Mettler-Toledo International - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $883.7M (-5% YoY; -15% QoQ) and adjusted EPS was $8.19 (-8% YoY); gross margin expanded 30 bps to 59.5% despite lower volume, aided by pricing and productivity programs.
• Against Wall Street consensus, revenue modestly beat ($883.7M vs $875.8M*) and Primary EPS beat ($8.19 vs $7.88*) — a clean beat on adjusted EPS, with management highlighting stronger-than-expected margin execution; GAAP diluted EPS was $7.81.
• FY 2025 guidance cut: local-currency sales growth to 1–2% (from ~3%) and adjusted EPS to $41.25–$42.00 (from $42.35–$43.00) due to tariff headwinds and more cautious volume assumptions, particularly in China; Q2 2025 adjusted EPS guided to $9.45–$9.70 with a net ~3% tariff headwind.
• Stock-relevant narrative: tariff regime introduces uncertainty and near-term margin pressure, but management expects mitigation (supply-chain optimization, pricing/surcharges) to fully offset gross tariff costs by next year; ex shipping-delay distortion, margins are expanding and Lab/Process Analytics trends remain constructive.

What Went Well and What Went Wrong

• What Went Well

  • Margin execution: gross margin +30 bps YoY to 59.5% (and +90 bps ex shipping-delay distortion); adjusted operating margin would have expanded ~50 bps ex the prior-year shipment recovery.
  • Lab/Process Analytics strength: robust demand in biopharma (single-use and digital sensors), new lab balances/titrators/thermal analysis driving growth; underlying Lab sales +5% ex shipping delay impact.
  • Product Inspection resilience: +8% LC growth, with mid-market innovation improving productivity and lowering total cost of ownership for food manufacturers.

• What Went Wrong

  • Topline declines: reported revenue -5% YoY to $883.7M; local currency -3% YoY (Americas -1%, Europe -7%, Asia/RoW -2%); sequential decline vs Q4 reflects seasonal and shipment-distortion normalization.
  • Industrial softness and China caution: core Industrial -6% LC; management flagged project delays and more cautious near-term customer behavior, particularly in China (Q2 indicated low-to-mid single-digit decline).
  • Tariff headwinds: annualized gross incremental tariff costs estimated at ~$115M; Q2 gross EPS headwind ~6% (net ~3% after mitigation), FY 2025 net EPS headwind ~2%.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mettler-Toledo First Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I would now like to turn the call over to Adam Uhlman, Head of Investor Relations. Please go ahead.

Adam Uhlman (Head of Investor Relations)

Hey, thanks, Kelvin, and good morning, everyone. I appreciate you joining us. On the call with me today is Patrick Kaltenbach, our Chief Executive Officer, and Shawn Vadala, our Chief Financial Officer. Let me cover some administrative matters. This call will be webcast and available for replay on our website at mt.com, and a copy of the press release and presentation that we'll refer to on today's call is also available on our website. This call will include 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, financial condition, performance, and achievements to be materially different from those expressed or implied by any forward-looking statements.

For a discussion of these risks and uncertainties, please see our recent annual report on Form 10-K and quarterly and current reports filed with the SEC. The company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement except as required by law. On today's call, we may use non-GAAP financial measures, and reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is provided in the 8-K and is available on our website. Let me now turn the call over to Patrick.

Patrick Kaltenbach (CEO)

Thanks, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our first quarter financial results, the details of which are outlined for you on page three of our presentation. We had a good start to the year with solid growth in our laboratory business, excluding the recovery of delayed shipments in the first quarter of 2024. Additionally, the strong execution of our margin expansion strategies led to better-than-expected earnings for the quarter. However, the ongoing global trade disputes and tariffs have significantly increased uncertainty in global customer demand. We also estimate cross-incremental global tariff costs of approximately $115 million, on an annual basis and are implementing mitigation actions this year that will fully offset these costs next year.

We are confident that our strong culture of operational excellence and our highly agile team will continue to perform well in this dynamic environment, and we will benefit from the breadth of our innovative product portfolio and strategic programs. Let me now turn the call over to Shawn to cover the financial results and our guidance, and then I will come back with some additional commentary on the business and our outlook. Shawn.

Shawn Vadala (CFO)

Hey, thanks, Patrick, and good morning, everyone. Sales, in the quarter were $884 million, which represented a decrease in local currency of 3%. Excluding the impact of shipping delays from the fourth quarter of 2023 that were recovered in the first quarter of 2024, local currency sales grew 3%. On a U.S. dollar reported basis, sales, declined 5%. On slide number four, we show sales growth by region. Local currency sales, declined 1%, in the Americas, 7%, in Europe, and 2%, in Asia rest of the world. Local currency sales were flat in China during the quarter. Excluding the impact of shipping delay recoveries in the prior year, local currency sales grew 3%, in the Americas, 4%, in Europe, and 3%, in Asia rest of the world, including 3%, growth in China. On slide number five, we summarize local currency sales growth by product area.

For the quarter, laboratory sales decreased 3%, and industrial declined 1%, with core industrial down 6%, and product inspection up 8%. Food retail declined 12%, in the quarter. Excluding the impact of shipping recoveries last year, we estimate our laboratory sales grew 5%, industrial grew 2%, with core industrial down 2%, and product inspection up 8%, and food retail declined 5%. Service sales, increased 6%, in local currency in the first quarter. Let me now move to the rest of the P&L, which is summarized on slide number six. Gross margin, was 59.5% ,in the quarter, an increase of 30 basis points, as positive price realization and benefits from our SternDrive program, were offset in part by lower volume. We estimate gross margin expanded 90 basis points, excluding shipping delays.

R&D, amounted to $46 million, in the quarter, which is a 2%, increase in local currency over the prior year. SG&A,, amounted to $243 million, a 5% increase in local currency over the prior year, and includes sales and marketing investments and timing of expenses. Adjusted operating profit, amounted to $237 million, in the quarter, down 11%, from the prior year. Adjusted operating margin, was 26.8%, which represents a decrease of 210 basis points, over the prior year. Excluding the impact of shipping delay recoveries in the prior year, our operating margin, expanded 50 basis points, on 3%, sales growth in the quarter. A couple of final comments on the P&L. Amortization, amounted to $17 million, in the quarter. Interest expense was $17 million, and adjusted other income, amounted to $3 million. Our effective tax rate, was 19%, in the quarter.

