The sensors must be calibrated, maintained and replaced on a timely basis, which creates an attractive, consumable stream. Over the last several years, we have further solidified our leadership position by expanding our portfolio into gas analytics with lasers, power generation analyzers and bacterial detection in ultrapure water analysis.

We continue to enhance our technology leadership in this market. We recently launched a new portable dissolved oxygen meter that can automatically calibrate installed in-line oxygen sensors. We also launched a new turbidity sensor, which significantly expands performance levels. Both of these products are targeted to the growing beer production segment. With our expanded portfolio, we can now provide a comprehensive solution package, which provides great opportunities in the larger brewers.

Another attractive aspect to the turbidity launch is that we moved the production of these sensors to China as a first step to build up sensor knowledge. Over time, we expect to move the entire turbidity parameter to China, which will help to achieve meaningful cost savings in this product category.

Very soon, we will launch our new pH sensor called InPro X1, which is based on a breakthrough technology and represents a leapfrog over any other pH sensor in the market today. Key benefit of the new sensor is the unbreakable design of the sensing element, thereby ensuring no release of contaminants or debris. It has cutting-edge measurement performance, and no calibration is needed at installation due to our intelligent sensor management technology that allows precalibration of sensors.

One additional example of our technology is the upcoming introduction of our new TOC sensor, featuring performance enhancement and intelligent sensor management. It will have significant enhanced measurement performance as well as provide superior features to help customers comply with regulation. In particular, we open new propriety services based on full traceable tools that ensure compliance for customers.

These are only few of the many product launches taking place in Process Analytics, but I thought they were good examples of our technology know-how and leadership. In addition to technology, Process Analytics is a great example of our continuous improvement philosophy with respect of sales and marketing. This business was the original pilot of our Spinnaker approach and for 15 years now they have been working to continuously refine and enhance the sales and marketing program. Process Analytics' excellent product portfolio combined with the leading edge sales and marketing initiatives, should continue to yield share gains for this business.

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

(Operator Instructions) And your first question comes from the line of Dan Leonard with Deutsche Bank.

So first off, on the Q3 guidance, it looks like you had good growth rate against a very difficult comparison, and the outlook is strong. So why wouldn't Q3 organic revenue guidance be a little bit better given that the comp is easier?

Dan, this is Shawn, thanks for the question. I think, when we look at it, we're actually looking at it more on a 3-year comp basis because I think it's important to look at that we started to have accelerated growth in the second half of 2016. So if you look at it on a 3-year-basis, it actually makes a lot more sense to us.

That makes sense, Shawn. And then my follow up, you mentioned that currency at current rates will be headwind in the first half of '19. Would you be willing to offer up -- will tariffs still be a headwind in the first half of '19 as they stand today? Or would you expect your remediation programs will have caught up to the tariff impact by then?

I think with regard -- it's Bill. I think with regard to the first program, we should have caught up with our initiation. I think it depends a little if this additional $6 million or what other activities could come to make a judgment on the second round of tariffs and what might follow after that.

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

So maybe on China. Obviously, it sounds like another fantastic quarter. Can you just maybe give us some color on like the cadence of how business is kind of ebbed and flowed there. The macro has been quite strong, but there's some worry, just given all the trade noise and you start to see maybe on the industrial side a little bit of indecision on purchasing. Like, what are you seeing on different parts of the business in terms of cadence? And then do you expect to see any different behavior between, sort of, lab versus industrial there, given maybe some of this question?

In general, we don't see any early signs of things changing. We have a very solid environment. The team is still very upbeat. And the only thing that impacts us is, of course, this previous year comparisons, and that's a little bit different quarter-by-quarter. But otherwise, we feel -- and we -- visibility that we have is good across all the product lines. You specifically asked about lab. Lab we have now many, many quarters of very solid growth, and I expect that to continue. But I would, of course, also say that we need to very carefully monitor things. For example, we have certainly seen that the stock market in China reacted to all these tariffs announcements, and so we certainly wouldn't exclude that this will also impact the demand. But it's too early for us to see it. And the only reason why we are here a little bit more cautious with our outlook is, again, related to comparisons, and we certainly had, also, some pent-up demand benefits the last couple of quarters that will not go on. And the pent-up demand is particular relevant in context of our industrial business. For labs that wasn't impacting us.

