Mettler-Toledo International (MTD) Q4 2019 Earnings Call Transcript

Mettler-Toledo International (MTD 1.63%)
Q4 2019 Earnings Call
Feb 06, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2019 Mettler-Toledo International earnings conference call. My name is Shauntel, and I will be your audio coordinator for today. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to turn our presentation over to your hostess for today's call, Ms.

Mary Finnegan. Please proceed, ma'am.

Mary Finnegan -- Treasurer and Head of Investor Relations

Thank you, and good evening, everyone. I'm Mary Finnegan, I'm responsible for investor relations at Mettler-Toledo and happy that you're joining us. I'm joined here today with Olivier Filliol, our CEO; and Shawn Vadala, our chief financial officer. I want to cover just a couple of administrative matters.

This call is being webcast and is available for replay on our website. A copy of the press release and the presentation is also available on the website. Let me summarize the safe harbor language, which is on Page 2 of the presentation. Statements in this presentation, which are not historical facts constitute forward-looking statements within the meaning of the U.S.

Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. For a discussion of these risks uncertainties, please see our Form 10-K.

All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions factors affecting our future operating results and in the business and management's discussion and analysis of financial condition and results of operations in our Form 10-K. One other item, on today's call, we may use non-GAAP financial measures, more detailed information with respect to the use of and the differences between the non-GAAP financial measure and the most directly comparable GAAP measure is provided in the 8-K. I will now turn the call over to Olivier.

Olivier Filliol -- Chief Executive Officer

Thank you, Mary, and good evening, everyone. I will start with a summary of the quarter, and then Shawn will provide details on our financial results and updated guidance for 2020. I will then have some additional comments, and we will open the lines for Q&A. The highlights for the quarter are on Page 3 of the presentation.

Sales growth in the quarter came in better than expected and was quite good given the excellent 8% growth in the prior-year quarter. Total local currency sales growth in the quarter was 4%. Growth in the Americas and China was strong. We again faced meaningful headwinds in the quarter due to adverse currency and impact of tariffs.

With the benefit of our productivity and margin initiatives we were able to overcome these challenges and delivered strong growth in operating margins and EPS growth. For the full-year 2019, we exceeded $3 billion in sales and achieved 5% growth in local currency. Food Retail was down significantly in 2019. Excluding this business, we have 6% growth in local currency sales.

We achieved a strong improvement in operating margins and a 12% increase in adjusted earnings per share. Given the material headwinds we faced in 2019, we are quite pleased with this performance. One final comment on full-year 2019, we generated more than $530 million in free cash flow. A very strong level.

Let me make some comments upfront on the coronavirus that is impacting China. To date, we have had no health impact to our employees in China, for which we are grateful. We are working with the team of contingency and backup plans due to travel and back to work restrictions that the government has imposed. Even before these actions were undertaken, we had taken steps, such as eliminating our annual sales force meeting and noncritical travel to reduce the risk to our employees.

We expect the coronavirus to significantly impact sales in China in the first quarter due to the loss of selling days. At this time, we would expect to recover the sales later in 2020, and therefore, have made no adjustments for full-year sales growth for the coronavirus. I wanted to mention this upfront so that you can put it into perspective as you evaluate our results and updated guidance for 2020. In terms of the full year, our view on 2020 has not changed significantly since we last spoke.

We continue to remain confident in our growth, margin and productivity initiatives. We believe we can continue to gain market share and drive earnings growth. Excluding Food Retail and the near-term impact of the coronavirus, demand in our markets remained solid, although we are cautious on the macroeconomic environment, as uncertainty does exist, and there are pockets of weakness in certain end markets. We will continue to invest for growth, but remain agile if market conditions change.

Based on market conditions today, we believe we are well-positioned to generate solid sales growth and strong earnings growth for 2020. Let me now turn it to Shawn to cover the financials and guidance.

Shawn Vadala -- Chief Financial Officer

Thanks, Olivier. Sales were $844 million in the quarter, an increase of 4% in local currency. On a U.S. dollar basis, total sales increased 3% as currencies reduced sales growth by approximately 1% in the quarter.

On Slide No. 4, we show sales growth by region. Local currency sales grew 6% in the Americas, 1% in Europe, and 5% in Asia/Rest of World. China had growth of 8%, a little bit better than what we expected the last time we spoke.

The next slide shows year-to-date results. Local currency sales for the year grew 5%. And as Olivier mentioned, excluding Food Retail, local currency sales growth was 6% in 2019. By region for the year, sales increased 6% in the Americas, 3% in Europe and 6% in Asia/Rest of World.

On Slide No. 6, we outline local currency sales growth by product area. For the fourth quarter, Laboratory sales grew 6%, Industrial increased 2%, with core industrial up 4%, while product inspection was flat. Food Retail declined 2% in the quarter.

The next slide shows full-year sales growth by product. In 2019, Laboratory sales grew 7% in local currency, Industrial grew 4%, with core industrial up 6% and product inspection up 2%. Food Retailing declined 8% in 2019. Overall, total sales in 2019 were up 5% in local currency and 6% if we exclude Food Retailing.

Let me now move to the rest of the P&L for the quarter, which is summarized on Slide No. 8. Gross margin in the quarter was 59%, a 60-basis-point increase over the prior-year level of 58.4%. Stern Drive initiatives on material costs and productivity in pricing were strong contributors to margin growth.

Partly offsetting these positives were tariffs from the U.S.-China trade dispute. R&D amounted to $35.3 million, which represents a 2% decline in local currency. This decline was impacted by timing of activity and the 15% local currency growth in R&D in the prior year. SG&A amounted to $206.7 million, a 3% increase in local currency over the prior year.