This rate is before discrete items and is adjusted for the timing of stock option exercises. Fully diluted shares, amounted to 20.9 million, which is approximately a 3%, decline from the prior year. Adjusted EPS, for the quarter was $8.19, an 8%, decrease over the prior year. Adjusted EPS growth, was 11%, excluding a headwind to EPS growth , of approximately 18%, from the recovery of delayed shipments and a 1%, headwind from foreign exchange. On a reported basis in the quarter, EPS, was $7.81, as compared to $8.24, in the prior year. Reported EPS, in the quarter included $0.23, of purchased intangible amortization, and $0.15, of restructuring costs.

That covers the P&L, and let me now comment on adjusted free cash flow, which amounted to $180 million, in the quarter, a 1%, increase on a per-share basis, and was impacted by higher bonus payments of $36 million, related to prior year performance. DSO, was 35 days, while ITO, was 4.2 times. Let me now turn to our guidance for the second quarter and for the full year 2025. As you review our guidance, please keep in mind the following factors. First, our guidance assumes U.S. import tariffs, as well as the impact of retaliatory tariffs from other countries, will remain in effect at current levels. Geopolitical tensions are elevated and include the potential for new tariffs or retaliatory tariffs that we have not factored into our guidance.

As of today, we estimate our incremental global tariff costs, at approximately $115 million, on an annualized basis, which already includes initial actions we have taken to lower our gross exposure. Secondly, we are taking various actions to offset the impact of higher tariffs, including supply chain optimization, cost savings, price increases, and surcharges. Our actions are expected to fully offset tariff costs, on an annualized basis, but we will have a headwind in our gross margin, in 2025, especially Q2, until the full benefit is realized. Third, the U.S. administration's trade policies have created increased risk to the outlook for our core markets and the global economy. Our outlook assumes market conditions will be slower than previously expected, especially in China. This implies volume growth in the second half of the year is similar to the first half of the year, excluding the impact of shipping delays.

We assume foreign currency at current rates, which would not materially impact sales or adjusted EPS, in 2025. Finally, please keep in mind that our third-party logistics provider delays negatively impacted our Q4 2023 result by $58 million, nearly all of which was recovered in our Q1 2024 results. For the full year 2025, this will reduce our sales, by 1.5%, and is a headwind to operating margin, expansion of approximately 60 basis points, and a headwind to adjusted EPS growth, of approximately 4%. Now turning to our guidance, for the second quarter of 2025, we expect local currency sales to grow approximately 0%-1%. Operating margin, is expected to decrease 170 basis points, at the midpoint of our range, or down 70 basis points, excluding the net impact of tariffs.

We expect adjusted EPS, to be in the range of $9.45-$9.70, a growth rate, of down 2%, to up 1%. Included within the EPS, guidance is a gross headwind of approximately 6%, from higher tariff costs, and we expect to offset about half, resulting in a net headwind to EPS growt, of 3%. For the full year 2025, our local currency sales growth, forecast is 1%-2%, or up 2.5%-3.5%, excluding the shipping delays. Operating margin, is expected to decrease 130 basis points, at the midpoint of our range and would be up slightly, excluding the net impact of tariffs and prior year shipping delays. We expect full year adjusted EPS, to be in the range of $41.25-$42, compared to our previous guidance of $42.35-$43, which reflects EPS growth, of 0%-2%, or 4%-6%, excluding the shipping delays.

Included within the EPS guidance, is a gross headwind of approximately 7%, from higher tariff costs, or a net headwind of 2%, including the benefits of our mitigating actions. Lastly, I'd like to share a few other details on our 2025 guidance to help you as you update your models. We expect total amortization, including purchased intangible amortization, to be approximately $72 million. Purchased intangible amortization, is excluded from adjusted EPS, and is estimated at $25 million, on a pre-tax basis, or $0.93 per share. Interest expense is forecast at $72 million for the year. Other income, is estimated at approximately $9 million. We expect our tax rate before discrete items, will remain at 19%, in 2025. Free cash flow, is expected to be approximately $860 million, in 2025, and share repurchases are expected to be approximately $875 million.

That's it from my side, and I'll now turn it back to Patrick.

Patrick Kaltenbach (CEO)

Thanks, Shawn. Let me start with some comments on our operating businesses, which will exclude the impact from the recovery of delayed shipments in the first quarter of last year. I will start with LAP, which had solid growth in the quarter. We continue to benefit from recent innovations like our new line of laboratory balancers, titrators, and thermal analysis instruments, and our sophisticated go-to-market approaches have helped us penetrate underserved market segments. We had strong growth in our process analytics business in this quarter, which continues to benefit from favorable biopharma market trends, especially in single-use technologies and recent innovations like our digital sensors with intelligent sensor management, that provide reliable inline measurement of critical analytical parameters. Precise analytics, monitoring, and control systems are crucial for optimizing bioprocess operations.

By providing real-time data and feedback, our systems can help ensure ideal cell viability, nutrition feeding, and consistent productivity throughout the bioprocessing lifecycle, from R&D, to manufacturing in both reusable and single-use formats. Turning to our industrial business, our underlying sales growth, was led by our product inspection business, where our growth initiatives and new portfolio have offset challenging market conditions for the food manufacturing industry. Our innovation investments, are well received in the market. Our new innovations have low total cost of ownership and can significantly improve productivity, for example, by enabling much higher line speeds in production and reducing waste, which is more important than ever to protect margins in food manufacturing. Switching to core industrial, sales were down slightly, excluding the impact of prior year shipment delay recoveries as industry conditions remain mixed across most end markets.

Our team remains active in engaging with customers with cost-saving solutions, like our quality control software, that improves process control and reduces waste in our manufacturing operations. Our suite of smart terminals helps customers transition manual processes to semi or fully automated process control that includes full traceability for reliable reporting. These solutions are increasingly important for customers looking to expand manufacturing in higher-cost geographies and automate more of their production processes. Lastly, food retail declined as we had expected. Now, let me make some additional comments by geography, which will also exclude the impact of last year's shipping recovery. Starting in the Americas, our underlying sales growth was led by strong growth in process analytics and product inspection. This growth was partially offset by lower core industrial sales against strong growth in the prior year.

