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

Bank of America's 2022 Healthcare Conference, coming to you live from Las Vegas. I'm Derik De Bruin, the Senior Life Sciences and Diagnostics Tools Analyst for Bank of America. It is our pleasure to welcome our next company, Mettler-Toledo. And Shawn Vadala, CFO, is here from Mettler today. And I just -- it's been interesting, the -- somebody asked me recently, it's like, Derik, what do you -- how do you best describe Mettler-Toledo? I said, wow, it's very simple. It's like beat, raise, repeat. That's essentially -- this is essentially my thesis on Mettler for the last 20 years that we've covered the stock.

So Shawn, let's kick off, you've reported last week and lot of stuff going on. So can you give us a quick recap of the quarter to sort of set the stage?

Yes, sure. Thanks, Derik, and it's, hello, it's great to see you in-person and see everybody here this week. We were really pleased with the start we had to the year. That's certainly better than expected with 14% constant currency sales growth. And if you look at that on a multiyear basis, like a 3-year CAGR, we feel like we're continuing to perform extremely well. And what's nice is that it's very broad-based. If you look at it in terms of our laboratory business, it's very broad-based in the laboratory business, but also our industrial business continues to perform really well, too. And we do feel like we are continuing to take a little bit more share than we normally have. And then if you look at the geographies, I mean, really pleased with China getting off to a really strong start with 16% growth in the quarter. I'm happy we could also maintain our 10% guide for the full year there. And then in terms of operating margins, there are increased challenges in terms of inflation in the supply chain, but our operating margin was still up by 70 basis points. And if you look at that on a 3-year basis, it's up over more than 500 basis points. So we feel good there. Similar story in terms of EPS. One thing that's also been a little bit more of a headwind, that's changed since the last time we would have spoken is foreign currency. We're very mindful of the currency environment at the moment. At the beginning of the year, we would have estimated it to be about a 1% headwind to EPS. Right now we're estimating more like 3.5% and so that's another one. And there's just more uncertainty in the world that we talked about on our call. But when we step back from all of that, we feel actually quite good about the things that we can control. We feel great about our organizational agility and our ability to continue to execute and really try to react to whatever circumstances there are. I mean it's been a very dynamic environment for the last couple of years. And this last 3 months has been no exception, but we do feel like we have a great culture in the company to be able to continue to react to these conditions and also a lot of great monitoring systems in the business to keep a good pulse on things.

So let's unpack a bunch of stuff there. So let's start with the lab business in your outlook for the year. So you, along with most of the companies in the life sciences tools space reported very robust systemic growth, although recognizing that your instrument profile is a lot different than a Thermo's or a Danaher's. But can you help us understand the dynamics behind the laboratory performance? And then this is also -- let's start there. We'll go to industrial next because once again your industrial mix is a little bit different. But is there unusual buying, catch-up buying, stockpiling, which I can imagine, but just the numbers are so good across the entire industry for instruments right now. And I'm just trying to decide if this is like, are we just about Thelma & Louise over the edge.

Well, I certainly hope not. I mean, if you look at our business, like you said, it's not the type of products that you would typically want to stockpile. I mean maybe some pipette tips. But other than that, I wouldn't think that there's anything in that regard. But if you look at our business, we always benefit from our diversity. And one of the interesting things is that diversity gives us like a lens into maybe the whole value stream. And if you think about it, like in the lab business, we're in research labs, we're in QA/QC, we're in scale-up, in process development. And then we're also in production and bioproduction. And if we look at the products serving all of those different applications, they're all doing well. Like it's not like it's this one is doing well and this one's down. We have actually very broad-based growth throughout our product portfolio in the laboratory. So I think that's doing well. I think our portfolio is strong. We've come up with a lot of new stuff in the last few years. We, of course, continue to benefit from our Spinnaker sales and marketing programs. I do think that our LabX software continues to make a difference. I mean, I continue to see examples of large pharmaceutical companies standardizing on LabX, and of course, that helps them not only with data integrity issues, but it also helps them with workflow automation. And of course automation and digitalization are themes in the lab business as well as the industrial and we'll talk a little -- we'll touch upon that when we get to the industrial business as well. And then when you think about LabX, for us, we do sell up to 40% of the typical instruments on a laboratory bench. And so when you can connect a lot of them with one software application, it's even a stronger value proposition. But we see, from our perspective, we see very good momentum in the end markets, not only biopharma, but chemical is actually doing quite well. And for us, chemical means more specialty chemical, but that's been doing quite well over the last couple of years.

