Mettler Toledo International Inc/ Q4 FY2025 Earnings Call

Thank you for joining us. My name is Jaco, and I will be your operator for today's conference. I would like to welcome everyone to Mettler-Toledo's fourth quarter 2025 earnings call. I will now hand it over to Adam Uhlman, Head of Investor Relations. Please proceed.

Thanks, Jaco, and good morning, everyone. Thanks for 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 is being webcast and is available for replay on our website at mt.com. A copy of the press release and the presentation that we will 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, 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 statements, except as required by law. On today's call, we will use non-GAAP financial measures and a reconciliation of these non-GAAP financial 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.

Thank you, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our fourth quarter financial results, the details of which are outlined for you on Page 3 of our presentation. We had a great finish to the year with broad-based growth by geography and product category. Our team continues to execute very well in a challenging environment and delivered strong adjusted EPS growth for the quarter with excellent free cash flow conversion for the year. I'm very proud of our organization's resilience and agility over the past year as we successfully navigated the challenges posed by global trade disputes and soft market conditions, and we remain agile in this dynamic environment. Looking ahead, we are very well positioned to drive growth with our Spinnaker sales and marketing program and innovative product portfolio while capitalizing on opportunities related to automation, digitalization and onshoring investments around the world. Our strategic initiatives and strong culture of innovation and operational excellence are deeply embedded in the organization and will help us continue to gain share and deliver strong financial performance. 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.

Thanks, Patrick, and good morning, everyone. Sales in the quarter were $1.1 billion, marking a 5% increase in local currency or a 4% increase when excluding previously communicated acquisitions. On a U.S. dollar basis, sales rose by 8%. Sales growth by region showed a 7% increase in the Americas, which included a 3% benefit from acquisitions, as well as a 4% increase in Europe and a 4% increase in Asia/Rest of the World. Local currency sales in China also grew by 3% during the quarter. For the full year 2025, we provided an overview of local currency sales growth by region. In terms of product areas, Laboratory sales rose by 3%, while Industrial sales grew by 7%, benefiting from a 3% increase due to recent acquisitions. Excluding acquisitions, core Industrial sales increased by 2% and Product Inspection increased by 7%. Food Retail experienced a significant growth of 19% in the quarter. Service revenue was up by 8%, including a 2% benefit from acquisitions. The summary of our P&L reflects that gross margin was 59.8% in the quarter, a decline of 140 basis points, which included an unfavorable impact from foreign currency of 70 basis points and acquisition mix. Our organic gross margin fell by 20 basis points, excluding foreign currency, largely due to an incremental gross tariff cost of 190 basis points. R&D expenses were $52.6 million, remaining flat on a local currency basis compared to the previous period. SG&A expenses totaled $259.8 million, reflecting a 6% increase in local currency from the previous year, including investments in sales and marketing. Adjusted operating profit reached $363 million, up 3% from the prior year, while adjusted operating margin was 32.1%, down 160 basis points year-over-year. Unfavorable currency presented a 100 basis point challenge to operating margin during the quarter. We estimate that tariff costs negatively affected our operating profit by 7%, translating to a 190 basis point decrease in our operating margin. Additionally, amortization costs were $19.7 million for the quarter. Interest expenses amounted to $17.4 million, with adjusted operating income at $4.1 million. Our effective tax rate was 19% this quarter, excluding discrete items and adjusted for the timing of stock option exercises, and did not include a $19.5 million discrete tax benefit from a tax audit settlement. Fully diluted shares decreased by about 3% from the previous year, totaling 20.4 million. Adjusted EPS for the quarter was $13.36, marking an 8% increase from the prior year, while incremental tariff costs had a gross impact of 7% on EPS. On a reported basis, EPS was $13.98 compared to $11.96 the previous year, which included $0.28 for purchased intangible amortization, $0.18 for restructuring costs, and a $0.14 net benefit from acquisition-related items, along with a $0.01 tax headwind and a $0.95 discrete tax benefit. For the full year 2025, local currency sales increased by 3%. Adjusted operating profit dropped by 1%, and our operating margin decreased by 140 basis points. Adjusted EPS grew by 4%. Excluding the impact of 2023 shipping delays that benefited 2024 results, we estimate that local currency sales rose by 4% in 2025, while operating margin fell by 80 basis points and adjusted EPS increased by 8%. Unfavorable foreign currency had a negative effect of 50 basis points on our operating margin for 2025, and incremental tariff costs posed a $50 million challenge to operating profit, affecting the operating margin by 130 basis points and EPS growth by 5%. Regarding adjusted free cash flow, we achieved $878 million in 2025, converting 99% of our adjusted net income. DSO was 35 days, and ITO was 4.2 times. Now, looking ahead, our guidance for the first quarter and full year 2026 is as follows: we assume current U.S. import tariffs and retaliatory tariffs remain unchanged. Despite recent favorable headlines from certain end markets like life sciences, we acknowledge elevated geopolitical tensions, leading us to expect customers to be cautious with their investments. On an annual basis, we are not forecasting a significant market improvement in 2026 compared to last year. We are confident in our ability to execute growth and productivity initiatives, positioning us to gain market share regardless of the macro environment. For the full year 2026, we maintain our local currency sales growth forecast at about 4%, or approximately 3.5% excluding prior acquisitions. We expect operating margin to increase by 60 to 70 basis points, with only minor changes on a reported basis. Adjusted EPS is projected to be between $46.05 and $46.70, representing an 8% to 9% growth rate. At recent exchange rates, foreign currency is expected to help sales growth by 1%, while having a slight negative effect on EPS. For the first quarter of 2026, we anticipate local currency sales growth of around 3%. We project that operating margin will decrease about 100 basis points at the midpoint of our range or remain flat, excluding adverse currency effects. Adjusted EPS is expected to range from $8.60 to $8.75, reflecting a 5% to 7% growth rate. Currency fluctuations will likely aid first quarter sales by nearly 4% but will have a neutral effect on adjusted EPS. Looking further into our 2026 guidance, total amortization expenses, including purchased intangible amortization, are estimated to be around $78 million, with purchased intangible amortization alone expected to be about $27 million on a pretax basis, or roughly $1.04. Interest expenses are projected at $70 million for the year. Other income is anticipated to be about $19 million, an increase from previous estimates due to updated pension accounting, partially offset by rising pension costs now accounted in operating profit. We foresee our tax rate before discrete items remaining at 19% in 2026. Free cash flow is anticipated to be around $900 million this year, representing a 5% increase on a per-share basis, with the first quarter estimated at about $100 million due to tax payment timings. Share repurchase plans suggest an outlay of between $825 million and $875 million. That's all from my side, and I will now hand it over to Patrick.

