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

Hi, good morning, everyone. This is Derik De Bruin, the Bank of America Life Sciences and Diagnostics Tools analyst, here with my colleague, Mike Ryskin. The -- welcome to the 2020 Bank of America Healthcare Conference, Virtual Vegas as we're calling this since we're doing this a little bit remotely, given the unusual circumstances we're facing. We appreciate you all participating. We appreciate everybody that's on the line. We just want to say thank you in advance for your patience and for doing this. And let's talk to our next company, which is Mettler-Toledo. Here with us today from Mettler-Toledo is CFO, Shawn Vadala. Mary Finnegan, an IR, is also on the line to keep me honest. And so let's just get right into it.

I was looking at my question list from when I hosted you for a breakfast in New York on February 7, and then I realized that none of those are particularly relevant today on May 13. So you actually made me do work and go back and think of new questions. So the first one I want to start with, Shawn, is Mettler was one of the only companies in the sector that tried to put something in their Q1 '20 guidance on the COVID uncertainty. Can you sort of talk about what you thought was going to happen, how things unfolded by geography? I want to focus more on the top line at first, but we'll get to the bottom line in a minute.

Yes, sure. Hey, before I get into the details, thanks for hosting us today, Derik, and it's good to talk to you, and I hope everybody else on the call is doing well also. In terms of the first quarter, we kind of -- let me start with China. So we kind of entered the quarter thinking that China would be down mid- to high single digit. That was against 13% growth in the prior year, certainly had expected COVID to have a negative impact on China. But of course, there was a lot of uncertainty in terms of like what that impact would be. In the end, we were down 13% versus the previous year. There were really 2 topics that we were really having to focus on throughout the quarter. The first was our global supply chain -- our supply chain in China. And as a reminder, that's not only about China, but that's also a global topic, given that more than 1/3 of our manufacturing is based in China. And then the second element there is customer demand in China. So if we kind of like talk about the first element, in terms of the supply chain, we were very happy with the results out of our supply chain in China as well as globally. You might have heard us say that we were one of the first companies to be able to restart production in the middle of February in the province of Changzhou. I think it's a real testament to our Chinese organization as well as our global supply chain team. Overall, we were very happy with our on-time delivery performance in China and globally throughout the quarter. But the second topic was customer demand. And of course, we had a challenging start in the quarter in China with demand down with all the government stay orders. We were always counting on March to be an important month. March was positive. But frankly, it wasn't at the level that we needed it to be to kind of mitigate some of the lost demand that we saw in the month of February. We saw that more so on the industrial side of the business. But overall, kind of -- we kind of look for more favorable activity kind of as we enter into the second quarter. In terms of the other regions, we kind of saw 2 factors playing out there. First was that we kind of felt like there was a bit of a slowdown in export markets that sell to China. So this would be more of a topic for the rest of Asia Pacific as well as Europe. And then the second impact was obviously the global spread of the virus. So if we kind of like look at Europe, Europe -- as a reminder, we entered the quarter kind of expecting Europe to be slightly down, more so because we had a very strong comparison with 9% growth in the prior period. But by the time we got to March, we clearly saw the negative impact of the government stay orders and shutdowns in the region. And then in terms of the Americas, I'd say we had less of an impact of COVID in Q1 with maybe the exception of our product inspection business, which we saw kind of start to drop off towards the end of the quarter given difficulty in completing installations and accessing customer facilities giving challenges related to, again, government stay orders and as well as maybe some of the operational challenges of that customer segment.

Great. Great overview. So local currencies down -- were down 3% in the first quarter. Your 2Q guide calls for decline in the range of, I think, negative 8% to negative 12%. I guess what's embedded in this guidance? And that's also in the light that you've made a comment that China is actually expected to be up in the second quarter. So can you sort of walk us through your expectations in the second quarter?

