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

Okay. Welcome back, everyone, to the life sciences and diagnostics track of the Stifel Healthcare Conference. We have Mettler-Toledo with us next, and we're happy to have CFO, Shawn Vadala, speaking on behalf of the company. I know Mary is offscreen there, but we won't make her peek her head out, again, just for her own purposes. So Shawn, thanks a lot for spending some time with us here.

Yes. Hey, Dan, thanks for having us. Really good to see you, and happy to be here today.

Yes. My pleasure. Glad to have you guys.

Maybe we can just start with just the way that the year has progressed. And thinking about one of the considerations being this idea that pent-up demand has been something that's helped a lot of companies in our space just by virtue of what couldn't be done during the pandemic. And a couple of the calls -- in fact, probably each of the 3 calls this year have involved a little bit of a discussion there just in terms of what you think you have coming to you once you start to wane on that pent-up demand, if, in fact, you think it will wane. So can you just sort of ground us a little bit on the thought process there?

Yes, sure. And if you don't mind, maybe I'll even give a little bit of color on the third quarter. And then I'll kind of like transition into the -- specifically about pent-up demand. But as you could see, the third quarter, we're very pleased, came in better than expected. We saw very broad-based growth throughout the portfolio with the exception of our food retailing business. But what -- one of the things that really stood out to us is that our growth was very strong on a 2-year basis. If you look at the growth in the quarter, 16%. But if you look at it on a 2-year stack basis, it was, I think, up about 22%. And if you look at our year-to-date results, we're up 20%. And then on a 2-year stack basis, it was up about 20%. So we're really seeing very strong 2-year growth throughout the portfolio. China was another highlight. I think back a year ago and we just came off 17% growth in China last year. And then we -- to do 19% this year on top of 17%, we were really pleased with that. We're seeing very favorable market trends in many areas and also very strong execution in the company. When I look at market trends, of course, biopharma is a standout, continues to be very strong. But then, getting to your pent-up demand question, we have benefited from some pent-up in other industries. I mean chemical has been very strong. Hard to tell how much of that is pent up, but that's been kind of a standout. We've also seen other industries or end user markets also performing well this year. Academia, I think, has come back. Maybe not 100% but certainly segments of academia have also done well, and we've seen some pent-up there. And then, of course, if we look at the industrial markets, that's where there's probably even been a bigger pent-up opportunity. But if we step back from that one, the Industrial business overall has continued to do very well and has shown really good resilience during the environment. But it's very difficult to tell how much of that pent-up we benefited from, from this year and how we look at it going forward. If you look at the guide going forward, we are a little bit more modest on the Industrial business versus our Laboratory business. But one thing we see maybe cutting through some of these trends is market shifting towards automation. The needs for automation were certainly a topic pre COVID, but kind of during COVID, it's just accelerated. Same with digitalization and connectivity. And what we're seeing is that those trends are playing out well, both in the laboratory space, and as you know, in laboratory, we have LabX software, which covers up to 40% of the instruments on -- or we sell typically up to 40% of the instruments on a lab bench and many of those are connected with LabX software; but also, on the Industrial side. And I hear that more and more from my colleagues on the Industrial business globally. In fact, I just had a conversation with one of our product leaders yesterday here in Columbus who was traveling here and just telling me different stories about what the market's looking at globally. And really, we have been very well positioned here with our investments in innovation to really be a more friendlier user interface for these companies, but also the market really is demanding it. And then the other trend we've seen is the acceleration of our digital marketing strategies. Like we talked about that a lot last year, but they just really are thriving in this environment. And when you kind of go back to the beginning and we talk about this really strong 2-year stack sales growth, we are continuing to take a little bit more market share than what we've done in the past. And I think certainly, part of that story is our digital marketing approaches. The ability to identify opportunities, guide the sales force towards those opportunities, as we do it, we're deliberately focusing on more attractive market segments. And then we're providing them with a lot of different tools to be successful in front of the customer. And then, of course, we're using a lot of different techniques to better engage customers. So that's going well. The one challenge, of course, is supply chain. I expect we'll talk more about that during the conversation today. But it has been a competitive advantage. It's been a challenge, but I think it has been a competitive advantage. And then all that's really translated into very strong earnings. You saw 24% in the quarter; year-to-date, plus 43%. And again, if we look at it from the lens of 2-year combined, it's in probably the 45% range in the quarter and over 50% year-to-date. And then on top of all that, the cash flow has been really good. Our cash flow conversion for this year is expected to be more than 100% for the second year in a row. So we really feel good about the quarter but also the year-to-date results. And then more specifically, to your pent-up topic, of course, it's difficult to measure these things. We certainly felt like there has been pent-up demand in the year. We will face a more difficult comparison next year, as we look towards 2022. We certainly kind of factored that into our guidance as we thought about Q4 being about 8% constant-currency growth and then next year being approximately 6% growth. But like I said, there is pent up, it's hard to measure. And I think we'll see a little bit of that play out. Certainly, as we kind of like look at the individual quarters next year, I think we'll see maybe a little bit of variety based upon some of the 2-year and 3-year kind of growth type numbers.

