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

Hi, everybody. Thanks for jumping on here. It's Steve Beuchaw from Wolfe Research. Welcome to our second healthcare conference and our first virtual healthcare conference, which we've been doing now across a variety of industries, dating back to March. We were actually the first firm to do a virtual conference. And well, I think our team is doing a pretty nice job. Shawn, thanks for being here.

Yes. Thanks, Steve. Thanks for hosting us. We very much appreciate it. And we also agree. Things have gone really smoothly today, and we've enjoyed being here.

I appreciate that. Nice to have Mettler-Toledo. And then I know Mary is in the vicinity as well, Mary Finnegan.

Hi, Steve.

Hi, Mary.

So Shawn, we're just talking. And what I suggested to Shawn is I think it would be really helpful if we started with just a little bit of ground work before we really talk about what's going on at Mettler. I mean Mettler is a little bit unusual in that the company has a Lab business, an Industrial business. But there's a lot going on in there, a lot of different customer types. I wonder, Shawn, if you could spend just a brief moment here, kind of reminding everybody about what Mettler, not necessarily what Mettler does, but who Mettler's customers are and what that mix looks like. Food is a big part of your business, Life Science is a big part of your business. These are essential categories. Could you just give us level set for us there?

Yes, sure, Steve. Very happy to do that. So I think you kind of like implied in your question, too, like our diversity story is a big part of the Mettler-Toledo story. You see diversity throughout our business, whether it be the products, the applications that we serve, the customers, our largest customer in the world, end customer is still only about 1% of our total sales. But then you also see some diversity in end market segments as well, too. But like you said, there's some pockets here that are important that I think people are -- that's good to understand. And for us, what we're always trying to do when it comes to these market segments is to try to make sure that we're monitoring them. And then we're redirecting our resources in an agile way towards the pockets of growth and where we see that there's going to be favorable trends. And that's something that the organization has really been very conscious of now for a good 5 years or so. And certainly, during COVID, we've been very specific about trying to look at segments that are maybe more resilient and are positioned for a better recovery. But maybe now I walk through some of the key segments. So the first one would be Life Sciences. And so when we say Life Sciences, we would estimate that it's about 1/3 of our business. But when we define Life Sciences, just to make sure you understand our definition, we would include traditional pharma in that as well as biopharma as well as the CROs and the CDMOs and testing labs. And so like when we put all that together, we would estimate that's about 1/3 of our business. There's, of course, a very broad range of applications that we serve here within Life Sciences. We're in R&D and research labs. We're also in quality labs. We're in process development with our automated chemistry business. And then we're also in production. And so whether it be our process analytics sensors, and we have a very wide range of different parameters that we're measuring in the production environment. We also have industrial scales that would be used to like way bio reactors and things like that. And if you kind of like take a step back and we go maybe back into the laboratory for a second. We cover up to 40% of the instruments on a typical laboratory bench. And so that creates a lot of cross-selling opportunities for us. It also creates a lot of opportunities for us to help customers with some of their needs, whether it be automating workflows or whether it's around topics around digitalization, like our LabX software. We've been developing LabX for 20 years. So there's a lot of knowledge here. You combine it with our best-in-class instruments. It's a very powerful combination. And then LabX can help customers with topics like data integrity. It can also help them with things around productivity with automating workflows, and then it can reduce errors in terms of data handling. And if you think about it, we've done a -- some of our own research in about 3/4 of the FDA warning letters that we've looked at had some form of data integrity element to them. So we feel like this really is an important topic for our customers. And as companies increasingly use CROS, it helps them to standardize their workflows in the data management and controls around that. So we see that as really a key discussion that we've been having with a lot of big pharma companies and also just general Life Science companies in general over the past few years, and we see that trend globally. The next market segment to maybe talk about is food. You mentioned food manufacturing. We would estimate that to be around 25% of our business. We're also in food labs, too. So if you think about our laboratory instruments, they can be sold into to the development and the quality labs within food companies. But of course, there's also a big element of production there as well, too, whether it be our core industrial instruments that might be helped -- helping them with formulating things. We have formulation software. We have terminals. We, of course, have weighing instrumentation there, too, or our product inspection business. So product inspection is maybe the business that we most frequently talk about food manufacturing, because it's about 70% of our product inspection business. And so what product inspection is doing is that if you go to the end of a production line at a food company, there is a series of different controls at the end of the line. A basic control would be checkweighing. You want to make sure you're not overfilling something. Otherwise, you're losing money, you want to make sure you're not underfilling something because then you're not complying with the law. That was the original product that we got into for obvious reasons. But then over the years, we got into -- we did a lot of adjacent acquisitions. We got into metal detection back in -- I think it was 1998. Just -- actually '97 just before -- yes, just before we joined the company. They just completed the SAFELINE acquisition. A few years later, we got into X-ray equipment. And then more recently, we got into vision inspection. And what that's done is that's giving us the broadest range of products and technology at the end of the line versus other companies. We typically go up against competitors and individually in those product categories. We're not competing on the whole category. So it really gives us a very strong relative market position versus competition. It's also an advantage when it comes to our service organization. We can have a lot of synergies there with services. And then we can -- if you look at the size of our service organization, we're about 7x as large as the next nearest competitor in the United States. And so the key here is what is this equipment doing, like the metal and the X-ray equipment, it's all about brand protection and food safety. And there's a productivity element to it as well. And of course, we can also combine some of these technologies into combination instruments, which is also very well received from our customer base. The next category I'd mention -- and it starts to drop down now is chemical. And so chemical, we would estimate at about 10% of our business. So in chemical, there's a wide range of what would fit into the definition of chemical. On one hand, a lot of the business would be in areas like specialty chemical. So for example, this year, companies making disinfectants and hygienic solutions. We've seen them actually do quite well this past year. But on the other hand, you have like petrochemical in that category as well, not a major part of the category for us, but still it's part of it, and we have solutions that would fit both of those needs. And then -- and if you think about it, again, there's products on both the Laboratory side as well as the Industrial side would be sold into the chemical industry. We've had some good success also in the past in this industry more -- in more recent years like in China as they've increased safety standards around the chemical plants. They've had some issues in the past with chemical facilities. And so that's been process safety and safety standards has been kind of a key growth driver for us there as a recent example. And then once we go past chemical now, of course, we're getting into single-digit kind of numbers. And so one of the ones that stands out there, of course, is food retailers. It's only about 6% of our business. This is the supermarkets. We only typically focus on 4 or 5 key countries in the world. So a very different business for us versus the other businesses. But this is the -- again, the supermarket, and this is the product that the consumer might typically see if they go to a store. And then after that, you get into a wide range of key end markets. I mean academia is another one that would come to mind and that -- we don't have a good number on it, but maybe it's in the mid-single-digit kind of a range. And then other than that, it gets very fragmented pretty quickly.

