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

Hi. Great. Thank you for joining us. I'm Patrick Donnelly, the tools and diagnostics analyst here at Citi. Happy to have Shawn Vadala, the CFO of Mettler-Toledo, with us for the next session. Shawn, maybe just start high level, we can start with 4Q, maybe just a quick recap. Obviously, a strong quarter for you guys. Things continue to improve sequentially the core business side. And then you've already raised 2021 growth guidance that you initially gave in 3Q. So maybe just talk through again kind of the biggest drivers of the strength in 4Q and what gave you confidence to move those numbers higher already this early in the year.

Yes, great. Well, hey, hello, Patrick, and hello, everybody, on the call. Thanks for hosting us today. Happy to be here. Yes, we were very pleased with the fourth quarter. It was a really strong quarter, better than we had initially expected. One of the things that stood out was very broad-based growth throughout the portfolio. But maybe if I highlight a couple of key positive points that happened in the quarter that also gave us some confidence as we were entering 2021. So our Lab business grew 12%. And what was nice about lab, there have been favorable market dynamics in the biopharma space. And so product categories that had more exposure to biopharma did well. We already had seen that in Q3. But what we saw is if you look at the rest of the portfolio, things really picked up as well during the fourth quarter. And so very good growth throughout the portfolio. And we also continue to benefit from some of the COVID testing in our pipetting business too. For the overall group, that's about -- we estimated that to be about 1% to 2% benefit. And then if we look at our Core Industrial business, this business has had -- we felt -- we feel like it's had very good resilience over the last few year. If you even go pre-COVID and you looked at some of the declining PMIs in Europe and other areas where this business has been more historically economically sensitive, it's really held up well. And then in the COVID situation, we felt like the business has performed really well. And what do we think is happening is that our ability to redirect resources towards better growth opportunities really continues to play well here, especially given the high degree of fragmentation in our industrial market. Industrial also benefits from our China business too. About 1/3 of our Core Industrial business is China and which is probably a good segue to China. So like in China, we had a very strong third quarter. If you remember, we grew 17% in Q3 in China. At that time, we were questioning a little bit of how much of that was pent-up demand, how much of that was maybe a little bit of government stimulus. But when we look at the fourth quarter, again very pleased with 12% growth in the quarter. We saw double-digit growth in both our laboratory and our Industrial business in China, which is we felt was a very good sign. And so overall, we feel like China is having a very strong recovery. And as we kind of like look towards Q1, they'll benefit from an easier comparison to last year. As you remember, China was down 13% in Q1 of last year. At the moment, we guide China mid to high 20s -- 20% -- mid to high 20s in terms of growth for the first quarter. So clearly, that was one of the things on our mind in terms of increasing the guidance for 2021. It's just knowing that we had a strong start to the year in China, but also in these other businesses that I mentioned. And if you look at Europe and the Americas, we also had a strong finish to the year with high single-digit growth in Q4 as well. And so when you look at Q1, we're now looking at 11% and 13% growth. And that, again, gave us more confidence to increase our full year guidance this early in the year.

Yes. Shawn, you touched on China, always a hot topic with Mettler. So maybe start there. As you mentioned 12% growth in the quarter. I think you talked about high single digits for 2021. So maybe just kind of parse out the strength that you saw there. Again, to you point, it sort of bottomed out in 1Q and then really nice recovery throughout the back half. It's nice to see sustainable kind of growth from 3Q into 4Q. So again, I guess, maybe just talk through what you saw as the year progressed. And again, what's baked into that high single as we think about '21?

