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

Good afternoon, everyone. I'm Derik De Bruin, the Senior Life Sciences and Diagnostics Tools analyst for Bank of America. On with me right now is my colleague, Mike Ryskin. And our next company right now is Mettler-Toledo, who's joining us. With us from Mettler is Chief Financial Officer, Shawn Vadala. Shawn, welcome.

Thank you, Derik. Thanks for hosting us. Hi Mike.

So Shawn, thanks again for participating at our conference. I appreciate hearing -- having you join us today. To set the stage, do you want to give your opening remarks before we jump into Q&A?

Yes. Sure. So we just announced our quarter last week, off to a really strong start to the year with a very strong first quarter and also what we believe to be a very strong second quarter guide. We feel, overall, we're emerging from COVID as a much stronger company. And so we felt like we entered it as a strong company, but we feel like we're coming out of it a bit stronger. One of the things we focused on a lot last year was how to navigate COVID in terms of COVID resiliency in terms of end market segments. But if you kind of, like, look at the other side of that, we were also trying to prepare for which segments would recover the best from COVID. And what we feel like is like a lot of the work that we did last year to prepare for the recovery is really paying off very much so in the first half of the year. And if you kind of reflect on some of the topics we talked about in terms of digital marketing tools, in terms of the ability to identify opportunities and then provide the sales force tools to be more effective, in terms of their selling process, the momentum on all those trends are very strong at the moment, and we're seeing really excellent conversion through all those types of activities. I'd also say that the organization continues to just really execute really well. And I continue to say the culture continues to shine very brightly. And [ agility ] has been really something that we've all had to be over the past year, and we continue to see that as the market continues to take different turns in different directions, and I feel really great about our ability to identify and react to those types of situations and ultimately serve customers.

Great. So I think to kick things off, I think the biggest change since we did our last conference is that Olivier retired, as CEO, and Patrick Kaltenbach took over his helm. Actually, I don't think we had -- I don't think we had a chance to say a proper goodbye to Olivier. So if you're listening, Olivier, thanks and good luck. And so I also just want to say the question. The next question I want to ask is, like, so what sort of new skills or perspectives does Patrick bring to Mettler?

Yes, sure. Before I answer the Patrick part also, obviously, Olivier was some fantastic CEO, and we're really happy that he's going to remain on our Board, and he's also going to remain involved in some of our marketing activities in the background. And under Olivier's leadership, we built a lot of really important programs like Spinnaker, Blue Ocean and Stern Drive, just to name a few. And these programs are very well ingrained in the organization, and we have really strong momentum on all those programs. With Patrick, we're very happy to have Patrick on board. I mean he brings more than 30 years of experience in Life Sciences and Analytical Instruments. He also brings a very wide range of experiences. When you think about a CEO, it's a very unique job description. And when you look at Patrick's resume, there's a lot of breadth there. Kind of, early on, for the strength in R&D, and Product and Development, but he also has a lot of experience in sales and marketing, also running a service organization. Lots of global responsibilities for large businesses and also a strong track record for talent development. So we just felt like -- the Board felt like with that combination of the breadth of his experience as well as the strong foundation that we have in place really sets us on a really good path for this continuous improvement, which is really part of our DNA. And then, of course, the cultural fit is always critical at every level of the organization, especially at the CEO level. And I'd say that the Board was very highly focused on this with their search and can attest, Patrick's been a really great addition to the team and is really off to a great start.

Great. I just want to ask another, sort of, like big future question because it, sort of, like thoughts into some of your conversations on the culture of the business. Look, I think, very few investors would argue with the fact that Mettler's execution and consistency to meet and exceed targets is beyond that of most of your peers. I think you've either outperformed a lot of your peers in terms of growth and performance without like revolutionaring your products or bold strategic moves. So I guess the biggest question I always get on Mettler is, like, why -- what's the secret sauce? Like, why -- what is it about Mettler's business, given -- is it your market? Is it the business model, that just consistently allows the company to outperform?

