Mettler-Toledo International Inc. (MTD) Earnings Call Transcript & Summary

Great. And good morning. This is Jack Meehan from the Barclays life science tools and diagnostics team. Pleased to be joined next at the virtual conference with Mettler-Toledo. We have CFO, Shawn Vadala as well as Head of Treasury and Investor Relations, Mary Finnegan. Shawn, maybe I'll just turn it over to you for some introductory comments.

Yes. Thank you very much, Jack, and thanks for hosting us today. Hey, we recognize there's a lot on the minds of investors these days. So rather than reflecting on 2019 or topics like that, maybe we can just jump into Q&A and get into more today's topics.

Great. Well, let's focus on the here and now with the coronavirus obviously top of mind. How do you -- how are you managing the business given some of the disruption? And how are you thinking this could impact demand in the first half of the year?

Yes. So -- and maybe, Jack, I'll make a few general comments about coronavirus, and then maybe I'll break it into like 3 different pieces in terms of like how we're thinking about the situation. So general comments first. So obviously, a very fluid situation, very difficult to estimate. As you can imagine, the overall situation continues to evolve and change very quickly. And the spread of the virus has also obviously created a lot more uncertainty since our earnings release last month. As we think about the situation, there's -- we think about it in terms of 3 different aspects. The first would be our supply chain in China. The second would be customer demand in China. And then the third would be customer demand outside of China. So maybe I'll just kind of briefly make a few comments on each one of those categories. So in terms of supply chain in China, overall, we feel pretty good about the situation in terms of our production capacity and in terms of our end-to-end supply chain processes. Our production workers are back to work and we're currently around full capacity. As I mentioned, things can change quickly and it's a very fluid situation. When we see situations like North -- I mean, I'm sorry, South Korea just in the last few weeks develop, it just shows you how intricate and interconnected the global supply chain can be. Fortunately, for us, we don't have any significant exposure to electronic components, but of course, created a couple of topics for us to address. But to me, I just more so highlighted as just an example of how things can change very quickly from day to day on the global supply chain, despite the fact that today, we feel actually pretty good about the overall situation. I think another thing when we reflect on the supply chain, it is one of the things that we can control better than customer demand. And we tend to feel better about the things we can control. And I do think we also benefit from our very strong leadership team as well as our organization in China. We've often talked about the strength of this team in the past. And if you even just look at the tenure of our Chinese leadership team, I think the average tenure with Mettler-Toledo is over 15 years. Many of these leaders managed our business through the SARS situation. And so ever since the first conversations on day 1, I think they were certainly familiar with how to handle such a situation and immediately launch into business continuity planning. The second part of the situation is China demand. This one is obviously a little bit more difficult to assess at this time. When we provided guidance a month ago, we had a handful of different considerations. Overall, we assumed that we would lose some working days related to the different government restrictions, whether it's regarding travel or the ability to not work in the office or in the production facility. And we also had assumed that there would be lower productivity from a customer perspective given the lack of customer-facing activities after February 10. We didn't have any specific algorithm in terms of like exactly what the productivity would be by day. But overall, we did feel like the month of March would be a very important month and that we would start to make up for some of those lost workdays and lack of productivity in the month of March. So accordingly, for us, March is going to be a very important month. And as I said before, the situation continues to be very fluid and difficult to estimate. When we do look at China, though, we do want to also highlight, we also benefit here from our e-portals. We benefit also from our telechannel. We have over 100 people in inside sales, telesales and telemarketing, we have been working with this group throughout the Chinese New Year and kind of preparing them to launch various marketing campaigns right after February 10. And I think we also benefit in China as we do globally from the diversity of our business, whether it be the diversity of our customers, our products or even the applications in which we serve. And maybe a final comment on China. We did expect when we provided guidance last month, that the government will stimulate the economy and we would anticipate some benefit during the second half of this year. At this time, it's still unknown in terms of the timing and the magnitude of such a stimulus, but we would certainly expect there to be stimulus. I think they've been vocal about that. And when they do, we would expect to see some form of benefit in both our laboratory as well as our industrial businesses. In terms of demand outside of China, this is clearly a very fluid situation as well. We did not anticipate the spread of the virus outside of China in our previous guidance. We're obviously very alert to the situation. We're closely monitoring it. And we're also initiating various different business continuity plans in different countries around the world, very similar to how we approached the Chinese situation early on. I would say that there's certainly different potential outcomes with the spread of the virus. But overall, I would say it's too early to judge for us at the moment. And March will also be, I think, a very important month to see how things develop, and expect we'll have a little bit of a better handle on the situation as we kind of finalize the quarter. As we kind of look at the different potential outcomes, obviously, a worst-case scenario would be if there were -- if this was to trigger a potential global recession. As we look at the different economies around the world, Europe has had weaker PMIs for the last couple of years. We've generally felt like Europe, the European economy has been good enough, good enough for customers to stick to replacement cycles. A key question for us at the moment is going to be whether this situation causes customers to delay purchasing activities or replacement cycles, or as I mentioned before, even worse, whether it's the type of thing that could trigger a potential recession. But of course, the situation is also not limited to Europe. The risks certainly are also there for the countries outside of Europe as well as the global economy. And I think in the short term, there's also going to be different risks in terms of the lack of access to customer facilities and topics like that. For us, most of our business tends to be lower price point business. But you can imagine, as you get into more complex or higher-priced products where there's installations, we could have some short-term topics in terms of access to customer facilities to complete installation work and things like that. And those are all things that we're carefully monitoring. But again, it's too early for us to be able to judge the situation.