The increase was driven by investments in our field force and growth initiatives and higher variable compensation, offset in part by cost savings initiatives. Adjusted operating profit amounted to $256.3 million in the quarter, which represents a 7% increase over the prior-year amount of $239.7 million. We estimate currency reduced operating income by approximately $3.5 million. We also estimate tariffs were a gross headwind to operating income by approximately $2.5 million.

Absent adverse currency and the gross impact of tariffs, operating income would have increased 9% in the quarter. Operating margins reached 30.4% in the quarter, the first time we crossed 30% and represented a 110-basis-point increase from the prior year. We are quite pleased with this increase in the quarter. A couple of final items on the P&L.

Amortization amounted to $12.8 million in the quarter. Interest expense was $9.6 million in the quarter. Other income amounted to $1.9 million. Our effective tax rate in the quarter was 20% before discrete tax items and adjust for the timing of stock option exercises.

Moving to fully diluted shares, which amounted to $24.6 million in the quarter and is a 3.5% decline from the prior year, reflecting the impact of our share repurchase program. Adjusted EPS for the quarter was $7.78, a 14% increase over the prior-year amount of $6.85. Absent currency and the gross impact of tariffs, our adjusted EPS growth would have been 16% in the quarter, a level we are very pleased at. On a reported basis in the quarter, EPS was $7.84, as compared to $7.11 in the prior year.

Reported EPS in 2019 includes $0.11 of purchased intangible amortization, $0.15 of restructuring, and a $0.32 difference between our quarterly and annual tax rate due to the timing of stock option exercises. In the quarter, we also incurred a one-time noncash deferred tax gain of $0.64 related to changes in Swiss tax law. We expect our effective tax rate to remain at 20%. One final point on reported EPS in Q4 of last year, 2018, we recorded a one-time noncash acquisition gain of $0.75.

The next slide shows our full-year P&L. We are very pleased with our 2019 results. We achieved 5% growth in local currency sales, 100-basis-points improvement in operating margin, and 12% growth in adjusted earnings per share. We're particularly pleased we're able to overcome, to a degree, the headwinds from adverse currency and tariff costs.

That is it for the P&L and we'll now cover cash flow. In the quarter, adjusted free cash flow amounted to $186.2 million, a 23% increase over the prior year on a per share basis. Our working capital statistics remained solid, with DSO at 40 days and ITO at 4.5 times. For the year, adjusted free cash flow amounted to $531.3 million, as compared with $455.9 million in the prior year.

This represents a 20% increase on a per share basis and represents a net income conversion of approximately 95%. We are very pleased with this level and believe we can continue to further improve net income conversion in the future. Now let me turn to guidance. As you heard from Olivier, we're not making any changes to our full-year outlook for 2020.

We continue to feel confident about our ability to execute on our growth and productivity initiatives. We believe we are well-positioned to continue to gain share regardless of the macro environment. We also believe we can continue to expand operating margins through our ongoing productivity and pricing programs. We remain cautious on the macroeconomic environment as certain indicators are weak.

While we believe our business is less susceptible to an economic downturn than in the past, we don't believe we're immune to economic cycles. We will remain in the investment mode, but keep agile to adapt if market conditions necessitate. Now let me cover the specifics. We continue to expect local currency sales growth in 2020 will be approximately 4%.

While the total sales growth is the same, we now expect Food Retail to be modestly down for the year and a double-digit decline in the first quarter. The last time we spoke, we had expected Food Retail to be up low single digits for the year and to be down in the first quarter, but not in the double-digit range. Our sales guidance for 2020 remains unchanged and we are also maintaining our full-year adjusted EPS guidance in the range of $24.85 to $25.10, which reflects a growth rate of 9% to 10%. While we have incorporated our Q4 beat, currencies have deteriorated since the last time.

In total, for 2020, we expect currency and the gross impact of tariffs to reduce our EPS growth by 2%. Absent currency and tariffs, our EPS growth of 11% to 12% is the same as what we provided in November. Some further comments on 2020 guidance. We expect interest expense to be approximately $42 million in 2020 and amortization to be $53 million.

Other income in 2020 will be approximately $7 million. You'll note this is higher than the last guidance, and it is related to pension accounting that is offset, to a degree, by higher pension costs that are above the line and included in operating profit. Now let me make some comments on Q1. Based on market conditions today, we expect local currency sales growth to be approximately 0% to 1%.

We recognize this is not a level you were expecting, so let me walk you through a few factors that are impacting our Q1 sales growth. First, Q1 will be our toughest sales growth comparison for the year as we had 7% growth in the first quarter of last year; second, we expect food retail to be down double digits in the quarter, which impacts sales growth by approximately 1%; and third, as Olivier mentioned earlier, we expect the coronavirus to have an impact on our sales in the quarter, but not for the full year. In Q1, we would expect sales in China to be down mid- to high single digits which impacts our sales growth in the quarter by approximately 2%. The impact from the coronavirus is, of course, difficult to estimate and reflects our current view of the situation, which is based on the assumption that people return to work on February 10.

For the full year, we continue to believe that China will have sales growth in the mid-single-digit range, the same level that we communicated last quarter. Let me summarize what this means to Q1 sales growth. Excluding the impact of the retail decline and adjusting our guidance for the estimated coronavirus impact, we would have expected sales growth in Q1 to be in the range of 3% to 4%. On a two-year stack basis, this would have been growth in the 10% to 11% range, which we're pleased with.

I realize we are providing you a lot of numbers, but thought it would be helpful to put the Q1 sales guidance into perspective. We would expect that adjusted EPS in the first quarter to be in the range of $4.20 to $4.30, a growth rate of 2% to 5%. Absent currency and tariffs, adjusted EPS growth in the first quarter would be 7% to 10%. In terms of free cash flow, we expect approximately $560 million, which is a 10% increase on a per share basis.

We plan to repurchase shares of approximately $800 million in 2020, which includes an incremental amount as we target a net debt-to-EBITDA leverage ratio of 1.5 times. As in the past, we will buy shares evenly throughout the year. Some final details. With respect to the impact of currency on sales growth, we expect currency to reduce sales by approximately 100 basis points.

