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

All right. We'll go ahead and get started. Good morning, everybody. Thanks for being here. Welcome to the Jefferies 2023 Global Healthcare Conference. I'm Brandon Couillard, I cover the life science tools and diagnostics sector here at the firm. Very happy to have Mettler-Toledo with us at the conference again this year. And joining us for this conversation, CFO, Shawn Vadala. So Shawn, thanks for being here.

Yes. Thanks for having us, Brandon. Great to see everybody. And look forward to this morning.

Maybe just to kick off, I mean, coming off of a -- I don't want to say it's a controversial sort of Mettler-type quarter. But it was a lot of moving parts right now and a lot of uncertainty as far as kind of what's going on in the biopharma market, what's going on geopolitically. What are some of the things that you feel like maybe didn't go your way in the first quarter, some of the areas of the business you're feeling good about and your kind of assessment of sort of the macro picture right now?

Yes, sure. Maybe I'll start with some of the things that also went well in the first quarter. Overall, I think we got off to a really good start to the year. We grew 7% and that was despite a pretty significant headwind in our pipetting business. Our pipetting business was down pretty significantly that we talked about, and that was a headwind of about 2% to 3% to sales. So despite that, I think we grew pretty well. And when you kind of look at that on a 3-year CAGR basis, we're up 13% on a 3-year CAGR in the first quarter. So we felt good about that. We also felt good about the breadth of our growth. We saw a lot of growth throughout the portfolio, both in the lab as well as in our Industrial business, and of course, retail did very good. And then our service business continues to do very well. Service is about, what, 21%, 22% of our total business, it grew double digit in the quarter, and that's on top of growing double digit for the full year last year. So we have good momentum. We've kind of talked a little bit more about this business over the last couple of quarters. And we feel like this is one of those things that should continue to hold up better if conditions worsen. And then maybe one other comment on maybe the positive column is our margins. We had a really good margin expansion in the quarter, very well -- very good especially on a multiyear basis. And then cash flow, of course, was good too. Now kind of going more to your question, what didn't go as well. The pipettes were down worse than expected. We had talked about this a little bit on our February call. But we very much view it as primarily a destocking issue with our customers as we talk to our customers, we sell directly to the pipe -- in our pipette business. I mean we do have some indirect business, but most of it's direct and so we have the ability to talk directly to the end user. And as we've been talking to end users as well as just looking at the comparisons. We're kind of lapping the most difficult comparisons. If you kind of look at like a bar chart by quarter, you'll see that we'd lapped very difficult comparisons, Q1, Q2 of last year. So we're kind of hoping that we start to lap better comparisons in the second half. And right now, we still expect things to be a similar headwind in the second quarter. But for the second half, we'll have more visibility, of course, as we finish Q2, but we don't have any new insights versus what we've said just a few weeks ago. Another thing that we talked about on our last call was our process -- in our Process Analytics business, like Process Analytics actually did very well in the quarter. We grew double digit, and we see a lot of resiliency in that business. But the one area where we do see a lot of headwinds is in downstream single-use technology. So like, for example, the PendoTECH acquisition a few years ago, where we're selling largely through an OEM channel, and we're seeing a significant headwind in that business. But that's something that when we kind of step back, that's a much smaller part of the overall business, so less concern in terms of the overall Process Analytics business. And then maybe another thing that didn't go as well was currency. Like currencies have really been against us since we provided guidance last November. And just as a reminder to everybody, our biggest exposure is the Chinese renminbi to the U.S. dollar. And so for every 1% that the renminbi weakens against the dollar or strengthens. It has an impact on our operating profit by about $4 million on an annualized business so that -- on an annualized basis. So that's been a very significant headwind for us as the renminbi is kind of continued to weaken and that certainly has continued during the course of the second quarter as well. And then the other exposure that we talk about is -- our second largest exposure would be the Swiss franc versus the euro. So why do we say that? Because we kind of have a natural hedge. We have more sales in euro than we do expenses. So we're long in euro, but we're also short in Swiss franc because we have more costs in Swiss franc. So there's kind of like a natural hedge there. So we tend to look at that cross rate. And as the Swiss franc has strengthened against the euro we've seen -- that's also had a headwind to our results as well. But otherwise, we did talk also about the macro a little bit on our last call. We specifically flagged more uncertainty that was kind of embedded within your question too. We do see uncertainty in the economy, PMIs have continued to moderate even over the last month. That's something that's certainly on our mind. And then more uncertainty in our end markets. About 40% of our businesses is sold into life sciences. About 20% is sold into food manufacturing and about 10% to 15% is in the chemical, just to kind of give it some context. If we look at food manufacturing as an example, we specifically called out some challenges in the packaged food industry during our last quarter as well.