Great. Thank you. That was really well put and comprehensive. So I appreciate that. One -- maybe just building off of that, you talked about kind of the diversity in terms of the ways you approach customers, whether it's the telechannel or e-portal. One of the other focus areas has been with Spinnaker and the way you deploy these field resources. Does any of the economic uncertainty change the way you think about the investment in terms of SG&A and how you go about that?

No, I don't think so. I mean one of -- so within Spinnaker, and I can talk a little bit about Spinnaker in general, and then I can maybe even talk about how we redeploy resources in terms of the field. Maybe I'll just answer your question quickly, but then I would like to kind of maybe come back to Spinnaker in general because I think it's a good way to think about how we're investing in the business and maybe also have been somewhat resilient over the last couple of years despite some of the more moderate PMIs. But in terms of like investments, I mean, the last wave of investment, like, so we have a Field Turbo program and then we have a [ Shift 5 ] program. These programs are -- have been designed to allow us to add resources to pursue under-penetrated opportunities around the world. Each wave or each year of Field Turbos and [ Shift 5 ] have had maybe different flavors to them. In each case, we're pursuing under-penetrated opportunities, but some of them are maybe more geographic-focused or -- but in this year, I would say it's a little bit more channel-focused. So we do have a little bit of benefit here because the focus entering 2020 was on our telechannel. So we were already kind of in that mode entering into 2020. So of course, we're going to continue to pursue that. But otherwise, in terms of like how we add positions to the field, I think it will be also kind of a reflection of our assessment after Q1 in terms of how we see the business coming in and making sure that we feel like there's still good opportunities there to pursue. But maybe I -- if you allow me, maybe I kind of go back to Spinnaker for a couple of minutes as well too, because I do think that this is an important differentiator for us. For us, on Spinnaker, we're -- we've been at Spinnaker for over 15 years. This is our supply -- I mean this is our operational excellence program for sales and marketing. Every few years or so, we kind of come out with a new wave of Spinnaker that kind of builds on the previous wave. And the latest wave has been very much enabled by data analytics, and I think it's really had -- we've had good traction on it and I think we've also seen excellent results in the business. And I think our industrial business was a very good example over the past year or so. And we've been using those data analytics to do everything from redesigning our territories in terms of like the accounts that we assign to our sales force. We've used data to also provide them opportunities to pursue, whether they're cross-selling opportunities or whether it's new opportunities based upon sources of information that we have externally. And then we provide them and summarize those opportunities into profiles that describes the opportunity in a great amount of detail that then allows them to have a very good chance to know where to go and how to pursue that opportunity. And then we supplement that with a lot of different tools, whether they're e-tools or whether they're value-selling guides. And you can imagine, in our industrial business, in the past, a salesperson might have a geography and they had a lot of discretion in terms of where they would spend their time and where they would -- and which accounts they would call on. And in the industrial world, you can also imagine, there's a lot of diversity in terms of different weighing applications and where they could spend their time. With this program, we're really directing them towards what we believe is our most attractive opportunities. We're intentionally directing them towards end markets like pharma, like food manufacturing and chemical. And as a result of that, I think we've seen a lot -- excellent results in our industrial business over the last year or so.