Thanks, Shawn. Let me start with some comments on our operating businesses, starting with Lab, which had modest growth in the quarter against strong growth in the prior year and good underlying organic sales growth for the full year. Our results reflect robust bioprocessing growth, especially with single-use consumables, which was offset in part by softer demand from biotech, academia and the chemical sector. While headlines for pharma and life sciences markets have been more favorable recently, we expect customers to still be cautious with their investments to start the year. Our unique go-to-market strategies will ensure that we are very well positioned to capitalize on our customers' growing needs for equipment replacement going forward. Our innovative portfolio remains an important competitive advantage, and we continue to invest to further differentiate ourselves from the competition. For example, we recently launched an entirely new electronic pipette called Vero that is lightweight and has a very compact design. It has an exceptionally long battery life and can complete 2,800 pipetting cycles on a single charge. It is also unique in that it allows scientists to adjust flow rates, which is very helpful when working with delicate cells or nucleic acids, for example. Our Vero introduction complements the many exciting lab innovations we have brought to market in recent years, and we have a deep pipeline for the future. Turning to Industrial. We had modest growth in our core industrial business this quarter, including strong growth in China against easy comparisons. Given the soft market conditions over the past year, we are pleased with the good sales growth core industrial delivered in 2025. However, market demand in most geographies remains subdued, and we have maintained our full year forecast for modest growth. Our teams remain active in identifying new growth opportunities, and we believe we are well positioned to capitalize on investments in automation, digitalization, replacement demand and onshoring in the future. Our Industrial portfolio is in excellent shape. And to support growing demand for automation applications, we recently introduced new high-speed data communication features and protocols across our smart automation weighing indicators that ensure the compatibility of our devices with our customers' IT and OT ecosystems. We have partnered with leading MES providers to enable seamless integration of our intelligent weighing devices through standardized interfaces into factory automation systems. Our solutions assure GMP-compliant batch records and enable intuitive operator applications, helping customers increase efficiency and reduce errors as IT and OT environments continue to converge.

