Danaher Corp  (NYSE:DHR)

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Q4 2018 Earnings Conference Call
Jan. 29, 2019, 8:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning. My name is Christie, and I'll be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's Fourth Quarter 2018 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino you may begin your conference.

Matthew E. Gugino -- Vice President of Investor Relations

Thanks, Christie and good morning, everyone, and thanks for joining us on the call. With us today are Tom Joyce, our President and Chief Executive Officer; Matt McGrew, our Executive Vice president and Chief Financial Officer; and Dan Comas, our Executive Vice President.

I'd like to point out that our earnings release, the slide presentation supplementing today's call and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website www.danaher.com under the heading Quarterly Earnings.

The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until February 5th, 2019.

During the presentation we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted all references in these remarks and supplemental materials to Company-specific financial metrics relate to the continuing operations of the Company and the fourth quarter of 2018 and all references to period-to-period increases or decreases in financial metrics are year-over-year.

We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are only available in certain markets. During the call we will make forward-looking statements within the meaning of Federal Securities Laws including statements regarding events or developments that we believe or anticipate will or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties including those set forth in our SEC filings and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements except as required by law.

With that I'd like to turn the call over to Tom.

Thomas P. Joyce -- President and Chief Executive Officer

Thank you, Matt, and good morning, everyone. Our fourth quarter results round out a tremendous 2018 for Danaher. During the year, strong revenue growth and operating margin expansion delivered double-digit adjusted EPS and mid-teens free cash flow growth.

We delivered 6% core revenue growth for the full year which was a meaningful step up versus prior years led primarily by the impact of new product innovation and commercial initiatives. The Danaher Business System continued to serve as the driving force behind our execution and our ability to take share in many of our businesses.

We generated $3.4 billion of free cash flow in 2018 resulting in 16.5% growth year-on-year that helps position us for significant capital deployment going forward. Our free cash flow to net income conversion ratio was 127% representing the 27th consecutive year in which our free cash flow has exceeded net income. We deployed over $2 billion of capital during the year including the acquisitions of IDT and BLUE Software. IDT joined our life science platform adding best-in-class genomics consumables capability and BLUE Software now part of Esko enhances our offering across the packaging development and production workflow. We're excited to have both these businesses as part of Danaher.

Turning now to the fourth quarter. Sales grew 5.5% to $5.4 billion as the impact of foreign currency translation decreased revenue by 2% while acquisitions increased revenues by 2%. Core revenue increased 5.5% with all five platforms delivering better-than-expected results.

Geographically high-growth markets grew high-single digits led by double-digit growth in both China and India. Across the developed markets, we saw high-single-digit growth in the US, while Western Europe was up low-single digits.

Gross margins for the fourth quarter. Gross margin was 55.1% and operating profit margin was 17.9%. Core operating margin declined 15 basis points driven primarily by accelerated investment spend, foreign currency impact from a stronger US dollar and tariff-related costs. Full year gross margin was a record high 55.8% and we increased our core operating margin by 70 basis points. This marks the fourth consecutive year that we increased our core operating margin by 70 basis points or more.

Fourth quarter adjusted diluted net EPS was $1.28 bringing full year adjusted diluted net EPS to $4.52, our fifth straight year of double-digit growth. Now let's take a more detailed look at our fourth quarter results across the portfolio. In Life Sciences, reported revenue increased 10.5% and core revenue was up 7.5%. Operating profit margin declined 30 basis points to 19.7% as a result of foreign currency impact and accelerated growth investments. For the full year, Life Sciences delivered an outstanding 180 basis points core operating margin expansion, a testament to the team's strong DBS execution.

Turning to the individual operating companies. Beckman Life Sciences achieved high-single-digit core revenue growth for the quarter. More than 20% growth in automation was driven by demand for new products like the Biomek i-Series, Beckman sample preparation platform launched last year.

We further enhanced our automation capabilities with our recent bolt-on acquisition of Labcyte Corporation. Labcyte brings complementary technology to the core Beckman offerings with an acoustic dispensing method that is used for liquid handling in life science applications.

The non-contact low-volume dispensing technique eliminates cross-contamination risks and greatly reduces fluid loss helping scientists around the world achieve better results. These organic and inorganic growth investments are helping us provide best-in-class solutions for our customers and contributing to Beckman Life Sciences' above-market growth rate.

Leica Microsystems' core revenue was up mid-single digits with positive performance across most major end markets and regions led by life science research in North America. Over the last few years, the Leica team has significantly improved their cadence of innovations through the use of DBS tools. Leica introduced three times the number of new products and technology in 2018 versus the prior year while improving their project on-time delivery by more than 2,000 basis points. The combination of better R&D processes along with enhanced commercial execution has contributed to a meaningful step up in Leica's core revenue growth over the past few years.

Core revenue at SCIEX was up high-single digits. Strong results in North America and China were broad-based driven by demand across the clinical, food testing and forensic end markets. Phenomenex, our separations consumables business achieved high-single-digit core revenue growth. It's been two years since we acquired Phenomenex and the team has made tremendous progress with a number of DBS commercial initiatives including funnel management and transformative marketing.