In the first quarter, we would expect currency to reduce sales by 160 basis points. That's it from my side, and I'd now like to turn it back to Olivier.

Olivier Filliol -- Chief Executive Officer

Thank you, Shawn. Let me start by providing some additional comments on our operating results. Our Lab business continues to perform very well with 6% local currency sales growth in the quarter. Most product lines did well, particularly if you look at it on a two-year basis.

Sales growth in Americas and China was particularly strong. Our Laboratory business is well-positioned to continue to gain share, and we are very pleased with our robust product portfolio. We expect market demand to remain favorable, especially in pharma life sciences. We also sell our lab instruments into other end markets and see some pockets of weakness in certain end markets.

Overall, we expect good growth in our Laboratory business in 2020, although we faced more challenging comparisons after several years of very strong growth. In terms of our Industrial business, product inspection was flat in the quarter, in line with our expectations. We continue to believe this business will grow low to mid-single digits in 2020. As we've discussed last quarter, we have not yet seen the large food manufacturers return to full investment mode, particularly with respect to global rollout.

We believe this is a matter of timing and are well-positioned to capture growth once these food companies return to investment mode. Core industrial did great in the fourth quarter, increasing 4% against 13% growth in the prior year. This was better than we had expected, and we are very pleased with the performance. We're executing well in core industrial as this business continues to gain traction with Spinnaker sales and marketing initiatives.

Core industrial is also benefiting from innovation. Underlying market demand is good enough, and we can capture growth given the diversity of our products, customers, end markets and geographies. Finally, Food Retail was down 2% in the quarter, pretty much on target with what we had expected. However, our outlook for this business has deteriorated since the last time we spoke.

We expect it to be down double digits in the first quarter and be down for the year. Underlying market demand is weak. And although we have easy comparisons we don't expect meaningful improvement in the later part of the year. We had assumed last time we spoke that given the lower level of product activity in 2019, we would have some recovery in 2020.

Based on our outlook for Q1, we don't see this happening until later in the year. As a reminder, we are managing this business for profitability, which also makes forecasting sales a bit challenging. We have an active cost reduction actions over the last year in light of the challenging conditions. Now let me make some additional comments by geography.

I will start with Europe, which was up low single digits. Lab had growth while core industrial and product inspection were down against very strong growth in the prior-year period. We continue to think this business will be up low single digits for the year. We would expect a modest decline in the first quarter, principally due to a significant decline in Food Retail, as well as the 9% growth in Q1 2019.

Americas continues to do very well with 6% growth in the quarter. Lab and core industrial had strong growth. We expect market conditions to remain favorable and expect solid growth in 2020, but this region will be impacted by prior-year comparisons. Finally, Asia/Rest of World had solid growth with most business lines doing well, except for Food Retail.

China had strong growth in the quarter with double-digit Lab growth and high single-digit Industrial goal. Excluding the temporary impact of the coronavirus, our outlook for this region remains favorable, but they will continue to face strong multiyear comparisons. I want to point out that in Q1 last year, China grew 13%, the strongest quarter of the year. Due to these tough comparisons and the impact of the virus we discussed earlier, we now expect Q1 sales in China to be down mid- to high single digits.

Our full-year sales growth in China remained unchanged from our previous level of growth in the mid-single-digit range for the full year, principally due to strong multi-year comparisons and a slightly more challenging industrial environment. One final comment on the business. Service and consumables together represent about one-third of our sales growth, and both grew 7% in 2019. Very happy with this strong accomplishment.

That concludes my comments on the different pieces of the business. We often speak to you about how we view our Spinnaker sales and marketing programs as key differentiators in the market. Another important differentiator is the strength and breadth of our product offering. Let me give you some additional insights, starting with our Laboratory offering.

We can provide more than 40% of the instruments that the scientists or chemists uses daily in a typical analytical lab. These instruments range from balances and pipettes to analytical instruments such as pH meters, titrators and UV/VIS, and finally, to our automated chemistry solutions, which can help in drug process development. We compete against different players across these product categories. No one has the breadth and leadership of the bench of instruments that we do.

Our LabX software can link these instruments and provide connectivity to a LIMS, or Laboratory Information System. This is a very powerful competitive advantage as none of our direct competitors has anything close to this capability. More important than the number of instruments we can provide is the value these instruments provide to our customers. Across the portfolio of instruments, we focus on three important value dimensions: first is automation, our instruments provide greater efficiency, higher sample throughput and less errors in daily laboratory tasks and analysis; second is information, our instruments can perform complex analytics, often with one click of a button and also can ensure the integrity and traceability of the data, this is especially critical in regulated environments; the final dimension is measurement quality.

We provide services such as calibration and good measurement practices to support the quality of our customer processes. We refer to the value outlined in these dimensions as the power of the bench. Our focus is to leverage and respond to global trends that our customers face, such as demand for greater productivity and digitalization and data management needs. Our Lab solutions ensure compliance, data integrity, and provide real advantages in terms of automation and productivity.

We have additional product launches and R&D developments in 2020 that will continue to reinforce the strength of these value dimensions. Likewise, on the industrial side, our product offering is very strong, and we continue to distance ourselves from competition with the breadth of the offering. Our industrial customers are constantly striving to improve the productivity and streamline data management. We are launching several highly innovative products and applications that help with these challenges.

For example, InVision is our breakthrough innovation for manual workplaces, where weighing, counting and packaging tasks have high error potential. InVision uses machine learning and combines WAN technology and camera recognition for fail-safe parts identification in milliseconds. Guided working steps, automatic data capture and process verification significantly increases production, quality and worker efficiency. The instrument directly connects to the customers' production and ERP systems, providing full data visibility and visual proof-of-order fulfillment.