Turning to Product Inspection. Sales growth in the fourth quarter was very strong as we have capitalized on our excellent portfolio, and we believe our organic sales growth in 2025 was well ahead of market growth. We continue to enhance our portfolio and recently introduced our new X3 Series of X-ray solutions for end-of-line inspections of loose products like prescription tablets and pills or food items like nuts, fruits and grains. The X3 Series offers both single and dual energy capabilities and is very differentiated in the market. Lastly, Food Retail sales grew strongly against easy year ago comparisons. While our Food Retail business tends to be lumpy, we were very happy with its growth in 2025. Now let me make some additional comments by geography, starting in the Americas, which had good growth across most of the portfolio, especially with our industrial and retail solutions. Growth in our Laboratory business was good and included very strong bioprocessing growth. Turning to Europe. Our fourth quarter results were better than expected due to very strong performance from our product inspection business. For the year, our European market organizations delivered good results despite soft economic conditions in some Western European countries as we continue to benefit from our Spinnaker sales and marketing initiatives and innovative portfolio. However, economic conditions in Europe are mixed, and we do not expect significant improvement in market demand in 2026. Finally, Asia/Rest of the World had good growth in the fourth quarter and was largely in line with our expectations. Our business in China grew 3%, led by good demand for industrial products from biopharma customers. Lab products were flattish, and our team remains very engaged with helping customers to help them address new China pharmacopeia regulations, including stricter minimum weighing standards and quality monitoring of ultrapure water, among others. Market conditions in China have recently been more steady, but as we know from the past, things can change quickly. In markets outside of China, we had very good growth against difficult comparisons in the fourth quarter. Emerging markets outside of China were 18% of our sales in 2025 and grew above our company average due to our dedicated resources and growth initiatives in these countries. Emerging markets are an important component of our growth strategy, and we expect above-average sales growth over the coming years.

In summary, we delivered another year of solid growth despite ongoing market headwinds as our team leveraged our sophisticated go-to-market strategies and strong product and service offerings. Our team's resilience and agility in our pricing, supply chain productivity and cost-saving initiatives were pivotal in navigating tariff challenges and government policy uncertainties throughout 2025. We are squarely focused on driving growth in 2026. We will continue to benefit from our strong global leadership positions, diversified customer base, innovative product offerings and significant installed base. Service and faster-growing emerging markets will remain tailwinds, and we have accelerated our digital capabilities to identify and pursue growth opportunities, increasing the effectiveness of our global sales organization. Our market-leading solutions and innovative portfolio uniquely positions us to meet increasing customer demand for automation and digitalization solutions as well as faster-growing segments. We also look forward to capitalizing on future growth opportunities with customer replacement cycles and investments on the nearshoring activities over the coming years. Now this concludes our prepared remarks. Operator, I'd like to open the line now for questions.

Our first question comes from Patrick Donnelly from Citi.

In your commentary on the first quarter, Patrick, you mentioned that you are taking a more cautious approach at the beginning of the year despite some positive news regarding pharmaceutical and life sciences customers. Are you observing this trend in the first month, or is it more a matter of typical Mettler conservatism? It would be useful to discuss that first-quarter guidance further.

Yes. Thanks, Patrick. And I'll let Shawn comment on this as well. But maybe to my comment on the headlines, again, headlines have been still pretty volatile. And while they have been better on the pharma and life sciences side, we all appreciate there's still more uncertainty in the market out there. And this also, across the broader portfolio and the broader markets we serve, still leads to longer deal cycles, et cetera. So as we said also in our Q3 call and also at the JPMorgan conference, we think our customers, and we feel that we'll start the year a bit more cautious, and we have really built that into our guidance for Q1 and for the full year.

Yes, I want to reiterate what Patrick said. We're very happy with the fourth quarter results, which exceeded our expectations, and we saw broad-based growth across our portfolio. We can delve into the details shortly. We're also pleased with our full-year guidance for 2026, maintaining a 4% local currency sales growth target. However, as Patrick mentioned, we believe our customers will likely begin the year with some caution in Q1. It's always challenging to predict Q1, as every year brings new uncertainties. Typically, we need to get through the quarter, especially March, to understand the trends better. But for now, we think it's wise to adopt a cautious outlook for the first quarter, and we anticipate gradual improvement as the year progresses.

Okay. That's helpful. And then, Shawn, maybe one for you, just in terms of the components of the guide. I would love if you could break out how you're thinking about pricing versus volume, both on the revenue side. And then if you could give a bit of a margin build with pricing, FX, et cetera, that would be very helpful.

We are quite optimistic about our pricing program. One aspect I appreciate most about pricing is that it emphasizes the company’s value proposition. We have heavily invested in innovation over the past few years, which allows us to realize pricing as we create value. As we look ahead, we expect to start the year with a stronger performance due to benefits from midyear pricing actions taken last year. For the first quarter, I anticipate pricing to be around 3.5%. For the entire year, we are maintaining a target of 2.5%. From an acquisitions perspective, we expect to gain about 1% in the first half of the year from acquisitions, which translates to roughly 0.5 points for the full year. This would result in an anticipated organic volume growth of 1% for the whole year, though we expect it to decline by about 1.5% in Q1. This reflects a cautious outlook, and it’s not unexpected if customers approach the start of the year with more restraint in their spending, given the market volatility they faced last year. Nonetheless, we are aware that headlines are improving, which may translate into business as the year progresses. Regarding margins, several factors impact our margins, particularly operating margins. Currency fluctuations significantly affect our margins, as we noted last quarter, impacting sales rather than profit. This creates a notable headwind in margin calculations. Specifically, the headwind is approximately 100 basis points for the first quarter and about 50 basis points for the entire year. Excluding this, we expect our operating margin to increase slightly in Q1 and rise by about 60 to 70 basis points for the full year. However, on a reported basis, we anticipate a decline of around 100 basis points in Q1, potentially around 90 basis points, with a slight increase expected for the full year.