That's helpful. And maybe, Bill, I know you always get excited about inflation. It feels like pricing should probably be a tailwind to you guys or at least be more favorable that is typical, just given the overall environment. How are you thinking about inflation in pricing right now for you and how that trends into maybe next year?

So as a -- so first, we generally do like a little bit of inflation, Ross. And I think it helps us with pricing messaging with our sales force, customers are more tolerant. What's maybe a little bit more nuanced about what we've seen now is the inflation related to tariffs. So if you look at where we're maybe getting some tariffs applied to us, it could be in product categories that maybe competition doesn't have the same challenge. And tariffs are also something that's, let's call it, less easy to talk to customers than general material costs or what's going on with wages. So I -- if I think about the profitability impact of what we do in pricing, I think that we should have -- continue to execute well on pricing, probably do better than average overall on a net basis, but that -- some of the higher price increases you'll see in the coming quarters will be offset by some of these inflationary impacts due to the tariffs.

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

I was hoping you'd just talk a little bit more on the product inspection business. I think you started out the year looking at mid-single digit growth there. Certainly, can appreciate the comps in the first half. But can you just help us with a little bit of the conviction in the back half ramp, hit the target for the full year?

Yes. If you look at our numbers, a part of the challenge has been self-created in the sense that we did talk on the last call that we have some facility consolidation. You -- we moved our biggest facility in the U.S. to a new location. But at the same time, we also closed 2 facilities, one in Chicago and one in Ithaca and moved these product lines to this new bigger facility down in Florida. And that's certainly absorbed a lot of energy. Internally, we have, certainly, also some challenges in the supply chain. And then that we have the other part which is related to our checkweighing business where we went live with our Blue Ocean system. And so often, when we go live, it takes a couple of months to be back in a smooth operations. So that was one effect. The other effect that we certainly also see is a certain slowdown from our packaged food customers. We had, in previous year, excellent, big orders with global rollouts. This year, we don't see them materializing in the same way. And that makes it a very difficult previous year comparisons on top of the things that I described before. And that makes us, also, a little bit cautious for the remainder of the year. The fundamentals remain very solid. And mid-term, we are very excited about this business. But again, it might well take a while until we see solid growth coming back. And certainly, these comments of before, we want to see that the packaged food companies reengage in global rollouts and increase their spending in protecting their brands and all the value propositions that we offer.

Great. And I appreciate all the color on the new product pipeline, just the breadth of the things that you're bringing to market now. Can you just help us put it in context of -- in terms of what you think the contribution from some of these new products could be relative to prior periods, just as we start to think about what the trajectory could look like going into next year?

Yes. As often, when we talk about new products, we share these with you to highlight how we continuously invest in our technology leadership that helps us to differentiate versus competition that allows us to increase prices and so on. But we have so many products in our portfolio that a new product really doesn't change the needle. It's -- it doesn't make that big of a difference. And to put it in perspective, Process Analytics, we talk about roughly 10% of our revenue and all these products that I mentioned will add to the growth. But you heard us also saying Process Analytics have very good growth already, and we benefit from previous product launches. So I don't want to suggest here that Process Analytics would further accelerate. But it gives us actually good confidence that Process Analytics would continue this kind of growth with this excellent profitability that we have and this -- in that sense, we presented it for what we do for the whole group. We have many, many product launches across all the product businesses that we have.

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

Just -- could you just move a little bit more of a breakout on where the headwind is you're seeing from the tariffs? I mean, is it supply chain? Is it COGS? Is it end-market demand? I'm just sort of curious in terms of like where you're feeling it and what you're doing to sort of offset some of these.

The comments of Shawn before were really focused on the direct impact that they do have. So it impacts our material costs, basically, the cost of goods. We try to offset that as far as possible through price increases and a few supply chain adjustments, and that's the piece that we have under control. There is a tentative, significant indirect impact on our customer base that -- we talked before about the food industry, for example, the meat industry in the U.S. is certainly impacted, and that can have ripple effect. But it's sometimes actually difficult to say if it's good or bad for us. So we always need to anticipate. And then there is the overall impact on the economy that, of course, we have -- it's difficult to anticipate and we don't really control. And so all our comments before was really focused on the direct impacts and there we feel actually we have good measures in place to mitigate the impact. But Shawn highlighted that maybe from a timing perspective, it might not always be in the same quarter that the cost is coming and the benefits, for example, of pricing that offsets it.