We expect customers could achieve productivity improvements of up to 30% with this revolutionary product. This is just one example of many new product developments under way where the combination of multiple sensor technologies and the use of machine learning and artificial intelligence enables us to develop breakthrough innovation with unique new value proposition. Furthermore, by utilizing different R&D expertise throughout the world, we can develop these products in very short time periods. These are just a few examples of the strength of our R&D innovation that continues to be an important component of our market share gains.

That concludes our prepared comments. We are very pleased with our results in the fourth-quarter and full-year 2019. While uncertainty exists in the global economy, we believe we are well-positioned to gain share and deliver good earnings growth and solid cash flow generation in 2020. Now I want to ask the operator to open the line for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Brandon Couillard with Jefferies. Your line is open.

Brandon Couillard -- Jefferies -- Analyst

Hey, thanks, and good afternoon. Olivier or Shawn, as we sort of think about China and the virus impact on the first quarter, which segments would be more impacted than others? Lab versus Industrial? Would you expect to recoup most of that in 2Q or more over the balance of the year? And would you remind us how much of the China manufacturing is for the export market versus domestic consumption?

Olivier Filliol -- Chief Executive Officer

OK. So referring to the segment with the biggest impact. First, I want to start. The fact that offices are closed here for additional days has an impact across the business.

The second impact that I want to highlight is the restrictions of the field sales force in terms of traveling. And again, that's quite broad based. On that latter part, however, we can take mitigation measures. We are, for example, very active already this week in rolling out a broad training program to our own sales force, as well as our indirect channel partners to be more effective in telesales.

In the past, we did telesales with a focused team. Now we want to make sure also that field salespeople are experts in telesales and leveraging that. Now this is kind of the short-term impact. Now when we think about segments, we need to think also the demand side that will be impacted here in Q1.

And as an example, the one that we expect to be most impacted is the retail business. The retail business is impacted because the Chinese consumers behave differently at this stage and that we will feel in a quite strong way. The Lab business, I would expect to be actually much less impacted. There might be even some upside later in the year.

Now in terms of how fast this comes back, we do expect a pent-up demand. We do also expect that from a Chinese government standpoint, there might be some stimulus that will help. I would hope that we see already some of that in Q2, but I certainly expect that it's going to take Q3 and Q4 to fully recover. So certainly not a full recovery in Q2, absolutely not.

Then in terms of the supply chain, you're asking how much of the products we produce in China. And then export to the West. I would first say, we have a part where we produce in China, but of course, we also source components, and that's quite significant. And the good news is we are very close on this whole supply chain impact.

Our local Chinese team has done a fantastic job in assessing the impact and taking mitigation factors. I have also my global supply chain team very actively on that one. We have, for example, contacted all our suppliers, and all our Chinese suppliers so far have given us green light. We feel comfortable.

We have also taken mitigation factors. At this stage, we do not expect any significant impact on our global supply chain. I do not expect any significant delivery issues coming out of that but this is also assuming that operations will come back on February 10. And if they are not, still field mitigation factors will help, but of course, it can't last for weeks.

Brandon Couillard -- Jefferies -- Analyst

Thanks. And just one more. The core industrial business is pretty remarkable given the tough comp in the fourth quarter. Could you sort of elaborate on some of the drivers there? If there was any, perhaps, fourth-quarter budget flush dynamic? And maybe speak to some of the innovation and maybe new products that might be supporting the strength? Thanks.

Olivier Filliol -- Chief Executive Officer

So indeed, very happy about the results. They've also exceeded expectations. I really feel this is a reflection of very good execution by the teams around the world because the end-user markets that we serve with core industrial, we're not particularly strong, as mentioned, that we even saw some pockets of weaknesses. Nevertheless, we did here very well.

I feel the core industrial benefit from things that we shared with you at previous occasions in the context of Spinnaker sales force guidance, for example, helps really very nicely in the core industrial because it helps us to guide the salespeople to the industry segments that are the most relevant and most interesting for us. We had, for example, particular focus on life science industry and pharma industry for core industrial, that helped. So on the one hand, the go-to-market dynamic and the marketing dynamic was strong, and then we had a good product portfolio. There were many smaller innovations, but together, they make a difference.

We had hardware products, but we had also software products that we had into use over the last two years that benefited. At previous occasions, I had shared that with you. For example, our new portfolio for the floor scales, but also in the area of counting scales and so on. So good product.

And on the prepared remarks earlier, I just highlighted the product InVision that we also feel, is a proof of strong leadership in innovation. Now none of these products will be important enough to really make a difference to the top line, the group sales, but in aggregation together, they make a difference. And they sometimes help us to open new doors and sell significant solutions to key accounts.

Brandon Couillard -- Jefferies -- Analyst

Very good. Thank you.

Operator

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

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Great. Thanks for putting me early, before all the questions get asked. Just a quick one. You mentioned some softness in the Lab business, some pockets of softness.

Could you elaborate on that one? I would assume some of that could be your thermal analysis portfolio?

Olivier Filliol -- Chief Executive Officer

Let me quickly jump in. We are talking about certain end markets that have weaknesses. OK, so it's really end markets. And when I talk about end markets, and this wasn't just Lab, this is kind of overall.

If you think one-third of our revenue roughly comes from pharma lifestyles, and the other two-thirds come from many different industries. And we had end-user industry like metal, plastic, electronics, and even some chemical industry that wasn't particularly strong. And it depends a little bit by region. But for example, in Europe, you have the automotive industry that is really weak.

Now automotive itself is not an important segment to us. But there are suppliers to the automotive industry that are relevant for us, plastic, but also, again, components and so on. And so we have these end-user markets. Now when you will say, hey, that's more relevant for industrial.