Our next question comes from Vijay Kumar from Evercore ISI.

Congrats on the nice spin. Regarding the Q1 guidance, Shawn and Patrick, you delivered 4% organic growth in Q4. I believe your Q1 is suggesting 2% organic, please correct me if I'm mistaken. What factors contribute to the decline from 4% to 2%? Additionally, what are your assumptions for the end markets? When you mention caution, could you explain the different assumptions you have for industrial compared to labs and pharma?

Sure, I can go over the assumptions for Q1 and the full year, as well as Q4. Notably, we had a strong performance in the Industrial sector, particularly in Product Inspection. Europe exceeded our expectations, along with some positive contributions from the Americas. Initially, we had concerns about Europe, but our Product Inspection operations there performed exceptionally well. However, we anticipate some decline in growth rates from Q4 to Q1, particularly in the industrial and retail sectors, along with a degree of cautiousness in both the Americas and Europe. For Q4, our Lab segment saw a growth of 3%, and we are guiding for a low single-digit increase in Q1. For the full year, we expect growth in the low to mid-single digits. The Core Industrial sector grew by 4% in Q4, and we foresee it remaining flat in Q1, with the full year guidance again in the low to mid-single digits. Product Inspection achieved 11% growth in Q4, with 7% being organic. Our Q1 guidance for Product Inspection shows an expected increase in the mid to high single digits, while the full year is anticipated to grow in the low to mid-single digits. Retail grew by 19% in Q4, with guidance for Q1 set at a high single-digit increase and flattish growth for the full year. In terms of regions, the Americas experienced a 7% increase, with 4% being organic. We are guiding for a low single-digit increase in Q1 and a mid-single-digit increase for the full year. Europe grew by 4% in Q4, and we expect a low single-digit increase for both Q1 and the full year. Lastly, China saw a 3% increase in Q4, and we are also guiding for low single-digit growth for both Q1 and the full year.

Thank you, Shawn. Regarding your EPS breakdown, it seems that about half of it came from below the line, specifically from interest expenses and increased pension income. Can you clarify where the additional $0.30 increase is coming from? It appears that the top line remained unchanged.

So you're talking the full year 2026, Vijay?

Yes, yes.

To clarify, our strong performance in Q4 was driven by sales. Some of the operational aspects may seem a bit confusing, but we excluded certain benefits from our adjusted EPS, such as the one-time tax benefit. In our 2026 EPS guidance, we've incorporated the EPS improvement from 2025. We also raised our EPS due to the reduced Swiss tax rate, which fell from 39% to 15%, contributing just under 1% to EPS. Additionally, there was some fluctuation from foreign currency, which was a minor setback, and we accounted for that. Also, we saw an improvement in pension income that will provide some support below operational performance. This is tied to how we do our actuarial accounting at year-end, and there might be some adjustments related to pension accounting above operational performance as well. Overall, we are very happy to increase EPS by $0.70 for the full year, which represents about a 2% increase, while maintaining our EPS growth target of 8% to 9%.

Our next question comes from Dan Arias from Stifel.

Shawn, food retail was pretty strong here. Is something picking up? Or is that just sort of the inherent lumpiness of that business? The outlook, I think, for the year is flat. So I'm not sure if spending improvement makes that easier, or if the big 4Q just kind of creates a tougher comp, which makes that harder to reach.

Dan, this is Patrick. Look, I mean, with retail, of course, we are very happy with the performance we have seen from retail in Q4, and also in 2025 as it was growing. But I also want to remind you that the retail business is a pretty lumpy business, a lot of project business. And as we still guide retail for Q1 for high single digit, I think fiscal year '26, we'll see a tough compare, and that we also guided to the flattish growth in 2026. Again, it's a lot of ups and downs, big project business there. We compete really well. We actually spent quite some amount of innovation and brought a lot of good products, new products over the last 2 years and that we compete extremely well. But again, it's more lumpy. And it was as proud as we are of the 2025 growth, we see the full fiscal year '26 given the tougher compares rather flat.

