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

Okay. Thanks, everyone, for joining us this morning. It's still this morning. Pleasure to have with us Mettler-Toledo. We have CFO, Shawn Vadala; and from Investor Relations we have Adam Uhlman in the background. Shawn, thank you so much for making the time this morning.

Thanks for hosting us today, Vijay. It's really great to be here and good to see you.

So if I just take a step back, Shawn, I mean you guys have -- this has been a phenomenal year, right? I would have thought that the 16%, 17% comp last year was pretty big. And I mean it's been successive being raised for you guys, it's really when all around stellar execution. Of course, the environment has been healthy. Maybe before I dive into Q4 and sort of the '23 guidance, when you started the year versus where we are now, what would you surprised you and how the year has played out so far?

It's a great way to start the discussion, Vijay. I mean clearly, the year has come out better than what we expected, especially from a top line perspective. I mean if you think back a year ago, we were first starting to experience inflation. I mean Q4 of last year, our operating margin was down. We started to see a real acceleration in inflation. And then in Q1, it kind of exacerbated with the war in Ukraine. But then as we kind of went through the year, we saw a couple of things. One, we saw a lot of resilience in our business, a lot of agility. I think our teams did a great job of responding to those challenges, whether it be with our pricing program or with our supply chain. Through the year, you heard us say many times that our supply chain was a competitive advantage. We really believe that. Patrick and I spend a lot of time on the road this summer with our organization, and we heard a lot of antidotes about how our supply chain was a competitive advantage and helped us gain market share. And then kind of like going to just sales in general, I think the markets were generally favorable this year, very broad-based growth. And the teams continue to execute really well. I think our ability to identify growth opportunities and capture those opportunities really has continued to be an advantage for us. And I think that's something that we really saw throughout the year. The other thing we saw was, I think, some trends continuing to emerge. We've talked a lot about automation and digitalization. We do think that those are sustainable trends. Those were topics pre-COVID, but certainly topics that I would say have accelerated during COVID. When you think about labor disruptions around the world, the need -- the impact of inflation around the world, all these things are driving investments in automation. And we certainly have seen that from our customers as well as digitalization. And as companies start to rethink their supply chains and kind of creating more flexibility in those supply chains, we also think that those new investments will also be disproportionately in automation. So like -- that's one of the reasons why you hear us talk a lot about that. But otherwise, very pleased with the performance year-to-date and feel like good about the future as we kind of look towards 2023.

Absolutely. And talking about the future and the outlook, right, I think we've seen some headlines on China lockdowns, some unrest out there. I think your fourth quarter guidance of 7% organic, that's below your 12% year-to-date. It seems a little light. You did cite some cautiousness in Europe. So maybe talk about the environment you're seeing between Europe and China.