Yes. That's a great point. Maybe turning to some of the customer segments. From -- looking at it from that lens, the Lab business, it's been pretty consistent, durable growth driver for the company. You talked about the potential opportunity for -- to benefit from stimulus here. As you look across the product categories, where are you seeing the best growth? And is there anything notable in terms of innovation and new product launches that continue that above company growth trend?

Yes. So overall, very pleased with the Lab business over the last few years. We -- like a lot of our businesses, we see really great execution. But the Lab business, I would say, also has a really robust product portfolio. We've come out with a lot of new stuff over the last couple of years, and that's -- it's also typical for us. We tend to have a good cadence of product innovation. We've always understood the importance of innovation in the lab space. It's very much appreciated by the customer. It helps drive replacement cycles, but it also supports our pricing premium. So I would expect that we'll continue to see good innovation. We continue to invest a little bit more there in terms of a percentage of sales, in terms of R&D, and it's something that's kind of important to us overall. In terms of the portfolio, probably one of the -- to me, the best things that I observed in 2019, as an example, was just the breadth of the growth in the portfolio. It's been really, really impressive. Yes, products that have higher exposure to biopharma like pipettes or process analytics are, of course, growing well. But you also see a lot of our traditional bench top instruments across the analytical instrument portfolio or even in automated chemistry performing extremely well also. And so the breadth of that has been a very impressive curve. And as you know, we also cover up to 10% -- I mean 40% -- I'm sorry, up to 40% of the instruments on a laboratory bench, and we connect them with our LabX software, which helps customers address topics around data integrity. And I think LabX has also been a differentiator here in the background.

Great. And maybe next, turning to the product inspection business. I had a couple of things I was hoping you could address is, first, where you feel like you are with some of the big packaged food manufacturers in terms of their spending cycle and when that might be able to turn around. And then also, you've made some investments of your own, notably the Tampa facility, I had a chance to tour. How is that site doing in terms of scale-up and utilization?

Yes, sure. So in terms of recovery, that one is certainly difficult to tell, and I think the coronavirus is going to probably muddy the water a little bit further on that business. On one hand, you can imagine that people are buying more packaged foods. On the other hand, you can imagine that maybe food manufacturers may start to restrict access to their facilities, which could result in projects being delayed. So a lot of questions there for us in terms of the current situation. We do start to benefit from easier comps in this business as well. But I think the most important thing is just to look -- take a step back and look at how well we're positioned in that business. I think we're extremely well positioned with our market share, our -- the breadth of our portfolio. Our service business is a competitive advantage. We've talked about in the past that we would estimate that our service business in the United States for product inspection is about 7x larger than our next nearest competitor. So all those things really make us feel like we're well positioned. And then when we look at the customer need, we feel also equally strongly that there's a need here. I mean the focus of food safety and brand protection as well as topics like productivity and quality and uptime are all very important to these manufacturers. And as a general rule, they -- a lot of the global companies in particular are looking for global partners in this regard. So I think that there's a need. We've talked over the last few months with different people about an article that came out in the Washington Post. I think it was around the beginning of January. It was talking about food recalls. I think with a large focus in the United States at a lot of food manufacturing companies. And from our perspective, it was a great testimonial to the importance of having this type of equipment, the importance of making sure it's installed properly and the importance of making sure that it's being maintained and serviced properly. And so from our perspective, there's clearly a need there. It's just difficult to tell when these global rollouts will start to come back and occur. I mean as you know, this industry has been under a bit of pressure in the last couple of years. And maybe one final comment on the business before I talk about Tampa is we've often talked about the opportunity to penetrate emerging markets, and we still feel very strongly about that. It's not just China. I mean China -- the product inspection business might be like 6% versus our global average of 16%. But I think this clearly applies to all other emerging markets, and we continue to look at those opportunities and our product portfolio, our positioning and all the other elements to be successful to really penetrate this with local manufacturers. But it takes time because a lot of the regulations are not driven by governments. It's driven by industry. And so it's really -- it will take time for these companies to really embrace and focus on their own brands and the importance of physical contaminants. In terms of Tampa, overall, very happy with Tampa. It was a very strategic investment. I think it's very unique in our industry. I think it's very impressive from a customer experience perspective. We have -- I think it's over a few hundred customer visits a year there. And so I think it's going to work out very well here in terms of not only the long term, but even the short and medium term. Obviously, there's room for more capacity and productivity, but I think we're pleased with where we are. And I think it's also important to reflect that we combined facilities here, so there were already synergies kind of entering into the situation. And we had a situation in our previous facility where we didn't have enough space, and so this was helping us kind of keep up with our current volume of business.