Okay. And then maybe on China, I mean, I know no one thing changes the growth picture for you guys. But how would you characterize the pharmacopeia opportunity over there that you talked about a little bit last quarter just in terms of what might be tangible when it comes to demand? And then when you think that purchasing might ramp up if, in fact, it does?

Yes, that's a good question, Dan. Look, I mean, in China, again, we are really well positioned with our team there. We have an outstanding portfolio and pharmacopeia is one of the opportunities. We have seen some really good customer engagement also in Q3 and Q4 of last year. We expect this to continue, but it's not like a step change, right? This is a continued upgrade of existing balances and customers' labs as they want to comply with things like minimum weight requirements, et cetera. So I think it's supporting our ongoing growth in China in the Lab business in 2026, but it's not a huge step change that comes all at once.

Our next question comes from Michael Ryskin from Bank of America.

Congratulations on the quarter and the guidance. I want to discuss the reshoring or onshoring opportunity, which you've mentioned several times before and brought up again today. Could you provide an update on that? Have there been any changes in discussions or in tone? I understand it's still early, but what is your sense of the timing? Are we looking at the beginnings in late 2026, or is it more of a 2027 or 2028 situation?

Thank you, Mike. There is definitely a lot of positive news out there. When we consider our product portfolio, nearly 50% is dedicated to manufacturing and about 20% to 25% is for quality assurance and quality control. With the trend of reshoring and onshoring, especially in the pharmaceutical sector, it's important to note that these factories still need to be constructed. Our portfolio plays a critical role in facilitating that development. We view this as an opportunity that will largely materialize in 2027 and beyond. It’s crucial for us to engage in discussions with our current customers to ensure they are informed and consider us as their preferred supplier when planning additional facilities in the U.S. This trend is not limited to pharmaceuticals; sectors like battery manufacturing present opportunities as well. Overall, I foresee a lot of promising prospects in the coming years related to reshoring, where customers are aiming to build redundant setups to mitigate risks from previous arrangements. While I believe this is a good opportunity for the future, we are not anticipating it to significantly drive growth in 2026, as it remains too early to predict.

Okay. That's helpful. And then I want to touch a little bit on Europe. It feels that that's been doing a little bit better than expected. I think it stands out a little bit more for us the last couple of quarters despite tough comps. Can you just talk about what you see driving that on the ground there? And how sustainable that is going forward?

Yes, I'll address that. As I mentioned earlier, we approached this quarter with some caution regarding Europe. We take great pride in our European organization. However, the European economy has been softer compared to other regions recently, with PMI figures dipping into the low 40s at times. Despite this backdrop, we have performed exceptionally well, thanks in part to our strong organization and our Spinnaker program, which has enabled us to operate more directly in Europe. This strategy has helped us to gain market share annually. In the fourth quarter, I want to highlight the impressive growth of our Product Inspection business, which has aligned with trends we've noticed in other regions. Our recent innovations have been well-received, especially targeting the mid-market segment, where we are performing strongly. Overall, we're competing effectively across other product categories, although some regions are facing more challenges.

Our next question comes from Catherine Schulte from Baird.

Maybe just on service. I think you said up 8% in the quarter, 6% organic. What's the outlook for that side of the business in '26, both including and excluding acquisitions?

Yes. Do you want to take it?

Yes. So yes, you're correct, Catherine. So we grew 8%, like looking at my notes to make sure I got it right. We grew 8% in the quarter, 6% organic. As we kind of think about next year, we're thinking about mid- to high single-digit growth overall for the business for the first quarter in the full year. And when you look at the first quarter, there's some acquisition growth in that. So Q1 would be more mid-single digit. I think the full year probably still rounds to mid- to high single digit. And as we've talked about in the past, we just continue to see Service as a great opportunity. The team kind of recently celebrated the fact that they achieved $1 billion in sales for the first time. And that was a nice milestone. It's a business that we've been really focusing on in terms of trying to penetrate. I think you're familiar, like if you look at the serviceable iBase that we have available to us as an opportunity, it's about $3 billion. So we penetrated about 1/3, and we continue to see opportunities to go after that. And as we do that, we have been putting additional resources into that business, and we continue to be optimistic kind of going forward for the medium to long term here.

Okay. Great. And then for China, another quarter of modest growth there in the fourth quarter. Sounds like maybe some easy comps in Core Industrial and Lab about flat. Can you just unpack a bit more what you're seeing in that market and the outlook for Lab versus Industrial in the low single guide for the year?