Yes. Sure. So well, I'll kind of go through the different pieces. Maybe I'll start with the geographies and even start with China, as you say, and then I'll talk about some of the different product categories. So yes. So in terms of China, yes, we expect China to be up mid-single digit in Q2. We expect the Lab business in China to be up more like low to mid-single digit, where we expect the industrial business to be up more like mid- to high-single digit. On the Lab side, Lab was down like mid-single digit in Q1. Labs are back to work, but we're just not seeing the purchasing back to normal levels. And for us, normal levels would be like high single-digit to low double-digit kind of activity. On the industrial side, we feel like we see a little bit more benefit from pent-up demand. Industrial took a bit of a -- had a steeper decline in the first quarter. And I think we see a little bit of pent-up demand there in the second quarter. But overall, I think the team has done a really nice job there. I think they've done a nice job identifying growth opportunities and kind of pivoting during the first quarter and as we enter Q2. And I think not only in China, but globally, we continue to see the benefits of our diversity in terms of the products, our products, our customers, the range of applications we serve and our lower price points. If we look at Europe and the Americas, we kind of expect both of those regions to be down mid-teens with Europe maybe likely worse -- a little bit worse, and the Americas maybe a little bit better. I think both of those regions, we're going to see significant impacts from the government stay orders in both regions as well as specifically lab closures on the Lab side of the business. We kind of now kind of talk through the different product categories. On the Laboratory side, we expect Lab to be down low double digit. Lab's going to be particularly impacted by the closures in Europe and Americas that I just mentioned. And as I also mentioned, we expect to see some modest growth in China. We also think it might take a little bit longer for the non-Life Science labs to kind of fully recover and get back to normal buying behavior. On the industrial side, we see industrial down high single digit in Q2 with the core industrial business down more like mid- to high-single digit and the product inspection business down more like high single digit to low double digit. One of the interesting things that we've been observing throughout the situation is our core industrial business. And this is also kind of a trend we've kind of seen play out over the last 1.5 years. As we look at Q2, core industrial will benefit from some of these better results that we talked about in China, but it will be negatively impacted by Europe and the Americas. But this this kind of topic that I referred to is, you see, the industrial business also benefiting from an increased exposure to some of these essential businesses. We've talked a lot about industrial, and how it's better positioned towards more attractive customer segments. But you really see that in this crisis in terms of serving essential businesses, which I think has played out quite well for them. And that's not only Life Science, but also how they serve food manufacturing as well as elements of the chemical industry that are producing some of the hygienic products. And there's also been good innovation in our industrial business as well. But despite that, we're not immune to the economy, and we're clearly going to feel the effects of negative manufacturing GDP and delays in customer replacements in the second quarter. And then if you look at our product inspection business, these customers are actually doing very well in terms of their own businesses. If you think about it, about 70% of that business is sold into packaged food companies. But at the same time, these businesses are facing many operational challenges. And they're also restricting access to some of their facilities, which makes it a little bit more difficult to do projects or to do installations and things like that. But we certainly see more opportunity and upside kind of on the other side of the crisis in that customer segment. And then food retailing, which is 6% of our business, continues to be under pressure. We see that business down mid-teens in the quarter. Similarly, this business is doing well from its -- in terms of its own business with a lot of consumer purchasing in grocery stores. But at the same time, they're also pretty cautious about starting new projects or having visitors at their facilities during the time.

Great. And let's talk a little bit more about the China lab comment. Is -- I mean, is that just, as you said, just because you're less focused on more biomedical research and more pharma -- you're less focused on pharma and biomedical research in China than you are on some of the broader industrial labs or broader labs that are out there. Is that the chief reason why you're sort of seeing that bifurcation?

Yes. I mean I don't know. I mean we certainly -- I think we focus, certainly, on both. I think from a mix perspective, there might be a little bit of weighting, as you mentioned, but probably not too significant. We just haven't seen the purchasing behavior necessarily back to normalized levels. I think similar to the West, too, there also have been some challenges with closures and things like that. But in the second quarter, we certainly see things not coming back to, like, I'd say, full activity that we would normally see.

Got it. So that sort of leads us to the next point. On the call, your -- I think your base case assumption is that you're looking for a U-shaped recovery, 3Q looks a lot like the second quarter with a modest improvement in 4Q. I guess can you give us your thoughts behind your thinking? I mean I take whatever Mettler says very, very seriously, since you provide a lot more color than many of the companies and have a lot better visibility. So I'm -- your comments are a little bit more cautious, I think, than we've heard from the other players in the market. So I'd love to know what your sort of like thought process is.