No, actually, for Lab too because we have a lot of instruments that go in quality labs. And so we saw. So, for example, thermal analysis would go and be relevant there, also weighing and so on. Now even that, when you look at the whole product category for us, we did well.

But when we analyze it by end-user segments, we saw some pockets of weakness. And that was what I tried to highlight, kind of also trying to say, hey, we have here an economic environment that is good enough for us, but that doesn't mean that every end-user segment is as strong as life science.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Got it. That's really helpful. And I guess, just sort of looking at those pockets or just looking about those things that there's -- I mean, do you think there's -- when those segments do recover, is there pent-up demand in those segments? I mean, given that they're sort of, like, outside into the life sciences area?

Olivier Filliol -- Chief Executive Officer

I think for these segments, we are rather late cycle. And in that sense, I think right now, we are in that situation. We saw it in Q4, we will also see it in Q1. But I think actually, there is upside on that one.

I rather think we see it also in certain PMI statistics and so on that these segments should actually start to recover. But let's be also cautious, the overall global economy is flattened.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Yeah. Great, and then just one follow-up. Obviously, tariffs have been a headwind for you. We've got this trade deal on the horizon between the U.S.

and China. Can you sort of talk about your expectations sort of for the trade outcomes and sort of like how that could impact if the things get resolved?

Olivier Filliol -- Chief Executive Officer

So the deal that took place doesn't have a direct benefit to us. So the tariffs that we are impacted on are still in place. And I don't think there is anything near-term here that could change. However, the fact that there was a deal between U.S.

and China, helps the overall economy, helps confidence in China and that's good for us. Again, I do not expect that tight situation will change here in the near term. And so we are assuming for tariffs, the status quo, and that means we still have headwinds from tariffs for another two quarters.

Shawn Vadala -- Chief Financial Officer

Yeah. So just to be clear, we're going to have headwinds for Q1 of about 2%, it was the gross impact of tariffs. And then we'll have a little bit of impact in Q2.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Great. And just one final question, Shawn. What's the embedded number for operating margin expansion in your 2020 guide?

Shawn Vadala -- Chief Financial Officer

Excluding the impact of currency, we're probably looking at about 70-basis-point improvement in 2020. But currency will probably -- right now, we're looking at it -- it could have a headwind of up to 20 basis points.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Great. Thank you very much.

Operator

Your next question comes from Patrick Donnelly with Citi. Your line is open.

Patrick Donnelly -- Citi -- Analyst

Great. Thanks, guys. Olivier, maybe just on the guidance. Since the last update, last quarter, we now have the headwind from Food Retail turning negative for 2020, a little bit of uncertainty around coronavirus, a bit of a headwind in 1Q at a minimum.

Just trying to think through how -- it seems like a few things have turned against you guys yet, you're maintaining that overall guide. Was there just enough conservatism in the original number? You're able to absorb these headwinds, maintain the guidance? Maybe it's more fair now, there's a little of a cushion removed? Or did other things in the portfolio improve a bit to allow you guys to maintain that number?

Olivier Filliol -- Chief Executive Officer

I would highlight two things. First, we did better-than-expected in Q4, and that gave us even more confidence in our execution, shows that our programs are really going well. And so that played a role. And the second one is, you mentioned here a few things that we are more concerned now.

But then I would highlight core industrial that I feel better. And I highlighted, we had really a very good results here in Q4, and we have better confidence for the full year. So I think that's a combination of things. Net-net, I feel as comfortable about the guidance for this year as I was in November.

And that's really why we keep the full-year guidance, even as we see here for Q1, a bigger target.

Shawn Vadala -- Chief Financial Officer

And as we mentioned in the past, too, one of the big questions we had a quarter ago was what is it going to be like when we start to lap some of these tough comparisons in core industrial? I mean, we just lapped 13% last year. Now we have one quarter behind us in that regard, and now it gives us a little bit more confidence in the momentum in that business.

Patrick Donnelly -- Citi -- Analyst

That's helpful. And then just on the recovery of the sales later in 2020, in China specifically, could can you just talk through what gives you the confidence that those are going to come back? And then on top of that, just any metrics you could help us think about if this headwind does keep going? If China is shut down a little bit longer than February 10? How sensitive is the business to another week, another two weeks, etc.? Anything you can provide would be helpful there.

Olivier Filliol -- Chief Executive Officer

From experience, we have seen that if we have a significant slowdown, we have the pent-up coming back. And that's just based on experience, and we have every reason to feel the same way here. And as mentioned before, I do expect that the government will also support the economy and that we will benefit. And there are certainly areas where we're probably going to see more investments, particularly in the area of life science as an outcome of it.

The second question, it's not an easy one to answer to be honest, we have spent a significant time to review here with our local team, the impact now for this February 10 we thought. I think it will mostly depend what kind of actions the government takes. If the government would suddenly extend this lock period for operations that people would not be allowed to go back to the facility or so, that's one. But the other one is they might restrict travel.

And I can't give you good numbers here for all the different scenarios. From today's perspective, I'm not particularly concerned about the supply chain. I think we can master that, and we have reasonable contingency. Even if this takes a few extra days, I don't see that as a big problem.

The bigger question is actually how our customers will react in that situation. That's the big one. I think we can manage things. You heard me saying before, we have contingency plan, we think about alternatives, we have this tele channel that we can activate, and all that stuff.

But it's difficult to anticipate what the customers will be, and we have so many different customers in China. You have international customers, you have the local ones, you have Food, you have life science, so every expansion will impact our numbers. No question. But I think with our guidance that we gave you and the details we gave you we gave you already quite some indication that this extra days of closing has a significant impact on our numbers.

And if this is extended by one or two weeks, then you need to assume that our numbers will be worse than what we are guiding you right now in Q1, right?

Patrick Donnelly -- Citi -- Analyst

I appreciate the color, Olivier. Thanks.

Operator

Your next question comes from Tycho Peterson with JP Morgan. Your line is open.