Turning to Europe, we had underlying sales growth, across our businesses, with the exception of retail. Our team, continues to execute very well, and we have benefited from our innovative portfolio and spending programs. Finally, Asia, rest of the world results were about as expected and grew modestly against easy comparisons. Market conditions in China remain soft, and economic uncertainty is increasing. We continue to leverage our spending program to identify growth opportunities, and our team remains highly agile to take advantage of opportunities. In summary, we are pleased with the good start to 2025, although we recognize there's increased uncertainty due to tariffs and the potential impact to our end markets and global economic growth. During uncertain times, our strong culture of teamwork, collaboration, and focused execution has been a critical asset that has helped our company successfully navigate uncertainty very well in the past.

We also benefit from our business diversity and help customers across their entire value chain from research and development, scale-up, quality control, and production. We also serve a wide range of diverse end markets, and over 70%, of our sales, are in core end markets of pharma, biopharma, food manufacturing, and chemicals. No end customer is more than 1% of sales, and we also benefit from our geographic diversity, as we sell in over 140 countries around the world. We also have a broad and diverse product offering and have introduced new innovations across a wide range of our portfolio in the recent years that provide tangible benefits, to customers, significantly enhancing our value proposition. Our automation and digitalization solutions help customers improve their productivity and reduce costs while enhancing compliance with relevant regulations.

Additionally, our average price points are low and typically below $10,000, and our large install base and replacement demand helps reduce typicality. Approximately 35%, of our sales, last year was service and consumables, and we are confident our dedicated growth initiatives in this area will remain accretive to our growth and profitability. Our go-to-market approach is also a competitive advantage during periods of increased uncertainty. Our sales and marketing excellence program, Spinnaker, ensures we are identifying and guiding our sales teams, to the most attractive opportunities in the market. For example, we expect to see increased U.S. onshoring investment over the coming years, and we will benefit from these investments. Our strong direct sales force helps us to communicate our value proposition directly to end users. Our global supply chain is another important asset as we serve customers around the world with 21 manufacturing locations in seven countries.

We also continue to increase the resilience of our manufacturing footprint, which allows us to produce products in multiple regions. U.S. import tariffs represent additional costs we plan to offset with supply chain optimization actions, cost savings, price increases, and surcharges. Our global pricing program, is deeply ingrained throughout our organization and is based on a sophisticated set of data analytics and tools that help support our end-to-end pricing process. Our Blue Ocean program, has also allowed us to have centralized price administration with robust processes so we can react quickly to changing conditions. Overall, we recognize there's increased uncertainty in the economy, and we remain agile to respond to the changes in the market conditions as necessary.

At the same time, we remain convinced in the long-term growth opportunity in our end markets and our ability to gain market share and grow faster than the market, especially in very dynamic market conditions. We remain focused on the things we can control and continue to implement strategies with a good balance of initiatives focused on growth, innovation, and operational excellence. Now, this concludes our prepared remarks, Operator. I'd like now to open the line to questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone to ask a question. Please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. One moment, please, for your first question. Your first question comes from the line of Dan Leonard of UBS. Please go ahead.

Dan Leonard (Managing Director and Research Analyst)

Thank you very much. My first question is one on China. Can you update us with your new forecast for revenue growth in China in 2025 and maybe parse that between industrial and lab?

Shawn Vadala (CFO)

Yeah. Hey, Dan, this is Shawn. I'll take that one. For China for 2025, for the full year on a reported basis, we expect China to be down slightly. Maybe I'll comment on Q2. We expect Q2, to be down like low to mid-single digit. On the full year basis, we expect that to be kind of like up low single digit in termws of the lab business and down low single digit in terms of the industrial business. For Q2, we expect lab to be down low single digit and industrial to be down mid-single digit. Hey, this probably is a good parlay into a little bit our thoughts on guidance.

When Patrick talks about uncertainty, clearly China is probably higher on the list in terms of areas where there's uncertainty, in terms of where we're seeing maybe some caution in the market in terms of customers maybe holding off in terms of investments. We see that a little bit here in the second quarter, so we're just a little bit more cautious here in Q2 and how we're thinking about kind of China developing for the rest of the year. I think going bold. Yeah. Okay. Thanks.

Dan Leonard (Managing Director and Research Analyst)

Maybe as a follow-up, you mentioned onshoring, and there have been a lot of announcements lately. I don't know, Patrick, if there's any way you could help us better quantify the potential opportunity for Mettler from various manufacturing onshoring initiatives.

Patrick Kaltenbach (CEO)

Sure, Dan. I'm happy to take that question. Look, I mean, the whole reshoring, home shoring, onshoring, whatever you would call it, is definitely something that will be important for us moving forward. That said, as these companies are starting the reshoring programs and factories are raised, etc., we are a bit later in the process.

We are not in the initial construction phase, etc., involved with these companies, but we are, of course, talking to many customers out there, whether it's semiconductor or other areas, who plan to make these relocations to make sure they understand the full benefit of our portfolio when they're ready to put in place their manufacturing control systems to help them with our industrial solutions, at the same time in the QC with our QC products, and of course, also in the R&D environment with the broad span of our research and development tools that we have for these customers. So far, I would say the impact on our business from reshoring and home shoring is not yet of any meaningful size, but we expect it to be an upside in the, let's say, quarters and years to come.

Shawn Vadala (CFO)

Yeah. We just feel like we're very well positioned for this trend as a global company, but also with our Spinnaker program, which really helps us to identify these types of opportunities.

Dan Leonard (Managing Director and Research Analyst)

Okay. Thank you very much.

Operator (participant)

Your next question comes from the line of Patrick Donnelly of Citi. Please go ahead.

Patrick Donnelly (Managing Director and Equity Research Analyst)

Hey, guys. Thank you for taking the questions. Shawn, probably one for you on the tariff side. Appreciate all the color and the gross number and some of the mitigation. Can you just break down kind of where that impact is coming from? Obviously, China was a pretty big concern coming in just in terms of some of the import exports there. Can you talk about that impact? And then again, the mitigation efforts that are ongoing, have you already started to move some things around? Similarly, on the pricing side, how should we be thinking about you guys are always quite nimble on pricing increases and surcharges. We'd love to just talk through both the gross impact, where it's coming from, and then also the mitigation efforts that are underway here.