Okay. To your point on automation and that being something that's increasingly in demand right now, is that -- are you seeing that as a pandemic -- COVID-driven decision to purchase instrumentation? Is it explicitly we want some things that could have less -- fewer guys standing next to each other in a lab or in a room? Or is it more just a natural evolution of wanting a more seamless workflow?

I think it's both. I think when you have -- well, maybe the last part, when you have automation, you have that seamless workflow with better quality data that's better integrated into your systems. That was certainly a trend we saw before. But the first part of what you said I think is very true. And I think in a COVID environment, certainly, there is a desire to have less people touching instruments. But now you kind of think about labor disruptions around the world, and it's even further exacerbated. And as companies even start to think -- rethink their supply chains in terms of maybe reshoring or near-shoring, that also -- as you start to make changes, you're going to probably do that in a more sophisticated manner than you did in the past. And so I really see that happening not only in the laboratory space but very much happening in the industrial space. And like I said, we -- that plays to our sweet spot. We've always been well positioned there. Fortunately, we'd also been investing there pre COVID from a product perspective. We've also introduced some new products recently and in the process to do that as well. And so we feel very good about these trends. I think you're right, they're not short-term trends. We do see them as longer-term trends. And what's nice about it is they're global trends. This is something that I was hearing very loud from my Chinese colleagues earlier this year, but I clearly hear that as well from colleagues throughout the world in every major geography.

Okay. Helpful. Let me ask specifically about product inspection, if I could. I mean that's a part of the business that's -- where the moving parts are, A, the things that are going on in the market, obviously; but B, some of the things that you guys have been doing operationally. Before the pandemic, we were at the Tampa site, and it felt like you guys were -- you were talking about being on the cusp of finishing up ERP in the next year or so. I think you're at that point now. So can you just sort of give us the view of your outlook on that business when it comes to just, A, the end market conditions and what customers are wanting; and B, how you feel like internally you're set up to be more successful than you might have been in the past?