Yes. All good. Maybe turning to the income statement. Next thing I want to talk about is just the margin profile of Mettler-Toledo. You've been pretty -- pricing is a lever. Your productivity is a lever. But you also have some of the best margins in my coverage as I just stack them up. So I'd be curious to get your thoughts on the pushes and pulls. And do you think there's ever a point where margins start to lever -- level off?

Well, in the foreseeable future, we still feel really good about our margin story. We recognize that we've had a very strong track record in the past in terms of our ability to expand margins for a prolonged period of time. But like you said, I mean, if you look at the programs that we have in place, I think they all have a lot of strong momentum. Of course, it starts with organic growth. And I feel very passionate about our organic growth story, especially given the highly fragmented nature of our markets. I mean we often say that we -- the market leader, we would estimate about 75% of the time. But our market share is probably more likely in the 25% plus per share. So lots of opportunity there to gain share. But then if you look at the programs, like pricing as an example, I think there's still plenty of runway in pricing. We continue to innovate. We're piloting some very interesting things that really get into more sophisticated topics like digitalization, the ability to provide more real-time guidance to the sales force at the time of a quote. Stern Drive, as you know, we've launched in the last few years. There's, I think, over 400 projects or so under the umbrella of Stern Drive, looking at a wide range of things from material cost savings, to manufacturing productivity, to back-office productivity. And these programs are all enabled by our Blue Ocean program as well. And so I think I see all that stuff coming together and also having very good momentum. And I think there's also a mix advantage that we have, too. As we continue to go forward, we continue to see our higher-margin businesses typically growing faster than our lower-growth margin businesses, and that will have some natural benefit to us as well.

Great. And then maybe in the last minute, I wanted to conclude with capital deployment. It's been a while since you've done a notable tuck-in deal. Does any of the market dislocation change the way you think you can execute on the funnel? And then can you alter the pace of your buyback at all given some of the stock price pressure? Do you feel pretty good about kind of the consistent approach?

Yes. So on the acquisition side, I think the short answer is that no changes on either one. On the acquisition side, we still like our organic story, but we also like acquisitions. We just have a very tight definition on strategic fit. I would say that maybe pricing gets a little bit better here, but that's also never really been our core issue. It's just really having the right fit. And so I think if we have the right fit, you'll continue to see us execute. And then a lot of the companies that we'd be interested in tend to be private companies, and so there's always a timing issue there when it comes to private sales in terms of their willingness to sell. And then in terms of the share repurchase program, as you know, we've never tried to time the market in the past, and we're not going to try to time it at this point either. We're committed to increasing our net debt-to-EBITDA ratio to 1.5x by the end of the year. And I think you'll see us kind of try to stay around that level going forward, and in the meantime, be very consistent with the execution of that program.

Great. Well, thanks for all the thoughts, Shawn and Mary. Appreciate it. And appreciate you sticking with us in the new format.

Okay. Thank you very much, Jack.

Take care, Jack.

Talk soon. Bye.