Yes, sure. So hey, I acknowledge that the 7% is lower than what we've been doing year-to-date. But still, I think if you put it into perspective, it's still a strong multiyear growth. We grew 12% in Q4 of last year. And if you look at it on a 3-year CAGR basis, I think it's something like 9% growth. And so we've been kind of doing that 9%, 10% pretty consistently throughout the year. So I think it looks a little bit better if you go out on a 3-year basis. But if you kind of like look at maybe the regions like you mentioned, Europe, keep in mind, Europe has been impacted by a couple of things. One is the war in Ukraine and our Russia business. So we've exited that business. We haven't been shipping into Russia since the beginning of the war. And so that has a drag on our European results, especially if you look at the seasonality of that business, it's like a headwind of about 4% to Europe in the fourth quarter and probably had a similar headwind in Q3. So if you kind of like look at our guidance for Q4 for Europe, I think we were saying low single digit growth for the quarter. And or was it low to mid-single-digit growth. And if you kind of exclude China, I mean, Russia, it's actually not so bad. But nonetheless, we did call out some weakness that we saw in the third quarter that we kind of thought it was appropriate to share with everybody. So our product inspection business was down a little bit in the quarter. And so this was the one business that we felt like has seen a little bit of softness in terms of like people delaying investment decisions. And I think it has a lot to do with the inflation there as well as maybe some supply chain challenges. And as a reminder, our product inspection business is sold about 70% in the packaged food company. So this is really a comment about packaged foods in Europe. Packaged foods actually in the U.S. is actually has very strong momentum. And it's very much comment to Europe. So that's something that we're kind of keeping an eye on there. And then with the elevated energy costs, we don't consume a lot of energy as a company. So we feel like we're relatively well positioned on the topic. But certainly, some of our customers do. And so this is something that we just kind of have our eye on. And so we -- when I make that comment, I think about the chemical industry, of course. And so it will be interesting to see how that develops here over the next few months. As I think about China, as you mentioned, like there's certainly the lockdown topic. Our Chinese business has been doing really well this year. I think we did, what, 15% growth in the quarter on top of like 19% growth last year. I mean the multiyear CAGR on 3-year basis has been kind of in the mid-teens kind of a range all year long. I think we have a good guide out there for Q4 of about 10%. We feel very good about China for the medium to long term. We continue to think that there's a lot of investment in the country kind of associated with the 5-year plan that benefits health and safety topics in general. But like when you think about the life sciences and when you think about also a lot of the strategic topics like lithium batteries or semiconductors or new materials, we see a lot of investment going into these industries. And one of the advantages is our team is I think we did a really good job of identifying these opportunities very, very early. And so we got into these accounts and these opportunities, I think, early relative to competition. And as a result, we've had some real series of sustained -- really good wins in some of these new opportunities that I can think of off the top of my head here. And so I think we do see good momentum there, and I think that will be a trend we'll continue to see. We also have seen like excellent growth like in our process analytics business in China. And to me, that's kind of a comment on the growth that we see in bioprocessing within the country. We also have seen a lot of investment in topics like automation and digitalization in China, too. That's not just a Western topic. That's clearly a topic we've seen in China as well. And so we feel very good about the medium to long term. Now in the short term, we always say things can change quickly, right? Things can be better or worse there, and it can go either way. Right now, the China lockdown has been a topic that has been on our mind. Of course, we've all seen that situation unfold a little bit here over the last week. We'll see how it plays out. At the moment, our facilities are not under lock down. But the bigger concern is certainly any potential impacts on the economy. That's -- I think that risk was already out there when we provided guidance, and we'll see how things play out here. But if I just step back, I think that we've all probably felt like no matter what, we think we all need to be kind of kind of conscious of the fact that we just need to carefully monitor whatever situation is out there and be able to react and be agile. And I think that there's been a lot of zigs and zags in the road over the last 3 years. And so whatever zig and zag, we kind of see going forward, I think we have a great organization that can respond to whatever is in front of us. And I think the same thing goes with China. But right now, we still feel very optimistic about China.

Those are helpful comments, Shawn. And maybe off of those -- building off of those comments on Europe, right. I know you guided for fiscal '23, but is there a cadence issue here? Because I would imagine Europe is -- we're seeing this energy that's unlikely to -- the energy crisis, that's unlikely to change in Q1. So perhaps in a slower start when it comes to Europe and any phasing issues for '23?

Yes. I mean we'll obviously provide more insight on our next call. I certainly don't want to provide quarterly guidance at this point in time. But as we start the year, I mean, that will be something on our mind, right? Like the energy crisis is going to be more of a topic at the beginning of the year than it is at the end of the year. So I think it's -- so I think if people are modeling the first quarter, I would certainly be a little bit more cautious on Q1, particularly to Europe.

Got you. And then for you guys, given you've already guided for fiscal '23, the only thing that stuck out for me, Shawn, was it's interesting, right? You had both an Analyst Day and you had the guidance for '23. So we can play a little bit of a match the following sort of here. Analyst Day was bullish, fiscal '23 guidance of 5%. That's slightly below the LRP. Maybe talk about what's driving the delta? Is it comps? Is it macro? Pricing seems to be pretty healthy. So 5% seems to be maybe prudent start because that's a way to characterize it.

Yes. I think I'd start by acknowledging -- it's always hard to provide guidance at the beginning of November for the following year, right? But we always feel like it's appropriate to share whatever we're thinking and how we see the world at that time. I think it's just better and it helps people as they think about the upcoming year. When we -- but our process is the same this year, no change to that process. And probably the one thing that stood out in our minds was this multiyear comparison, right? Like we've come off of 3 really strong years. Our guidance for this year is 10% growth. Last year, we grew 18%. And if you look at it on a 3-year organic CAGR basis, I think that translates to like 9% growth. And so that was the primary topic on our mind. And that would apply to any of the businesses or any of the regions. If you kind of look at the pieces a little bit, maybe Europe is a little bit lower than how we would think about them from a long-term perspective. Maybe long term, we think about Europe as more of a low to mid-single-digit region as opposed to a low single digit, and that probably says a little bit something not only about the comp, but about some of the conditions that we were already experiencing and seeing here towards the second half of this year.