How comfortable do you feel that the pipette destocking headwinds will, in fact, be behind you? I feel like that's been a tricky thing to try to call for other companies in other product lines, but you're seeing the same dynamic, right, where you had this huge stocking period, we thought it'd be worked out, but then it turns out it's going to be at the end of the year now. So I guess how comfortable are you that pipette is a drag on the top line, once we get in the back half, where it will sort of be neutral.

Yes. I mean, hey, we'll, of course, know a lot more here in over the next month as we finish the quarter and have some better insights into Q3, but kind of sitting here today, like I said before, we do feel like we're going to lap better comparisons in the second half of the year. We do have the ability to also talk to customers. And just to kind of contrast a little bit, there is a difference between, I think, the pipette destocking topic in the bioprocessing. The bioprocessing is really coming off the whole vaccine production phenomenon, whereas in the pipettes, this had a lot more to do with COVID testing and then people just kind of stocking those consumables, pipette tips -- pipettes to a certain degree because they were -- because of the lack of availability. So I think in terms of like sequencing, this probably -- that one probably comes back before -- at least in our business, that one comes back before then we would see in terms of the single-use exposure that I mentioned with Process Analytics.

Your business, as far as services, has done well, is that a function of all the instruments that you've placed in the last 2 years or higher attach rates? Is there a geographic nuance to it? Just kind of unpack drivers of that strength. And I guess your outlook for services maybe this year and next year?

Yes, great question. So I think there's -- I think it's a little bit of both or everything. On one hand, we've had a lot of sales in our product business over the last few years. So our installed base has grown quite nicely. A lot of those products will be coming off of warranty or have been coming off of warranty. So that creates a nice opportunity for us to do services. But then in terms of just like our strategic focus, we have put more emphasis on this business. It was always important to us. I think we did well. But when Patrick came in as CEO, a lot of his theme is doubling down, doubling down on our strategies, not necessarily changing things. But there's a couple of areas that I think he felt like we could lean into a little bit harder where he felt like we could do a little bit better and this is one of them. I think he certainly has challenged the organization over the last year or so in terms of thinking bigger in terms of what we can do in terms of services. We've been reallocating more resources into this area. And then we've also been working on things over the last few years that are now kind of resonating. And so like one of those things is within our Blue Ocean program, we've been able to work on the ability to have service quoted automatically at the point of sale. And so we've talked in the past about the importance of selling a service contract at the point of sale. Previously, we would have provided education to the sales force. We would have provided maybe some incentives to the sales force to encourage them to do that. But now we're kind of forcing that conversation by embedding it automatically into the quote. And it might sound like an easy thing, but it's not like we're just selling one product with one service offering. So to get the mechanics behind that to work properly where you're matching the appropriate service to the application to the product to the customer need is something that's quite sophisticated. And I think that's also having a positive impact. So we are seeing benefits in terms of attachment rate. And then another thing, too, is if you just look at our -- the scores in terms of customer satisfaction, we're scoring at an all-time high right now in our service business, too. And that's kind of continuously been going up over the last couple of years. But right now, it's a nice position to be in. So we're -- ultimately, we're doing a good job taking care of customers, which always helps.

Curious to get your assessment of kind of the current demand environment, operating environment as you see it in China right now. Is -- a lot of questions around is the current COVID case spike impactful? Is it disruptive? Is it just noise? And a bit curious to any end-market nuances you're seeing in the customers...

Yes sure. Yes. It's an interesting one. I've asked our colleagues a handful of times just over the last week, what is their experience with what we read in the Western media about COVID cases and you'd expect to hear something more negative. And it just seems like it's not much of an issue. People have really kind of, I don't want to say dismissing it, but very much just kind of moving forward, acknowledging it more as a common-cold type of a situation and not letting it get in their way. At some level, I would have expected that there would be some drag on productivity, just with people out sick more than they would have ordinarily. But I'm not hearing anything, at least in our business in terms of any excessive absences due to sickness or illness. And I'm not hearing of anything from a customer perspective, which also I would have thought there could be some downside there. So I'm not saying that there's not a potential downside. I'm just not hearing anything at the moment. The one thing that I am hearing though is that we always talk about China, and we feel very good about the medium and long term there. I mean, the focus on health and safety and life sciences and strategic categories like lithium batteries and semiconductors, all these things create a lot of opportunity for us. And they're, of course, looking at their own ability to be more self-dependent, which is creating a lot of investment opportunity in the country. And they're also highly focused on research and development and funding research and development, which also helps us. So I think we're positioned really well to benefit in China over the medium to long term, but we always say things can change quickly in China in the short term. It's not always a straight ride. We saw how quickly things changed just from November to December last year with the reopening. When we provided guidance, one of my bigger concerns at that point in time would have been prolonged lockdowns due to COVID. And then within a month, all of a sudden, they were reopened, 80% of our workforce had COVID, and we were kind of on the other side of it. So things can change quick more quick in the short term for the positive or for the negative. Right now, there does seem to be some concern about what the government is going to do, what is the government going to do to support investment, life sciences, infrastructure, stimulus. There's certainly a lot of qualitative commentary about a desire. But in terms of specific programs, they haven't really announced much, at least that's my understanding. And I think that hesitation or that lack of clarity could create a situation where people start to hold back in terms of the market. And so that's something that we kind of have our eye on a little bit here. So it could be maybe a timing topic but something that I think is something that we're monitoring.

