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

Okay. Everybody, welcome back to day 2 of the Stifel Healthcare Conference. This is the life sciences and diagnostics track, and we're happy to have as our next company, Mettler-Toledo. With us, we have Shawn Vadala, CFO; and I believe Mary is floating around somewhere in the background. I'm not sure if she's going to jump on. But hi, Mary.

So hi, Dan. Thank you for hosting us today. We really much appreciate it. And yes, Mary is here in the background with me today.

Hi, Dan.

Okay. Great. Shawn, maybe -- this is a fireside chat. I mean I think maybe a good place to start with these things is just to sort of circle up on the recent quarter. It was certainly a nice step-up relative to 2Q in being up quite a bit versus being down a bit. Can you maybe just give a quick summary of what drove the upside and the snapback, if you will, and how you're kind of characterizing the 3Q period?

Yes. Sure, Dan. Yes. So hey, obviously, the quarter came in much better than what we had expected, really pleased with the execution throughout the global organization, also saw some favorable trends start to develop in the quarter as well, too. Hopefully, we'll see how sustainable some of these trends are, but definitely some positive takeaways from the quarter. Maybe I start with our Chinese organization, a much stronger recovery in China than what we would have initially anticipated. Our Chinese business grew 17%. So given that China is about 18% of our total business, that had a pretty significant impact on the results. In China, we saw double-digit growth in our Laboratory business, but we saw even stronger growth in our Industrial business, which probably was the bigger eyeopener. Our Industrial business grew over 20% in the quarter. So we had very much a V-shape recovery in China. We felt like there was a bit of a pent-up demand topic there. If you kind of go back to Q1, I think China was down maybe 13% with our Industrial business down about 15%. A little bit unclear in terms of, well, maybe how much stimulus we might have received in China during the quarter, but there was maybe some hints that we might have also received a little bit of stimulus there. The other positive story in the quarter was, I'd say, biopharma, in general, is doing quite favorably. And then we also saw -- and we see that throughout the various product categories that have exposure to biopharma, whether it's on the testing labs, in the laboratory side or process development or even production. But then we had a -- we would call it a tailwind from COVID in general relating to the testing labs, so this gets into our pipette business. We would have estimated about a 1% to 2% benefit from the COVID testing labs in the quarter, so that was also a benefit. But otherwise, we -- yes, we felt good. The Industrial business continues to show resiliency despite challenging conditions in the West. Our operating margins were up significantly, up under 250 basis points in the quarter, which puts us up about 140 basis points year-to-date. So very pleased with all the programs on margin expansion and cost reduction. And one thing that we haven't talked a lot about is our cash flow. Our cash flow is really strong not only in the quarter, but on a year-to-date basis. And right now, I think we're looking at probably a cash flow conversion of about 100% or so for this year. So we're very pleased with that as well.

Yes. Okay. That's great. Maybe just to sort of -- I think it's sort of buried in some of those points there. But it occurs to me that one of the things that you have talked about or the company has talked about more over the last couple of quarters is market share and market share gains. So I'd like to dig into that a little bit, if I could.

Sure.

And I guess the first place to start would be, are share gains growing? Are you gaining more share than you had in the past? Or is it just that in the current environment, that has become more important to you and so that is, on a relative sense -- in a relative sense, contributing more to growth?