Tycho Peterson -- J.P. Morgan -- Analyst

Hey, thanks. On the cost side of things, you had flagged some cost reduction actions last year, I felt like they may be over in the first part of this year, but it seems like those programs are continuing. Is that a correct assumption? And are you accelerating any cost actions on the Food business in light of what's now a lack of recovery there?

Olivier Filliol -- Chief Executive Officer

Yeah. So we initiated the different cost actions. There were cost actions related to the Food Retail business. These were executed throughout last year, and we're going to have the benefit also ongoing here.

There were also cost actions that we did in the area of IT, back office and so on. These were executed mostly in Q3. And so we have more benefits coming in this year. So yeah, different things we have benefits in 2020 coming from that, and we build it in, in our guidance.

Shawn Vadala -- Chief Financial Officer

Yeah. And then on top of that, of course, we have our ongoing programs under the Stern Drive umbrella that we're constantly doing as well, too.

Tycho Peterson -- J.P. Morgan -- Analyst

And then, Shawn, can you quantify the price contribution in the fourth quarter? And you had the question before on tariffs, but as we think about those eventually kind of getting unwound, just your latest thinking on ability to capture price this year in this environment?

Shawn Vadala -- Chief Financial Officer

Yeah, sure. So on the pricing, we're very pleased with the quarter. It came in very much as we expected, just slightly under 2.5%, which kind of puts us right at that same kind of number on a full-year basis. And then in terms of tariffs, on an annualized basis, the gross headwind is about $25 million.

As we've kind of communicated in the past, if it all went away, some of the mitigation actions would also go away. We've kind of mentioned in the past that we would see probably an EPS growth benefit of 1% to 1.5% and probably say, sitting here today, it's maybe closer to 1.5% kind of benefit on an annualized basis.

Tycho Peterson -- J.P. Morgan -- Analyst

OK. And then just lastly, given the unchanged China outlook, setting aside the coronavirus impact, are you factoring in any government stimulus versus the macro slowdown there in the base business?

Shawn Vadala -- Chief Financial Officer

I mean, it's not like we have a formula where it's so micro, but I mean, certainly, it's in our thinking and to give us confidence that we can still meet the midyear. I mean, I'm sorry, the mid-single-digit sales growth guidance for the full year for China as kind of Olivier kind of already mentioned with the expected recovery in the second half of the year. But certainly, that could be an upside that we could see in the latter parts of this year.

Tycho Peterson -- J.P. Morgan -- Analyst

OK. Thanks.

Operator

Your next question comes from Dan Leonard with Wells Fargo. Your line is open.

Dan Leonard -- Wells Fargo Securities -- Analyst

Thank you. Circling to China again. Can you elaborate on the fourth-quarter performance? It came in better than we were looking for. Where did you exceed plan? And some of other companies in analytical instruments talked about some weakness in China in Q4 and toward year-end.

Apparently, you didn't see that. Can you discuss maybe what the differential trends you were seeing?

Shawn Vadala -- Chief Financial Officer

Yeah, we were very pleased with China. It came in a little bit better than we expected, 8% growth. On the Laboratory side, we were double-digit growth. So we're very pleased with that given the stack comps that we've talked to you about in the past.

But equally, very happy with the Industrial business. I mean, our Industrial business was up high single digits, very strong, high single digits. So we were very pleased with that type of growth as well, too. Offsetting that is we had weaker results in the local retail business there.

But otherwise, very pleased with what we saw in the quarter. And frankly, we're feeling very good entering 2020 before the coronavirus situation.

Olivier Filliol -- Chief Executive Officer

Yeah, I would attribute it to really good execution by the team. I think the team does a fantastic job. And they are very effective in implementing Spinnaker and they are really good at going after the industry segments that have the best opportunities. And that was very helpful in that environment that we experienced here in China last year.

Dan Leonard -- Wells Fargo Securities -- Analyst

And then my follow-up, how are you thinking about Europe into 2020? You're coming off three quarters here where growth was just barely above flat. You have a tough comp in Q1, so that will be four quarters of that type of result. How are you thinking about the outlook for that region looking forward? Thank you.

Shawn Vadala -- Chief Financial Officer

Yeah, we expect to get off to a slower start there. As you mentioned, we have our toughest comp there with 9% growth in the prior year. Europe will also have a little bit of retail effect in the first quarter as well. But right now, we continue to feel like the economy has been good enough there, but we're very much aware of where PMIs have been over the last year.

We continue to monitor it closely. But as we always say, as long as customers stick to the replacement cycles, we feel pretty good. And similar to China, we also have a very strong execution by our sales and marketing organization in Europe. And given that it's our largest direct business, we often get the most impact from a lot of our Spinnaker sales and marketing initiatives there.

Dan Leonard -- Wells Fargo Securities -- Analyst

OK. Thank you.

Operator

Your next question comes from Dan Arias with Stifel. Your line is open.

Dan Arias -- Stifel Financial Corp. -- Analyst

Afternoon, guys. Thanks. Olivier, on the Food business, it sounds like this will end up being a pretty prolonged period of just challenging conditions by the time all is said and done. I guess, I'm wondering, once you've recovered a bit, do you think there might be some new market share opportunities? Is that in the picture? Or is the competitive landscape pretty settled with a bunch of big players in it?

Olivier Filliol -- Chief Executive Officer

I think the competitive landscape is quite settled because we are not running the Food Retail business for market share. We really run this business for profitability. We are focusing, particularly on large accounts. We are focusing on the most attractive countries.

And in that sense, we have refined our strategy and are executing that strategy, and we'll stick with it even when the market will recover. Yeah. Yeah, I think we want to be very disciplined on that business. And we have been running this strategy for now quite a few years.