Through these and other DBS-driven growth initiatives Phenomenex has increased the size of their addressable market by 30%. At Pall high-single-digit core revenue growth was driven by similar results across both our Life Sciences and industrial businesses.

Biotech was up double digits led by strong performance in single-use technologies where demand for new products like the iCellis Bioreactor system continues to help drive share gains. IDT delivered mid-teens revenue growth with positive performance across all major regions and product lines. The team continued to build upon early progress with DBS and the business has consistently exceeded our initial performance expectations.

Moving to Diagnostics. Reported revenue increased 3.5% and core revenue was up 6%. For the full year, Diagnostics delivered 6.5% core revenue growth, a meaningful step up versus prior years driven by both organic growth investments and the continued evolution of our Diagnostics portfolio. Reported operating margin declined by 70 basis points to 18.8% in the fourth quarter. However core operating margins expanded by 20 basis points. At Beckman Diagnostics, core revenue increased at a mid-single-digit range led by China and improved results in North America.

By product line, immunoassay led the way and we saw a good growth in automation as well driven by early success in Europe with our recently launched DxA 5000 automation system. In hematology, we're encouraged by early customer feedback on our new DxH 900 high-volume analyzer and the DxH 520 for low to mid-volume settings. These are two of the many new products that Beckman introduced this year that expanded our offering and improved our competitive position in the core lab.

At Radiometer, high-single-digit core revenue growth was driven by a strong quarter in North America, Western Europe and China. Our blood gas and AQT product lines delivered outstanding results, and we believe Radiometer continued to take share in the acute care market.

Leica Biosystems, core revenue was up mid-single digits with broad-based strength across most major regions in product lines led by double-digit growth in advanced stainer. And at Cepheid double-digit core revenue growth was driven by North America and Western Europe. The business achieved a significant milestone in the fourth quarter placing its 20,000 instrument globally further expanding Cepheid's marketing leading installed base. Continued innovation around our test menu has also been a meaningful contributor to Cepheid's outstanding results.

The team maintain their cadence of innovation with the recent CE-IVD marking of the Xpert HBV Viral Load test, a new rapid test for the quantitation of the Hepatitis B Virus that delivers results in less than an hour. With the addition of this test, Cepheid now offers a complete virology test menu suitable for any laboratory setting making high-quality testing and disease monitoring accessible to even more clinicians and patients.

Turning now to our Dental segment. Reported revenue was flat and operating profit margin increased by 70 basis points to 13.8%. Core operating margins declined by 185 basis points primarily as a result of ongoing investment spend focused on new product development. Dental's core revenue was up 2.5%, one of our better quarters in some times.

We remain encouraged by signs of end-market stabilization particularly in our North American traditional consumables and equipment business where we saw another quarter of positive sellout data. Our Dental business in China now over $200 million in annual revenue saw double-digit growth again this quarter. Our approach as a more localized player offering a comprehensive product suite positions us well for continued growth in the region.

Our specialty consumables business was up low-single digits versus the tough prior-year comparison with solid performance across orthodontics and implants. Growth was led by performance in high-growth markets with particular strength in China and Eastern Europe.

At the Greater New York Dental Show in November, we featured a number of new technologies from across the Dental platform. These included the DEXIS Titanium intraoral sensor and Nobel's X-Guide for computer-guided dental implant surgery. Both important products that support the team's focus on providing customers with a best-in-class fully integrated digital workflow.

In addition Ormco's full scale Clear Aligner System, Spark continues to be very well received in Australia. And as a reminder, the team obtained FDA 510(k) clearance for Spark earlier in the fourth quarter. This is obviously an important step as we continue our expansion of our Clear Aligner offering.

Moving to our Environmental & Applied Solutions segment. Reported revenue was up 4.5% and core revenue increased 5%. Reported operating margin decreased 40 basis points to 22.7% with modest core margin expansion. In product identification, core revenue increased at a mid-single-digit rate led by demand for marking and coding equipment and related consumables.

Videojet core revenue was up high-single digits with positive performance across all major regions end markets and product lines. The team continued to expand Videojet's powerful installed base which now includes more than 10,000 remotely connected printers. Using data analytics, we're able to help customers run their packaging processes and plans more efficiently, and with fewer instances of disruptive downtime.

Videojet's industry-leading connectivity provides unique insights to help us serve customers more effectively, and this differentiated offering is a key contributor to Videojet's above-market growth rates. 2018 marks Videojet's ninth consecutive year of mid-single-digit or better core growth. Our packaging business which includes Esko and X-Rite was down low-single digits, but we're encouraged by recent order trends and feel well positioned for improved performance in 2019.

Finally, turning to Water Quality. Core revenue growth for the platform was up mid-single digits. Core revenue increased at Hach at a high-single-digit rate of momentum in both municipal and industrial end markets. Geographically the developed markets and China led the way.