Understood. And then that's helpful perspective and how we're thinking about the comps as being a driver here for '23 guidance. But just from an end market perspective, right, what is the '23 guide assuming for lab and industrials and food?

Yes. So if we kind of look at our guidance by business area, our lab guidance would be mid- to high single digit for next year. Our industrial business would be low to mid-single digit, and that would be true for both our core industrial business and our product inspection business. And then our food retail business is mid-single digits. So if you kind of step back from those guides, I'd say the lab and industrial numbers are a little bit lower than what we would think from a long-term perspective while food retail is maybe a little bit higher. I mean we typically think about food retail as a low single-digit business over the long term. But as you know, it's only about 5% of our total business.

Understood. Yes. Understood. And I know you've touched upon Europe. But you did mention China, you continue to remain optimistic. How should we think about China here for '23 -- China and Americas in 2023?

Yes. So for China, we're thinking about China is high single digit for 2023. But if you kind of look at the pieces, we're thinking the lab business will be about 10%, and we're thinking that the industrial business will be more mid-single digit. And that's -- it really comes back to this comment about multiyear comparisons and especially on the industrial side, which is going to be a little bit historically more susceptible to the economy. But if you kind of like look at our Chinese business this year, I mean, our guidance is double-digit growth for this year. And last year, we grew 25%. So we're just coming off of like really high comps there, which kind of factors into how we think about the guide there. But as I mentioned before, we do feel good about the medium to long term. And like any part of the business, we -- whatever happens in 2023, we already have a mindset of how do we come out of this stronger. And so we are still investing in the business, including in China, and we want to make sure that we are investing for the future and coming out stronger here.

Understood. And sorry, on Americas how are you thinking about...

I'm sorry, the Americas were -- our guide is mid-single digit for next year. And out of all the regions, in terms of like the economy seems to -- from our perspective, what we're seeing in our markets has been -- continues to be favorable, very good momentum. The bigger risk in the Americas, of course, is rising interest rates and what does that ultimately do to the broader economy. But like the rest of our business, we feel like our mix is better than it has been in the past. Maybe we can talk about that in a minute. And we feel like we're doing well there. The bigger comment is -- continues to be like these multiyear comparisons. We have what -- for this year, we have low double-digit guidance for the full year and coming off 20% growth last year.

Understood. And just to sum up the fiscal '23 guidance philosophy there, Shawn. It's really the comps. It's not so much as a macro rate which is driving the fiscal '23 guide?

Correct, correct. I mean, we acknowledge uncertainty in the macro for sure, and we called out some topics in Europe, but it's very much about the cost.

Okay. And then a recession has been topical for investors. And I think it's a little misleading when Mettler says 40% of our revenues or 30% of our revenue is industrial. I think the exposure is different. So if you could just maybe compare and contrast, right? What is your exposure to pharma, [ Dx ] health care, academia, industrial? And how that's changed versus the last cycle?

Yes. So I think there's maybe a couple of ways to look at that. I can look at it maybe by end market, and then we can look at it by our different businesses. So by end market, we would estimate that about 40% of our businesses is sold into life sciences. And so that would include small large molecule pharma, biopharma, that includes CROs, CDMOs, testing labs. The next biggest end market exposure we would have is food manufacturers, and we would estimate that in the 20% range or so. We talk a lot about food manufacturing with our product inspection business, but we also sell a lot into food manufacturing in our core industrial business as well as our laboratory business as well. And then the next biggest exposure we would have would be chemical. And when you think about chemical with us, it's mostly specialty chemical. We have a smaller portion that's sold into oil and gas, but it's mostly specialty chem. And that exposure is probably in the 10 to 15 kind of percent a range. It's a little bit higher than what we would have seen historically around 10%. And I think part of that is because -- like lithium battery would be included into that segment, and we've seen very strong growth there. And then once you kind of go beyond that, you get a wide variety of end market exposures. Like academia would be there, that's probably in the mid-single-digit kind of a range. Of course, you're familiar with our food retailing exposure, which is about 5% of sales. And then you get into things like material plastic and electronics manufacturers, you get into logistics and things like that. So that's -- I think that's one way to think about it, maybe you can do the math and frame your own view on like what's cyclical and what's not cyclical. And then the other way is to kind of look at our different businesses. And the business that has been historically the most cyclical for us would have been our core industrial business. And so our core industrial business is about 25% of our total business. Now that compares to about 30% during like the 2009 kind of a range. So if we kind of like look at our mix shift from '09, our lab business today is about 56%. Back then, it was like 45-ish, and core industrial is a smaller component well. And then -- and of course, food retail is also at a smaller element. But what's interesting is that within that core industrial business, we've done a really nice job of improving the mix of the end markets that we're selling into. So the way we look at it is we would say like we're selling to more attractive end market segments. And that's been very, very deliberate for our Spinnaker sales and marketing program. We've literally -- I've always said, like I think our industrial business has benefited the most from the program because you can have the ability to sell into a very wide range of customers, if you were just letting a salesperson just try to meet a quota. But because we don't look at it like that, we literally guide them with detailed analytics and profiles to the opportunities that we think are the most relevant, then we're able to -- through that process, we've been able to increase the mix towards more favorable end market segments. So if you step back from that, our core industrial business, we would estimate about 60% of that is sold into pharma, biopharma, food manufacturing and chemical.