Shawn Vadala (CFO)

Yeah. No. Hey, Patrick. Great questions. I think the first comment is, of course, we already started to want to have more flexibility in our global supply chain going back, coming out of COVID. As part of that, we had kind of expanded in Mexico, which was part of an acquisition that we did a while back. With this need to have more flexibility in our supply chain, we started to build out Mexico. More recently, with the global trade disputes kind of on the horizon, we've been accelerating a lot of our plans here. This is one example. Of course, we do a lot of things with our global supply chain, but we've been making a lot of progress in our optimization of our global supply chain processes here recently and made a lot of progress here already this year.

As a result, our exposure to imports directly from China, we estimate that number is more in the range of about $50 million right now. Previously, we would have said that that number was under $100 million. It was a little bit dynamic, and we wanted to see a little bit how things played out here with the timing of tariffs, but we're really pleased to make good progress in terms of that number. Of course, Mexico is now higher than China, but expect it to still be below $100 million. As we think about the rest of the world, we expect imports to the U.S. to be in the range of about $250 million, with a significant portion of that coming out of Switzerland.

Patrick Donnelly (Managing Director and Equity Research Analyst)

Okay. Then just the pricing offset, you think about that?

Shawn Vadala (CFO)

Yeah. I'm sorry. That's the impact, of course. Then the mitigation. There is the supply chain. There is also some cost savings, and then there's pricing. Pricing, we expect our pricing before we were communicating pricing to be kind of like in the range of about 2% for this year. Right now, we're thinking it's going to be 3% or so. It will depend a little bit on how the tariffs play out because some of our pricing is going to be price increases related to inflationary, higher inflationary conditions that we expect from the trade war, but also a significant part of our mitigation actions also is surcharges, which gives us a little bit of flexibility as things can go up or down with the tariff rates.

That could change a little bit going forward, but I think the flexibility will play out kind of well here as we kind of go forward. As we kind of go into next year, you'll see the mix changing a little bit as we continue to work on supply chain optimization to put us in a position where we really have a lot of confidence in terms of our ability to mitigate the gross headwind at the current rates.

Patrick Donnelly (Managing Director and Equity Research Analyst)

Yeah. That's helpful. Patrick, maybe just on the industrial market overall, that's become, for the group, a little more concerning just given the macro backdrop, all the volatility out there. What are you hearing from customers on the core industrial piece? What's the right way to think about how you guys are forecasting that today versus maybe a few months ago when things were, I guess, slightly different? Appreciate it.

Patrick Kaltenbach (CEO)

Yeah. Sure. I'll make a general comment on how I see the industrial and market, and then Shawn break it down of how we see the growth forecast for the second quarter and the full year. Look, I mean, I think we are exceptionally positioned with our product portfolio to serve the automation needs and digitalization needs in the industrial markets. Yes, we have seen recently some delays with customers that had larger projects that moved. That's also why we see a bit of a slower movement in Q2 in our industrial. Overall, we are confident in our solutions that we see. The trend for automation, the need for automation, given aging populations, reduction of workforce worldwide, will stay in place.

If you take also into account the whole reshoring and home shoring activities that are coming, these customers will not start with a lot of manual processes that they will try to start to automate as much as possible, given also the higher labor costs that we will face in the home shoring countries. I think that's why we're seeing currently some softness given the uncertainty. I think for the long term, we are very well positioned with the portfolio. Shawn, can you break it down in terms of the industrial growth numbers for Q2 and the full year?

Shawn Vadala (CFO)

Yeah. Hey, on the industrial side for Q2, for core industrial, we expect core industrial to be flat, and we expect product inspection to be up mid-single digit. For the full year, we expect core industrial to be flattish, and we expect product inspection to be mid-single digit.

Patrick Donnelly (Managing Director and Equity Research Analyst)

Thanks, Shawn. Thank you, guys.

Operator (participant)

Your next question comes from the line of Jack Meehan of Needham Research. Please go ahead.

Jack Meehan (Equity Research Analyst)

Hey. Good morning, everyone. I'm going to continue on this topic of tariffs, but just in terms of customer behavior, I was curious if you saw any evidence of pull forward in the first quarter or in any of the April trends that you've seen so far.

Patrick Kaltenbach (CEO)

Yeah. Thanks, Jack. We have not seen a significant or any meaningful pull forward action in the quarter. I know there was something in the news of in the car industry, etc., but I would say in our industry, we have not seen customers highlighting their placing orders earlier because they are concerned about the tariffs. We are serving markets that are not really concerned about these very short-term moves, and they also do not make a lot of short-term planning. That is what I see. From what I am hearing from the salesforce, there has been not an acceleration of orders given the tariff impact.

Jack Meehan (Equity Research Analyst)

Okay. Within lab, I was curious just for some more color on the process analytics business. Had some encouraging commentary from some of your peers in the bioprocessing world. I was curious how you feel about the setup there. Thank you.

Patrick Kaltenbach (CEO)

Exactly. Yes. We have seen also some really nice growth in process analytics, also driven by some of the comments, of course, that you have heard from a lot of the biopharma customers that they really increased manufacturing. We see a good increase of both single-use, but also multi-use sensors in the space. There has been a very healthy recovery also on the portfolio of single-use sensors, which had been over the last years subdued, and there was also kind of an overstocking issue still last year that has been fully resolved. Now we see some really healthy ordering come again.

Jack Meehan (Equity Research Analyst)

Awesome. Thank you.

Operator (participant)

Your next question comes from the line of Dan Arias of Stifel. Please go ahead.

Dan Arias (Managing Director)

Hey, good morning, guys. Thank you. Shawn, just to follow up on manufacturing, the capabilities in Mexico, I think that's through BioTIPS, if I remember right, and it used to be Pipette Tips and Life Sciences reagents that you made down there. Have you expanded the production breadth beyond that at this point, or is it still focused on a subsegment of lab, and so that's where the gross margin gains would be focused?