If we look at the Industrial business, can you remind us the breakdown between product inspection and core industrial in terms of just the mix. Which of those 2 segments would you describe [ that are ] maybe actually more macro sensitive, I could make a case for both of them. And are you seeing any differences in order book or change in demand trends. Curious if you have more backlog in one part of the business than another that gives you more visibility and what you're kind of assuming for industrial in the second half.

Yes, sure. So our total industrial exposure, I think, is about 40% of our business. About 60% of that is core industrial. About 40% of that is product inspection to get a little more specific, core industrial is about 25% of the total company and product inspection is about 15% of the total company. Historically, we would have said our core Industrial business is more cyclical. And our product inspection business is more secular. About 70% of that business is sold into packaged food companies. But what's been really interesting over the last few years is that our core Industrial business continues to be rather resilient, much more than, I think, past cycles. And so that's something that has been great to observe. The teams are executing really well. I think there's a few things that are kind of behind that. One is we do have a better mix of business than we had in the past. We would estimate about 60% of that business is sold into a combination of pharma, biopharma, food manufacturing and chemical. And when we talk about chemical, we're talking more specialty chemical. And a lot of what we're hearing recently is a lot of our chemical customers are actually benefiting also from some of these hot segments that we talk about, like lithium battery as an example. So we have a better mix of business. We also have, I think, better macro or not -- maybe macro is the wrong word, but better trends like mega trends, like the trends towards automation and digitalization are -- it's a topic we've been talking about over the last couple of years, and it is very much continues as -- and it's kind of intuitive. As people are focused on overcoming the challenges of workforces in terms of labor shortages, they're focusing more on automation. And so there's a lot of investment going into automation. Same with digitalization, the desire and need to have information to gain more insights into your business, that trend seems to continue to accelerate every single day. And our instruments do a great job of extracting information in a very secure way and having really good connectivity into our customers' systems. And so we continue to see that part of the business doing really well. And then maybe the last thing is, and I think this last comment is a little bit more about the future. I'm sure we've had some benefit, but I think it's going to be a benefit that we'll see much more over the next 3 to 5 years, is this reshoring of supply chains. I think most companies in the world have really rethinking their supply chain through -- with all the COVID challenges that they faced over the last year as well as maybe some of the geopolitical topics in the world. And so they're just looking to have more flexibility. And with that focus, that's creating a lot of investment around the world, not only in the U.S. but also in Europe and China as well, too. And so that's a positive for the core Industrial business. So I don't want to act like we're immune to the economy. We're not. Historically, this would have been the business that would have been more susceptible to a downturn, but it's been more resilient than what we would have seen in the past. And to kind of like maybe get specifically to your question, we were -- if we kind of look at the second half of the year, we're kind of looking at the mid minus kind of a range, kind of low to mid kind of a range for the second half of the year. So I think we're well positioned there. Now in terms of product inspection, that one's a little bit different. That one, we typically do have more visibility into because it tends to be longer order cycles. It's more of a CapEx purchase versus the rest of our portfolio. And as I mentioned before about 70% of that business is sold into packaged foods. So we're selling a pretty wide range of end-of-line inspection equipment, metal detectors, checkweighers, x-ray equipment that kind of stuff. Very important from a brand-protection perspective, important for quality, important for productivity. And so the value proposition still resonates well with our customers, but it also can get tied to investment cycles. And if you just kind of look at the headlines over the last couple of months, there's been a lot of packaged food companies that are kind of out there talking about challenges, whether it be financial challenges because of higher inflation and material costs, whether it be restructuring activities, facility consolidations, those types of things. And so that's -- so when we talk to our organization, we actually had a really good first quarter there. We grew very well in the U.S. We had good growth in Europe, but nonetheless, the outlook is much more modest. I think our outlook for the second quarter was low single digit. And for the second half of the year, we're probably still going to be in that more low single-digit kind of a range. And one of the things we're seeing is that there's a lot of interest for projects, but projects are getting delayed. And so that's something that we're kind of monitoring.