Yes. Yes. So China overall came in as expected. We're pleased with that. Yes, we recognize that Industrial had an easier comparison, but we'll still take it. They actually had quite strong growth in the quarter. When we kind of came out of the budget toward last year, kind of we were in China in September, one of the takeaways for me was you could just feel that there was a lot more positive energy coming out of our Industrial team. So it's really kind of cool to actually see it translating into results here. So I think they're doing very well there at the moment, and that's good in the context of an economy that still has some challenges. And when you kind of cut through and look at the markets, one of the markets that really is doing better there is the pharmaceutical end market. We see that in both sides of the business. Maybe the one area that is more challenging is on the chemical side. And for us, chemical means mostly specialty chem, but that's a more challenging end market at the moment. But when we look forward to China for this year, we're still looking to guide in that low single-digit range for Q1 and for the full year. Right now, I'd probably think Lab and Industrial will probably both be in that kind of a range. Maybe some quarters better than others, depending on how things play out here a little bit. But big picture, I think we've had at least a year of things have moderated there. We've had some modest growth. I think it's a good base, hopefully, to now grow on. We're not building anything too significant to get over our skis. As we know, things in China can change quickly in either direction, but hopefully, we'll start to see things pick up at some point. And I think longer term, we still feel very optimistic. I think when you look at like the 5-year plan, and you look at all the investments going into the pharmaceutical industry and life science industry in China, it's very encouraging. And then you look at some of these trends about GLP-1s and the number of companies in China that are investing in that, it's also a good opportunity, just as an example. So I think our team is well positioned for that. As you know, we have a really great China for China story with us making most of our products in China for China, and selling mostly to Chinese private companies. I think that's just a good setup for us. And we've always performed well there relative to the market.

Our next question comes from Luke Sergott from Barclays.

I just wanted to kind of touch on somewhat more of the pharma side and also the ANG weakness that you talked about. And also, I guess, part of that in 4Q was the biotech weakness as well. So we're starting to see some green shoots in biotech. Pharma is doing a lot more M&A. And I know that it's probably going to track a different cycle than obviously the clinical research. But how are you guys thinking about when that funding starts coming back? And where in that cycle would you guys start to see some of the pickup? Or if this biotech or like the early-stage pharma where you're seeing weakness now is more just associated with kind of the academic funding environment?

Yes. I'll take that. We are quite excited about the overall biopharma market, particularly the biopharma processing activities, as Shawn mentioned regarding GLP-1 and similar products. This is where we see good momentum globally. This area serves as a significant growth driver for us. Regarding academia, government, and biotech, our exposure in that sector is relatively limited, primarily within liquid handling and pipette sales. We are not particularly prominent in that segment, and it's difficult to predict when we might see improvement there. It largely depends on the return of substantial funding to biotech and academic sectors. We would likely notice an uptick first in the pipette business, which, as of Q4, remains somewhat pressured and has seen a slight decline. We will need to wait and see when the funding resumes and if we observe increased momentum. The pipette business is our main indicator in this case, though it's a smaller segment of our overall operations.

Got you. And then one for Shawn. Regarding the gross margins, I understand that the tariff environment is very fluid for you. Generally, we’ve observed a decline in gross margins across the industry. Is there a situation where your efforts to mitigate tariffs, aside from pricing, are ongoing, and you're feeling pressure from your suppliers? Is there going to be a timing mismatch in when you can pass these costs on to your customers? I'm trying to understand how this will ultimately play out for you, or if you feel that you're currently in a position where you have to absorb the costs until things stabilize.

No, we're actually managing input costs quite effectively. The SternDrive program has significantly contributed to this. It incorporates advanced digital capabilities, allowing us to assess appropriate cost levels, which we refer to as should costing. This helps us identify potential opportunities within our cost structure. However, the already complex environment due to tariffs has become even more challenging because of substantial currency fluctuations in the latter half of the year. As I mentioned earlier, this situation poses approximately a 70 basis point headwind to our gross margin in Q4, which we expect will carry into the first half of next year. Additionally, while our recent acquisitions are satisfactory from an operating profit standpoint, they present some unfavorable mix effects that impact gross margins. These acquisitions were mainly distributors and service businesses, leading to smaller incremental product sales. When we filter out the effects of foreign exchange and acquisitions, organic gross margin declined by 20 basis points both for the quarter and the year, despite experiencing a significant headwind from tariffs—190 basis points in the quarter. Throughout the year, we worked to mitigate these challenges, particularly with the Swiss tariffs, which increased to 39% that we had to absorb in Q4. The reduction to a 15% tariff rate on Swiss imports will primarily benefit us in 2026, with some residual effects possibly impacting early Q1 due to pre-existing inventory. I hope this clarifies the situation a bit.

It does.

Our next question comes from Tycho Peterson from Jefferies.