For the full year 2018, Hach achieved 10% core revenue growth. The Hach team has consistently combined outstanding commercial execution with innovative new products to deliver this market-leading growth. Hach has developed a best-in-class digital marketing platform that we've now rolled out across our other Water Quality businesses. And the team has meaningfully expanded Hach's addressable market with new products like the CM130 Chlorine Analyzer for dialysis applications and the Claros' water intelligent software system. The team's commitment to continuous improvement has helped Hach differentiate its customer value proposition and further strengthen its competitive advantage.

At Trojan, core revenue declined due to a tough prior comp comparison, but we saw healthy levels of project bidding activity during the quarter, and we're encouraged by the underlying momentum in the market.

Lastly, ChemTreat's high-single-digit core revenue growth was driven by strength across North America and Latin America primarily in the food, chemical and oil and gas end markets. The team's commitment to commercial excellence has helped ChemTreat sustain a remarkable track record with 2018 marking their 51st consecutive year of core revenue growth.

So to wrap up, 2018 is a tremendous year for Danaher, and we're well positioned as we begin 2019. Over the past several years through a combination of organic and inorganic growth initiatives we've transformed Danaher into a higher growth, higher margin and higher recurring revenue Company with strong footholds in attractive, fast-growing end markets. Our portfolio today, combined with the power of the Danaher Business System positions us well as we focus on delivering long-term shareholder value in 2019 and beyond.

We're initiating first quarter adjusted diluted net EPS guidance between $1 and $1.03 which assumes core growth of approximately 4%. We continue to expect full year 2019 core revenue growth of approximately 4% and adjusted diluted net EPS to be in the range of $4.75 to $4.85.

Matthew E. Gugino -- Vice President of Investor Relations

Thanks, Tom. That concludes our formal comments. Christie, we're now ready for questions. Christie, we are now ready for questions.

Questions and Answers:

Operator

Thank you. The floor is now open for questions. (Operator Instructions) Your first question is from Tycho Peterson of J.P. Morgan.

Thomas P. Joyce -- President and Chief Executive Officer

Good morning, Tycho.

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

Thanks. Good morning. Maybe want to start on margins, obviously a lot of the moving pieces here between FX, tariffs, M&A and then some of the Dental investments. I know it's going to be may be more of a back-end loaded year for margin expansion this year. Can you maybe just talk about when some of these acquisitions may turn margin-accretive? And then can u also comment on, Diagnostics margins looks like they contracted quite a bit. Can you maybe just touch on that as well?

Thomas P. Joyce -- President and Chief Executive Officer

Sure, Tycho. We'll -- obviously, we did a few things here in the fourth quarter to take advantage of what we saw was a pretty strong quarter evolving particularly in the latter month of December. And so we did accelerate some investment some spend in a couple of areas that impacted both the cost of goods sales line and SG&A. We've accelerated some investment in life science in particular, in life science, in R&D and sales and marketing, and also did a few things accelerating some cost actions in Diagnostics and made some investments in new products around Dental.

So, I think a few things that really made some good sense there. And to your point, clearly FX and tariffs were headwinds in the quarter and made a difference. I think, if you put those aside, overall margins would have been up by roughly about 50 basis points where it not for the FX and tariff impact. So, we do see margins continue to improve during the course of the year. Obviously we've got a terrific track record here.

In terms of acquisition-related impact on the margins, IDT turns core here in April, so we'll start to see those start to move through. It'll take a bit of a while here before we see the impact of Labcyte, obviously our newer acquisition. But IDT, at least we will be a much more material contribution. So we'll see that starting in April which will be a help.

On the Dx side, as I mentioned we did accelerate on some cost actions and some investments there. We've got a terrific line up of new products that are coming through. And so continuing to invest in our automation products, hematology, some new products that are coming a little bit out in the future around immunoassay and clinical chemistry will, I think -- certainly also are having an impact there. But we think those investments make tremendous sense. Obviously we had a bit of a comp there with Cepheid coming up with the fourth quarter in 2017, where Cepheid's top line was operating, I think north of 25% a year ago and was up low-double digits in the fourth quarter here.

So a little bit less, a little bit of a tough comp there that had some impact on margin. But again specific to Dx, just coming back very briefly to FX and tariffs, if you put those aside, DX would have been up about 50 basis points in the quarter.

Matt McGrew -- Executive Vice President and Chief Financial Officer

And Tycho, maybe just to add some more color. If you think about the -- kind of first half, a headwind that we've got in FX, we're going to kind of see the margin ramp throughout the year. Q1 we're going to have -- of the $400 million of revenue headwind, $200 million is going to be Q1, that's probably going to be $0.05 or $0.06 of EPS hit in Q1. So if we wouldn't have had that in Q1, I think we probably would have seen more like double-digit EPS growth at the high end. And the FX impact here in the first half is going to be greater than what will be in the second half of, heading into '19.

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

Okay. That's helpful. And then just one quick follow up on Dental, obviously nice recovery there. How much of this you think is kind of broader end-market strength versus some of Danaher specific factors, like the Nobel, China strength and anything we should be thinking about in terms of the clear aligner launch here in the US in terms of revenue contributions for this year?