Yes. I think there's a lot of ingredients to the secret sauce. Maybe I start a little bit with the business model. And then we can kind of talk about the organization, and ultimately, the culture, which I really am passionate about, that does make a lot of the difference as well, too. But if you look at the business model, I mean, we're -- we've said it many times in the past, but we're a global leader in very highly fragmented markets and also very niche markets, very niche markets. So if you look inside of Mettler-Toledo, we have about 25 different types of product categories that we manage the business towards. Each one of those categories has very dedicated product focus in terms of research and development, product marketing, but it also has dedicated sales organization as well. And so -- and we're selling often directly to the end user. So -- and we're selling at relatively low price points. So we have a really interesting dynamic where we have direct sales specialists who can articulate the value proposition directly towards a customer who's using the project -- product, understands it and has an appreciation for the value and therefore, a willingness to pay. So to me, that's also important. And so when you step back from that, we're typically number one, about 75% of the time, but at the same time, we only have a market share, hard to measure, but probably still in that 25%-ish kind of a range. So plenty of market share to gain. So we just need a little bit of a market share gain each year to really hit our targets. And then you kind of like get into the diversity of the company. We have tremendous diversity in terms of customers. Our largest end customer's probably in that 1% kind of a range, lots of diversity in terms of products, applications, also even competition. And if you kind of go back to those 25 businesses, we typically have different competition in each one of those silos. So a lot of the secret sauce thing comes with managing also that complexity that I just described. And so then that gets into the organizational architecture, which tends to be very flat. Flat architecture drives accountability, also drives a certain level of entrepreneurship where we have leaders that really own their business, can stay close to their markets, that facilitates the agility that we talk a lot about. And then you kind of get into like the overall aspects of, like, the culture of strong execution, focus on continuous improvement, collaboration, all these things. And when you, kind of, put it all together, we feel like we have a very great platform with a really powerful culture that can continuously improve, kind of, as you go forward.

Got it. Speaking about performance, can we talk a little bit at about the first quarter and, sort of, what you saw coming out. You did -- local currency sales grew 18%. You guided to 11% to 13%. I think, certainly, most companies -- I think, most people expected you to beat, just given, sort of, the trends going in to it, but I think plus 9% was ahead of the expectations. I guess, can you just, sort of, talk about the broader markets, and where you're going? And I guess the other question is -- the 2 questions on that is, like, where are there still pockets of weakness? And how much of what you saw in the first quarter do you think was due to catch up spending and the demand versus just customers feeling better about the macro environment and accelerated spending?

