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

All right. Good afternoon, everyone. Thanks for sticking with us. Sorry for the technical challenges. But here we are. Welcome to the Jefferies 2020 Virtual Global Healthcare Conference. I'm Brandon Couillard. I cover the life science tools, diagnostics sector. Very pleased to have Mettler joining us at the conference again this year, albeit in a different format. Happy to have Mr. Shawn Vadala, CFO as well as Ms. Mary Finnegan, Treasurer and Head of IR. Thank you both for joining us here today.

Yes. Thanks for hosting us, Brandon, and we hope everybody on the call is doing well.

Shawn, I'd like to start off maybe just at a high level. Can you kind of just recap how the first quarter played out geographically and by the segments? And then I'd love to dig into kind of how you're thinking about 2Q in what is a pre-COVID environment right now?

Yes, sure. So I'll just make a couple of brief comments on the first quarter. So sales were down 3%. Geographically, China was down 13%. The impact of COVID was a little bit worse than we expected from a customer demand perspective there. And then, of course, throughout the quarter, we did see the impact of the virus on the other regions. If we look at Europe, Europe faced a very challenging comparison to the prior year. Europe was -- had growth of 9% in Q1 of last year. So we ended the quarter without thinking that there's much growth expectations in Europe. I think we're expecting it to be down slightly, but Europe ended up being down about 5% because of the spread of the virus as well as the impact to customers who are exporters to China. And then in the Americas, we're up low single digit, less of an impact in the Americas, maybe with the exception of our Product Inspection business where we felt like there was a bigger impact, given some of the operational challenges with some of the food companies.

And so you were down 3% overall in the first quarter. You kind of guided 2Q down 8% to 12%. Can you talk about what's baked into that 2Q outlook? And any color you're willing to share with us right now in terms of how the top line sort of played out between March, April and now that you have May behind you?

Yes, sure. So yes -- so as you kind of said, our Q2 guidance was -- is down 8% to down 12%. Of course, when we provided that guidance, we had the benefit of knowing what our April results are -- were at that time. So for me, I'd probably prefer to kind of stick to talking about the Q2 guidance. If we kind of look, maybe start geographically there, we expect China to be up mid-single digit with our Laboratory business, up low single-digit to mid-single digit and our Industrial business up mid-single digit to high single digit. When we look at China, I think it's important also to look at what our experience was in the first quarter when we kind of look at Q2. For example, in our Laboratory business, in the first quarter, it was only down mid-single digit. And so we have probably not as much of a recovery there in the second quarter as compared to our industrial business, which was down double digit in the first quarter. But we feel like we get a little bit more benefit from some of this pent-up demand in the second quarter. But overall, we feel very positive about China. We feel very good about the execution from our team. And we, I think, generally continue to benefit from the diversity of our business there in the lower price points of our products. If we look at the other regions, we guide Europe and the Americas to both be down kind of like in the mid-teens kind of a level. We'd expect Europe to be a little bit worse than the Americas. I think their economy was a little bit weaker also entering into the overall situation. Both regions, of course, are impacted by different government stay orders and lab closures. And of course, that's going to be an important topic for us to kind of monitor as we labs starting to reopen. If we kind of like look at the business by the different product areas, in the Laboratory side, we expect Lab to be down low double digit. The headline, of course, for Lab is the impact of the different lab closures in Europe as well as the Americas. And I think it's important we talk about lab closures. It's not just the academic labs we're talking about. I mean there are labs closed in pharma as well as other non-life science labs due to different government stay orders during the quarter. And then in terms of China, as I mentioned, we do expect more modest growth on the Laboratory side in China in the second quarter. In the Industrial business, we expect Industrial to be down high single digit in Q2, with Core Industrial down mid-to-high single digit and our Product Inspection business to be down high single digit to low double digit. Our Core Industrial business will benefit a little bit more from some of this recovery in China in the quarter. Industrial is a little bit more disproportionally weighted towards China. So probably I would say about 1/3 of that business is China-based. So we'll get a little bit of benefit there. The other thing we're seeing in our Industrial business is that we have been getting some benefit from our exposure to some of these essential businesses for a safe and healthy society. These are also happen to be some of the attractive business segments that we've talked about in the past like pharmaceutical and food manufacturing. But we have seen some benefit in our Industrial business as well as benefits from some innovation in that business as well. Of course, the business is not immune to negative GDP. And of course, that's going to still be a headwind for us overall in the quarter. And then in the Product Inspection business, if we look at that business, those customers are actually seeing quite a surge in terms of their own customer demand with a lot of focus on packaged goods and people starting to focus more on cooking at home. But at the same time, we see that business undergoing different challenges in their supply chains and their operations with kind of that surge and also maybe some focus on protecting their own facilities from virus contamination. So given some of that restricted access and some of the focus on kind of holding off on new projects, we tend to see that business being down again in the second quarter.