Thomas P. Joyce -- President and Chief Executive Officer

Sure. Well clearly, we've seen some stabilization in the end market as I commented in my remarks. And that really is coming in the form of improved sellout in North America and specifically in the areas that we're more challenged in the past several months in quarters which was on the traditional equipment and consumables side. So end-market stabilization definitely a contributor, but our execution continues to improve as well. And a number of the steps that we've taken over the last several quarters has continued to enhance the way we're executing in that market.

From a clear aligner perspective, again things are going extremely well in Australia, but we're trying to take a very thoughtful approach to the way we expand our geographic footprint, making sure that we are cultivating the right customer targets as we did in Australia, the digitally savvy end customer, dentist and orthodontist who has historically taken advantage of our Insignia product line as an example.

And so as we think about geographic expansion, we'll be thoughtful about where those markets are well set up from our standpoint for commercial execution. And obviously we're in the process of ramping our own capacity, and so that will be an impact as well.

I would not expect that we will be talking to material contributions to the Dental platform for growth rate this year. But perhaps as we go into next year, we'll start to be looking at some numbers that are starting to make a difference.

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

Okay. Thanks, and congrats on the quarter.

Thomas P. Joyce -- President and Chief Executive Officer

Thanks, Tycho.

Operator

Thank you. Your next question is from Ross Muken of Evercore.

Thomas P. Joyce -- President and Chief Executive Officer

Good morning, Ross.

Ross Muken -- Evercore -- Analyst

Good morning, guys. So it seems like you had sort of better execution investments this quarter. The business has been doing reasonably well, but relative to your peers, you're a little underweight on immunoassay. And it seemed like that had quite a good quarter. Just give me a little bit of a feel for probably execution at Beck and how you feel about sort of that growth step off into next year given maybe some of the things you've also done in the portfolio there?

Thomas P. Joyce -- President and Chief Executive Officer

Sure. Ross, this is clearly, the fourth quarter was clearly one of Beckman Diagnostics' better quarters in some time. And that really comes to or is driven by improved commercial execution in a number of regions and new product innovations starting to drive some impact. And we saw mid-single-digit core revenue growth in the fourth quarter that was really led by immunoassay and automation and those are obviously key drivers here. 2018 is the first time that our immunoassay business has tipped over and become a bit larger than our clinical chemistry business.

So you see the impact of our commercial execution there and some of the automation related competitive advantages we have that are driving that immunoassay growth rate. And that growth rate has been very consistent in most cases with our competitive set. And so, now we're mixing upward, our core revenue growth by virtue of that performance.

North America in particular saw some improvement in growth rates and obviously that's a key battleground for us. And we're encouraged by what we're seeing in our competitive win rates and our customer retention rates. So I think a meaningful step up here into the kind of 3%-ish kind of growth rate, but what we're looking for is kind of another 40 basis points to 50 basis points of step up going forward. And I think what we've seen historically over the last couple of years is that very thing.

Automation is going well as I mentioned in my remarks. Hematology, you know that's been kind of a drag for us. We're seeing a much more competitive product line because of both the high volume and the low and mid volume offerings now. And I think with what's coming around low and mid-volume, immunoassay and clinical chemistry as well as some of what we're doing in terms of menu gas, that we'll start to see continued or will see continued performance improvement there.

I think one thing to keep in mind is we -- I know we often talk about Beckman, it's obviously the biggest business in our Diagnostics portfolio, but it's also important to remember the DX platform grew 6.5% in 2018. And so as we do the comparison appropriately to broad-based competitors in the market we're feeling pretty good about how the portfolio is stacking up right now.

Ross Muken -- Evercore -- Analyst

That's helpful Tom. And maybe just, I feel like you guys have consistently highlighted given where the balance sheet is, how strong the cash flow is, sort of the M&A firepower opportunity. Obviously though it's a sort of been a choppy or volatile public equity market which sometimes will make transactions more complicated, but I guess, how are you thinking about sort of your ability to execute on something at least more sizable in the current environment? And how you thinking about valuations as you look at them broadly? And whether or not you've seen sort of sellers given some of this volatility get a bit more sensible around potential prices?

Thomas P. Joyce -- President and Chief Executive Officer

Sure. Well, in terms of our ability to execute and we talked about this at a fair amount when we were all gathered in December. We feel terrific about where we are. Some really good acquisitions this year obviously, $2 billion or better executed this past year, IDT and BLUE and a few other smaller deals are terrific additions to our portfolio.

But the balance sheet today, it's in as good a position as almost we have ever been. If you think about our leverage ratio today we're talking about being in the -- being above 2 in terms of net debt to EBITDA. That's the lowest level since pre-Pall. And so in terms of our capacity, our ability to execute both from a balance sheet and of course also from a talent perspective, we feel very good about where we are.

In terms of the valuations in the market today, we all know that M&A can be episodic. We are nothing if not patient about looking for and cultivating the most strategic and financially attractive deals. The pipeline is good today. Our cultivation levels are as good as ever. You've heard us talk about the breadth of that cultivation which is across all the platforms probably with a little bit less emphasis as you might imagine right now in terms of large capital deployment, a little bit less emphasis, perhaps I'm doing that in Dental.