Yes. Sure. So maybe I'll give you a little bit of color on the business and then, kind of, answer some of those questions that you just asked at the end. So as I mentioned before in the beginning, like very broad-based growth. I mean, almost every category had excellent results. So I'll start with the Lab business. We had 20% growth in Lab. We saw continue -- we started to continue to see like the strong trends that we saw earlier in biopharma. Biopharma remains very strong, as you would expect. But what we also saw in Lab was a recovery in a lot of the non biopharma segments. We highlight chemical as an example, but there were also really good improvement in several other market segments as well. The Lab business continues to really benefit from a strong portfolio as well as our Spinnaker sales and marketing initiatives in our ability to target growth. And it kind of goes back to the beginning when I talked about preparing for recovery and being prepared for certain market segments to come back. The Lab business does benefit a little bit from some COVID testing tailwind. Overall to the total group that was about 2% in the first quarter. And to the Lab business, it would be about 4%. And as we kind of like look towards the second quarter, we still expect very strong growth in the Lab business with something in the range of the mid-20s. If we, kind of, skip now to the industrial business, the core industrial business has been just phenomenal for the last few years. If you kind of look at it relative to the situation in the past few years by quarter, it really performed extremely well, and this quarter was certainly a highlight with 25% growth. We saw exceptional growth in China. And we can talk maybe a little bit more about that in a bit. But the trends there are very strong. But we also saw -- what was also nice is we saw double-digit growth also in the Americas, in Europe as well. And so we also feel like, probably out of any of the businesses, this business continues to benefit from Spinnaker in terms of our ability to really target the most attractive opportunities in the market. And we've talked a lot in the past about how we are focused -- it's over time improving the mix of that business towards the more attractive market segments, and we just really see that continue to gain traction. We also see the markets shifting in a favorable direction towards topics like automation, digitalization, connectivity. Especially in China, we see that. And I think our portfolio is also benefiting from that as well. In terms of Industrial, there is also a pent-up topic, and I'll come back and talk about that, maybe more broadly, after I get through each one of the businesses. Product Inspection came in as expected, up 5%. This business continues to be the one that's been the most negatively impacted by COVID. As a reminder to everybody, about 70% of the business is sold to packaged food companies. And these companies have just been more strict in terms of having visitors in their facilities, also a lot of operational challenges at a lot of these companies over the past year. Our guidance for the rest of the year here was more like mid- to high-single digit. And we -- when we talk about risks and opportunities, this would clearly be one that we would put on the opportunity list in terms of the timing of when we start to see some of this pent-up demand start to come back. We do start to see some early indications in our pipeline. And of course, it's going to take time for that to translate into orders and let alone sales. But it's nice to see some early activity there. And then our Food Retail business was up by 13% and off to a good start in the year. If we look at it geographically, China was clearly the standout with 44% growth. They were down 13% last year, but still on a 2-year combined growth basis, really strong start to the year with great growth, both in the Lab and the Industrial businesses. And then if we look at the West, both Europe and Americas were up 14%, which was also a very nice start to the year for both of those regions. And speaking, maybe specifically, to the questions you added into the -- your initial question about pent-up and some of these other things. In terms of pent up, it's difficult to tell, right? Like clearly, there's an element of pent-up. We see it with some of the markets that have recovered in the Lab space, like chemicals, as an example. We also see it in some of these western numbers, as well as even China. Like, China, I feel is a little bit on a Wave 2 of recovery. The initial recovery was a little bit focused on their local recovery. Now they're participating in a global recovery. And so for me, it's a little bit difficult to pinpoint how much of that is really -- of our numbers is pent-up and how much of it is sustainable. That's why we're a little bit more cautious when we look at our guidance for the second half of the year because we feel very good about the growth in Q2. We can see those trends continuing from Q1. Always difficult to tell beyond the current quarter that you're in. So we, kind of, default a little bit towards more of a more normalized multiyear growth rate for the second half of the year.

Yes. But along those lines, I mean, you're talking about 20% growth in local currency in the first half and then going down to the mid-single digits in the second half. It just seems like -- that seems a little draconian, just given the trends so far. But what's your biggest concern?

Yes. I mean, probably, a little bit that we start to get into comps in the second half of the year, like, China grew 17% in Q3 of last year. Their Industrial business, I can't remember the exact number, I think it was up over 30% in Q3 of last year. We certainly have the COVID -- we don't have a large tailwind from COVID but we'll start to see that fall off in the second half of the year probably in the testing labs . But I can't sit here and say that we have a lot of concerns with the end markets right now. There's a lot of favorability there at the moment, and we're executing really well. And then -- but the other side of it is, like, there is a question at some point after stimulus, after catch-up, what does it look like. And it's just -- we don't know. And we do know things can change quickly. We've seen things change very quickly, many times over the past year. So we gravitate a little bit at this point to a more normalized -- I wouldn't call it draconian, it's really more of a normalized multiyear growth rate. But clearly, there could be some upsides in different areas like Product Inspection or maybe there's more sustainability coming out of China is another example.

Got it. And your -- can you remind us just how big the overall random business is the pipette business?

Yes. it is, probably, about 10% of our total business, probably a little bit more than that in the last few quarters given their growth. But yes, a little bit more than 10%.

Got it. And you're just -- I assume [indiscernible] been good in that, just given the shortage going on, there's going to be some pricing gains in that business more so than average?

Yes, definitely. I mean we started the year with higher than normal price increases in that business. We very recently put in place some additional pricing measures, not only for that business, but we did in different businesses around the world, just kind of in response to some of the increased material costs that we we're experiencing and seeing. So for example, it rained in a lot of it comes down to increased cost in resins, which are up very significantly -- the Texas situation, kind of, exacerbated that. And so for us, we were -- very much had our eye on this during the course of the first quarter. And already started to really start actions in the second half of February. And so by the time we got towards the end of the quarter, we were already in April, communicating to customers and with new prices in effect already, kind of, entering into the month of May.