Shawn Vadala (CFO)

No, it's significantly expanded. We literally added on to the facility a few years ago, and we've been moving a wide range of products throughout the portfolio, which will include lab, industrial, and also on the food retailing side.

Dan Arias (Managing Director)

Okay. Helpful. When it comes to the tariff offsets, obviously, you're implementing a plan today. If you were to get some de-escalation here, like it's possible, do you see the chance for some stickiness that could kind of leave the door open for a benefit relative to where things are today, just in the sense that, to your point, you have a low ASP portfolio? If you were to raise some price in response to tariffs and then sort of align to a cost structure for a particular scenario, but then not have that scenario be the way that it plays out, would you not necessarily have to pull it all the way back, and so you could be left with some upside? Is the idea really to just sort of flex back down on pricing and surcharges as the situation changes?

Shawn Vadala (CFO)

Hey, we'll see how things play out, right? I mean, there's a lot of different scenarios that could happen. I mean, things have changed so much here in the last two to three months, more than what we would have expected in terms of the surcharges. Of course, yes, they would have to pull them back if rates change, but I think we'll just see how things play out here.

Patrick Kaltenbach (CEO)

Yeah. Yeah, of course. Also on the manufacturing side, as we have now really increased our manufacturing footprint, for example, in Mexico, we also have put a lot of effort into really making sure we establish a very strong local supply chain there as well. That is there to stay. I mean, we have a very competitive setup there to serve, especially the North American market, that is, to some extent, redundant to the Chinese operations that we have as well. Again, given that we are already almost two years into the whole relocation or redundancy building, we will not pull that back.

Shawn Vadala (CFO)

Yeah. Yeah. Yeah. I was thinking more in terms of pricing. I think that's probably a key outcome from all of this is because when we talk about Mexico, we're still going to have a very significant manufacturing footprint in China for China and for the rest of the world. We are just building some redundancies here, which just increases our flexibility. I just think that is a longer-term strategy that's going to be a good strength for the organization going forward.

Jack Meehan (Equity Research Analyst)

Yeah. Okay. Thank you.

Operator (participant)

Your next question comes from the line of Brandon Couillard of Wells Fargo. Please go ahead.

Brandon Couillard (Managing Director)

Hey, good morning. Shawn, I just want to clarify. When you're talking about seeing some orders being delayed, some push-outs for projects, is that isolated to core industrial? Was that a China-specific comment or more global comment?

Shawn Vadala (CFO)

My comment was specific to China that we sense that there's a little bit more if you talk to the different regions, if you talk directly to the sales organization, there's actually still a lot of optimism in the Western markets just given really good customer activity. We are a little more cautious from the top down here, just recognizing the situation. When we talk to maybe the Chinese organization, they're optimistic for the media, like going out a little bit, but they're a little bit more cautious in terms of just timing in the short term if you kind of look at their Q2 outlook. That is an area where we're feeling a little bit more hesitation from customers to delay things a little bit here, kind of a wait-and-see mode. Kind of makes sense, right?

When you look at the significant level of tariffs that are going on, I'm sure some companies are going to try to take a wait-and-see approach just to see how it plays out a little bit. Fortunately for us, Brandon, though, maybe it's a good point to comment on is if you look at our customers in China, we're not typically selling to the exporters. A very significant part of our business there is still our core markets, which are serving the local market. We've talked a lot in the past about, I think, something like 15% or less of our business is actually sold to multinationals. And then within that Chinese portion, most of it's private companies. And like I said, a very small portion of that relates to actually exporters.

A lot of what we're doing is actually supporting them with their own strategic initiatives to build up their own life science industry, etc.

Brandon Couillard (Managing Director)

Okay. That's helpful. Shawn, it doesn't look like your free cash flow guide actually changed at all. How do you just, I guess, approach managing working capital in this environment? Are you taking down or pushing out your own CapEx such that the free cash flow number is actually the same?

Shawn Vadala (CFO)

Yeah. Yeah. Hey, I think we still feel good about it. We'll revisit it as we go along. We felt like we did pretty good here in the first quarter, especially if you exclude the timing of the bonus payments year on year related to prior year performance. I think we were up, was it like 17% on a per-share basis or something like that? I feel like we had a good first quarter. Of course, we're looking at things to kind of optimize things in terms of how we think about other types of line items on the cash flow statement too that will allow us to continue to reinvest in our business as we expect, but also just maybe optimize things in terms of how we can benefit from this year in this environment. We'll see how things play out here a little bit.

Brandon Couillard (Managing Director)

Thanks.

Shawn Vadala (CFO)

Yeah. Thanks.

Operator (participant)

Your next question comes from the line of Vijay Kumar of Evercore ISI. Please go ahead.

Vijay Kumar (Senior Managing Director)

Hey, guys. Thanks for taking my question. Shawn, maybe my first one on the guidance cadence here. Q1, ex the shipping delays, you guys did up 2%, low singles. Q2, 0-1%, what drives that step down in revenues? Are you assuming some demand destruction because of tariffs here in 2Q? I think the back half sort of assumes you step back to 3% plus to hit the annual. Maybe just talk about this cadence for 2Q and back half.

Shawn Vadala (CFO)

Yeah. I mean, I think if you kind of cut through our guidance and you look at price versus volume, you're right. Q2 will be kind of the low point of the year. I think it's very much related to these comments on uncertainty in the short term with maybe more optimism in the medium term. Part of that caution in the short term is going to be China. I think maybe just to kind of look at the regions here, I mean, we are expecting kind of flattish results here in lab and industrial. We already talked about mid-single digit and product inspection. We expect retail to be down a little bit in Q2. From a regional perspective, we expect the Americas to be flattish to up low single digit. It's probably another area where there's a little bit of caution.

With Europe up low single digit, and we already talked about China being down low to mid-single digit. Maybe the two areas that jump out a little bit was the China comments and then maybe just a little bit more cautious on the Americas in the short term.

Vijay Kumar (Senior Managing Director)

Understood. My follow-up here on tariffs, I think you said $50 million was China. The overall $115 million, when you said annualized, what is the impact for fiscal 2025? Is that something lesser because you're using annualized comments? I think.

Shawn Vadala (CFO)

Yeah. I think maybe one way to think about it, not to put an exact number on it, is about 7%. It would probably be about a 7% gross headwind to EPS in terms of the tariff impact this year. We expect to offset probably 75% or more of that this year, which would result in a net headwind to EPS of about 2%.