Yes. I think it's a little bit of both. I think, of course, taking a little bit of market share each year has been -- is a big part of our story because we have such highly fragmented markets. And keep in mind, when we talk about market share gains, we just need just a little bit. Just a little bit can add -- make a difference on our top line. So sometimes these are basis points that are less than 1%, but it does make a difference. But maybe to elaborate a little bit more on this question, so let me start with maybe the crisis side of it. So like, yes, our ability to serve customers during the last several months has been a differentiator, I think a competitive advantage. This goes back to the beginning of the year in China where I would hear antidotes from our Chinese colleagues talk about how some of the -- our competitors were challenged to supply their customers. And so we had customers reaching -- new customers reaching out to us. This is also important when it comes to our field service organization, the ability to be able to visit a customer and to ensure uptime of their production or their products. And most of these businesses were essential businesses, so that was also very important. I would also say that these things are not necessarily temporary. I think they enhanced our brand. And with our existing customers, I think we've very much been able to build -- further build the trust with our customers. And we actually see this with improvements in our Net Promoter Score throughout the year. The favorability has actually increased during the course of this year, and I think it's -- it comes back to this ability to support customers. So I think that's one thing. But then I think there's a whole another layer of these digital approaches that we talk about. And so the journey we were on to take a little bit of market share each year, I do feel like we accelerated that journey this year. You certainly heard Olivier talk a lot about this on our call a couple of weeks ago. It is something we are excited about. But again, to put it in perspective, these are -- it's hard to measure how much market share we're taking. It's probably -- it probably is basis points, but these basis points do make a difference. And if maybe you give me a chance to maybe elaborate on some of these digital approaches for a second because I do think it's a big part of our story this year, and I think it fits well with these market share gains. But there's different attributes of it. It's not -- and this is not something we just stumbled upon this year or was just agile this year. This is a journey we've been on for a long time. It's part of the Spinnaker story. You've heard us talk a lot about how do we use analytics. In the past, you've heard us talk about digital approaches and digital tools, how we guide our sales force. This year, it all kind of came together. And I think what happened is that in COVID, the change management accelerated a lot. So we had a lot of the tools before. But the change management, whether it be inside the organization to adopt some of these tools or whether it be customers to embrace some of the tools, really made a difference. And there's really 3 aspects of it. The first is what we refer to as advanced analytics. So as I mentioned before, our markets are highly fragmented. And so because of that fragmentation, it's important that we're targeting the hot sectors of the market. And so in COVID, that means market segments that are a little bit more resilient to COVID or have a better recovery to COVID. And so we use -- so once we identify those segments, we use analytics to identify the specific opportunities, whether it's the ability to penetrate existing accounts through cross-selling or whether it's to identify maybe new opportunities and new customers by looking at different data feeds externally as well. And then once we identify those opportunities, we create individual profiles of each opportunity, and then we give that to the sales organization. And we're talking thousands, thousands of profiles that we then distribute throughout the entire organization. They get qualified initially. But then if you're the sales person, you have something that's very tangible. The conversion rates on these profiles is actually very good and very promising. And each year, they've actually gotten a little bit better as we continue to refine our machine learning and our algorithms. And so it's been a very good story for us. So now the salesperson has a profile, now they need to execute on it, right? And so then that's the second part about digital tools. And so we've talked a lot about how we've invested in digital tools over the years, but I think this is an area where the change management has been really important. And so we have like a -- think of -- like a digital library with literally a handful of thousands of different tools out there very much focused on value-selling, cross-selling, eDemo capabilities, video capabilities, presentations. And then our sales force can then utilize those to be more effective in front of the customer. And a lot of it does come down to value selling because you're sometimes penetrating in the area where you're not as familiar as a salesperson. So that training and those tools are really important in terms of helping them with their success. And again, we've seen some increased win rates as a result of this. And then the third part of it is our digital approaches. And so there's a lot of different aspects to digital approaches, whether it means e-marketing approaches, whether it means our sales setup where we're better leveraging inside sales where we've been investing a lot over the last few years, and then also maybe just customer portals. And so all these things, again, we had coming into this year. In fact, the last wave of field turbos we had was very much focused on adding inside sales resources to the organization. And then it was very convenient for us to leverage a lot of those resources to help qualify some of these profiles that I talked about, but also to call on new customers. And as a result, again, we're seeing good KPIs internally in terms of lead generations, hot leads and conversion statistics, which gives us confidence with the results we've been seeing that have been relatively broad-based in the business to feel like we're making some progress here.

Yes. Okay. That's a fantastic explanation to the question that I asked. And I'll follow it up by apologizing for what analysts like myself tend to do, which is try to oversimplify the equation in a lot of ways. But if I were to take what you said and then ask how at a high level would you sort of split the difference between what a direct sales force guy has in terms of knowing about the opportunity versus knowing about the customer himself or herself and what he or she might need, how -- is it really a 50-50 mix in that I understand the opportunity better and then I understand that account within the opportunity better? Or could it be more skewed to one versus the other when you're looking to translate where that share is most likely coming from?

Yes. I mean I think it's both. I think it's both. I think in some cases, we're pointing them to new opportunities that they never would have been aware of. I mean we've even had customers -- I mean I can think of a good story a year or so ago where I'm in an annual planning meeting with our Indian colleagues and they're telling us a story about how a customer said, "How do you even know about this project that we're working on?" And so if the customer is giving us that feedback, that gives you some insight that it's really pointing us to new opportunities. But at the same time, we know a lot more about our customer. And sometimes, it's simple things like just looking at a profile of what a typical -- like if it's a global company, we can look at the profile what types of applications they typically have and what kind of products they typically buy, and then we can do some easy analytics on some gap analysis there. But then we can also provide testimonials from other sites around the world to give not only more credibility, but to help the salesperson with -- to better understand what the customer really values and what they appreciate.

Yes. Okay. Okay. Last one on market share, and then I'll move on. But I'm just curious about some of the things that you've done in support of those efforts. And if I think about pricing, I mean nothing about the pricing that you've been able to get says that you've sacrificed pricing, but I am curious as to whether there are areas in the portfolio where you're willing to take a little bit less in order to get a toehold, knowing that once you're in that account, there's probably the opportunity to do what it is that you normally do.

No. I mean we very much do not use price to gain market share. We try to stay disciplined, especially during a challenging market environment like we've experienced this year. We talk a lot about it with the global organization. In fact, Mary and I were at a call just before this with our global organization where we were reviewing our annual plan for next year. And I presented a slide on pricing, and I certainly shared the same kind of commentary about the importance of staying disciplined. And we have. And that's really an important part of our story here. Our customers appreciate the value proposition. And the better we do at articulating that value proposition, the more successful we are. But at the same time, hey, if we're entering a new market segment or something like that, there's going to be different price points of different market segments. Like if there's -- like if we're in emerging markets and it's maybe a lower-end solution or a mid-market solution, of course, there might be different price points there, but I don't view that as sacrificing price. I think it's better aligning product and value and market conditions.