Yes. From an end market perspective -- maybe I'll back up. So coming off a good quarter, right, like 13% growth albeit softer comps compared to the rest of the business but also happy with the guide for Q4 and next year of more high single digit. About 70% of that business is sold into packaged food companies. These companies certainly have been the most challenged, at least from our portfolio, in terms of operationally challenged and distracted during COVID. We certainly have been seeing improved order and quotation activity in that business during this year. Certainly, on -- the early side quotations have been higher over the last couple of quarters. We saw some of those benefits here in the third quarter. And if you just kind of think about the underlying needs of these customers, the needs to focus on food safety, brand protection, productivity uptime, I mean these were needs pre COVID, and they're probably also accelerated and increased during and post COVID. So we feel like the needs are there. And then we also, of course, feel like we're very well positioned. If you look at the breadth of our portfolio, we're broader than competition. We also have a very significant service organization. Like in the U.S., when you were at Tampa, you would have heard it's about 7x larger than the next nearest competitor, very important in terms of uptimes. In terms of the pent-up opportunity, we've always felt like it's difficult to judge. We feel like, hopefully, we can start to string a couple of -- more than a couple of quarters together here with some higher growth than normal. I always felt like this business can have upside or downside, depending on how these projects go through. If the -- if we kind of enter another difficult wave of the virus, that could be one of those things that could create some short-term distractions with things getting pushed out. But overall, we're positive. We feel like we're well positioned. And then if we look internally, we have some really nice product launches that have been recently launched to the market and that will also be launched next year. So we feel really good about the portfolio as well kind of entering next year. If I think about the operational side, yes, it's a really interesting question. I mean the Blue Ocean go-live in Tampa last year has really given us the ability to have much more transparency into our business. This business, like a lot of our businesses, does have its challenges in terms of supply chain. But what Blue Ocean has been able to do is it's allowed us to have that transparency so that we can quickly react to situations and then we can leverage our global platform to maybe reroute things or better optimize our internal supply chains where we can maybe source from another part of the world and help each other out. And by doing that, we've been able to avoid potential shortages of certain components. And that's something that we've seen not only in product inspection but also globally. And that -- and if you talk to our teams, they'd also say it's -- Blue Ocean itself is what helped us reduce our manufacturing lead times as well as manufacturing costs. But I would also say that from my perspective, we're very much in the early innings of Blue Ocean optimization in Tampa. I'm really happy we had it in place last year so that we can continue to navigate COVID with that benefit. But in terms of like operational efficiency, I see a lot more opportunity there kind of going out the next 3 to 5 years.

Okay. Okay. And then just on -- you mentioned there's upside potential for PI. If that were to materialize and you would have looked from a regional perspective, would China be the most likely driver there?

Well, China, we've always felt like does have upside. I mean it's a smaller part of the global PI business, but certainly, it would be -- it's very -- it's an area where maybe only 5% of our Chinese business is probably product inspection. Globally, it's around 15%. So clearly, a penetration opportunity. I -- we just launched -- as part of these launches, we actually launched a product that is very much geared towards the middle market in China. So I think that will do well. So I would expect -- I wouldn't be surprised if we saw some upside there. But to really move the needle like next year, it would be more about seeing some of the larger Western companies really get back to global rollouts and really get back into an investment mode. We feel like the -- and if I had a guess, I would say the U.S. would be the region that would do that versus Europe. I think conditions in Europe are probably more challenged than they are in the U.S. in that regard in terms of packaged food companies.

Okay. What do you make of the situation in Europe right now? I mean it's -- they're dealing with some real COVID challenges that I think, in the U.S., we tend to -- it feels pretty good here. So maybe you can kind of forget the extent of the things that Germany and The Netherlands and some of these other countries are dealing with, do you feel like that is -- I mean you guys do a nice job on mitigating concerns, but how much is the situation in Europe really kind of on your mind when it comes to being sufficiently paranoid, so to speak?

Yes. I mean we're always looking and monitoring all the different regions and product categories and end markets. I mean we certainly see the case counts in Europe. I'm on the phone daily multiple times with colleagues from Europe so I hear a little bit the firsthand antidotes (sic) [ anecdotes ] about what they're experiencing. From a company perspective, I would say that if you look at this last wave, I really don't think it had much impact on our business. I mean you might get some things delayed, but in terms of like access to facilities and these types of topics, which were much bigger issues in the first waves of COVID, we didn't really see that as much, and we didn't really see too much of necessarily a change in buying behavior. But does it affect the broader economy? Good. Certainly, from a consumer perspective, it's going to affect consumer-facing businesses more. Certainly, it has an impact on social protocols, which can affect travel and topics like that. But right now, we're monitoring it, but we're not as concerned in the short term about COVID necessarily being a disruptor. But the toll certainly could be there. But we'll also have more modest expectations for Europe versus the other regions, too. Like when we look to next year, we're more cautious, more low to mid-single-digit growth. And then out of the 3 regions, the major regions, I would certainly say that that's the one that is on our mind in terms of like could it be a soft spot kind of during the beginning of next year. We'll see how it plays out, but certainly something to monitor.

Okay. Helpful. Maybe just on the lab side, pipette demand has just been outrageous for the last year or so. 2022 expectations, I believe, call for high single-digit growth based on the initial look. Can you kind of separate out what you're thinking you might have if you remove the Rainin piece from the rest of lab?