And of course, it hurts when we see that it impact our top line. But this resource shifting that we are doing in the organization, helps us to grow many businesses with excellent profitability, with excellent long-term growth opportunities and the Food Retail business, we did less of that. And as a consequence, it became smaller in percentage of the total business. Today, Food Retail is about 7% of our revenue.

This is much less than what it was a couple of years ago, and I feel this is the right strategy. So I'm not irritated by these temporary challenges. But of course, it hurts, no question.

Dan Arias -- Stifel Financial Corp. -- Analyst

Yeah, I gotcha. OK. And then, Shawn, I guess, maybe this is a housekeeping question, but anything from a pacing perspective across the quarters of 2020 that look either different or clearer than they did back in October? Aside from the obvious with the virus and food factors. Any word just along the fundamentals?

Shawn Vadala -- Chief Financial Officer

Yeah. No, I mean, of course, the recovery from the coronavirus is now, like, the topic that's going to impact Q2 versus Q3. But nothing really standing out from my mind when I look at the rest of the year at this point in time.

Dan Arias -- Stifel Financial Corp. -- Analyst

OK. Thanks much.

Operator

Your next question comes from Jack Meehan with Barclays. Your line is open.

Andrew Wald -- Barclays -- Analyst

Hi, this is Andrew Wald on for Jack. Turning to product inspection. Can you walk us through some of your customer segments and the trends in spending?

Olivier Filliol -- Chief Executive Officer

OK. The biggest category is packaged food. And that's the biggest one, but you would also have for example, the cosmetics industry. You have also a little bit of pharma.

And you also have meat, which can be packaged meat. So these are kind of the different categories. They are typically big companies. Many of them have global operations.

Yeah. That would characterize kind of the key end-user segment. The packaged food companies, the branded packaged food companies have a rather difficult period. There are new market trends from consumers that impact things.

You have channel topics that they face as branded consumer packaged companies, and you see that also kind of the overall performance of these companies' market caps and so on. And that has an impact on their investment behavior. And we feel that.

Andrew Wald -- Barclays -- Analyst

That's great. Thank you. And in Europe, have you seen any impact from stocking related to Brexit?

Olivier Filliol -- Chief Executive Officer

No.

Shawn Vadala -- Chief Financial Officer

No.

Olivier Filliol -- Chief Executive Officer

No, the whole Brexit topic has not been a particular relevant one for us. Now we had our contingency plans in case it would have been a hard Brexit. Now things are really calm for us. And of course, if at the end of the year, this hard Brexit becomes, again, probability, then our contingency plan will be very relevant.

But I want also to remind, the U.K. is about 3% of our revenue, so even if Brexit would have some demand implications, it's not so relevant for the group level.

Operator

Your next question comes from Vijay Kumar with Evercore ISI. Your line is open.

Vijay Kumar -- Evercore ISI -- Analyst

Hey, guys, thanks for taking my question. Olivier, just maybe a big picture on the revenue side. And I appreciate all the macro comments. But if you just look at over the last few years, Lab products, it's run pretty hot.

It did slow down in '19. In '19, you also had Food, which was severe, and you had tariffs, which were incremental, right? If the macro really hasn't changed. Like, where is the delta coming in when you look at '19 versus '20, right? And I think putting all the pieces together, I think you're trying to say macro hasn't changed, but we're trying to be prudent. So maybe just walk us through on where do you think could be the plus and minus.

Olivier Filliol -- Chief Executive Officer

Let me have Shawn respond here, just maybe clarify a few things, and then I'll come back.

Shawn Vadala -- Chief Financial Officer

Yeah. So Vijay, maybe one thing is that in 2018, if you're comparing it, the growth in '18 included a little bit of acquisition growth, so I think if you look at '19 and '18 on an organic basis, and I think it was 7% in both years. So from our perspective, we don't feel like there's any difference or slowdown. And especially when you look at our growth on a multiyear stack basis, we feel very good about the business and the momentum.

And if you look at inside the business, what was, I think, particularly interesting this year is you saw very, very strong growth across many of the product categories. And so it just shows you the breadth of the portfolio really working, the robustness of the portfolio, lots of new products coming out in the last few years. And of course, Lab benefits disproportionately from our Spinnaker initiatives, just given the end markets and a lot of the focus. So we actually felt very good about Lab entering this year, recognizing people might have wanted us to guide higher than mid-single digit, but really, it was very much just related to the multiyear stack comp.

Olivier Filliol -- Chief Executive Officer

Yeah, I'll leave it. I totally agree in that sense. I don't think there is a particular effect here that we need to highlight.

Vijay Kumar -- Evercore ISI -- Analyst

Understood. And then maybe one last one, and Shawn, maybe I missed this, but the pricing assumption for '20, is that consistent with the with '19? And anything on the tax line, pluses or minus for '20 versus '19?

Shawn Vadala -- Chief Financial Officer

Yeah, so on the pricing side, we had kind of previously guided between 150 basis points to 200 basis points, acknowledging that the last few years, we've been in that 200-plus basis point range. But I think it's also fair to say, in the last few years, we've also been able to take advantage of some inflationary situations or the tariff situation. We kind of entered 2020 with a lower inflation environment around the world. So I think we probably will see something more in the 150- to 200-basis-point range.

And then in terms of the tax rate, no change to 2020. We expect to be at 20% before discrete items in 2020.

Vijay Kumar -- Evercore ISI -- Analyst

Thanks, guys.

Operator

Your next question comes from Steve Willoughby with Cleveland Research. Your line is open.

Steve Willoughby -- Cleveland Research

All right. Thanks for squeezing me in here. I guess, first, Olivier, based on the feedback you're hearing from either internally or externally, how confident are you at this point that things get going again next Monday in China?

Olivier Filliol -- Chief Executive Officer

From today's perspective, everything points out to this. But honestly, things have changed a lot every day. We have been on the phone and the email exchanges every day, and there was always news. I think in that sense, I'm confident with the information I have, but I have also seen that individual provinces make their own decisions, and that can also influence us, there can be travel restrictions specific to provinces and so on.