So let's go to industrial. We don't often focus on it given our health care investors. But the results last quarter on the core industrial is where you stand out. Can you just give us a little bit more detail on the size of the business, what are the dynamics on the results? And how much of this business you would characterize as sort of economically sensitive? I think investors are nervous that once again, we're heading to recession scenario, and you've got -- if you just look on paper, you've got a bigger -- you've got a bigger stuff if you slap on a label as industrial relative to some of your peers?

Yes. So if you look at our industrial business, it's about 25% of our portfolio.

This is the core industrial.

This is -- yes, thank you. Core industrial. So total industrial is about 40% with 25% being core industrial, 15% being product inspection. On the core industrial side, more than 60%, we would -- it's difficult to estimate, but we would estimate that a little bit more than 60% of that business is sold into pharma, biopharma food manufacturing and chemical, which is, again, more specialty chemical than chemical. So the mix of that business really has improved over the years. And that's very deliberate, right? We've -- if you think about our Spinnaker sales and marketing programs, this last wave is focused a lot on sales force guidance that we've talked a lot about in the past. And I really believe our industrial business has benefited as much as any of our businesses from that. Because of that focus, the ability to direct the sales force towards these more attractive end markets. And we do that, of course, with data analytics, where we can identify opportunities. We can then summarize those opportunities for the sales force. We've used also analytics in -- I'm sorry, also digital tools to help better enable them and make them more effective in front of a customer. So imagine there's like a digital library of all kinds of tools. That's -- I think their effectiveness and the conversions that we're seeing in the field have really improved over the last couple of years because of that. And then, of course, we're using a lot of digital tools to engage customers. A lot -- I think last year, we might have done a couple of thousand webinars as an example. And that's the total company, not just industrial. But -- and then if you look at the industrial business by region, all 3 regions actually had a good first quarter. Now China was better than the other 2 regions, but they all had a good quarter. So I think that also tells you a little bit something. And then if you look at trends like automation and digitalization, I feel like that's a trend in the lab, but also in the industrial business like companies need to be more productive, right? And so we've seen a great shift towards productivity solutions, and that actually has played really well towards our portfolio. In terms of, think about like the industrial terminals we have that have that connectivity to their systems. And it also helps them with capturing data. And we've also kind of leaned into that trend a little bit from our innovation perspective. So we feel like the market has kind of shifted a little bit towards where our strengths are from a portfolio perspective. And then we've continued to also identify like hotter segments like lithium batteries, microelectronics, things like that. And then I also feel like as we talk about the supply chain and disruptions in supply chain, there's also opportunities from a customer point of view because as customers rethink their own supply chains and they invest, those are clearly opportunities for us as well, too.

I mean, 2 points. One, I mean, you've also changed the portfolio since the financial crisis in this. I mean you're not doing truck scales, I would say, and you're not as much as China industrial, like hard industry, the other ones was. But the other thing is I do think that given this is a health care conference, I do think that some of the exposure to the material sciences markets, some of these other things are underappreciated just on the fact it's like, look, yes, we call it life sciences, but we touch all R&D avenues right now. So let's talk on product inspection. I mean you have the biggest -- I mean, when you mean that, you mean X-ray, checkweigh, X-ray inspection, checkweigh, that type of stuff, and you have the number 1 franchise globally, I believe, in product inspection. And how is that business doing?

It's actually doing well. This is the business that was most exposed to COVID. If you think back over the last couple of years, a lot -- about 70% of the business is sold to packaged food companies. And a lot of those companies were very challenged operationally during COVID. And so they had a lot more stringent protocols about and, frankly, priorities in terms of like how to manage through the virus and in terms of even how they thought about prioritizing investment in their facilities. But coming out of COVID, we feel like there's this pent-up opportunity. We're in our fourth quarter in a row now of either high single-digit or double-digit growth for that business. We feel like we're well positioned. Like you said, we have the broadest range of instruments from checkweighers to metal detectors to x-ray equipment. We have a really strong service organization as well, too. You've heard us say in the past that our service organization in the U.S., we'd estimated 7x larger than the next nearest competitor, and we're very global. And we also have a lot of exciting new products coming out in this business as well, too. So we feel like we're well positioned there. But as we hear things of like lockdowns in China, as an example, it could -- we could see different growth rates in different regions. But if I look at the health of the business, like in the U.S., for example, the pipeline looks quite good at the moment, but things can always change. But right now we feel pretty good about the opportunity.