So -- and just a lot of numbers out there, Shawn, to go through them. The most cyclical part of the business is core industrial, and that's about 25% of our revenues right now.

Yes.

But within that 25%, the mix has changed and 60% of this is now biopharma.

60% is pharma, biopharma plus food manufacturing, plus chemical. So those 3 end markets represent 60%.

And aren't those, by definition, less cyclical, Shawn? Like almost like more than half the revenues with the core industrials, if it's biopharma food and specialty chemicals, like it should be much more stable, no?

Yes, very much. I don't have the specific breakdown of what it would have been in 2009, but that's exactly the point, Vijay. Like about 10 years ago or 15 years ago, you would have seen a much more heavy industrial content within that business. And I think through Spinnaker, we've really been able to move the business towards these more attractive end market segments that are also not only less cyclical, but faster growth, there's a lot more cross-selling opportunities. They also require more services. And so it's just a much more attractive business for us today than it was in the past. And then on top of that, of course, the industrial business is also benefiting a lot from these trends in automation and digitalization. I mean you've seen these elevated growth rates in our industrial business for the -- our core industrial for the last at least few years. Probably, this is now 4 or 5 years. And what we felt is that there's really been this acceleration of companies making investments into automation. And we have -- that's like our sweet spot, and that's where our portfolio really thrives. And it's not just -- and it's a combination of software and terminals that they really can integrate into a customer's application so that they can really do process control when they're filling -- like during filling and formulation applications. So if you think about like a bioreactor, the first thing you're going to do is fill it up, right? And so the -- but that's not -- it's not like they just turn it on and turn it off. It's a very precise process and there's a lot of formulation that goes into it as well, too. And it's also like the pacing of how you fill it up and so -- and it's not just bioprocessing. And you can think about food companies do the same thing chemical companies as well, too. So there's that whole ability to integrate into the customer's ERP and provide that type of process control really is where we have a lot of strength. And then, of course, when you start then connecting it to our smart sensors of way modules and then we've done a lot too to help with these trends towards more flexible manufacturing. More -- we have much, much more modular solutions that allows them to change their manufacturing setup much more quickly, much more efficiently. And that ability to like integrate and have more ease of use, like all those little things really add up to enhancing the overall value proposition to the customer.

Understood. So would it be fair, Shawn, to say that really 10% of overall company revenues, right, that's 40% of the industrials is really the true cyclical part of the business?

10% of industrial...

10% of overall company revenues.

10% of overall? Hey, I wouldn't want to go out there with a number like that, Vijay. Yes, yes, I wouldn't want to go. I think you can like do the math on the pieces that we've kind of put out there and then kind of draw your own conclusion. But I understand like where you're going. Yes.

Understood. And then maybe let's start with the end market rate, you said biopharma is 40% of revenues. What is large versus small molecule? Have you seen a differential growth rate between those 2 segments?