But certainly the other four platforms are all at the front of the line, and with the capacity we have and the ability to deploy a significant amount of capital this year, we're hoping that things break our way. In terms of sensibility of valuations, well of course the sellers always think their valuations are sensible. This volatility helps, clearly I think the shake up in the latter part of last year may have gotten some folks thinking about, what they might do, but things might have sort of stabilized here. So it's early, a little tough to tell, but we're in great shape and are prepared to do things of consequence.

Ross Muken -- Evercore -- Analyst

Thanks, Tom.

Thomas P. Joyce -- President and Chief Executive Officer

Thanks, Ross.

Operator

Thank you. Your next question is from Scott Davis of Melius Research.

Thomas P. Joyce -- President and Chief Executive Officer

Scott?

Scott Davis -- Melius Research -- Analyst

Good morning, guys.

Thomas P. Joyce -- President and Chief Executive Officer

Good morning.

Scott Davis -- Melius Research -- Analyst

I -- overall really strong quarter. I would love to have a little bit more color on what you're seeing out of China just given the variability of results that we've seen across the Board from both cyclical and non-cyclical companies have had a range of outcomes that are pretty broad, but what are you guys seeing in China? What are your local guys telling you? And what kind of confidence do you have in 2019 in the region?

Thomas P. Joyce -- President and Chief Executive Officer

Sure. Scott, I know there's a lot of interest in China right now. There's been a lot written about what appears factually based to be a slowdown in the broadly defined Chinese market. We are not seeing anything specific that we could point to today that is impacting our businesses in China.

I think you can start with the fact that we're really well positioned across our core market side, Diagnostics, Life Sciences, Water Quality, Product Identification, consumer package goods and of course Dental which is you heard again growing double digits are great markets to be in. So I'm not sure that it's, what you're reading about today which appears to be a -- more of a consumer-driven slowdown in the Chinese market would be as obvious in our businesses. Our business in China was up double-digit in the fourth quarter. That's the eighth consecutive quarter or better said the second straight year of double-digit growth for us in China. So, and that was pretty broad-based, I mean pretty much across the Board. We can't really point to any particular slowdowns.

Over the past three to four years, our China growth has been up high-single-digit, low-single-digit. So, could we start to see a little bit of impact there? I think we could. I think these consumer-driven impacts can start to move across into -- even the industrial market's psychologies. And while we have -- we have very little industrial exposure left, broadly defined at Danaher, whether that's in Pall Industrial or Hach Industrial or PID Industrial, it's probably less than 10% of Danaher wide today, and therefore and even smaller portion of our China business. Those are things we'll watch carefully as indicators as to whether or not we're seeing a broader slowdown.

Scott Davis -- Melius Research -- Analyst

Make sense. And guys, just a little bit of a nuance question here. But when I see companies take a step-up in investments, discretionary investments, it always begs the question of, are you catching up on spend or you're getting ahead of spend? And obviously the nuance there being if you're catching up, it's more of a new normal. If you're getting ahead it's more pull forward. So do you have...

Thomas P. Joyce -- President and Chief Executive Officer

Sure. It's an interesting question Scott, because I think it's probably, I think if you look across, how broad our portfolio is, and the number of operating companies, I'm sure we can find examples of both. But I think largely, we try to get ahead. We tried to look for those things where based on what we were anticipating in the quarter, we thought we might not have room for. And some things where we can use some good discretion about investments that would have some impact on a relatively near-term basis.

And so, clearly I think there could always be a mix there. But the strategic intent is to look for those things that when we knew were the right things to do, we're anticipating that we would do at some point and we wanted to get ahead to try to continue to enhance the growth trajectory of the business.

Scott Davis -- Melius Research -- Analyst

I think that's a fair answer. So, thanks, guys and good luck to you this year.

Thomas P. Joyce -- President and Chief Executive Officer

Thanks, Scott. Good to hear from you.

Operator

Thank you. Your next question is from Derik De Bruin of Bank of America Merrill Lynch.

Thomas P. Joyce -- President and Chief Executive Officer

Hi, Derik.

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

Hi. Good morning. Hey...

Thomas P. Joyce -- President and Chief Executive Officer

Good morning.

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

Couple of questions. I guess first one is any pull-forwards budget flushing of that, just given the tariff issues and just concerns on spending, just if you noticed anything different about sort of like spending trends in the quarter?

Thomas P. Joyce -- President and Chief Executive Officer

Not that we can see Derik. The order rates looked pretty solid. We said when we've spoken in December, so we had a pretty solid October and November that remained consistent in December. And I think in general our businesses are probably a bit less exposed if you will to budget flush, pull-forwards, given the 70% recurring revenue which is obviously largely made up of consumables.

And in some parts service, but when 70% of your revenue is driven by that recurring revenue, you're a bit less -- whether it's exposed or vulnerable, however you might want to describe it to a budget flush or a pull forward at year-end. So, I'm sure, there could be a couple of circumstances whether it's a high-end Leica microscope or a couple of things at Beck LS where somebody might do that, but in terms of materiality of it, it doesn't appear that that had much impact.