On that point, on the increased input costs. I mean, I think inflation is sort of on everyone's mind these days. How much of that typically can you pass on to customers? How quickly can you adapt to rising input costs, whether it is a waiver or COGS? And sort of, how much wiggle room do you have on price on the back end? Because normally, I mean, I think you take as much price as anyone else in the group, if not more. So how much more wiggle room is there?

Yes. I mean when it comes to wage, of course, that's set annually, so we can really factor that into our annual price increases. It's really more of the material costs that are more volatile within a year. One of the real benefits that we have, Mike, is Blue Ocean. Blue Ocean has a lot of benefits and just the visibility into the business. And being able to really understand these costs and the magnitude of them and to do some sensitivity analysis on it allows us to be able to react very quickly. And so already for this year, we were already anticipating this situation, frankly, on higher inflation, and it was one of our highest priorities really kind of coming into the quarter. And so globally, we were able to align on some actions already by the end of March. And like I said, we've already been able to communicate them to the customers, and they'll start to take place in the month of May. And we kind of, like, looked at it very differentiated, like we always do. Whether it's different product categories or different countries that would have higher inflation in this environment. So I feel like, so far, we've been extremely agile. I think that we certainly feel like good -- that we've taken some actions already to put us in a good position with what we would perceive as higher material costs for the rest of the year if things get worse than what we expected. We also created a little bit of flexibility with a couple of things we did. We typically don't do surcharges, but in a couple of areas where we thought that we needed to be bold because of the high material costs and that things could be volatile, we thought it was best for us and the customer to do a surcharge that we can flex either way if we need to. So while we have the biggest risk, I think we also have like a mechanism there to help address it. And then I think as we kind of get towards the end of the year, of course, or even towards the end of the year, we can then assess the situation and then take that knowledge and build it into our 2022 pricing for our annual price increases next year. So I feel like we've put ourselves in a pretty good situation given the challenges at the moment.

Great. And Shawn, you -- historically, the company has not done a lot of deals. And I think you did a couple in 2018/'19, and you just recently did the PendoTECH deal. Is this a sort of a subtle shift in strategy that, going forward, you have to do a little bit more capital allocation towards deals? Or is this simply just targets of opportunities that showed up right place, right time and you were just there?

Yes. I mean, timing is everything. Like we've always felt like we're a great fit for bolt-on M&A. I think PendoTECH is a great example of that. But we've always been very disciplined with what we refer to as our own strategic fit. Like, we're very disciplined on that. So we want a tight strategic fit. And when that comes available, we jump all over it. And so if we had another PendoTECH tomorrow, we'd jump on it as well, too. But I don't view that as a shift in our strategy. It's just really a question of availability and doing something that's strategically beneficial for the organization. But maybe just to talk about PendoTECH for a second. I mean, we do think it's a great strategic fit. It really complements our Process Analytics business, which is really one of the jewels of our portfolio. Process Analytics is probably about 10% of our overall business but really serves very attractive end markets with a lot of that business in bioprocessing. And so we feel very good about the combination of our business and their business. If you look at why we're confident with that, they're highly complementary because PendoTECH is very focused on downstream bioprocessing, where we're more focused on upstream, not that we don't have downstream applications, but our strength just tends to be more upstream. And then PendoTECH also has a leadership position in single-use sensors. And so we have single-use as well. But to get that combination to us is highly attractive. And then the other thing that's complementary is geography. PendoTECH is, as you would expect, very much disproportionately focused in the United States. If you look at like their Asia Pacific business, it's only like 2% to 3% of their business. So I think we can really help them out quite significantly when it comes to growing internationally.

Got it. And how should we think about I mean, look, you've continually expanded margins, new products, price, all this, I think, for years, people have been telling me that Mettler is going to run out of room for margin expansion, yet you seem to push it to new levels every year. As the question goes, it's like is 50 basis points a year, still a good, sort of, model to think about this for the business, the underlying business? Or do you see 150?