I wanted to dive in a little more on the industrial strength, Product Inspection. Shawn, I appreciate your comments that some of this is new product intros and opening up the mid-tier market. Is there any way to kind of delineate how much of this is kind of broader market recovery versus actually opening up new markets? And then I know in the past, you've talked about replacement cycle here, in particular, the industrial portfolio well positioned. Is that business benefiting at all from replacement cycle at this point?

I'll take it, Tycho. The growth we are seeing in our Product Inspection business cannot be attributed to any underlying market recovery or strength. In fact, we believe the food market is still facing significant pressure. However, we are well positioned with our portfolio and the innovations we have introduced, such as advancements in x-ray detection and injection weighing, and there is more to come. We have a clear plan to not only dominate the high end but also target the mid-range market, and that strategy is proving successful. I would say the growth is primarily driven by innovation and our reputable performance. When it comes to the installed base and the replacement market, we are noticing aging across the board, not only in Product Inspection but throughout the portfolio. There have been about two years of subdued replacement activity, and picking that up requires more certainty in the market and greater confidence among customers to invest. Customers cannot delay indefinitely, but once the market stabilizes and there is more clarity, we expect a gradual recovery in the replacement business, returning to more normal levels and potentially even exceeding them. However, this will not be sudden; it will be a gradual resumption of the replacement business.

Okay. That's helpful. And then following up on the pharma onshoring, reshoring comments earlier, I appreciate that's more of a '27 and beyond story. Fair to assume, Lab will see that later, but maybe you'll see it on the Industrial side earlier, weighing in dimensioning for transport, logistics, things like that?

Yes, that's a good way to think about it. As you know, for onshoring and reshoring, we collaborate with industrial partners and automation solution providers that utilize our equipment. I believe they will begin to ramp up as they get ready for manufacturing solutions, automation lines, and everything necessary, including our own products for production. The Lab and the QA/QC products that we provide for these markets will probably follow a bit later.

Okay. And then maybe just one last one on bioprocessing. I know it's a smaller part of the business. Maybe just touch on what you're seeing there? How do volumes look? And what are you baking in this year?

I'm sorry, Tycho, can you repeat the question?

Just bioprocessing, and consumables, single-use. Can you just talk a little bit about volumes and what you're baking in on the bioprocessing side this year?

We did not include specific guidance for it. However, in bioprocessing, we experienced a very strong fourth quarter, particularly in the Americas, where U.S. bioprocessing performed especially well. The single-use market also showed strong results in that region. We view this as an above-average growth driver in the Lab business and feel optimistic about the momentum that will carry into 2026.

Our next question comes from Doug Schenkel from Wolfe Research.

So I guess another question on Lab. I think in Tycho's last question, he got at the bioprocessing component there. But again, Q4 results came in pretty well ahead of estimates. You grew solid mid-single digits on a really tough comp, and you accelerated on a 2-year stack basis. What would you call out as driving the underlying improvement? So not just in process analytics and bioprocessing, but more broadly, what's driving underlying improvement? Did you see any signs of budget flush? And then I'm just kind of underlying in there, was there anything that you would call out in terms of just the change in trend in key end markets?

Yes, Doug, regarding the overall pharma and biopharma market, much of it is focused on biopharma processing, particularly in process analytics. In terms of budget flush, we have observed some, but it's challenging to quantify exactly how much. However, we did experience improved momentum towards the end of the quarter, suggesting a budget flush, which also impacted our Lab portfolio. If we consider our involvement in the Lab space, it's closely tied to our robust software solution, LabX, which enhances connectivity across our product range in both R&D and QA/QC labs, enabling our customers to automate more workflows. This trend supports our competitive edge and drives momentum. Our strong presence in this sector allows us to invest in automation in both Industrial and Lab areas, contributing to our increasing traction in the market.

Our next question comes from Dan Leonard from UBS.

I want to revisit, Patrick, the comments you made on your emerging market view. You commented that you have an expectation for above-market sales growth from emerging markets. And I want to clarify, does that comment include China? Or were you speaking to emerging markets outside of China?

Yes. A very good question, Dan. Yes, and thanks for that question. I think it's an important one. We really speak about outside of China. So we expect for the emerging markets, which we also said, in the meantime, make about 18% of our total revenues versus China is like 15% or 16% of total revenues, but above average growth and above corporate growth rate is specifically pointing towards the emerging markets ex China.

Appreciate that clarification then. And then what is your updated view on growth in China over the medium term? Is that fleet accretive or fleet neutral?

Yes. So we're not necessarily formally updating guidance on China. I think we are very optimistic still about the medium to long term. We clearly acknowledge that it doesn't need to grow at the rates that it grew in the pre-COVID era. The last time we updated our algorithm for growth, we were kind of looking at high single digits for China. But sitting here today would be very comfortable if it was mid-single digit with our ability to still hit our 6%-plus long-term sales growth algorithm. And just as one example, the emerging markets outside of China are now bigger than China, and we kind of see a lot of growth opportunity there, but there's also a lot of other things going on inside the company that we feel good about.