In terms of tariff, I'm not sure that had much impact, at least as we look at our China numbers throughout the course of the quarter. We're not a significant target, right now I wouldn't say in the crosshairs, at least if you measure that by virtue of the financial impact. We've talked already to about $12 million to $13 million of impact per quarter or about $50 million annually with about $30 million of incremental impact in 2019 versus '18. So we're doing somethings obviously to try to offset that.

But in terms of the impact of that dynamic on orders or pull-forwards, again limited exposure probably to some extent, a limited level of even the awareness level at the China end market level. So nothing to point to specifically at the moment in terms of the impact on orders of volume.

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

Great. And just a follow-up question, have you made any decisions in terms of how much debt you're going to put on the Dental spin? And just a question of sort like of at the time of the spin, sort of what's the RemainCo leverage ratio is going to be?

Thomas P. Joyce -- President and Chief Executive Officer

I would say what we did back with Fortive is probably a good proxy here. Our intention is to launch the Dental business with a strong balance sheet with an investment-grade rating and an ability to use their free cash flow to add incrementally to their portfolio through some inorganic moves, some M&A moves. So I think that's -- that our history is probably a good proxy for what we would do going forward. And I think, we would do that in a way that also leads us in terrific shape from a RemainCo perspective.

I mean, obviously we start with a good position here in the beginning of 2019. It's hard to imagine, being in a better shape, but I don't think that Dental given, its scale will ultimately impact us in terms of RemainCo being set up to win from a capital deployment perspective.

Matt McGrew -- Executive Vice President and Chief Financial Officer

So, Derik, maybe the simple way to think about it is, we're at two times -- two turns today. If we did the spin today, we'd likely do Dental at two turns.

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

Got you. Thank you. That's really helpful.

Thomas P. Joyce -- President and Chief Executive Officer

Thanks, Derik.

Operator

Thank you. Your next question is from Steve Beuchaw of Morgan Stanley.

Thomas P. Joyce -- President and Chief Executive Officer

Hey, Steve.

Steve Beuchaw -- Morgan Stanley -- Analyst

Hi. Good morning, and thanks for the time here. I actually, maybe will just jump off from the conversation there about Dental and the spin with just a couple more questions around the assumptions there. I guess first off, any change to the thought process on timing? I think we all remember with Fortive, you guys were able to execute a little faster than initially planned. And then as you think about the plan for Dental for this year, do you anticipate any impact of channel inventory fluctuations? And then maybe last one on Dental. As you think about the trajectory of margins there you clearly put a lot of the capital to work driving accelerated commercial investments. How do you think about that line being in '19?

Thomas P. Joyce -- President and Chief Executive Officer

Sure. Thanks, Steve. Good questions. So let's talk first about the spin. We said all along we expected it to be in the second half of this year. That's still our expectation right now. I mean, I think if I have to peg it, I would probably say it's, we did Fortive kind of right at the midpoint. I think Dental is more like, probably I would call it more mid to late in the second half. As we said, when we announced we want to continue to see this market stability. We're encouraged by the fourth quarter performance clearly and the positive sellout data, but I'd like to see a bit more of that.

And we need to obviously make absolutely certain that the business is ready to stand up on its own and continue to make good progress. And we're encouraged by all that and that's not just in the last two quarters, we've really been at that for much longer than that. So we're making good progress.

I mean one thing that's clearly on our mind and you guys have all read about it is, the federal government here in Washington has reopened, but the shutdown certainly didn't help our timing for IPOs and spins. You probably read in the news, the backlog of -- in SEC filings and tax ruling and so on and so forth are likely going to create some delays here. So, I think, when you put all those things together, we'll continue to make progress year. But I think we need to be aware of some of those factors.

In terms of the channel inventories and your question about that and being influx, we worked really hard as -- over the last couple of years to ensure that we build sustainable processes in partnership with our channel customers, our channel partners to ensure that we have great visibility and transparency around those channel inventories. We talked a lot about that over the last couple of years. And I think, key to ensuring that we have those channel inventories in good shape for all of our benefit -- for both the benefit of our customers as well as ourselves is to make sure that we have good transparency and visibility. And I think we've established that, and a good dialogue month-to-month and quarter-to-quarter with our channel partners.

So I feel good about the stability of those. There's obviously always some variability with sellout and category-by-category, but as the general rule, I think our processes are much better as are processes in the channel.

Finally, in terms of margins and commercial execution, again we've done a number of things here that we feel good about in terms of driving performance. First of all, the cost structure is in a much better shape than it was three to four years ago. You've heard me talk about consolidating from 10 OpCos (ph) to 3 and probably now north of 30% reduction in manufacturing in back office. So the cost structure is in better shape. But we're continuing to invest significantly in new product innovations that will normalize a bit as we go forward.

And I think you combine that with the impact in terms of continued top line improvement and that leads us to really continuing to be very positive about our long-term growth and margin opportunities in the platform. So I think, we'll -- we expect to see some modest growth and core OMX here in the first quarter. But we also expect that to continue to improve throughout the course of the year.