Vijay Kumar (Senior Managing Director)

Sorry. I just had a follow-up on. I think you used current levels in your prepared remarks. Are we assuming the current, I guess, rates to sustain, or is the guide assuming post the 90-day pause for tariff rates to creep back up? What is the guide assuming on tariffs?

Shawn Vadala (CFO)

Yeah. No. Good question. We assume it's at current rates. We assume it's at current rates. Recognizing it can go up or down. We'll see.

Dan Arias (Managing Director)

Understood. Thanks, guys.

Shawn Vadala (CFO)

Yep.

Operator (participant)

Your next question comes from the line of Matt Sykes of Goldman Sachs. Please go ahead.

Matt Sykes (Analyst)

Good morning. Thanks for taking my questions. Maybe taking the China questions in a different angle. Do you think that if this tariff situation lasts a little bit longer than expected, meaning beyond Q2, there could be some shifts in the competitive landscape in China, meaning the local players would maybe prefer local substitution, if possible, from a technology and performance standpoint because of pricing, and that could shift things if this lasts longer than expected? Do you feel pretty comfortable with your competitive positioning to kind of penetrate through these near-term issues?

Patrick Kaltenbach (CEO)

Yeah. Thanks. Thanks, Matt. Look, I mean, first, I think you want to appreciate that most of the products that we sell in China, we actually manufacture in China. We import very little from the U.S. to China. While there is a bit of a tariff headwind there as well, it is much, much smaller than the other direction because most of the products that we sell in China, we manufacture in China. It is very, very competitive in a very competitive situation, but also ourselves being in a very, very good position there because we source locally. We have manufacturing locally. We have a strong local marketing team. From many perspectives, our customers here are almost like a Chinese company because we are fully merged there with the customers. We are very quick adopting also to local application demand changes, etc.

We have a strong R&D and marketing team there that helps us to really understand customer moves. We think we can continue to compete very effectively in the local market with our setup there. The few products that we still manufacture in the US or in Germany or in Switzerland and ship them to China, we are looking also there into options to localize some of them, but it, of course, depends on other priorities and also on IP questions, etc. The exposure of that tariff in China for US products is, for us, rather small. If we think really, we are set up for long-term good competitive position in the market.

Matt Sykes (Analyst)

Got it. Thank you for that. Maybe just two quick ones. Patrick, one for you just on services growth. You said 6% in the quarter, a little bit below kind of the run rate you were doing last year, if I recall correctly. I'm sure some of this is comps, but just maybe talk about the underlying strength that you continue to have confidence in that services growth. Then, Shawn, could you just—I'm sorry if I missed this—but just any FX assumptions in the EPS guide over the course of the year that might have offset some of the tariff impact?

Patrick Kaltenbach (CEO)

Thanks, Sam. I'll start with the services questions. Yes, Q1 was a bit tougher compared to last year, but we are still pretty pleased with the 6% growth that we have seen in Q1. For the full year, we forecast mid to high single-digit growth in 2025. We have invested a lot also last year into a growth program in services to make sure that we really can tap deeper into installed base that is currently not serviced by our team. We have implemented more marketing and telesales resources to reach out to customers, have real sales programs in place, and also added a significant number of new service people in the field. I think that whole growth program has still a long runway. I'm actually quite pleased with the outlook and what I'm hearing from the team.

I also want to recognize the team here for having really outstanding feedback from our customers in terms of net promoter scores. They are higher than ever. That also tells me that our customers are really pleased with the service that we deliver.

Shawn Vadala (CFO)

Maybe the second part of your question, Matt. We reduced our full-year EPS guidance by 2% at the high end of our range and 2.5% at the midpoint. At the midpoint, about two-thirds of that relates to the gross tariffs offset by our mitigation actions. The other third reflects the lower sales volume for the year, offset by better operating performance and more favorable foreign currency. Currency, we expect from an EPS perspective to be at current rates, flattish or neutral for the year. Last quarter, we were expecting it to round to like a 2% kind of a headwind.

Dan Arias (Managing Director)

Thank you. Very helpful.

Shawn Vadala (CFO)

Your next question comes from the line of Doug Shankle of Wolfe Research. Please go ahead.

Good morning. This is Avery on for Doug. Thank you for the question. Just looking at your margin for the quarter, obviously, we have the shipping impact, but gross margin was up 30 basis points. I was just wondering if there was any favorable mix there. Just looking at the OPEX line, it seems like that number was a bit elevated in dollar terms, specifically SG&A. Just wondering if you could give any color there. Was that preparation being done in advance of the tariffs? Going forward through the balance of this year, would it make sense to expect that level of OPEX as a percentage of sales to be somewhat elevated relative to last year?

Yeah. Hey, so in terms of the gross margin for the quarter, we were actually very pleased with our gross margin, certainly a little bit better than what we had expected. It was up 30 basis points, but if you exclude the impact of the shipping delays from a year ago, it was up 90 basis points. We had good performance in pricing. It came in about in the 2% kind of a range. We also saw some good progress continued on our Stern Drive program and productivity initiatives in the company. In terms of mix, there might have been—I think there was a little bit of favorable mix there as well too in the quarter as well. Otherwise, we feel good about the performance. If you kind of look through the year, there's a lot of moving parts this year.

If you kind of exclude the shipping delay topic, you exclude the tariff net of our mitigation actions, our gross margin is probably up in the 30 basis points kind of a range, which given the top line not having the volume that maybe we expected at the beginning of the year, we feel actually pretty good about that. In terms of SG&A, of course, there is always going to be—we are investing in the business. This was an important topic for us too as we entered the year in terms of continuing to drive growth in the business. We have a lot of great programs, a lot of great ideas, and we are going to continue to do that. When you look at one quarter versus another, there can always be a little bit of timing.

I would not try to overread from one quarter to another quarter. Of course, we are going to look at non-sales activities for the rest of the year and try to be a little bit more cautious until we get a little bit more clarity on the top line. I think if you just kind of cut through everything and you look at our operating margin for the full year and you kind of exclude the shipping delay topic from last year, which is like a headwind of about 60 basis points. On a reported basis, maybe we are going to be down by about 130 basis points. If you exclude the shipping delay topic, which is about a 60 basis point headwind, and if you exclude the tariff costs and the mitigation activities, our operating margin is probably up slightly for the full year.