Yes. Okay. Okay. That's great. Let me just switch to a couple of geographies and parts of the business that stuck out a little bit in 3Q. I'll start with China, and then I'll go to PI. On China, I mean what is the sentiment around core industrial spending right now? I feel like the lab spending trends are somewhat straightforward or more straightforward, but I'm a little less clear on pent-up demand and how GDP and macro outlooks are kind of filtering into what you're thinking about China.

Yes. It's a really good question. I think it's still a story to be known to a certain degree. Like for us, like I said before, the Chinese industrial numbers very much stood out in the quarter. Given the strength of those numbers, we very much felt like it was a pent-up demand topic as well as maybe some stimulus. And the stimulus part maybe caught us even more off guard because all the talk about stimulus leading into the third quarter really did not indicate it would be a stimulus similar to what we've seen in the past based upon economic expansion and infrastructure going to the western part of the country. All the stimulus talk was more about public safety and maybe some strategic investments in other industries that we felt would be more favorable towards our Laboratory business. But when I look at the third quarter results and even talk to our colleagues, I felt like there might have been a little bit of a stimulus there, but it's always hard to tell or to measure. As we kind of look to the fourth quarter where we have, of course, better visibility, we still feel like we'll have a good quarter on the industrial side in China. We probably expect something in the high-single digit kind of a range for core and for industrial in general in the fourth quarter. And so I'd say that that's still a good number, but certainly some moderation from what we would have seen in the third quarter. Going into next year, we're a little more cautious. I think that we'll start off with a good number in Q1, but that's because also we're lapping a much easier comparable Q1 of this year. The big question mark for us is really once we get past Q1 and we start to lap comps, what is it going to look like? And frankly, it's really hard to tell. The situation is dynamic. I mean in China, they've done a nice job of controlling the virus, and there is a lot of focus on developing their own capabilities in many areas and being more self-independent, more independent in many areas. So I can imagine that there are definitely some favorable trends there. There's just similar -- like the West, there's also favorable trends towards things like automation, data, digitalization, all these things play well for us. So longer term, we feel great, but we're a little more cautious on the tough comps that we have once we get past Q1. And so when we look to next year, right now, we're a little more cautious on industrial because of those comps. And so we -- when we kind of break out our -- or bifurcate our guide for China next year, we kind of say, hey, mid -- right now, we're comfortable saying mid single digit overall, maybe high single digit on the laboratory side, but maybe low single digit on the industrial side, acknowledging that we need to see also how things play out here. And we need to see what it's like once we start facing those challenging comps, particularly in Q3 of next year.

Yes. Okay. Okay. And then maybe just on product inspection, I think that was down 9% or so during the quarter, which, you mentioned, was a little bit worse than expected. Did that piece underperform across all geographies? I know it was down in each region, but I'm wondering how it played versus expectations in each region. And then if we sort of look to next quarter, you're looking for some sequential improvement there, but I don't really know whether on the call, we got the sense for whether that's still down a bunch or whether you creep up into growth territory because I know the guide for next year is mid singles, but I'm trying to bridge between the down 9% in 3Q to up 5% in 2021.

Yes. Yes. Sure. Sure. So hey, we were down in each region in the quarter, maybe a little bit worse in the Americas. That could have also been partly related to some timing with our Blue Ocean go-live in Tampa. But we don't like to highlight that too much because I don't want to distract from the fact that the market is a little bit softer right now. And I think to me, that's the key takeaway. It's a little bit of an anomaly, right? We all know that people are buying more packaged food this year than they have in the past, and these companies are actually quite busy with their own market demand; but at the same time, they're very much distracted with operational challenges, whether it's operational challenges to try to meet that demand or whether it's operational challenges to make sure that they have safety in their plants and that they're not contaminating their employees with the virus. And you can probably recall, earlier this year, a lot of articles about meat-packing plants having challenges with the virus. So there's been a lot of emphasis, rightfully so, of these companies to make sure that they don't allow visitors into their plants and things like that. And then maybe the third element is like you need time for these projects, too. These are typically -- these are more important decisions. They're not -- they need to integrate into production lines and things like that. So people need time to evaluate that and to determine like how things want to fit in. So it's a question of priority. We're -- as you know, we're still very optimistic about the business. I do sense that there will be a pent-up story here at some point. It's just very difficult to tell when that's going to happen, especially with virus case count surging around the world right now and knowing that this business is the one that's been probably the most sensitive to the virus from a negative perspective over the past -- this past year. So I can imagine that we still -- it might take a little bit of time until we see things come back. But in terms of maybe the sequential quarterly progression, Q4 certainly looks like it should be a better quarter than Q3, but we're probably flattish. And if it were down a little bit, I honestly wouldn't be surprised, especially with the surging virus case counts around the world. But again, it's -- I don't think -- it's not a question of whether it's down a little bit or up a little bit in Q4, it's a question of like making sure that we're positioned properly to catch this wave. And then just longer term, we do feel like we have really good competitive advantages in the business for a variety of reasons.

Yes. Okay. That's perfect. Let me ask a couple of questions just on the embedded assumptions around 2021 the way you were talking about the guide there.