Well, we're still operating under the 70 to 100, to be honest with you. We still feel really good about it. We -- if you look at our -- all the ingredients to the margin expansion story, they're all -- they're all doing very well. I mean, it starts with having organic sales growth, which I feel extremely good about at the moment. Then you get into the programs, like the pricing program we've been at it for over 10 years now. And we have just as much opportunity and enthusiasm today as we have in the past. We've talked more recently about this next chapter of pricing where we get into active price guidance where we're literally providing information to the sales force right at the time of quotation based on the data attributes of the quote, and to tell them like a recommended price. And as we piloted this capability, it's been very, very successful. And so -- and we're just at the beginning of rolling it out globally. So there's a lot of benefits from that. There's also some productivity that comes along with that, too. But something that really gives you some insight in terms of where we are in our evolution going from 10 years of, like, look back analysis and just having good transparency in the past has been positive. Now we like literally have machine learning that takes all this data and can recommend a price based upon the data attributes of the order. And we've done a lot of data studies over the last few years to really determine what's most correlated to price. So we feel like this is a great example of where we're going in pricing, but also probably a good example of where the business is going in other areas as well, too. Then you have Stern Drive. Stern Drive still has well over 300 projects. I think last year, it was over 400, maybe even of different isolated projects focusing on direct material cost savings, direct labor productivity and other types of savings and productivity as well in the back office. And so we feel like we're still relatively early innings of Stern Drive. We feel like there's still a lot of opportunity within our complexity of Mettler-Toledo to harmonize and optimize things from an end-to-end perspective. And that's where Stern Drive is now having a bit of its focus. And so yes, so we feel very good about our ability to continue to expand margins. And then I should also mention that if you look at the businesses that continue to grow higher than the corporate average, whether it's product or even region with China. We tend to continue to increase the mix of our businesses towards the higher-margin [ is best ].

Yes. Couple of minutes remaining. I need to ask you a question on tax rate and, sort of, like tax initiatives and sort of, like, what's you're current thinking, potential reform prophecies? Yes.

Yes. I mean, obviously, difficult to assess very much a moving target. Will be very interesting to see the final details on what ultimately gets -- becomes law. But if we kind of just take a step back and we do our initial back of the envelope from the initial discussions, not trying to make adaptions for any of the recent rhetoric with changing of rates. Our initial first blush was that our 19.5% tax rate could go up to something in the 24% range. But I also would really emphasize this was very preliminary, and anyone that's familiar with taxes knows that the devil really is in the details, and how they define things will ultimately be important to see what it ultimately means to us.

Got it. And, I think, a question I'm asking all the companies is, what do you think changed about your industry in general and Mettler-Toledo, in particular, in the wake of the COVID pandemic. I guess, how do you sort of see your business and your markets changing? What's going to be different?

I think our end markets are going to come out stronger. The focus on health and life sciences and safety are going to be, I think, very favorable for our end markets, whether it's Life Sciences or Food Manufacturing, as good examples. I think that we, as a company, are also going to come out stronger. I mean, we already -- I think, we already are. And I think a lot of the things that we talked about last year with digitalization with marketing capabilities is something that has so much more runway to it, where we still are seeing so many benefits from the things that we've done over the past year, and we're still focused on continuing that journey going forward. I also think that we have gained share in COVID and that there's a platform that continue to gain -- continue that journey as we also go forward. Our ability to serve and support customers has been something that I think really has stood out over the past year, and that's enhanced the brand and helped us build trust with customers and also win new customers. And I think that's going to be something that's a benefit going forward. And then like any organization, you like to think that you're going to come out of it also a little bit more productive with our ability to also use digital tools in the workplace.

Yes. I think, we're all trying to figure out what our life looks like. I know, we're certainly more productive. So hopefully, the productivity gains can last, going forward. With that, Shawn, thank you very much for being here. Investors, thank you for listening. We always appreciate your support. Have a great day, and thanks for being here.

Yes, thanks for hosting us. Take care. Bye, everybody.