Yes, sure. So yes, we're really pleased with China. We have a very strong team there. As we've talked about many times in the past, they do a wonderful job. Like we talk a lot about at Mettler-Toledo about identifying and pursuing growth opportunities. And I would say our team in China is good as any of our teams around the world in terms of their ability to do that. So I think they've been very agile and very good at identifying opportunities. I do feel like there's also a strong recovery occurring in China at the moment too not only on the -- in the lab side, there's very strong dynamics in terms of the focus on life sciences and even just with the COVID environment, the focus on vaccine development and production as well as even an increasing trend towards trying to create more self-dependence, independence, so I think in terms of life sciences in China. But on the industrial side, we've seen a very strong recovery. And part of that was probably pent up in Q3, but we saw it again here in Q4. And I do tend to think that there's some element of government stimulus going on beyond maybe what we had initially expected. Like if you looked at some of these programs that the Chinese government was talking about earlier in the year, they didn't necessarily sound like your historical programs towards economic development going to the western part of the country. But what we've seen is that there certainly has been some investments in projects in different parts of the country that we feel like we're benefiting from. And also, to a certain degree, I feel like there was maybe some credit easing going on over the last maybe 6 months or so that certainly creates a better economic environment for the Industrial business. But as you know, our Industrial business also is not necessarily weighted towards exporters. And so we certainly haven't gotten caught up with any of those headwinds per se. And if you take a step back, our Industrial business has also done a really good job over the last several years of really trying to refocus their resources towards more attractive market segments. And so we're less dependent on maybe some of the heavier industrial segments that we would have been 5 or 10 years ago. And so if you kind of like look at the Lab business plus the more attractive segments within Industrial, it's about 2/3 of the mix of that business right now. So it's a much healthier business than it would have been 5 or 10 years ago, and I think it's really well positioned to kind of continue some of these trends. As we kind of look at 2021, we're going to -- certainly, as I mentioned before, we're going to have an easier comparison in Q1. And so we're going to have a very strong start to the year. I would expect Q2 probably is going to be -- maybe not as -- not -- it's not going to be as strong as Q1, but probably another good quarter. But then when we get to the second half of the year, we're very much going to start lapping very difficult comparisons. And I think that's when it gets a lot more difficult for us in China. As I mentioned before, Q3, we grew 17% in China, and we had more than 20% growth on the Core Industrial business. So it's really that second half of the year in terms of comparisons that's on our mind. But looking beyond 2021, we're very optimistic about China. We feel very good about the growth dynamics here, whether it's this focus on life sciences, the number of new scientists graduating universities each year. And again, we're selling personal instruments. So that's very meaningful. And then just all the other -- the economic side of it, increasing GDP, GDP per capita, more focus on automation, productivity, quality, data integrity, all these things are favorable trends for us.

Yes, it's a good lead into my next question, which is kind of as we think about China in the longer term, clearly, to your point, you guys played a lot of attractive pieces of this market. Obviously, a lot of investments still going on in the life science industry in that region. I guess, should we be thinking about this as kind of a high single-digit sustainable grower for you guys? What's the right framework to put around that?

Yes. That's very much how we think about China. I very much think it's going to be above our corporate average, very much think of it as a high single-digit grower for the foreseeable future. We'd certainly expect there's going to be years where we're going to do double digits in China as well. And as you know from the past, I mean, things can always change quickly in China too. So I think we'll see volatility. But I think if you look over a longer-term horizon, it should be a high single-digit grower, yes.

Okay. And maybe shifting over to Europe. We saw some nice improvement sequentially throughout the year there. Certainly probably a tale of a few different stories there, with some countries that have been a little more cautious with things like COVID, with some of the new variants and kind of pausing things. I guess, what have you seen kind of at the end of '20 and into this year around just the general environment there?

Yes. It's been interesting. We certainly did much better than we expected in Europe in Q4. I mean we grew 7%. And I -- if we kind of look back at our original guidance, I think we were thinking maybe it was going to be flattish in Q4. So certainly exceeded our expectations. What's been interesting is the new variant certainly is a hot topic in Europe, but it seems, from our perspective, to be more a topic around impacting social restrictions and social lockdowns. We really have not had much of an impact from a business perspective. At least that's been our experience. The one exception I would highlight is our Product Inspection business, which just globally has been more negatively impacted by COVID than our other businesses. But absent that, we really had a good finish to the year. And if I look at our Q1 guidance in Europe, our guidance is high single digit for Q1. So we expect to have a very good start to the year there as well too. But I don't want to diminish the uncertainty that the virus can create either. It's certainly a fluid situation, and things obviously can change quickly.