Great. And if the second round of -- or the latest round of stuff that's in discussion goes through, I mean, with that in mind and that you can't do things immediately, it's like, how long would it take you to sort of implement if you do get another hit?

Yes. We would -- given the -- this is Shawn, Derik. Given the timing of this one, we kind of leverage largely our annual price increase process. So it really could be dragged into the first quarter a little bit. But I would say, at some point during the first quarter.

Next, we have Mr. Patrick Donnelly with Goldman Sachs.

Bill, maybe just a little bigger picture. When you look at Europe, can you just talk through the trends there. I mean, a little bit of mixed macro data points, PMI is still healthy but not accelerating. So just wondering your outlook there, how things are going.

So I think, overall, our European business is performing well. If I look at our lab business, it's growing mid-single digits, our industrial business growing mid-single digits and we're down in retail. And retail is just purely lumpiness. If I -- if we were to look out to the second half of the year, I would say that's the type of numbers that we would expect to put up, so we don't, at this point, see any significant changes. There's probably some swings between individual countries, but the overall picture for Europe, I think, would largely stay similar to what we saw in the first half. And we were happy with what we saw in the first half.

Okay. And then can you just talk through the transition of the Tampa facility, how the new facility is tracking? And then also any other future moves this year we need to think about? I know you guys have discussed moving the Chicago Vision business in the second half. So just wondering anything we should look out for -- from a disruption point of view?

So the Chicago facility, that's done. That's -- including in the Ithaca, so the U.S. relocation is completed, and it's more a question of fully digesting it. The other facility relocation that we have is in Switzerland. There is -- that impacts the laboratory balance business here in the coming few weeks. However, that -- I expect this actually to be much smoother and at this stage really don't expect any impact on our supply chain. And I just got the update yesterday that, basically, I think, except one person every -- all the employees will actually join us at the new location, and that gives you an indication that it should be really much smoother, and it's also a much more standardized product makes it also simpler. And then the other relocations that will take place later in the year are office jobs, and so I don't expect any impact from there.

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

I'm going to stick with some of the themes here. But Bill, can you actually clarify your comment on pricing? I mean, basically, were you implying that if competitors source their products outside the U.S. and are not subject to tariffs inflation, it may be harder to pass through the price increases? I'm just -- I just want to get clarification on that.

Yes. So what the -- so Ross' question was, "Hey, you guys normally like a little bit of inflation, and you can usually do better than inflation. Do we realize even been better pricing with a little bit of inflation and with a low inflation environment?" And the distinction, and I wanted to -- I agree with that statement -- I just wanted to make the distinction with regard to tariffs that's not as straightforward because the -- we could be going against a competitor in that product category. We have a tariff and he doesn't because where he imports his product from versus where we do. I think that's a statement specific about pricing and inflation. I would think about in terms of what the impact is on our operating profit of tariffs. I then would defer to what Shawn said. And that is that we expect to largely offset them. We might have a little bit of a delay. But that we can largely offset them between what we do in pricing and what we do in supply chain. Now in the details of that answer on pricing, Tycho, it might be that we're raising prices on some other products that are not tariff impacted, but we view it as an effort to, in our mind, get -- offset that $10 million of headwind that we have. And -- so yes, I -- that's a little bit how we've tackled it.

And then, separately, you guys have a Stern Drive program. I mean, that's separate from the facility consolidation and the like. I mean, anything notable there? Is that something you could potentially expand?

I -- the number of -- we just had a review with it in the recent days, and the number of projects have increased this year versus last year. They will increase again next year. So we're very happy with how Stern Drive's going. And as Olivier mentioned, some of the things we're doing to offset tariffs do relate to supply chain and is reflected as part of the Stern Drive program.

Okay. And then last one, just rounding out the geographic discussion. You touched on Europe and China. I guess, here in the Americas lab and core industrial, you called that a solid. On the lab side, we've seen some good numbers from other life science companies. Are you starting to see some benefit of the NIH budget?