Do you think Mettler's pricing algorithm going forward is higher than it has been historically. I mean, you're capturing a good amount of price this year, I think, like 4 points or so. Is that still firm? Maybe seeing any slippage or like maybe more pricing sensitivity and -- do you think kind of '24 might look similar to the past 10 years or more like this year?

For this year, we still feel really good. Like I think we'll update everybody at the end of the second quarter, but the 4% still feels good from my perspective. The team has executed really well. As we have mentioned before, we're going to have higher price realization in the first half of the year than in the second half because we're benefiting from a lot of the actions we did during last year. So we're getting kind of the full year benefit in the first half of the year. We just have a great foundation for pricing. We've talked about it a lot. We talked about it at our Analyst Day back in November. Selling largely personal instruments directly to the end user at relatively low-price points is a good formula. We can -- and then over the last few years, I really do believe our value proposition has increased a lot. And so that's a good situation in terms of willingness to pay. When you have a sales force that's a direct sales, they're dedicated to a product category, they're really in a position to articulate that value proposition. And when they are often selling to the end user, they're selling it to a person that understands that value proposition. So it really works out well. And then, of course, we have the program on top of that with all of our sophisticated tools and analytics that actually -- that helps as well, too. As we kind of like look into the future, a lot of it will depend a little bit on the inflationary environment. When inflation is higher, of course, it's going to be a little bit easier to do more on pricing, we'll kind of have to see how that goes. And before I provide specific guidance on 2024. But I think the long-term algorithm that we think about, assuming inflation does go back to a more normalized level, is probably more in that 2% range. Historically, we probably would have said 150 bps to 200 is we would have delivered something in the 200-plus kind of a range and probably acknowledge that's probably still -- that should still work for the algorithm going forward.

Are there any specific areas in your business, generative AI tools -- theme, where you see scope to apply those internally? And any examples you can speak to?

Yes. I mean -- where we see -- and for us, it's probably a little bit more weighted on the deep learning and machine learning than pure AI. But in terms of like optimizing production processes, that's an area where we do see a good opportunity. There's a lot of opportunities in back-office processes as well in terms of how you can either automate things or pre-populate fields so there's a lot -- I think a lot of things we can do on the back office. And then even on the front end, there's things that we can do and we have done to shorten analysis cycles for customers in terms of stuff we're doing with our embedded software or our stand-alone software that we sell to customers.

Maybe lastly, you guys have made such tremendous improvement on margins last several years. [ Is it ] tougher to realize from here, do you feel comfortable with kind of the historical algorithm in terms of annual margin expansion?

I think it's amazing, but I just feel like we just have such good momentum in terms of our margin -- with so many different programs that support the margin, whether it be simply -- I say simply, but organic growth is an important thing, increasing volume. I mean we're a market leader in highly fragmented markets. I think we have a really good opportunity to continue to grow organically. Pricing I already kind of talked a little bit about. Our SternDrive program in terms of operational excellence in the supply chain. I mean we've -- our supply chain team has been obviously pretty distracted over the last few years with logistics, with COVID. It's going to be really neat to see them be able to use a lot of that capacity to focus more on the SternDrive initiatives. And we're already seeing that internally, and I think that should deliver some really good benefits here over the short and medium term as well. It's certainly something that we're going to be leaning into. The Blue Ocean program is a huge enabler for all this stuff, the ability -- when you have like a single instance of an ERP globally with harmonized global processes, it creates an opportunity to not only do things in shared service centers, but also to automate things. And then just the mix benefit we get -- just growing businesses are our highest margin business as well, too. So that also should be in our favor. And then maybe one last comment is that I'm also really encouraged when I look at our portfolio from the inside, and I can really see the granularity of it. Our highest-margin businesses continue to still expand. Like we still haven't really seen that ceiling internally yet. And so that, to me, is also pretty encouraging. And every time you kind of hit a different number, that's a milestone. I think it's natural to say like, is that a new ceiling, can you grow more? And I just remember years ago, hitting some of those internal numbers, and we're well beyond those numbers today. And so like that's also very encouraging to me to see that the organization really can continuously improve, and that's -- and I think a lot of that also just comes back to culture.

Awesome. Well, we'll have to leave it there. Shawn, thanks so much for being here. You all have a great day.

Yes. Thanks, Brandon.