So let's bounce, since you mentioned China, let's bounce back to China. I mean we think it was very strong in the quarter. I mean considering how people were sort of thinking this and the conversations I was having so we're going into the prints. I mean, given all the lockdowns, given all the other dynamics, I guess, what gives you confidence that an outlook of 10% sales growth in China, given like all this seems to be around is like are you worried about -- what are you worried about? And what's good -- what's going on in the region right now?

Yes, I mean, maybe I'll start with what's -- what we feel good about, and then I'll kind of layer in a little bit to what we worry about. But I -- right now, we're coming -- like you said, we're coming off a very strong first quarter against a very challenging comp last year. We feel good about the guide for Q2 and for the full year. If you look at the business, both the lab business and the industrial business are doing well. Again the mix of business here. The lab business is almost half of our business now. If I think about 10 years ago, it was probably 35% of our total business. I think last year was like 49%. So that's doing quite well. On the industrial side, we've also here deliberately focused on the more attractive market segments that we've talked about. So if you take like our lab business in the more attractive segments of industrial, it's probably more than 2/3 of our -- of our Chinese business. Similar to the global industrial business, just as much there, I'd say trends like with automation and digitalization are playing out very, very well in China. And as there continues to be more focused on developing their own life science industry, as well as other industries, we see a lot of opportunities, like things like microelectronics and lithium batteries. And I feel like our Chinese organization was very quick and agile to kind of pivot towards these types of opportunities as we kind of think about new growth sectors. And like you said, even new materials being an opportunity as well. And so we generally feel good about those trends there. In terms of like what we worry about, I mean we all know things can change very quickly in China. It always has been the case. It can go one way or another very quickly. But when we look medium to longer term, we continue to feel good. If we maybe reflect for a second on the lockdowns there, maybe there's a couple of dynamics. One hand, you have the supply chain. So from our perspective, about 1/3 of our global manufacturing is based in China. More than 75% of that is outside of Shanghai. It's mostly up in Zhengzhou, which I think you've been to in the past. That's about 115 miles outside of Shanghai. Fortunately, they have not had the same experience with lockdowns that we've had in Shanghai. But in Shanghai, -- we've been very fortunate that our logistics hub has been open throughout the lockdowns. We had special permission to be open. And then if you look at our production in Shanghai, we were also fortunate to be one of the first 600 companies to be part of the wave 1 reopening. So they're reopening the city in waves, and we were part of the first wave. And I've heard also that a lot of our suppliers are in the second wave, which -- I don't know if that's this week or next week, but that's maybe another topic there. But we all know that things can change quickly there. But so far, we feel good about how we've been able to navigate that. And then from a customer perspective, we've continued to see good momentum in the market. And then it's also important to recognize that as big as Shanghai is, it's still a very large country. And so if you look at our sales outside of Shanghai, it's probably still more than 85% of our sales are outside of the Shanghai province. But like I said, things can change quickly in the short-term, but we have a very strong organization there. As you know, that's very agile, and we have confidence that we can navigate whatever comes our way in the short-term. But we feel very good about China for the medium and long-term.

So just going a little bit deeper there. So can we talk a little bit about supply chain inflation pricing sort of your margin impacts and sort of help offsetting this? I mean you're getting more pricing than most of your peers out there and your margins keep going up?