Our next question comes from Jack Meehan from Nephron Research.

I had a couple of questions on core industrial. The first is called out seeing some signs of life on the PMI side. I was just curious in that context, can you unpack the first quarter guide? I think you're assuming flat growth. Is there some timing dynamics going on? Or just piece those together for me.

Yes, you're correct. It is indeed a slight decline from what we experienced in the second half of 2025. Looking at our businesses, this particular segment is more susceptible to economic fluctuations. The recent PMIs show positive trends, but there is typically a delay before we see any impact on our operations. To remind you, around 60% of our core industrial sales are directed towards the pharma, biopharma, food manufacturing, and chemical sectors. Among these, the chemical sector has been facing more challenges this year, and we anticipate this pressure will persist into Q1. As we start the year, we expect companies to be more cautious with their spending. We usually maintain about 1.5 months of backlog at any given time. This is how we approached our guidance from last quarter. We have communicated that we wouldn't be surprised if the year begins a bit slower, and that is how we currently feel.

Got it. Okay. If we continue to see positive trends with the PMI, can you discuss what the drop-through is? Specifically, if we experience incremental organic growth, what would the flow-through be on the margin line?

I think on the core industrial side, it's going to be right around corporate average. It depends, of course, what part of the portfolio you're in. But like if you're into the part of the portfolio that's really serving the opportunities regarding automation and digitalization, which is the faster-growing sector, that's above corporate average. But some of the stuff that's a little bit more cyclical tends to be below corporate average.

Our next question comes from Josh Waldman from Cleveland Research.

One for Shawn and then one for Patrick, I think. Shawn, can you talk through how you're thinking about the organic growth progression through the latter 3 quarters of the year? I guess, are you factoring in a larger than normal ramp off of the Q1 to get to the full year? And then on the embedded caution to start the year, I guess, are you seeing this in the order book when you consider normal kind of order seasonality for January?

Yes. So maybe I'll take the first part of the question first. So I think if you look at our ramp up, it's not like a significant ramp. Yes, we're going to be down a little bit organic volume in Q1 per our guidance. But if you, like, look at the second half of the year, it probably implies something in the 2% kind of a range in terms of organic growth. Now in the second half of the year, we'll have a little bit less pricing and a little bit less acquisition benefit. So that number might not be as high as just simply adding the increment of organic volume. But that's kind of like how I would probably see it sitting here today. But certainly, I wouldn't want to get into specific quarters. I think every year is the same, and this year is no different, and probably even has a little bit less visibility as you started, just given all the volatility from last year. But we're going to learn a lot more here over the next couple of months. And I think once we get through the full quarter, we'll have a much better perspective on what Q2 looks like, and what the rest of the year looks like. And then in terms of orders, we never comment on months and particularly just in Q1, I mean, January is always a goofy month, right? February is a goofy month. You have Chinese New Year timings. Seasonality-wise, these are lower months in the year, so we'll see. And like I said before, we only sit on about 1.5 months' worth of backlog. So we'll see how it plays out. And we're executing well. We feel really good about how we're positioned. We have, I think, a really good balance of looking at growth opportunities and also keeping an eye on productivity topics, and we'll continue to have that balance going forward.

Got it. Okay. And then, Patrick, on service, I think you said the group reached $1 billion in sales. Can you remind us how that's dispersed across the Lab and Industrial segments? And then in the past, I think you've talked about service as an area of strategic investment. I wondered if you could talk through what you see as the near-term opportunities in service to drive incremental share growth on the hardware side?

Yes. Very good. Thanks, Josh. Yes, look, I'm very excited about services and also the growth rates we have seen over the last years. We made a really conscious decision to overinvest in services as well and drive that opportunity. As Shawn said, we currently cover about 1/3 of the installed base. There's ample of opportunity for us to continue to cover more of that with strategic programs. We are making good progress. When you think about the breakdown between Industrial and Lab, for example, it's almost a longer revenue line because in Industrial, you would have to differentiate between, for example, PI where you have a stronger service business versus core industrial as a bit less. But I think it almost balances it out across the portfolio in terms of the contribution and comparison to the product business. But we are very excited about where we stand. It's a great strategic program for us as a company, and we are, of course, super proud that the team achieved this major milestone of $1 billion revenues in services.

That concludes the question-and-answer session. I would now like to turn the call back over to Adam Uhlman for closing remarks.

Thanks, everybody, for joining us today and for your excellent questions. Please feel free to reach out if you have any follow-ups. And have a great weekend. Take care. Bye.

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