I'd like to stick with that, Shawn, just on the PI business. I mean it's been somewhat of a laggard for a little while here. You've still got a strong market share position. Arguably, the sector trend for more packaged goods and eating at home is probably here to stay. But once the virus, I think, sort of triage sort of dissipate somewhat and you're able to get back in those facilities, don't you see that as potentially a material catalyst, just given the amount of the concentration of packaged goods customers in that segment and arguably, what is probably somewhat of a pent-up demand situation there?

Yes, very much agree, Brandon. Very much agree. I mean, in the short term, I can imagine that there still might be some challenges, but medium term and it's kind of hard to tell is that a Q3 or Q4 topic, but definitely would expect to have some tailwinds in this business. I think it's a good dynamic for us overall. And I think given, like you said, the focus of the consumer starting to eat more at home as well as these businesses doing better, I think there's going to be more of a capacity for projects. I think there'll be also maybe more focus like even in countries like China on maybe personal consumption and maybe more local manufacturing for food. I think all those dynamics should actually play very well for us. And as you know, we feel like we have a lot of good competitive advantages in this business, given the breadth of our portfolio, the relative size of our service organization near our -- next to our -- next nearest competitor and our overall global reach in this business.

Just sticking sort of with the current sort of COVID environment, to what extent, if at all, has it diminished your pricing power? And then would love to sort of get an update on where your material -- raw material sort of cost index sits right now.

Yes, sure. So no, we still feel very optimistic about our pricing capabilities. We had good results in the first quarter. We had guided to like 150 basis points to 200 basis points, and we ended up pretty close to the high end of that range. We still feel good about maintaining similar levels kind of as we kind of go through the year. One of the things that we observed back in 2009 with that downturn is like we always felt like companies, if they had the ability to delay a purchase, they would. And so -- but at the same time, companies that were still buying things, they really needed to buy things. And so there was overall a higher willingness to pay for those customers and much more appreciation for our value proposition. So back in 2009, we actually did more significant price increases at that point, and we were pleased to see that our theory proved correct and we actually had very strong price realization back in 2009. This is a different environment. It's not an environment where we feel like we can go out with bold price increases. But at the same time, we do see a strong value proposition for the things that we are selling. And if we stay disciplined, which we are, and we've been working with the organization over the last couple of months on this, I think we should be well positioned to continue to deliver good results. And at the same time, we still have a lot of positive things happening in the program that we've talked about in the past. Some of these are data-enabled solutions where we can provide active price guidance to the sales organization at the time of an order based upon various data attributes of our customers. So many good things going on in the pricing initiative or program, I should say. And then I think the other part of your question was material costs. We did see some benefit in the first quarter on material costs. I think the material costs were down 1% to 1.5%. I probably would expect something kind of similar as we kind of continue here through the year. But overall, I would say our margin expansion initiatives, pricing, Stern Drive, material cost reduction all very strong execution at the moment. And these were really important elements for us to help maintain our operating margins flat to prior year, despite the fact that our sales volume was down significant -- not significantly, but our sales volume was down in the first quarter. And I think these will continue to be important levers for us as we kind of navigate the virus situation and the economic situation. Of course, the volume decline in Q2 will still be a net headwind for us, but I feel like we're very well positioned as we kind of navigate this and will come out stronger.

Yes. I think that's probably a good segue into my next question. I mean I think you've taken up operating margins on average about 100 basis points a year over the last 10 years, now in the mid-20% range. And like you said, even though organic was negative in the first quarter, still held the line there. I think one of probably the biggest debates and questions I certainly get is just the runway that's left for Mettler. Could you sort of speak to the margin expansion headroom that you think you still have? And what are, say, 2 or 3 of the key drivers of that?