Yes, sure. So I think an important nuance for us is that we certainly don't view it as an expectation or guidance for the third quarter. We really just share it as like this is how we are planning the business. This is our operating mode. And given all the uncertainty that we kind of see for the second half of the year as we kind of evolve from a health crisis into a global recession, we just feel like it's prudent for us to plan our business and kind of prepare for a more difficult third quarter than what maybe others are currently planning for or talking about. If you look at our business from the inside, I mean, we do have a short-cycle business, and it's going to be also difficult to judge some of these reopenings of labs. Another topic we talk about is pipeline development with certain parts of the business, even in the Lab business with like titration and having to get customers comfortable with methods sometimes, it takes a while to maybe nurture a sale. And some of those activities, even though we have had excellent contact with customers throughout the crisis, it's not so clear in terms of like what new capital they're all releasing for projects as well as what their decision processes are going to be during the crisis as well. And these are questions that make us a little bit more cautious for how we feel like we should be planning our own business as we kind of enter the second half of the year. But in the end, as you know, we always say, like, "Hey, we just need the economy to be good enough that people get back to replacement cycles." And so we kind of feel like a lot of our business is replacement. We do benefit from our lower price points. And so we feel positive that there will be recovery. It's just a question of timing.

And that's a great segue to my next question. I mean, if you go back, you look at the financial crisis and sort of the rebound in your business was quite a bit sharper and faster, I think, than some of the other companies that we cover in the space. Is that attributable, do you think, to your just your ASP of your instrument product and pent-up demand for that? And is that the sort of the same sort of situation you see unfolding for -- when we do get a rebound, that there'll be -- the lower-priced equipment will sort of come off and do much better and on a lower -- on a basic -- on pent-up demand? Sorry, I'm stumbling on my words before you.

No, no, no. That's fine. Hey, that's historically how things have played out, whether I go back to 2009, or whether I look at the downturn in China in like '13 and '14 and '15. Typically, we do see pent-up demand, and we see things come back pretty well. But every -- and I think, as you mentioned, I think we do benefit from lower price points. I think we benefit from diversity. But at the same time, too, I think we are deliberately also doing a lot of things analytically to identify where those opportunities are, and the organization has been extremely agile in terms of like refocusing and reallocating its energy towards pockets and areas of growth. For example, we're looking at every single segment in our portfolio at a like sub-segment level in terms of customer segment, and we kind of evaluate each segment in terms of its resilience to COVID, but also in terms of its recovery to COVID. So you can imagine you have different marketing focus and sales focus in terms of while you're in the middle of the crisis with resiliency, but then you have a different focus as you kind of look at which segments might have better recoveries. And so we do that not only from a marketing perspective, but also in terms of how we deliberately guide our sales force to those opportunities with some of the analytical profiles that we've talked about in the past.

Right. I mean I sort of summarize that to clients who sort of ask about Mettler's secret sauce. And I said like, well, look, I mean, when I first started covering the company and met Olivier for the first time, he was sort of pioneering Spinnaker. And I like to tell people that Mettler was big data before anybody knew what big data was, right? Sort of how I look at the company and sort of your success in that, being able to target these. Shawn, you already alluded to this to a certain extent, but your business is a lot less cyclical than it was in terms of the markets and sort of thinking about a decade ago. I mean if we go into a deep recession in 2021, it's like how do you think -- how resistant do you think your business is going to be? And so like how do you sort of see -- and what additional measures do you think Mettler will take to sort of mitigate that?