But again, from today's perspective, we do expect that we can relaunch our operations.

Steve Willoughby -- Cleveland Research

OK. Thank you. And then just a follow-up on that. Are you expecting any -- in terms of the revenue headwind from this kind of extended holiday, does it impact the segments equally? Or is one of the segments impacted more in the near-term here?

Olivier Filliol -- Chief Executive Officer

As I covered early on, first, we are impacted now just by the fact that we can't meet our customers and that we can't really take orders or initiate quotes and all these things. That sure, I would say they're independent across all the industry segments. But then there are industry segments that will be impacted in terms of demand in Q1. I was highlighting that, for example, Retail will probably be more impacted than life science, pharma customers maybe even packaged food companies.

So there will be differences.

Steve Willoughby -- Cleveland Research

Very good. Shawn, just one quick one. If I have my notes correctly from a quarter ago, I had written down that you were thinking about 90 basis points of margin expansion this year when backing out FX and I think that you said 70 basis points now. I just wanted to clarify that.

Shawn Vadala -- Chief Financial Officer

Yeah, we were a little bit more optimistic on the margin maybe three months ago. One of the things kind of mitigating that was higher pension service costs. So there's a benefit below OP on that for the nonservice part but the service part is above OP. So they kind of largely offset each other in terms of EPS.

But it's a little bit more of a drag on OP.

Steve Willoughby -- Cleveland Research

OK. Thank you.

Operator

Your next question comes from Dan Brennan with UBS. Your line is open.

Dan Brennan -- UBS -- Analyst

Great. Thank you. Thanks for taking the questions. Olivier, or Shawn, in terms of the 2020 kind of making up the temporary shortfall here in Q1, did that work equally for both consumables and instruments? I would assume instruments, you likely kind of make those up, but I would figure consumables, whatever research isn't done or whatever things aren't done in Q1 probably get lost.

So can you just speak a little bit to -- I know you're more instrument heavy, but how do you characterize kind of the ability to make up both instruments and/or consumables, whatever is lost in Q1?

Olivier Filliol -- Chief Executive Officer

On this consumable topic, most of our consumable is actually related around liquid handling pipette. Actually, the pipette business could be one that has some upside from the whole thing. You can imagine, but pipetting is very important, and I wouldn't be surprised that research and so on will be intensified, even an area that we right now see in our Chinese business. So I don't think that we will lose on the consumable business for the full year.

And even the other part of the consumable, I don't think will be much impacted. The consumable piece is impacted by the research activities. And in the area of production, for example, when I think about process analytics and so on, I don't think that the demand would be impacted for the full year.

Shawn Vadala -- Chief Financial Officer

Yeah, we might see something in field service, but that's a smaller part of the Chinese business versus our global average.

Dan Brennan -- UBS -- Analyst

Great. And then I know you addressed this earlier, but I kind of wasn't clear, maybe I just missed it. Are you assuming in the full-year guide that the government does produce some additional stimulus? Or that, Shawn, I think you may have actually said to Tycho's question that actually could lead to upside, I just want a clarification on that.

Olivier Filliol -- Chief Executive Officer

It's part of the pent-up recovery that we were mentioning before. It's not huge, but we have it as --

Shawn Vadala -- Chief Financial Officer

As a consideration. Yeah.

Olivier Filliol -- Chief Executive Officer

Yeah.

Dan Brennan -- UBS -- Analyst

Got it. And then this might be hard to do, but given coronavirus is kind of impacting a lot of things outside of China, but is it possible to kind of step back from coronavirus and say you've been pretty consistent since last year flagging these uncertainties and some pockets of weakness, but we have seen PMIs tick up a little bit here. Is it possible to kind of separate coronavirus from what you're seeing globally? And do you think as you look back over the last couple of quarters, are things looking any better? Is it stable? Worse? Because the language seems similar but I just want to see how you'd characterize the global environment for your businesses.

Olivier Filliol -- Chief Executive Officer

It didn't change too much. I think what I was highlighting before that I felt better about our execution in Q4, particularly also in core industrial, but also overall I felt better on that piece. What came in weaker is Food Retail, and certainly, we have now global economy things, but I wouldn't give too much weight on that. So net-net, I feel the same.

Dan Brennan -- UBS -- Analyst

Got it. And then maybe one more, just on product inspection. What could we look for in terms of visibility or kind of the environment getting better? Is it packaged food capex? I don't know, are there any trends we can watch ourselves just to kind of see you get ahead and when this market could begin to recover and you kind of see that investment spending happening?

Olivier Filliol -- Chief Executive Officer

Packaged food capex is certainly a good indicator for that. This is an indication how much investment is going in packaging equipment and all these things, that is. And in general, I would say when these consumer packaged companies are recovering, we will see investment going back into it.

Dan Brennan -- UBS -- Analyst

Great. Thank you.

Operator

There are no further questions at this time, I will now turn the call back over to the presenters.

Mary Finnegan -- Treasurer and Head of Investor Relations

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

Operator

[Operator signoff]

Duration: 71 minutes

Call participants:

Mary Finnegan -- Treasurer and Head of Investor Relations

Olivier Filliol -- Chief Executive Officer

Shawn Vadala -- Chief Financial Officer

Brandon Couillard -- Jefferies -- Analyst

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Patrick Donnelly -- Citi -- Analyst

Tycho Peterson -- J.P. Morgan -- Analyst

Dan Leonard -- Wells Fargo Securities -- Analyst

Dan Arias -- Stifel Financial Corp. -- Analyst

Andrew Wald -- Barclays -- Analyst

Vijay Kumar -- Evercore ISI -- Analyst

Steve Willoughby -- Cleveland Research

Dan Brennan -- UBS -- Analyst

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