Oh, gosh. So if I look at like Q3, Rainin had really good double-digit growth, but so did the rest of the lab portfolio. In the third quarter, it wasn't the fastest growing business we had, but it was right there with our other businesses. For us, what was really interesting in the third quarter is that we saw COVID testing labs start to be a headwind in the quarter for pipettes. But we also saw other areas like just regular biopharma research as well as academic research and more of the high-end labs really picking up. And so overall, the net situation was positive for us, which was good because we certainly expected the headwind from the COVID testing labs, but it was a pleasant surprised to see the other labs doing well. So when we look at the business for next year, we're definitely much more modest because we're going to have a much bigger headwind there in terms of the COVID testing labs, bigger for that particular business. But then we probably also had a little bit of pent-up opportunity with some of these other labs in the quarter. So for pipettes, we probably will be flattish next year. But that's in the context of, I think, high single-digit guide for the overall lab business to kind of put it in perspective.

Yes, that's helpful. I think your -- if I remember the comments from the call correctly, you're expanding capacity on the pipette side, and I think you got some government subsidy there or a grant to do that. Does that have margin implications if you're able to sort of build out your manufacturing capability on the government dime and then benefit from the volume, the leverage?

I mean of course, there'll be some efficiency gain. I mean we're going to get more capacity. It will also help us out with logistics for pipettes as well. So I'm sure there will be some benefits because, like you said, it's a grant. But I wouldn't also -- if you put it in the grand scheme of Mettler-Toledo, it's not going to be significant. But very pleased with the grant and really helps our capabilities in regard to capacity but also logistical capabilities.

Yes, it doesn't hurt. I mean it's better than poking the eye with a stick, as my dad would say.

Yes, yes, exactly.

Okay. And then maybe just on pricing overall. I mean where -- you've done really well with price in the past, and it's been pretty consistent. I'm just curious, whether with the pandemic and just the way that things have evolved over the last couple of years, are there new pricing opportunities for you? Or when we think about '22, '23, '24, are you likely to get pricing from sort of the predictable spots, the spots that you've gotten it in the past?

Well, I mean, it's a little bit of both, right? So like on one hand, there's just certain categories where we always have a very good foundation and position for pricing. And so those areas typically tend to be in our laboratory portfolio. Of course, the answer is differentiated based on what category we're talking about within laboratory, but I definitely see that playing out as well. And overall, I would expect the lab portfolio will have higher price increases versus the rest of the portfolio. But at the same time, we also are looking at the actual situation and differentiating off of that. So like, for example, in the Industrial portfolio, if you go back to the beginning of this year when like steel prices started to significantly escalate, we looked at which industrial products we sell that have the highest steel content, and we had, in some cases, double-digit increases. And some of that was surcharges versus increases, but we were very quick there. And I think it's just a good example that we do try to differentiate but also look at the specific situation. And I -- what I would say is as we kind of go into next year, we're going to continue to do that. And I kind of feel like the combination of being -- having the ability to closely monitor the situation through our systems and then having the organizational culture to be agile enough to react timely to those conditions is really the basic formula to succeed in this environment. And whether it's pricing or supply chain or whatever it is, that's a very oversimplified view of what we've been trying to do, is to really leverage the transparency we have into our business and then have a culture that can quickly react. So with pricing, we have certainly a presumption of what we are planning for, for 2022. But the reality is no matter what topic we're talking about, we know things are probably going to change, and we're going to have to react, and that's the key. And we're already very closely looking at pricing for next year with the organization, and we will react as things change and evolve. And as you know, it's just such a dynamic environment. I mean I don't think any of us have really been through a business cycle that's been so dynamic from many lenses. And so -- but I do feel very good about our organization's ability to respond to these challenges.

Okay. And sorry to just ask the question if you mentioned it on 3Q, but the pricing assumption in 2022 is what?

3%.

Okay. 300 basis points, got it. Maybe just bouncing around a little bit and asking about China specifically. I think the outlook there is for 10% for 2022. Do you think that that's fairly balanced between lab and Industrial. I mean labs got the harder comp, but there's obviously a lot of good things going on there. So how would you -- how should we look at the 2 components there?