Yes. So I -- so the challenges in the supply chain, it's interesting to see how they've continued to increase, right? I mean it's like it's been 2 years now -- and then 3 months ago, we felt like, okay, that's probably the worst, and then all of a sudden, you see what's happened in the world in the last 3 months. And so I feel like on one hand, it's been a competitive advantage of our organization to overcome a lot of these challenges. On the other hand, we certainly have headwinds. So on the Advantage side, I mean, the ability to support customers and have less lead times than a lot of our competitors has allowed us to gain some share. But on the other hand, we do have our challenges. And it's -- you see a lot of broad-based inflation throughout different material categories. Electronic components is, of course, the topic and sometimes the availability of electronic components can be a challenge. We've tend to benefit a lot from our diversity. But at the same time there's often a cost to securing some of these key components. The other side of it is transportation. So transportation, you would have thought that out of all the different categories, this one might be more transitory. But if you look at the last quarter, it's continued to increase with the war in Ukraine, transportation routes that might have gone through Russia, whether it be a plane or a train. They've all had to be rerouted. Gasoline prices are higher. So transportation costs generally are higher in the world. Of course, that might be further exacerbated with when the ports fully reopen and Shanghai. So that's one that we're kind of monitoring as well. But like you said, I feel like we've -- we have been good about working with our customers to increase prices. This is something we'll continue to do if things continue to worsen. Of course, there can be a time lag at times between when we feel the inflation in terms of when we can pass it on to customers. But if you look at like our operating margin, we feel very good about our ability to deliver more towards the high end of our guidance for the full year of about 100 basis points. And if you look at our gross margin, we expect to be more positive in the second half of the year and for the full year, be maybe more positive like 20 to 30 basis points.

Got it. Can we -- one of the comments I've always made about Mettler is that you were big data before big data was a word and just sort of thinking back to the first time I ever met Olivier and he was working on sort of like the pricing and sort of like the sort of targeted pricing and that type of stuff and doing this. So what lessons have you learned from COVID to sort of like -- that you can sort of like funnel back into the system? Because I'm sure you're collecting new sources of data, new information and ways to sort of survive.

Yes. I mean a lot of things, a lot of it comes down to data and analytics. I mean on one hand, right from the beginning, we put in place a lot of dashboards to be able to monitor the business. I mean I remember years ago when we first started Blue Ocean, people would talk about a dashboard that an executive could have to look at the total business. And I, frankly, skeptically at that point, thought flush was a really good thing, but I didn't think we needed that at the global level at that time. And it's interesting, at the beginning of Blue Ocean, we literally have dashboards at the executive level that we can get daily pulses on a lot of the business. And it's been really, really valuable to us. And it allows us to be a lot more agile and a lot quicker, I think, in terms of how we identify trends, good and bad, to be able to react to. The other thing is like a lot of our programs, like within sales and marketing that you kind of talk about. The ability to use that data to -- it's one thing to collect the data and have the algorithms and the machine learning. It's another thing to be able to go all the way through the process and be successful in front of the customer. And there's a lot of different tools that are digital that we've been able to benefit from throughout that chain. And I feel like, and I mentioned it a little bit earlier in my -- I think, the industrial response, but our ability to better educate the organization digitally, to give them tools to be more successful, to use more digital platforms, to engage customers. All of that has been accelerated significantly because of COVID. And I feel like those learnings have allowed us to double down. Like if you look at kind of like what is our focus and what's Patrick's focus? I mean, double down has been very much a theme. And I think it's proven that a lot of the corporate programs that we've had in place have been successful, and we're kind of doubling down on a lot of those areas. And a lot of it -- you could pick a functional area, but ultimately, it's about having better visibility in the business and then being be able to react a little bit quicker.

And I think when we've talked about Mettler with investors, I think people are still scratching their heads. It's like how do you drive upgrade cycles because your products actually last a long time. And you've got to -- so how do you look at this like installed base of millions of instruments worldwide. They've got something, in some cases 10-year, 15-year life cycles on them. How do you drive upgrade cycles? How do you drive replacement cycles?

I mean there's maybe 2 things that come to mind. One is innovation, of course. And we have a strong focus on innovation. And a lot of times, it's making sure that you're very close to your customer and understanding their true needs. And I think when you do that, you see that our teams continuously come out with new features that are meaningful to our customers. And then -- and of course, software plays a part in that, too, whether it's our one-click type analytics with manned machine user interfaces that are very easy to use, things like that, having connectivity products that are performed better in certain environments like more hazardous or harsher environments sometimes. So innovation definitely is an important part of it. And then the other thing is our installed base of instruments. Like looking at that installed base, it's probably about, I don't know, $15 billion, and it's one of the core assets of the company is be able to harvest that installed base and look for opportunities to replace old products with targeted sales and marketing activities.