Yes. Sure. So I mean, of course, this year has a lot of uncertainty with the volume decline, at least in the second quarter. We'll see how things play out for the rest of the year. But I think when we get on the other side of this year, I think we should continue to have our normal cadence of 70 to 100 basis points margin expansion per year. We -- certainly, we don't feel like it's appropriately to be talking about a ceiling at this point in time. We feel like there is a lot of runway in our margins. We have a lot of good inspiration inside the company with some really great success stories to see that we -- there can be a lot of runway on this topic. The levers are the things we just talked about. I think that the pricing program will continue to have a lot of opportunity going forward. I think we have very good strength in terms of the ingredients and foundation of the program. We've often talked about in the past that we're selling personal instruments. We're selling them at relatively low price points directly to the end user. So yes, someone on our side who can sell directly and articulate that value proposition, but we have somebody on the customer side who understands that value position and is willing to pay for it. And so that's a very important dynamic. And then we are at relatively low price points, so we can tend to stay under the radar from a lot of the different procurement programs. And then we back that up with our program in terms of analytics, the team, our processes and the culture, frankly, that we've built about pricing over the last 10 years, which I think is ultimately the most important thing. And then the Stern Drive program, we introduced Stern Drive just a few years ago. We have over 300 projects in process in Stern Drive. I think we're much in the early innings of Stern Drive. I think you'll hear us talking about Stern Drive for many years, similarly to how you hear us talk about Spinnaker. And in the end, it's about operational excellence on the supply chain side and whether it's material cost reductions or manufacturing, productivity or even back office productivity. And I would expect there's going to be some good opportunities for us going forward here as well.

You made the comparison to 2009, and in particular, just how you have more data-enabled decision-making today than you did 10 years ago. I guess a 2-part question. Number one, to what extent has that informed your decision to perhaps hold off on more aggressive cost actions, like those that you took in the great financial crisis back then? And then secondly, how meaningful is that in terms of being able to capture share in this environment with probably a lot of your competition back on their heels right now?

Yes. Sure. So I mean our internal data certainly doesn't give us the ability to project out 6 or 9 months with any degree of accuracy. But our views in terms of recovery from a lot of different sources, internal, external and just our general views on our end markets, I mean, I think that's ultimately very important. We've evaluated each end market in terms of its resilience to COVID and its potential recovery from COVID. And that analysis in itself has helped guide our thoughts in terms of how we deploy resources during the crisis, but also how we prepare for a recovery. So as you say, we feel like we've been very agile with our cost structure in terms of our ability to reduce it by 9% in Q2. But we have made a conscious decision at this point to do it on a temporary basis just so that we're also agile enough to be able to recover quickly. And we are assuming recovery is just a question of the timing of that recovery. Can you repeat the other part of your question, Brandon? I forgot.

Well, just the extent to which your big data analytics and the information you have about your installed base can allow you to capture share perhaps in an accelerated rate when your competition is on their heels?

Yes, yes, yes. Okay. Of course. Thank you. Yes, and that fits to our Spinnaker program. So the data that we have now, we would argue, has allowed us to maybe even leapfrog some of our capabilities. So we're using this data to identify and pursue targets and opportunities. As I mentioned, about some of these segments that might be hotter than others, it's allowed us to pursue those opportunities. The data has allowed us to guide our sales force also to the opportunities. We have this pipeline of profiles that we can provide to our sales force in terms of cross-selling opportunities as well as external opportunities that we have been able to develop from various external data sources as well as our internal data sources. And so for us, that's been really a key enabler here to kind of like gain share during the virus. We also -- I think it's also important that it's not only about data analytics, but it's also about digital tools and digital processes. So we use these tools and these processes to better engage our customers, whether it's our eDemo capabilities. So we had eDemos before COVID, but you can imagine in this world of remote work that there's been a lot of acceleration in terms of the acceptance of eDemos. And I think customers have become increasingly more comfortable and even confident with making purchasing decisions based upon eDemos. We also have ePortals that we had before COVID, but you can also imagine that they're more interested in connecting more electronically with their processes with us at this point as well. And then we also use these tools to support our sales force, whether it's our digital library of various tools or value selling guides and things like that. So I think all of these things allowed us to gain a little bit of market share, which is very important, given the highly fragmented nature of our markets. And then behind this, we also have the Spinnaker methodologies beyond the digital processes. And so within those -- within that methodology, you have like this whole topic of go-to-market and sales force guidance. And so we had already been investing in our inside sales force before COVID, but you can imagine that it's become increasingly more important here over the last few months. And then as part of our methodology, it's also about targeting the most attractive end market segments, and as I just mentioned a few minutes ago, the analysis that we've done to assess, which markets are going to be more resilient or have a better recovery to COVID is kind of part of that methodology.

Very good. That went fast. Unfortunately, we're out of time. Got to leave it there. But thanks so much for joining us. You all have a great day.

Thank very much, Brandon. Take care.