Yes. Hey, it's always difficult to speculate on that. I mean Olivier and I always say and as well as Mary that we like to tailor our actions to the situation. We don't have like necessarily cookie-cutter solutions on the shelf. I think we -- but we also demonstrate that we have a lot of agility, and we can act really fast when we need to. But you're right, I mean, in terms of like cyclicality, I think we're not immune to the economy, but we certainly are less susceptible. And I think there's maybe 2 elements to that. One is we definitely have a better mix of businesses. And -- but we also have better tools and analytics and change management capabilities that we also just talked about. And I think as we kind of enter COVID, we certainly have seen a lot of the benefits from investments on the sales and marketing side. And frankly, I think we've gained even more traction as we've kind of navigated the crisis and have been able to guide the sales force towards these more attractive opportunities that we talked about. But then even in terms of the mix, I mean, yes, we have more labs. We're now -- more than half the business is lab. But even on the core industrial side, we have just a much better mix within core industrial. And we've seen that play out over the last few years. With, I think, much better growth versus what you would expect when you look at these PMI statistics over the last couple of years. But you also, I think, start to look at decent growth. I mean decent results, I should say, in the core industrial business in the face of this global crisis. And I think part of that is that we've been able to reposition that business to some of these more attractive segments that I also mentioned that also happen to be essential businesses in the middle of the health crisis. And as well as our service business. Our service business is now 1/3 of our business. So I think for me, it's -- we're better positioned. We're not immune. And if we get hit with another wave or a deeper recession, I think you can expect us to be agile and react appropriately. But one the other things we've always tended to benefit from is our diversity that we talked about as well as these lower price points.

So client chiming in, wanting me to ask how much of your business is core industrial.

Yes. Sure. So core industrial is about 25% of our business, that's down from probably 30% about 10 years ago. And if you look at a geography like China, 10 years ago, core industrial would have been about 60% of our business and today it's down to about 40% of our business.

Right. And the same for product inspection, just how big of that – a big of chunk related to that.

Yes. It's about 16% or 17% of our business, and that's up from about probably 12% about 10 years ago.

Got it. So let's sort of move to the bottom line. You had sales down 4% in Q1, yet gross margins were up 50 basis points and operating margins were flat. So how did you accomplish that?

Yes. Hey, I think it goes back to this agility and resilience. I mean one of the things we've really seen throughout this crisis in the quarter, it's just the culture of the company just really has shined. I think for us, who have been here for over 20 years, we're very proud of our culture. But just to see people come together and focus not only work collaboratively, but like really execute under challenging circumstances with a lot of time on their hands, it's been really phenomenal. But if you look at like what drove like the margin story, it wasn't -- a lot of it was nothing new. Again, we had the programs entering the quarter, whether it be pricing or Stern Drive, I felt like we had really good execution on both of those topics we tried to communicate early on with the organization, the importance of staying disciplined throughout the crisis, especially on the pricing side, this was an area where we were very successful back in 2009 during that crisis. It's a different situation when it comes to pricing in this crisis. But in the end, there's still opportunities and discipline goes a long way. We also had some cost savings initiatives that we -- just part of our normal ongoing cadence that kind of came into the quarter. And then I felt like our Chinese organization was extremely proactive. I mean back -- I can remember back in January when I was having daily calls with them when their crisis started to break there. And very early on, they were bringing it to maybe where I could even ask about like, hey, here's how we're thinking about our cost structure, here's how we're -- and they were literally presenting things up very, very early on in the process. So it just shows you how proactive the organization is and how committed they are to these types of actions. And so we were pleased with it. And I think we kind of go into the second quarter, feeling good that we have some good programs in place for Q2 as well.

Perfect. Perfect lead-in. You're reducing second quarter operating cost by roughly 9%. I think the question I've gotten from investors like, wow, they're cutting that, that's going to be sustainable. Just think of the operating leverage when the growth returns. I think you said on the call that these were temporary measures and costs is going to come back in '21. Is that correct?

Yes. Yes, I think that's very important. Like we were very pleased with our ability to quickly address the situation. And as you said, cost would be down 9% versus the prior year, but they are temporary. And so we would expect those costs to come back in 2021. Hey, maybe there might be 1 or 2 things that from a discretionary perspective that we realize doesn't fully come back. But I can also imagine there would be opportunities for us to reallocate some of those 1 or 2 items towards either investments in growth or technology to continue to drive productivity and growth kind of going into the future.

You've suspended your buyback program for 2Q. We always get asked -- I always get asked by investors. It's like, well, is Mettler only going to buy back shares? Will they ever do a dividend? That inevitably leads to the question of like, why don't they split their stock, yada, yada, yada. So can you sort of like go through that whole series of questions? Because I know the answers, but the answers haven't changed in 20 years since I've been covering this company. So -- but let's just do it since I got a couple of questions.