So I always have to -- this is another question I've been asking for years because it comes up again. Your capital deployment strategy? I mean, you've done some more recent deals. I mean you did PendoTECH and then I'm blanking on the name of the when you did previously with the weights business.

Troemner.

Troemner. Yes, that's right. So you have done a little bit more M&A in recent years. But still in all, you're still mostly focused on doing share buybacks. So can you talk about this? And you know, I mean, it comes up again and again, dividends, stock splits, that type of stuff, which I know what your answer is, but indulge me.

Okay. So of course, we feel like we're a very good platform for acquisitions. We've done acquisitions throughout our corporate history, especially as a public company since '97. But we're just really disciplined. Like our definition of strategic fit is pretty narrow. And I think that's why you don't see us do as many acquisitions. I mean the PendoTECH acquisition was a really good example of what we like to do. Process Analytics complements our existing process analytics business quite well, pressure sensors that are upstream and downstream, but strength in downstream applications, single-use technology. So it's a hot space, but it also very much complements our offering where our strengths tend to be more on the upstream. We, of course, can help them get to the next level, especially globally, and the acquisition continues to perform extremely well. And it's been a really good marriage of 2 great cultures. They fit in really, really well to the company, which is also important. So acquisitions like that, that can also increase our exposure to attractive markets that are good adjacencies, I think we'll continue to do them and when they're available. But in the meantime, we do think we're -- we do like the share repurchase program. We're very consistent with that. We -- and we'll be consistent in the market, and I think we'll continue to target a leverage ratio of about 1.5x kind of going forward. And then kind of going back to M&A, too, I should point out, too, we also feel really good about our organic growth story, right? Like so we still feel like we have a lot of runway there. We serve very highly fragmented markets. Our average market share is probably in the 25% kind of a range. And so we feel like there's plenty of market share to still be gained there. And then otherwise, we feel like given the consistency of our share repurchase program, we feel like it has a lot of attributes similar to a dividend. And then I think your stock splits question is a question you've asked in the past. And we've looked at it in the past and we're not sure we see necessarily the value of splitting.

As I say, it's more of a question of -- I think it's more of a liquidity question than anything else. I think there's a lot of investors that the light on Mettler, but it's not particularly liquid. It's hard to build positions. I mean historically, Mettler has 2 valuations, which is expensive and then really expensive. I think most [indiscernible] visions. And so it's more of that question is like we have an opportunity to sort of get more people involved in the stock. That's where that sort of like question comes from. Any questions from the audience? Shawn, you know my -- we've been doing this a long time. You know my closing question, which is the, what's underappreciated about Mettler-Toledo?

Yes. I mean we feel like we try to communicate pretty transparently. So I feel like everyone probably has a good handle on us, but to use it as an opportunity. I mean, I think we often benefit from our diversity, whether it's the diversity and the end markets we serve, the customers, our products, the applications we serve and then our ability to use that diversity to pivot towards opportunities continues to be part of our -- I think our core success. I think as we look at end markets, too, I think that our ability to improve our end market exposure over time really has been impactful. For example, we're often asked about like our -- I mentioned earlier about our industrial exposure, but like in life sciences, we've historically said it's probably about 1/3 of our business. And over the last year, we said, hey, it's more than 1/3. It's difficult to estimate, but that exposure is probably closer to 40% these days. And that's, again, a very deliberate focus to try to focus the organization on these more attractive opportunities. And then our cash flow, like we're very proud of the fact that our cash flow was -- had a free cash conversion of more than 100% over the last 2 years. Now this year it will be a little bit below that because of timing of bonus payments and things. But I think we have a very efficient operating model at the company, and we really do focus on the nuts and bolts of end-to-end processes, which I think results in really strong cash flow. And I think that's something that at times our return on invested capital may be underappreciated.

Yes. I don't think it is. But yes, I mean, it certainly is outstanding in terms of if we look at the numbers. On that, thank you once again for being here. We're right on time. Thanks, everybody, for attending. Thank you for your support and be safe and have a great conference. Thanks, Shawn.

Thank you.