Yes. No, I mean lab does have a hard comp, I mean, but so does Industrial actually, too. And -- but we do feel like more positive about lab for 2022 because I think Industrial benefited more from some of this pent-up stuff topic that we talked about as well as some stimulus from the government, which is also always hard to quantify. So when we take a step back, we'd expect lab to do probably low double digits. The Industrial side might be more like mid, maybe mid plus, maybe mid to high, but probably in that kind of a range. We'll kind of have to see how things play out during the year.

Okay. Okay. And then maybe just on op margins. The last plane that I was on was actually to spend a day with you guys in Denver way back in February of 2020. And the comment that you made during one of the meetings was that you actually felt better about the margin expansion opportunities going forward than at a point in the past, which is interesting because a lot of the questions that I get are how does Mettler continue to expand margins. So how do you feel about that statement 2 years later or a year and...

We're still really positive. We really are. I mean -- and if you look at this year, we'll be up probably about 120 basis points on a 2-year basis. That's about 250 basis points for next year. We're guiding to around 100 basis points. But we really feel good. The formula is unchanged, but of course, the momentum is there. The initiatives below it are there. It always starts with organic growth. And I feel as good today as I've ever felt about our organic growth strategy just given the high level of fragmentation of our markets and then just all the things that we talked about -- more towards the beginning about digital marketing techniques and those types of topics. Pricing, in addition to some of the tactical things that we're doing to kind of fight inflation, we're just really in the early innings of rolling out our guided pricing program. I've talked about that in the past, about piloting it and good results. We launched that globally at a global meeting with all the senior leaders in January, very well received, some great testimonials behind it. And that will be rolling out here over the next few years. And for those of you not as familiar with that, we're like literally providing pricing recommendations at the time of a quotation in an order and so -- like just based on the data attributes of the customer. And so it's a very effective tool, and we've had really good results with that. And then, of course, the overall foundation for pricing continues to be the same, right? We're selling, at the end, relatively low-priced instruments at -- directly -- with a direct sales force directly to the end user often. And then SternDrive. SternDrive -- we're just in the process of launching our third wave of SternDrive. It's going to focus on topics like value engineering, smart manufacturing and a bunch of other things. SternDrive tends to have like a few hundred projects or so under the umbrella. And that's also been one of the things that have been also helping us fight some of this inflation. And then Blue Ocean. Like I think Blue Ocean really has been a great enabler for helping us navigate the storm, but also it provides us now the foundation to drive more automation in the organization. Like once you have a single instance of an ERP system with harmonized processes around the world, you can really get a lot more benefit when you start thinking about bots and automation opportunities. So I do think that there's more productivity to be gained through the Blue Ocean program. So as we think about the future, we still think 70 to 100 basis points a year in terms of margin expansion is very much how we think about the future.

Okay. Last point on Blue Ocean then I'll let you go. I think I remember seeing in the last filing that you have about 80% of the users globally integrated into Blue Ocean. Is there a point at which you envision having everyone? Or is that sort of a continuous process and you never actually get to 95%, 100%?

Well, I think we'll eventually have everybody on the system. That's definitely the goal. We have a lot of smaller organizations in Asia Pacific and in Europe that we still need to bring on the template as well as some of the acquisitions we've done in the last few years. The one remaining roll-in that's larger, and it's -- when I say larger, it's about 5% of our total sales, is our French sales and marketing organization, which will not happen in 2022 but probably will happen in 2023. But kind of even beyond these roll-ins, I mean, of course, Blue Ocean is more than just the roll-ins. It's been this platform to continuously harmonize and optimize our global processes. So I do see it continuing, especially as technology improves and creates opportunities for us going forward as well. The relative spend on Blue Ocean will come down over time, but it will be a program that I see will be part of our umbrella programs just like Spinnaker is for years to come.

Yes. Okay. Okay. Let's leave it there. Shawn, always a pleasure talking to you. Enjoy the Thanksgiving holiday, if I don't see you or talk to you. And we will catch up with you when I see you next.

Sounds great, Dan. Happy Thanksgiving to you and everyone on the call. Great to see you as well.

Take care.