Yes. I mean, we don't track it like that. But what we do is like we can certainly look at the product categories that benefit the most from like large. So one of our strengths of our portfolio is that we have a lot of diversity, right? We talk about that a lot, not only in terms of products but also in terms of customers and things like that. And -- but like in terms of products and applications that we serve in lab, we go from R&D, where we would sell like pipettes and pH and UV/VIS and of course, everyday lab instruments are also used in R&D. We're in the quality labs. And so like we sell up to 40% of the typical instruments on a typical quality lab bench. Of course, when we're in these labs, we can connect them with our LabX software, which is a huge differentiator for us. LabX is not only important from a data integrity perspective and allowing customers to comply with those requirements, which is important, right? Like if you -- we've done an analysis where you looked at FDA warning letters and like 2/3 of those warning letters have some element of data integrity, but LabX is also really important when it comes to automating workflows. And we've showed -- we actually showcased a couple of examples of that when we were at the Investor Day. And then you get into scale-up and preproduction where we have like automated chemistry solutions. I mean, automated chemistry historically is a very small molecule focus, but we also have some large molecule applications where we can monitor like protein aggregation and things like that. And then when we get into bioproduction, that's where we have our largest piece of large molecules. So we do stuff in the research with pipettes and then we also do stop in production with our process analytics business. And so more than half of our process analytics business is sold in the bioproduction. But of course, in bioproduction, you also have core industrial way modules and other things. And again, I also don't want to oversimplify it. It's not like we, of course, balances and other instruments are typically also used in large molecule as well, too. But the things that stand out of the piece is that I mentioned. Of course, also on the research side, I would say, is pH meters as well, too. And so I would say when we look at it, hey, though, like process analytics, of course, has been growing very fast for us above our corporate average at the high end of our lab growth. And then we've also seen good growth on pipettes when it comes to pipette instrument sales, where we've seen a headwind there is with the pipette tips and with this inventory stocking topic that you've heard about. And that topic primarily relates from our perspective. The only place we've really heard it is in terms of the pipette tips.

How big is that piece, Shawn? Is that -- can you quantify what the headwind has been in 3Q or 4Q?

I don't have a specific breakout, but like when we were getting the tailwind, the tailwind was about 1%. So I would say the headwind is less than 1%.

Okay. So this is a rounding error?

Yes, yes.

And sorry, on the overall, when you look at biopharma as piece, what's been the compounded CAGR for biopharma? Has it been about a 10% CAGR?

Yes. Like I said, we don't break it out by biopharma, but I think the best way to probably look at it is our overall lab business and acknowledging that our process analytics business has been growing faster than the average lab. But I mean, we grew at 10% in Q3 and 13% in Q2 and 18% in Q1 and 22% in 2021. So we've been putting up some really big numbers. Now, hey, we probably benefited a couple of points last year because of the PendoTECH acquisition. But overall, still really, really strong growth.

Understood. And maybe shifting gears here on ASPs and pricing. I think one of the questions that someone asked me was, what is the typical ASP for products Mettler sells, right? Do you have anything which is like a true capital, which is like north of $100,000? What's the average ASP for your Mettler products?

Yes, yes. Before I answer, I just also want to clarify too, like when I said bioprocessing or bio is growing faster than average, I also want to make clear too, like on the small molecule side, we've got actually really excellent growth as well, too. And if you look at the categories that grow, that are most susceptible to [ small date ], we've had outstanding growth as well too. So now in terms of your question on average ASP, the average instrument is less than $10,000. And so that, to me, is always interesting, and it's also important when we get -- when we start talking about pricing because we tend to stay -- that sale ends up going directly to the end user most of the time and it's just kind of below the radar in terms of like CapEx approvals and things like that. It's not considered so strategic when it comes to -- from a financial perspective, it's more strategic in terms of the value that you can provide to the end user and which is why we have people that appreciate that value. Now we do sell stuff that's more than $10,000, but it's very -- I'm struggling to think of an example that would go above $100,000. But when we kind of go above $10,000, you'll get stuff in the $20,000 to $50,000 kind of a range. And that depends, right? You could get stuff like in product inspection, you could get some of our analytical instruments could be a little bit more expensive, like an automated chemistry solutions and things like that.

Understood. That's helpful. And so when you look at the ASP, and it's a fragmented market, I think in the past, you've said that this has allowed -- this has been key to Mettler's pricing strategy, right? It's not high ASP. Give us a context on what historical pricing trends have been. I think the guide is looking at 4 points of pricing. Is this now a new paradigm should we look at pricing as being perhaps above historical trends?