NIH is not a huge piece for us. But if we look at how we performed in pipettes, for example, which would be the product category that has the best -- the largest exposure, we certainly had solid demand from that sector the last couple of quarters and have a good outlook for the second half.

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

Olivier, just going back to your comment on pent-up spending in industrial. I'm just -- I'm curious whether you're able to give a sense of how much of the existing Mettler customer base you've seen just participate in the replacement cycle at this point versus those that sort of haven't come back to you yet. Is that a reasonable way of looking at things?

So the pent-up demand was specific to China. The -- we -- this is not a topic for the Rest of the World. In China, we had a situation where, it -- for the industrial business really had a very difficult environment about 3 years ago. And then there were some sectors that hardly recovered and honestly, we also, kind of, shifted resources away from that sectors and then focused much more efforts on the chemical industry, pharma industry, food industry that we think -- feel is more sustainable and more core to us. And there, we have certainly a good customer base where we have this pent-up demand because they have slowed down in the replacement cycle but also they had not invested in additional capacity in the same way. And now where the growth is coming back, we have the pent-up demand. Quantifying it is, however, difficult, but I certainly have 3 groups with exceptional growth that we have apart to this.

Okay. And then, Bill, maybe on food. Obviously, that's a lumpy one. I think you're up against a pretty favorable comp there next quarter. So you're expecting a rebound there in growth or is that sort of similar to PI in that the project timing is just going to have that business needing a little bit to get back up?

I'll let Shawn take that one.

Yes, you're right, Dan. So we have an easier comparison going into the third quarter, and we would expect high single-digit growth in the third quarter.

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

Just couple of housekeeping questions, Bill or Shawn. Within China, could you break out the lab versus core industrial? And then what exactly were net ASPs in the second quarter? I didn't catch that.

Yes. So lab in China was up over 20% in the quarter, and industrial was up 10%. And then in terms of pricing, we had a quarter very similar to the first quarter, strong momentum in the program, north of 2%.

Very good. And then what was the M&A impact to the lab business?

Yes. I think it was 3%, yes.

Very good. And then, lastly, if you could just remind me what the total annual transition tax payments you expect will be.

Yes, just the payment I think we paid in the first quarter, which was, I think, $4 million -- I mean, second quarter, it was $4 million.

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

A couple of questions. I'll ask them both and then I'll jump in queue. One just a very big-picture question. I'm not going to direct it to anybody in particular. But we talked about the macros, operating environment, products, execution, tariffs. These all sort of oversimplify it, but sound like issues that we very much have a handle on. Things are stable, steady, going well. Over the next 90 days or so, you guys are going to be going through your planning process for 2019. I wonder, given that we seem to have such a good handle on all those dynamics, what do you think are the really critical swing factors that you're thinking about that you'd recommend that we think about as you think about the outlook for 2019? And then as a follow-up, just a couple of housekeeping things. I wonder if you could give us a sense for what you -- you've estimated the impact of selling days or Easter might be on 1Q, 2Q. And then any view on gross margin, specifically, the cadence of gross margins in the back half would be really helpful.

Sure. Maybe I'll make a comment about packaging those tariffs and currencies, et cetera. And then let Olivier talk about some of the things he's expecting for budget tour. I do feel, Steve, that one of the key messages we have this quarter is that we have close to $0.50 of headwinds in the second half of the year that we didn't have last time we talked to you, and we haven't adjusted our guidance for the full year. And I think that speaks to -- we're entering a budget cycle with some channels, but we feel like we have our arms very much around those. So a lot of things going well for us. With regard to some other bigger-picture or longer-term items, I hand it to Olivier.