Thank you. Just one on industrial. Core industrial is down 6%, while PI was up 8%. Are you seeing a fundamental difference in customer trends between the two businesses, and what's really driving the strength in PI?

PI is 70% or so of that business is sold in food manufacturing, where our industrial business has a broader mix. Our core industrial business also has a broader geographic mix with a large China element disproportional to not only product inspection, but to other parts of the world. On the product inspection side, I mean, food manufacturers are still under pressure, but we're very pleased with our team's performance. We've come out with some new products in the last few years that have addressed needs in the mid-market. They're very well received in the marketplace, and we're just competing really well. I think the market's still a challenging market, but we're having some good success here.

Operator (participant)

Your next question comes from the line of Rachel Vatnsdal of JPMorgan. Please go ahead.

Rachel Vatnsdal (Executive Director)

Perfect. Good morning, and thanks so much for taking the question. First off, I just wanted to dig into Vijay's question earlier on the second quarter guide and the implied back half range. You highlighted some of the customer caution primarily impacting the second quarter. Can you just walk us through why you think most of this customer caution in light of the macro environment is mainly going to impact the second quarter? Which segments are you expecting to see the most improvement as we get into the back half of the year on that customer caution as well?

Shawn Vadala (CFO)

Yeah. If you kind of look at the second half, just to keep in mind, Rachel, the second half will benefit from pricing relative to Q1. I think if we kind of just look at volume in the second half versus volume in the first half—and when I say the first half, I mean excluding the shipping delay in Q1—they're probably pretty similar. Our view is that at the beginning of the year, our guidance assumed that things were going to improve in the second half of the year. Right now, we're kind of taking that off the table for the moment, and we're just saying that we think things will probably be more consistent for the second half of the year on a volume basis. We do have some benefit a little bit on pricing in the second half relative to the first half.

Rachel Vatnsdal (Executive Director)

Great. Just in terms of the tariff offsets, you highlighted supply chain optimization, price increases, and surcharges as well. Can you bucket how much of the $150 million is offset by each of those drivers? Follow up to one of the earlier questions, just in terms of the gross margin impact, can you just walk us through the timing of implementing those mitigation efforts? Really, how should we think about the cadence of gross margins ramping from the second quarter through fourth quarter?

Shawn Vadala (CFO)

Yeah. Hey, it's a little bit early for us to give Q3 and Q4 guidance. We did our best to provide Q2 and the full year, but of course, we do have our internal thoughts on that. Let's see how—let's get through Q2 first, and we'll give you an update on Q3. In terms of the pieces, of course, I understand where your question's coming from, but it's pretty dynamic. I mean, probably the one number I'll provide is that our pricing assumption for the year was 2%. We expect it to be more at 3% or so now for the full year. That kind of gives you maybe some context for what we're doing. Of course, pricing is something we can do quicker than on the supply chain side. That pricing will have an element, like I mentioned before, of price increases and surcharges.

It might go up or down on the surcharge side. That is a little bit something that could be a little bit fluid as we kind of go through the year. As we kind of get to the end of the year, or maybe even better said, as we go into 2026, we are going to see a lot of the supply chain optimization kicking in, a lot kind of going into next year. Precise timing, things will happen throughout the year, but the reality is that we are accelerating a lot of things. It is probably best just to think of them as being in place by the end of this year as we kind of go into next year. If we go a little bit faster, maybe there is a little bit of upside, but it is going to take some time to do some of these things.

The other thing is, hey, we've already done a lot on the supply chain optimization side in terms of already mitigating the gross tariff headwind, which we actually feel quite good about with our supply chain processes.

Operator (participant)

Your next question comes from the line of Michael Ryskin of Bank of America. Please go ahead.

Michael Ryskin (Managing Director)

Hey, thanks for taking the question, guys. For my first one, you touched on a lot of these things earlier. You talked about industrial a lot. You talked about China. I'm just kind of hoping to get it in one place and maybe bring all those topics together. In terms of the fiscal year 2025 guide, the reduction of 1.5% local currency from 3% to 1-2% now, any way you could just sort of bridge that for us? How much of that 150 basis points reduction is China? How much is lab industrial? Just whatever way you think makes the most sense, just so we can see sort of what's changed, obviously, and where you're assigning those cuts.

Shawn Vadala (CFO)

Yeah. I think you could probably do the math with me a little bit here. Before we were saying China was going to be up low single digit for the full year, and now we're saying it's down slightly. That might be about a point in itself. In terms of other changes, we're taking down both the Americas and Europe. We were at mid-single digit before on a reported basis. That was, I'm sorry, excluding the shipping delay topic. Now Americas is down more like low single digit, excluding the shipping delay. It would be, yeah, actually both on a reported and excluding shipping delay. Europe is maybe just slightly lower than expected.

In terms of the divisional, you can kind of see probably the one thing that kind of jumps out is before on an adjusted for the shipping delay basis, we were saying lab might be mid to high. Now we're saying it's more like mid. We were saying industrial would be up low single digit on an excluding the shipping delay. Now we would say it would be more like flattish.

Michael Ryskin (Managing Director)

Okay. That's a great summary of all that. I guess I'll keep it to one follow-up. You haven't directly addressed NIH, U.S. government. I know it's a relatively small part of your exposure, but still there's some there, especially if you think about sort of the lab, high pets, some of those more, some balances. Just what's been going on in that end market? Have you seen any meaningful change from customer behavior? Someone asked about stocking earlier. It sounds like that hasn't happened. Just sort of your thoughts on U.S.A. and G, U.S. NIH. Thanks.

Shawn Vadala (CFO)

Yeah. I mean, of course, our direct exposure to NIH is closer to zero than it is to one. If you look at our broader academia exposure in the U.S., and you just look at our U.S. academia exposure, it's about 2% of our global sales. If we add in government, it probably gets to about 3%. I'm talking specifically the U.S. A&G as a percentage of our total sales. Smaller part of our business, but certainly a part of the business that we are seeing under pressure and does not have a big impact on our numbers, but certainly it's adding to a little bit of the headwind that we see in the Americas here, especially in the short term.