Okay. It was very thorough. So let's dive in on some of those points, and then we'll talk a little bit about -- we'll actually ask the CFO some CFO questions, I promise.

I'm happy to talk about the market, too.

One thing that has come up that we probably didn't anticipate in the early going, and it makes just a ton of sense now as we think about your business in Life Sciences is you do have a bit of a COVID-related tailwind. You are a part of the solution in a number of ways. And you and Olivier talked about pipettes, for example, is an area where a product area where there's just been a lot of demand can you help us to size up the COVID tailwind? And then I've got to admit, I was a little confused as to the progression. It seems like "hey, maybe it's a little slower in 4Q, but then we think it's going to be strong in the first half of '21." Can you just talk through the progression, the size and what it means for the model?

Yes. Sure. Sure. Absolutely. So when we talk about -- I mean, there's a lot of benefits from COVID in our business that are maybe direct or indirect. But the one that we really call out when we talk about the tailwind is specific to the testing labs, which is very much related to COVID testing. There's liquid handling involved. Pipettes. Pipette tips. This is very much a discrete opportunity. Of course, there's going to be other benefits in headwinds as well related to COVID that we don't try to quantify. But on the benefit side, of course, there's going to be activity in research labs. There's going to be activity in process development. And then ultimately, in production. But what we're talking about with our tailwind is approximately -- is related to the pipetting, and that we would estimate that in Q3 was approximately 1% to 2% of a tailwind. We definitely consider that the tailwind will continue into Q4 into next year. I think we all agree that testing is going to be around for a while. I wouldn't read too much into our comments about the Q4 versus Q3. I think we were guiding more towards 1% as opposed to 1% to 2%. That's a little nuance. It's maybe a little bit of rounding involved. We just have a smaller topic at our -- so we have 2 main brands and production facilities for pipetting. One is Rainin, which we sell directly. That's our core brand that we've had since 2001. And then the second one is a company called Biotix, which we acquired a few years ago. It's a second brand goes through indirect channels as well. Just as we kind of like look at the forecast and the production forecast for Q4. There's a couple of smaller topics in the second brand that makes us think that it might be closer to 1% than 1% to 2%. But I wouldn't read too much into that. For next year, we're -- it's kind of our guests versus anybody else's guess. We tend to think it's maybe 1% during at least the first part of the year. Once we get past a vaccine. I think there still will be testing, but the -- and we still will have some benefit. But just the size of the benefit will be probably less than what we saw in Q3 of this year. So there will be maybe a slight decrement to it as well. But overall, it's been a nice business. I think that our teams have performed extremely well to keep up with market demand in terms of increasing their capacity. It's really admirable, their agility. And we're really, really pleased with their performance here. And that's also globally, we have production capabilities with pipettes also in China that we had invested in a few years ago as well. And we have some things already in the pipeline to increase capacity for next year in our existing plants as well as a new facility that I think we talked about on our call a couple of weeks ago with a facility that we're going to be building in Mexico. And this was actually planned before COVID. But the timing actually worked out kind of nicely for us.