Steve Beuchaw -- Morgan Stanley -- Analyst

Got it. Really helpful. And just one quick follow up, you flagged a couple of times and it's very true that the business has transformed significantly over the last couple of years, faster growth, some changes inorganically that have been really helpful. And so, I have to imagine you feel maybe better now than you did even a couple of years ago about your ability to drive growth to target on investments. When you think about 2019, maybe we'll set aside the inorganic, but think about where you can drive organic investments? What are your top priorities? And then I'll get back to you. Thanks.

Thomas P. Joyce -- President and Chief Executive Officer

Sure. Thanks, Steve. I think we've gotten a number of priorities, but clearly they would be consistent with where we've invested really over the last couple of years. We've invested significantly in our Diagnostics platform organically. I've talked about new products that are now having an impact at places like Beckman Diagnostics. We've continued investment rates at Cepheid sustaining those double-digit growth rates both from, in terms of investments in instrumentation, the evolution of the architecture as well as the expansion of the menu.

In Life Sciences, well, we continue to make investments, a number of organic investments. But of course inorganic has played a key role there. I think, obviously we look back on those investments in businesses like Pall that have helped to transform the platform, but even as recently as this past year with the additions of IDT and Labcyte, those inorganic moves are obviously not to be overlooked in terms of their impact on improving the growth rates.

But you know, Water Quality and PID are making investments as well. Those new CIJ printers at Videojet that are helping us to drive connectivity and enhancing our service offering to customers is having an impact on sustaining that growth rate at PID and at Videojet specifically. And Water Quality investing in things like the CM130, opening up a whole new market like dialysis testing where water plays a critical role. Those are having the impact. Now, the investors may not be as material there as what might go on, and say, in a new platform at Beckman, but boy (ph), it has an impact when we roll those things out to the market. So it's broad-based, but I think within a given platform or an operating company, it's very specific relative to new product innovations that we think can have a material impact on growth rates.

Steve Beuchaw -- Morgan Stanley -- Analyst

Great to hear. Thanks so much.

Thomas P. Joyce -- President and Chief Executive Officer

Thanks, Steve.

Operator

Thank you. Your next question is from Julian Mitchell of Barclays.

Julian Mitchell -- Barclays -- Analyst

Thanks. Good morning, and welcome to Matt in your role.

Matt McGrew -- Executive Vice President and Chief Financial Officer

Thank you, Julian.

Julian Mitchell -- Barclays -- Analyst

Just a first question around Environmental & Applied, which I don't think has been touched on yet. Wondered if you could give any update on how you've seen the older patterns there particularly in some of the more industrial-weighted businesses? And also flipping over to Pall, what are your expectations for the microelectronics unit there, given the CapEx seems to be coming down?

Thomas P. Joyce -- President and Chief Executive Officer

Sure. Good morning, Julian. So let's start with Environmental & Applied just broadly, a very good quarter really driven by consistent performance at PID and terrific performance across Water Quality and specifically at Hach. So I think those businesses are tracking quite well. They are, to your question, each of those businesses including Pall represent some of the limited industrial exposure that we have.

I mentioned to, I think with Scott on earlier question are the -- that, we're not necessarily a terrific proxy in terms of the industrial side with about probably less than 10% of the portfolio being at Pall Industrial, Hach Industrial and PID Industrial. And so, I mean our sense is, we could see some moderation there in 2019. But in general, the underlying trends remain pretty solid. So, I don't know that we're necessarily making any kind of macro call here.

But given where we are in the cycle, it wouldn't be unheard off that we'd see those limited pockets of industrial exposure perhaps soften up a little bit. So far so good, Pall Industrial for example fourth quarter were up high-single digits, and orders were in a similar range on a two year stack. Hach Industrial, pretty good numbers, PID numbers pretty solid. So we'll continue to watch that carefully.

Specific to your question about Pall and the microelectronics market, that has been a phenomenal market for Pall over the last few years since we've owned the business. And so I think it's still is pretty solid today as we look at those growth rates. But again, I do not think it would be unusual given some of what we've read about in terms of the -- let's just call it, the consumer electronics market and some of these, what you read about in terms of the impact in China to see a little bit of moderation there. It's been tremendous so far, but we are not ignorant of the headlines.

Matt McGrew -- Executive Vice President and Chief Financial Officer

And that's also a business Julian, that micro-e is a business, it's got a lot less consumables than some of our other businesses kind of giving it a little bit more of that cyclicality as well.

Julian Mitchell -- Barclays -- Analyst

Thank you. And then my second question around margins. One would be kind of a follow-up on the Dental question, in that, should we expect the step up in investments to step back down materially once the spin happens, so you'll see in the first 12 months of Dental as a stand-alone company may be a decent margin tailwind from that? And then firmwide if we think about the core margins, as you said, they were down slightly in Q4. Do we expect those to rebound in the first quarter, maybe as some of that investment spend firmwide cools off?

Thomas P. Joyce -- President and Chief Executive Officer

Sure. Well, on the Dental question, I do think that there will be a combination of factors that would impact continued improvement in what you'd see in Dental margin. Some of that would be some moderation in the investment spend around new products, because again as I've mentioned, we've tried to be very focused on continuing to set that business up to grow, not only in terms of the investments we made in -- in our digital platforms, because of the importance of digital dentistry going forward, but certainly the investments that we're making in the clear aligner business.