Yes. So I hate to disappoint you, but the answer is still not going to change, even in the middle of these circumstances. But hey, we still love the share repurchase program. We feel very strongly about it. We think it's a really good way to return capital to shareholders. We very much do think that we're going to restart the program, hopefully, later this year when there's less uncertainty in forecasting, I mean, that was clearly the primary reason why we suspended the program was just a significant forecasting uncertainty and us just kind of acknowledging that. But I think you'll see us get back to our normal cadence of daily purchases, not timing the market and targeting a 1.5 leverage ratio going forward.

Great. Have you -- are you worried at all about sort of like some of the geopolitical things that are going on? I mean, obviously, trade tensions are picking up again. And there is -- there -- people are sort of moving to more protectionist areas. You've done some work to protect your supply chains, but I mean, are you concerned that you might get some blowback from pushing to more local, buy more local in China or some of these other regions? And I guess, what's your sort of thing on the geopolitical and the trade tension renewals?

Yes. I mean there's a lot of different pieces to that. In terms of like the China local topic, I feel very good about that one. We've been there for over 30 years. We manufacture a lot of our products locally. We're very much viewed as a local company. Almost all of our leaders are Chinese with the exception of one senior leader who's in R&D. And so -- and even to the extent we import in China, it tends to be higher-end precision instruments that are coming out of Switzerland. So I just -- throughout the whole trade tensions over the last couple of years, we really haven't picked up on any particular concerns there. We do import into the United States, export from China, about $100 million of product. If tariffs were to go up there, that would be, certain -- something that would be unfavorable to us. But I think a bigger challenge would be the risk to the global economy. Can the global economy really sustain a trade war or an escalated trade war at this time? I mean we -- the last trade war was happening while the economies were generally very strong. It could be a different situation. And so I would be more concerned about the impact on the economy more than anything else.

And final question. Shawn, I normally ask what's misunderstood about Mettler, but I'm not going to do that, different times, different questions set. But the question is like what do you think the long-term implications of COVID-19 will be? Is there anything that -- about how Mettler is going to change the way you do business or how you think your customers are going to change the way they're doing business that you think will persist?

Yes. No. Hey, I think for us, I mean we had many foundational investments that we've been making over several years that we're benefiting from at the moment that allowed us to react quickly. I think from our perspective, we would view this as evolutionary and not necessarily a transformational moment. I'd say more than anything, I feel like it's just accelerated many existing trends, like topics like digitalization, which is further driving productivity in our sales and marketing organization. I'd say that if you ask Olivier and I, we would probably say that, hey, we're -- even though we were on a really good path here, we've probably even leapfrogged a little further in terms of our ability to use analytics to identify and pursue opportunities, how we guide our sales force with data, and then how we're providing them with digital tools. And we also made a lot of adjustments here over the last few months with ways that we engage customers and leverage our remote capabilities. We talked about, on our call, like our ability to use e-demos or even launch products with e-demos, things like remote services. I think these trends will continue. And I think it's also forced a customer to also get more comfortable with it as well. It wasn't like we weren't doing it or we didn't have the ability, but the adoption from the customer side's probably also accelerated where they've gotten more comfortable with transacting business digitally which I think helps with the whole sales process. And we also have these customer portals, which also makes it easier for them. But -- go ahead. Yes.

Go ahead. No, I'm going to say, is that -- does that make it more -- does that -- is that more profitable for you to do it that way?

Yes, absolutely. And I think not only makes it more profitable. I think it makes us more effective. For us, a lot of it has been about, like how do you reallocate your resources towards growth and capture more market share. And I just feel like this positions us extremely well. And as things kind of continue to evolve at our customers, I also think we're very well positioned with the diversity of our business with the wide range of applications that we serve with our broad range of products and services.

And with that, Shawn, Mary, thank you very much. Thank you for participating. Always a pleasure to chat with you. So to clients on line, thank you for dialing and for your support. I'll make a shameless II pitch here to remember that's coming up. And with that, thanks, everyone, and have a great conference. Be safe.

Yes. Thank you. Have a good day.

Bye.