Yes. And then maybe last one on the geographical basis, and then we'll hop into some segment questions. But on the U.S., really nice improvement from 3Q to 4Q, obviously. I think it was down 7% kind of midyear in 2Q and then all the way up to high single-digit growth in 4Q. Can you just talk through, I guess, that recovery, again, quite steep? And then is it just customers being able to work better around COVID? Is there more testing -- more COVID benefit in the number? Maybe just talk through that. And then again, it would be great to hear your expectations as we enter into '21 here.

Yes, very similar to Europe. Very pleased with the quarter. As you said, we did -- and I think it was about 8% growth here in Q4. We definitely saw a lot of good momentum, especially in the area of biopharma. COVID testing probably disproportionately benefits the U.S. a little bit more than the other geographies, just given the size of our pipette business in the United States. But overall, I would say we're executing very well here. All the things we talk about in terms of our digital marketing strategies also are very applicable to the Americas. So I think we're doing well executing on that. I think we also saw the general market conditions outside of biopharma to slowly start to pick up. Now I'd say some pockets are still slower than others, but we did start to see some improvement here during the fourth quarter. And as we kind of like look to Q1, similar to Europe, we kind of look at high single-digit growth start to the year in the Americas. And for both Europe and for the Americas were more in the mid-single-digit growth kind of a range for the full year for 2021.

Right. Okay. And then maybe we will do some product questions. I guess looking at the Core Industrial business, managed to grow low single, even facing a mid-single-digit comp. I certainly would have -- would not have predicted that midyear during the peak of COVID. So maybe just talk through, I guess, what you saw there. It seems most correlated, obviously, to China, as you touched on a little bit. But yes, it would be great just to hear kind of your thoughts on what drove that recovery. And the resiliency certainly proved a lot more resilient than I thought. And again, I think it probably plays into some of your commentary about how that business has shifted over the years.

Yes. Yes. I think you've hit a lot of the key points. I mean -- maybe I'll start with the latter is like I -- there certainly has been a resilience in this business in the last few years that's -- we've been very encouraged by. And I think a lot of it has to do with the high degree of fragmentation in the Industrial business. And so it's like a ripe opportunity in terms of how to take advantage of all the things we're doing with Spinnaker sales and marketing, also some of these digital sales and marketing programs that we've talked a lot about over the last 3 to 6 months. And so just the ability to use the analytics to identify opportunities and then really deliberately guide the sales force towards those opportunities, then provide them with information about the opportunity supplement that with digital tools to help them prepare for the opportunity, whether it's value selling or cross-selling. And then having a lot of digital capabilities for how to better engage our customers, whether it's with inside resources or whether it's with digital capabilities like e-marketing and things like that. And so like that, all those things we're doing in all of our businesses or at least most of our businesses. And I would say Industrial has been arguably benefiting the most, especially as we've been just really shifting our focus towards growth opportunities and what we would call more attractive market segments. So it's a better mix like we talked about a little bit before. But there is also an element of China. Out of -- if you look at the mix of Industrial, probably about 1/3 of Core Industrial is China. And so that's going to be a higher mix percentage than the other product categories. And so when China is doing well in Industrial, certainly it's going to help the overall Industrial numbers. But if I look at Q4 as an example, I think we still had growth in Europe and the Americas, certainly not to the same degree we had in China. But just having growth, I think, is a very positive sign and in the environment that we've been operating in. And then maybe one final point on Industrial. I think our team has also done a nice job on innovation too. And as the market continues to look towards ways to gain more productivity and automation, but also digital connectivity, these types of topics also play very well to our sweet spot in terms of the value proposition that we can provide to the market.

Yes. This business, I guess, when we think about '21, it feels like it's been a pretty consistent mid-single-digit grower over the past few years, obviously, a little lighter in 2020 understandably because of COVID. So I guess given the comp dynamics here as we enter '21, what's the right way to think about how it plays out this year?