Yes. I mean I think it will largely go back -- come back to what is inflation looking like after 2023. Like, I mean, certainly, our customers understand inflation. They've understand costs. We've been very thoughtful with how we've increased our prices over the past year so that we can tie it back to inflation. And so I think that's been very important. And then -- but at the same time, I mean, I do acknowledge that our value proposition, I really believe, has increased over the last few years, too. And I think customers appreciate that. As companies are focusing more on automation and digitalization, that does play to our strengths in our portfolio. And there's really good paybacks in terms of what we can provide there. So they're focused on that, they see the paybacks. It's kind of a win-win for both sides. But as I kind of think about the future, I feel excellent about our pricing program. I feel like we certainly highlighted a lot of things that we're doing in the program at the Investor Day. You might have heard and I think the tools that we have, the stuff we're coming out with on active price guidance, I mean, I think we have some good stuff there. But I wouldn't want people to walk away thinking like pricing is going to be different than it was historically kind of going forward. So what does that mean? I think historically, we're in that 2% range or so. And if inflation were to go back to historical levels, we'll probably be in that kind of a range again. But of course, we're always working to do better and we'll see how things come. But right now, I feel really well positioned with our foundation. And I also feel really well positioned in terms of our value proposition. And we're, by the way, continuing to invest heavily in that value proposition because we see the importance of doing that. And so we're doing some things from an innovation perspective to continue that kind of coming out of '23. And then the pricing program has a lot of momentum in it. And again, without going into too many details, we try to feature that at the Investor Day. And maybe just one topic there that we talked about at the end was active price guidance where we're like literally looking at data attributes. Through data studies, we found correlations between pricing and the data attributes of an order, and then we've been able to build out some algorithms and through machine learning, we can then recommend a price at the time of a quotation to a salesperson, which to me has been a very exciting project. We're doing -- rolling it out very methodically. We're still in the early innings of our rollout in terms of countries, and we kind of start with our tele sales organization before we go to the field, but the results have been excellent so far with the program.

What's been sales' feedback on that, Shawn? Because I always -- I feel like sometimes when you have data driven, I think the pushback from the sales is you don't know the context rate, it's the context.

That's a great question. Actually, it's been very favorable. And I think one of the reasons why it's been favorable is that we do not make it a black box. We actually will show the salesperson kind of how the recommendation was arrived at, and then we'll show a lot of historical context as well, too. So in the end, it actually better educates the salesperson and then that strengthens their ability to be able to explain and articulate the price.

Understood. And then maybe the last 2 minutes here, Shawn. One, the fiscal '23 guidance, I think you would assume 4 points of headwind from FX. FX looks like it's improved slightly. And what are you assuming for margin expansion? It looks like based on the pricing commentary, a lot of this is coming from gross margins?

Yes. So I guess a couple of topics there. One is the FX. So that was the headwind of sales. The headwind to EPS in our guidance was about 4.5%. And I agree, I think there's been a slight improvement just recently, but we've all seen how volatile this one has been. So I wouldn't want -- it's not that significantly different than what we guided. And I'd rather -- let's let it play out and see -- we'll just update the numbers wherever they are at the end of this quarter or at the time when we provide guidance for next year, or update guidance for next year. And then when you think about currencies with us, I think it's a good reminder, like the biggest exposure we actually have from a bottom line perspective is the Chinese renminbi versus the U.S. dollar. And so for every 1% that that changes, that impacts our operating profit by about just over $3.5 million, call it, between $3.5 million to $4 million, call it, $3.7 million, $3.8 million. And then the second biggest exposure we have is our Swiss franc exposure to the euro. So we were long in euros because of the sales. We're short in Swiss franc because of our cost structure there. And we happen to have like this natural hedge if the rates were to stay the same. So as the Swiss franc strengthens against the euro, that's a bad thing for us. And so for every 1% change in that cross rate, that affects our operating profit by about $2 million. And then I'm sorry, I forgot the second part of your question, -- margins for next year.

Yes.