Yes, we gave, of course, some prebriefings to our operating units around the world, what we want to focus on going forward, what kind of environment we expect. In essence, we are expecting the macroeconomic environments to be actually quite similar to what we had this year. We expect all the units to remain agile and in case that things would change and you have seen us in the past, actually, reacting to these things quite in a fast way. But the working assumptions right now is that things remain the way they are right now. And I would also say, we are in a continuous investment mode. So you have seen us doing field-doable programs in the recent quarters. And I'm still in that mode, I just approved a couple of more of these investment projects and I do expect, actually, good growth going forward, coming also from all the different programs that we have in place around sales and marketing, around field doables, new product launches and so on. So that's very much the briefings that we gave to the units. And I have no indication from any team that they see particular concerns or changing economic environment. But of course, I don't want to say that macroeconomic things might not impact us. A dollar appreciation, for example, can impact also certain emerging countries, and we would certainly also see that in the numbers. But that doesn't necessarily mean that we would adjust our operating plans. And with that, maybe, Shawn, to specific questions.

On the gross margins, yes. So in terms of the margins, Steve, we're -- we'd look at gross margin maybe that's flattish in the third quarter. Just as a reminder, we're going to have a little bit more of the tariff headwind in the third quarter. Still working through maybe some of these internal topics that we talked about are earlier as well, too. And then in the fourth quarter, we would expect gross margins to be, maybe, up in the 50 basis point kind of range. So on a full year basis, it would be flattish on a currency neutral basis.

Really appreciate all the color here, team.

And we will now take our last question from Mr. Steve Willoughby with Cleveland Research.

Actually I have a couple of them for you. I guess, first, as you're trying to offset tariffs through price increases, do you typically see or have you already seen, customers either try to hold off on purchases, given the price increase or maybe try and pull forward spending ahead of price increases? And then I have a couple of follow-ups.

Yes. Actually, if anything, we've seen -- we saw a little bit of acceleration in June with certain customers that knew that we were going to be announcing the price increase. And then maybe to add a little bit more from a competitive situation, we've actually seen competitors come out with some pretty significant price increases as well which we felt was encouraging.

Steve, that'll be -- Steve, maybe one comment. That tends to be more in distribution channels, and most of our sales are direct, so that's not a big impact. And even in the examples that we're thinking about, that's mostly them placing the order before the end of the quarter.

Yes.

Got it. Okay, okay. And then secondly, just regarding the changes, or I guess, lack of changes in your EPS guidance. Shawn, I think you made a comment of maybe $0.05 to $0.10 of a headwind from tariffs and then $0.25 to $0.30 from FX. So you add those up, you're looking at maybe $0.30 to $0.40 of incremental headwinds and maintaining the guidance. I understand, maybe $0.05 is from the 2QB, and you're trying to do some pricing. But you're aware of what you're doing to kind of pull the strings here to find some other offsets. Is it something you're doing with compensation? Or is it something else where you're finding those extra dollars to offset these headwinds?

I think, we feel our cost structure is in really good shape. I think that's the -- one of the biggest things we've looked at. We do a lot of homework, Steve, before we go on to the budget tour. And that gave us some confidence, say the cost structure is in good shape. I forget, I think it was Tycho or somebody asking about Stern Drive. Stern Drive programs are in good shape with the facility consolidation, should have more of a benefit in the second half. So there's just a number of things in terms of our cost structure being in good shape.

Okay. And then I think just last thing the facility consolidation done in Tampa, are the headwinds or disruptions and increased focus there, is that finished now or is that something that also continues in the third quarter?

It will take, certainly, a couple of additional weeks, months. But I certainly feel that the biggest challenges are behind us.

And we have one question that just came into queue from Mr. Jason Rodgers with Great Lakes Review.

Just wanted to know if the plan is still to purchase around $475 million worth of shares in 2018?

Correct.

Yes.

And do you have the service growth, what that was for the quarter?

Hold on, service growth was...

So -- go head, Shawn.

Yes, service was up 9.5% in the quarter. And on a year-to-date basis, 6%. Service, should point out, had a little bit of benefit from the Easter timing in Q1.

And then finally, what should we expect as far as the product inspection business for the fourth quarter?

For the fourth quarter, we're looking at high single-digit growth. They start to have an easier comparison in the fourth quarter.

And there are no further questions at this time. Ms. Mary Finnegan, back to you for closing remarks.

Thank you, Emoni. And thanks, everyone, for joining us tonight. Of course, as always, if you have any questions don't hesitate to contact us. Given that we're in Switzerland, so it's probably best to send an e-mail, but we're happy to get back to you at that time. Take care. Good night, everyone.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.