Yes. I mean we -- it's funny, because like at the end of Q3, we were pretty cautious on Industrial when we gave our initial guidance. So we're thinking like low single-digit guidance. We were very mindful of the tough comparison we were going to have in China in Q3 of this year. As I mentioned before, China in Core Industrial grew more than 20% in Q3 of 2020. And we also were a little bit concerned about what the economy was going to look like too, because there is an element of uncertainty around the economy post-COVID. Once you get past government stimulus and these types of things, what are things going to look like? And historically, this business still is the one that has been more sensitive to the economy versus our other businesses. But when we -- so -- but when we look at the year now, we feel definitely more positive. We're going to have a very strong start in our Chinese business. And I think we're going to have also good growth in our Americas and our European businesses too. So if you look at the cadence of the year, we're going to start off very strong in Core Industrial, but then we're going to have very difficult comparisons in the second half of the year. And so when you kind of blend all that together, right now, we're thinking it's mid-single-digit growth. But of course, it's hard to project at this point in time what the second half of the year is going to look like.

Yes. Understood. And then maybe shifting to product inspection. Hard to pick at anything with Mettler. But if anything, maybe this was the one area that was slightly disappointing. In 2020, I think it was down 7% for the year, didn't really see that much of a recovery as a lot of the rest of the business did. Just talk through, I guess, what you guys saw there. It's been a little more muted, obviously, in recent times after being a great business. So is it just a lack of willingness to spend from customers on the CapEx side? Maybe just talk us through, I guess, what you're seeing there, and then we can get into expectations.

Yes. Yes. No, it was definitely below our expectations as well, including in the fourth quarter. I think there's a few dynamics. I think one is it is more susceptible to the negative side of COVID. If you think about the business, about 70% of the business is sold into food manufacturers. And on one hand, these businesses are very busy trying to meet consumer demand, but that also creates a lot of challenge for them operationally in reconfiguring product lines from serving restaurants to consumers, also trying to keep the virus out of their facilities. If you think about earlier in the year, some of the -- some of these facilities were challenged with the virus in their facilities. And so they're very cautious now about letting visitors enter their facilities. And then at the same time, there's a -- it takes time to launch products in terms of how do you want to integrate equipment into your manufacturing facility. So if you step back, they have a lot of operational challenges at the moment. And I think it's going to take some time for them to get on the other side of that and really get on the other side of COVID before we see them really have the opportunity to focus and invest here. But beyond that, pre-COVID, this industry also had challenges as well, and I think there's a certain degree of that as well. And so if we kind of like look at the customer base, I think there has been some slowness in terms of the ability to commit to capital spending. And we've observed some delays in that area. And I -- but I think there's still going to be a really nice opportunity here post-COVID. Food safety is still an important topic. Brand protection is still an important topic. Productivity is still an important topic. And we're very well positioned here with the breadth of our portfolio, our global reach in this business as well as the size of our service business. And we've talked about that in a bit in the past. And service is very important in Product Inspection because of the uptime of these lines. And if you look at the United States as an example, we would estimate -- I'm sure you heard us talk about this in the past, but we would estimate that our service organization is about 7x larger than the next nearest competitor, which is a huge value proposition. So we feel like we're very well positioned here. And there should be a pent-up opportunity post-COVID, but it's just the timing of that is more difficult to determine at this point in time.

Yes. I guess when you think about the '21 outlook, I think you guys originally talked about mid-single. I guess is that still the view? What have -- has customer tone changed at all as we kind of work through '21, maybe COVID numbers are coming down a little bit? I don't want to get ahead of ourselves by any means. But -- and I guess the next question would be, what would it take for this business to get back to high single or even low double this year, given again the comp dynamics is quite beneficial?

Yes. I mean, hey, I -- we still view this year as a mid-single-digit growth number, but acknowledging that we're going to have easier comparisons to last year. But we are cautious while we still -- yes, numbers are getting better, but we're still in the midst of COVID. It's a very fluid situation. And we just know that this business has been the most negatively impacted out of all of our businesses by COVID. So from our perspective, we really need to get on the other side of COVID. And I think at that point, we'll start to see things start to accelerate. We view the business very much as -- I think post-COVID, I would be surprised if we didn't see this business as a high single-digit business kind of post-COVID, at least for a period of time, as there's reinvestment and pent-up opportunities. And certainly -- and also wouldn't be surprised if we're going to have a quarter here or there where we can do some double-digit growth in the business. But again, timing and duration is very difficult to determine at this point in time.