Okay. I should mention before we continue that if anyone has questions, feel free to pop them into the interface box here or send them to me by e-mail, and I'm happy to anonymously relay them over here on the webcast. I would like to spend a little bit of time here on your food exposure, both food from the PI side lab as well as food retail. I know it's sort of an interesting matrix. But it's a big piece of the business. And it's real hard to get your head around. Because on the one hand, there's an acceleration in demand within food retail as things go to food retail and away from restaurant and hotel and wholesale supply. And then, of course, there are some safety restrictions on accessing customer sites, which is, I guess, more of a PI issue. As I try to piece it together, it seems like maybe it's a blend of puts and takes in 2020. But then you have some pent-up demand in '21. Is that a fair sort of very simple synopsis about how much demand is sort of delayed?

Yes. I mean I think on the product inspection side, in particular, we feel like there also is a pent-up demand story. The equipment has been worn very hard this year with the surge on their own customer demand. I can imagine there's also been a lot of distraction in their facilities going from, like you said, restaurants to consumer demands as well, too, and they probably need to spend some time with some of that instrumentation once they have some time to focus on it. We feel like we're really well-positioned for that. Not to repeat what I said earlier, but I think with the competitive advantages we have with the breadth of our portfolio and all those topics, I think we're -- we should be really well-positioned. The timing is just harder to predict at this time, at this point. It's we certainly see sequentially Q4 looking better than Q3. But that doesn't mean it's going to be a strong quarter. It's going to be flattish. It could even be down a little bit. I mean this is the business that we've seen that has been the most impacted negatively by the virus, at least. And so if you look at that, and you see the rising case counts around the world. Does that mean that certain things get delayed that are supposed to be installed in Q4? Does that mean that projects don't start, that were supposed to start. But eventually, we see a nice pent-up story here at some point in in '21. And so we're looking forward to that. It's not clear in terms of like the pacing of the investment. I don't know if it's quite as simple as like we have a vaccine, and everyone's going to place an order the next month. But I could imagine that this thing will pick up at some point post vaccine. On the food retailing side, that's a slightly different dynamic. They've also had different challenges as well to adjust to the situation. But in the end, it's not about wearing the equipment hard. It's not production equipment. But we're going to be tied a little bit to their replacement cycles. So these are typically a handful of retailers in our core countries. And so it will be very much more dependent on what's their natural replacement cycle. The good news is that they should have more funds available with the crisis to invest. And so we're hoping that, that would inspire them to make some investments. But it's not clear where we would fit in that priority as well as they think about their own dynamics in their stores.

Historically, you've managed the food retail business for profitability for returns. Does the opportunity here change that philosophy at all?

No, I think it's going to be the same. I think that like it's always also been a lumpy business, too. If you go back for 20 years, I mean, there's always been waves, whether it was like we've been around long enough, we can remember the Y2K wave. And then there's been other regulatory things that have happened in different countries over the years. And so could this bring on a wave? Maybe, but I'm not so sure. I mean it's -- in the end, it's 6% of our business. We'd be happy if there's a wave to catch. Right now we're kind of more modestly thinking it's a low single-digit growth next year. And over the longer term, I think that's what we're going to tend to see. So we just tend to think of it like you mentioned, in terms of like managing it for profitability and trying to be disciplined on the business in terms of how we manage things like price and cost and things like that. And we think we have great solutions. We think we compete well. It's just a very different. The nature of the business is just different than our other businesses.