So then -- yes, so our gross margins are up. I could give you both. Our operating margin guidance for last year that we talked about at our last call was a 160 basis point expansion. And then our gross profit margin expansion next year that we -- that was part of our guidance was 150 basis points. So you can see we're getting very good margin expansion on our gross margin next year. I mean a lot of that will come down to the timing of some of the pricing actions that we did in 2023 that kind of carry forward into next year. And like I said before, we have very good momentum on the pricing program. We also have good momentum on our SternDrive program, which is kind of like our supply chain excellence program similar to Spinnaker on sales and marketing. And as supply chains start to ease around the world, one of the benefits of that is going to also be indirect benefits is going to be -- our supply chain team. We'll have more time to also spend on their SternDrive projects. They were able to continue to do those throughout the pandemic, but let's be honest, it's been a very challenging 2 to 3 years for that part of the organization. And so we're kind of looking forward to them having more time to spend on some of their projects. And they're actually about to launch the third wave of SternDrive. Actually, we talked about it at our Investor Day. So you would have heard that. And Oliver kind of provided an update about some of the things that we're thinking about for this next wave. And so I think there's going to be some good legs to that program as well, too. So as we kind of think about our operating margin expansion going forward, I think pricing at SternDrive will both be important elements to that. Plus the mix benefit that we're getting, right, we talked about like the mix profile going towards these more attractive market segments. These are also our more profitable businesses, too. And so we are getting -- we are seeing mix benefit on our margin as these faster growth businesses are also our higher-margin businesses.

Understood. And maybe my last question here, Shawn. The Analyst Day, you had EPS growth of 15%. But if I look at the 6% plus top line and margin expansion with your capital deployment and share repo, I was getting to maybe like 12% earnings. Is the guidance LRP assuming a little bit more activity on the M&A front?

Yes. No, it's organic. And so maybe I can clarify a little bit. So like -- so the guidance -- the way we thought about the guidance is we didn't want to get too formulaic. We don't want people to focus on every piece of the algorithm. And we kind of wanted to intentionally say like, hey, we're going to do 6-plus on sales. And we're going to do mid-teens on EPS. We didn't get so precise. We said mid-teens in EPS. And we're confident we can do this mid-teens. We've done it for many years, and we have a lot of confidence that we're going to continue to do it in the future. And oh, by the way, we have a free cash flow conversion of approximately 100%, which I think is something I wouldn't -- that's, I think, one of our strengths as well, too. So now how do we go from top line to bottom line? I think when I look at how you were thinking about it, I think maybe you were just a snitch light on the share repurchases. But I think the bigger thing is like don't get too caught up with the operating margin. Like we said 100 basis points or so. So think about that as 100 basis points or better. And then in each year, we're going to get to the mid-teens probably a little differently each year, right? Like next year, operating margins is going to be much stronger than that. There's going to be some years where it's going to be a little bit more sales. But we didn't want to get too focused on the pieces. We just wanted people to really focus on the bigger picture. So sorry if that caused maybe a little bit of confusion, but that's how we were thinking about it.

No, that's extremely helpful. I think you said you didn't want to be formulaic and that's exactly where we end up doing, trying to make it a formulaic algorithm. Maybe at the last comment here, if you will, Shawn. A lot of your peers have made investments in working capital metrics and that's dragged down our free cash conversion. I couldn't help but notice your free cash conversion. You guys really do stand in life science tools. I'm curious, as you talk to the supply chain and all the uncertainty right, how come Mettler didn't make those strategic investments? Or is it that earlier, what you said, supply chain is a true strategic advantage for Mettler. Is that what we're seeing here in the free cash conversion?

Yes. I mean I'm not sure if I understand the last part of it about not make strategic investments, but like we certainly built up inventory levels over the last year, right? And I think that when you look at our free cash flow conversion this year, it's not going to be at the same level it was the last few years, but we're confident we'll get back to more normalized levels next year as we kind of bring back down the inventory levels. But hey, this is something that we really focus on as an organization. It's always been part of our DNA. I think it ties in really well with like operational excellence and a focus on end-to-end processes. And so it's very much consistent with our culture. And what's interesting to me is that we were just at a global meeting actually that were hosted for our finance organization a couple of weeks ago. And we actually -- when we talked about this topic in particular, it's like it's making sure the organization never thinks there's a ceiling. Like when we hit DSOs of like 40 days, that seems pretty low. But now we're, at what, 35 days or so. And it's like just continuously thinking and we showed some examples of different parts of the organization. But you don't get there just by hope and luck, right? There's a lot of -- there's a lot behind the scenes through analytics and providing transparency and a lot of focus on how do you shorten your order to cash cycle. And I think that -- and what's kind of cool about it is like we actually launched some tools at that meeting that will be stuff that we'll be doing for many years over the next many years about that will literally help us continue to improve that order to cash cycle in this. And it just really gets into this whole digital journey that we're on, and we're actually really excited about it.

Fantastic. I think with that we're at the end of time. Shawn and Adam, thank you both for taking the time. This is a helpful discussion.

Hey, great to see you, Vijay, and I wish everybody a great rest of the conference.