Patrick Kaltenbach (CEO)

Okay. Thanks. I'll leave there.

Shawn Vadala (CFO)

Yep.

Operator (participant)

Your next question comes from the line of Tycho Peterson of Jefferies. Please go ahead.

Tycho Peterson (Managing Director)

Hey, thanks. Maybe just to kind of round it out on the lab, I want to probe into pharma a little bit. You touched on bioprocess earlier to Jack's question, but pharma specifically, can you maybe talk about what you're hearing from your customers there? Any concerns about them leaning on you guys on prices? They have to respond to tariffs. How do you think about replacement cycle? Because you've talked about that as an opportunity as well.

Patrick Kaltenbach (CEO)

Yeah, good. Thanks. I'll take that, Tycho. We are actually not hearing from our pharma customers yet any big impact in terms of their pricing concerns. We have very healthy engagement with pharma, small molecule, and large molecule customers right now. I think they're excited about the lab portfolio we have, including the automation features. I would say not a negative impact yet. I mean, we'll see if there's anything else coming up, but right now, what I'm hearing from the sales force, very strong positive engagement with pharma customers.

Tycho Peterson (Managing Director)

Okay. Maybe another angle on China manufacturing. Some of your large multinational competitors, including your biggest one in Balances and Scales, does not do a lot in China. Is there an opportunity to gain share here for you guys, given your manufacturing footprint within the country?

Patrick Kaltenbach (CEO)

Yeah, maybe. Look, our team is very close to the customers there. I want to remind you our total exposure to customers there in China is about 60% is actually local companies and only 15% are multinationals. 25% are government and state-owned companies. Yeah, we are talking to customers there. If there's more happening with companies in that space, we will definitely use our worldwide footprint and the references we have from other countries.

Shawn Vadala (CFO)

Tycho, if I understand your question, I think you mean our competitiveness in China versus other competitors that do not.

Tycho Peterson (Managing Director)

I think if you have the multinational competitors that don't manufacture in China, you have a competitive advantage in China.

Shawn Vadala (CFO)

Yeah, exactly. I agree. I think we do have a competitive advantage in China versus a lot of our competition. And as you know, we've been there for a long time, since the 1980s. We not only manufacture mostly in China for China, but we actually develop a lot of products in China for China. We really have a good sense and a strength of what the market expectations are at the right price points. Because of that, we've been very much perceived as a Chinese company over the years. If we're not making it in China, we tend to import from Europe, specifically Switzerland. We feel good about our posture there in China. Frankly, we feel like we're competing well globally in general against competition.

Tycho Peterson (Managing Director)

Okay. Are you seeing any stimulus there?

Shawn Vadala (CFO)

Not really.

Jack Meehan (Equity Research Analyst)

Not a big change. I mean, there's talk about stimulus. In the last stimulus program, our sales team was quite engaged with customers, helping them bundling products together to comply with benefit guidelines. Not right now, any new stimulus that we would be aware of.

Patrick Donnelly (Managing Director and Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Your next question comes from the line of Catherine Schulte. Please go ahead.

Catherine Schulte (Senior Research Analyst and Director)

Hey, guys. Thanks for the questions. Maybe first just on tariffs. For the $100 million or maybe a little more of imports into the U.S. that are not coming from China and Mexico, how much of that is coming from Switzerland? I am just trying to think about what the incremental gross impact could be if the country-specific tariffs go into effect in July as proposed, just given your Swiss exposure, and how much of that you think could be offset if necessary.

Shawn Vadala (CFO)

Yeah. Hey, Catherine. If you look at our exposure, we have been very specific about our Chinese exposure, especially given the nature of the rates. We expect it now to be more in the $50 million range. We have also given some color on Mexico, given it is such a significant moving piece and it relates to the China situation. In terms of the rest of the world, we prefer not to go into every single country, but we would say that we are importing about $250 million into the U.S. from Europe and the rest of the world, and a significant portion of that is coming out of Switzerland.

Catherine Schulte (Senior Research Analyst and Director)

Got it. Maybe just on capital deployment, any appetite to do more on the buyback side, just given where the stock is today?

Shawn Vadala (CFO)

No. Hey, we're very consistent here, right? We don't try to time the market, and we try to stick to exactly what we say at the beginning of the year. Our assumptions are the same for the year.

Dan Arias (Managing Director)

Great. Thank you.

Operator (participant)

Your next question comes from the line of Josh Waldman of Cleveland Research. Please go ahead.

Josh Waldman (Senior Equity Research Analyst)

Morning, guys. Thanks for squeezing me in. First, Patrick, a follow-up on core industrial. I think you mentioned softness in the U.S. in the prepared remarks. Is this primarily where you're lowering your outlook in core, or are there other areas that are tracking below?

Patrick Kaltenbach (CEO)

No, I'll take that, Josh. Look, it's more in China that we lower the outlook on core industrial. In the U.S., what I referred to in Q2 was some delays of larger products. These are really larger projects, industrial automation projects, and they're not always really close within the time window that the field initially thinks they will close. We forecast, or we recently saw some forecast delay in Q2, but overall, the biggest takedown in industrial and in the growth rates compared to what we said in the last earnings call is definitely in China.

Josh Waldman (Senior Equity Research Analyst)

Got it. Okay. Patrick, can you remind us what portion of the business is sales to bio production, OEMs, maybe how business is tracking there, and then if you're seeing any signs of onshoring in that business?

Shawn Vadala (CFO)

You're talking about core industrial? We do not break that out, Josh, but what we have said in the past is that about 60% of core industrial is a combination of pharma, biopharma, food manufacturing, and chemical. For us, chemical means more specialty chem.

Josh Waldman (Senior Equity Research Analyst)

Okay. Thank you.

Shawn Vadala (CFO)

Yep.

Operator (participant)

There are no further questions at this time. I will now turn the call back over to Adam Uhlman for closing remarks. Please go ahead.

Adam Uhlman (Head of Investor Relations)

Okay. Great. Thanks. Hey, everybody. If you have any questions, feel free to reach out to me. I hope everybody has a great weekend and take care. Bye.

Operator (participant)

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.