So, some of those may moderate slightly. In the cases of clear aligners, those actually would probably be sustained. So a bit of a mix there. So, but again I think in general in terms of the value-creation opportunities with the Dental platform, continued improvement in growth and profitability. We feel good about those trajectories.

And then in terms of core margins more broadly, I think, there's an impact here, as Matt mentioned earlier around FX and tariffs here in the first quarter, as Matt mentioned, probably $0.05 to $0.06. And so those will tail off, we'll see better margin performance, the deeper we get into the year, but we'd we start out in the most challenging part of the calendar for certain.

Julian Mitchell -- Barclays -- Analyst

Great. Thank you.

Thomas P. Joyce -- President and Chief Executive Officer

Thanks, Julian.

Operator

Thank you. Your next question is from Doug Schenkel of Cowen.

Thomas P. Joyce -- President and Chief Executive Officer

Good morning, Doug.

Doug Schenkel -- Cowen & Company -- Analyst

Hi. Good morning. So first a question on growth investments and gross margin. When I think of opportunistic growth investments and the impact on the income statement, I typically look to R&D and SG&A lines. That said, it looks like there is some impact at the COGS line this quarter, is that right? And if so can you provide a little bit of detail on what you did and what to expect the returns to be this year? I'm just at a high-level trying to get a very handle on how gross margin was impacted by these investments versus things like FX and tariffs. So that's another component of the question as well.

Matt McGrew -- Executive Vice President and Chief Financial Officer

Yeah. Sure, Doug. So, I think some of the things that's we've kind of have done is -- when you think about some kind of cost pull-forwards if you will, specifically around maybe some supply chain related things, et cetera like that. I think we saw some of that, probably most pronounced in Diagnostics, specifically at Beckman Diagnostics. And then also if you think about some of the new product ramps kind of capacity if you will with Spark at Dental and some of our other kind of new product accelerations where you're kind of building for that first time to the degree that we're able to kind of pull some of that forward here from 2019, and get some of that work done a little bit earlier to kind of have more impactful launch, and timing some of that with the sales and marketing as well, right? So, you kind of holistically plan into pull-forward and get a launch out a little quicker. So I think you'll see a little bit of both, that R&D, sales and marketing and those items that impact COGS.

Thomas P. Joyce -- President and Chief Executive Officer

I think, Doug also it's important to think about the situation in the fourth quarter where again as the quarter progressed, we were seeing the continued good performance on the top line. And so we look broadly at where there are those opportunities to take advantage of growth investments. And that is one of those fortunate circumstances, it doesn't happen every quarter obviously, but you look to take advantage of those things, because it benefit to you, both on the -- hopefully on the short-term and on a long-term basis, and we were clearly not holding back.

Doug Schenkel -- Cowen & Company -- Analyst

Okay. That's super helpful. And then just a couple of a small but important quick follow-ups on China. I know this may not apply to you as much as some other folks, but I'm just curious, if you've had any success passing along price to offset tariffs in China? And that, at a higher level, I'm wondering if you'd be willing to share, what the growth rate for China is that you've embedded into 2019 guidance? Thank you.

Thomas P. Joyce -- President and Chief Executive Officer

Sure, Doug. I would say price broadly defined is achieved across our portfolio largely on the consumables side. It's a little bit more challenging on the -- given the competitive set, in our businesses on the equipment side. So we generally get it on consumables, and that's both true probably broadly and in China. I would not necessarily associate what we're getting in terms of price which has been pretty consistent with an ability to pass those on specific to the tariff.

The tariffs obviously are coming in other commodities than that which impacts our consumables business. So, we're certainly not having a specific conversation with customers about that. But, our -- in general we try to get price on a global basis and generally on the consumables side. And then in terms of growth rates, you probably mentioned already today about the consistency of our performance in China and in terms of what our expectations are for this year, we embedded an assumption that China will continue to be a high-single-digit kind of growth rate and could very well be right up there at a double-digit growth rate. But I think high-single is probably the right way to think about it.

Doug Schenkel -- Cowen & Company -- Analyst

Okay. Thank you, again.

Thomas P. Joyce -- President and Chief Executive Officer

Thank you.

Operator

Thank you. We have reached our allotted time for questions. I will turn the call back over to Matt Gugino for any additional or closing remarks.

Matthew E. Gugino -- Vice President of Investor Relations

Thanks, Christie and thanks, everyone for joining us. We're around for questions all day.

Operator

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

Duration: 58 minutes

Call participants:

Matthew E. Gugino -- Vice President of Investor Relations

Thomas P. Joyce -- President and Chief Executive Officer

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

Matt McGrew -- Executive Vice President and Chief Financial Officer

Ross Muken -- Evercore -- Analyst

Scott Davis -- Melius Research -- Analyst

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

Steve Beuchaw -- Morgan Stanley -- Analyst

Julian Mitchell -- Barclays -- Analyst

Doug Schenkel -- Cowen & Company -- Analyst

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