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

Okay. Welcome back to the 2023 Stifel Healthcare Conference. We are on the life sciences and diagnostics track. Our next company is Mettler-Toledo. Happy to have CFO, Shawn Vadala with us. Shawn, thanks for spending some time with us this morning.

Yes. Thanks for hosting us.

Yes. Our pleasure. You -- Mettler-Toledo is one of the companies that provides an outlook on the next year on their third quarter call, which is very helpful for us. And so you did so on your earnings call.

I'd love to talk a little bit about just, at a high level, how this guide for next year, which is for flattish top line revenues, compares to the philosophy that you've had in prior years? You tend to be a conservative team out of the gate for a good reason. How would you compare this guide to prior guides?

I think our approach is very much the same. I mean we recognize it's always challenging to guide at this time of the year in any year. We typically only sit on 1.5 months' worth of backlog. But we also think it's important that we can share our insights. And unless we have 0 insight, we feel like it's appropriate to share what we're thinking. . And we always like to think that there's upside to our guidance. We always have more initiatives internally to exceed those, but we also are very aware there's a lot of uncertainty in the world. And I'm sure for everybody, it's a little uncomfortable when you're in a situation where we were down in Q3. We have tough market conditions for Q4, and we've kind of told everyone we're going to start -- we expect to start the year off down similar to the second half of this year. And so there's an expectation that there's growth in the second half of the year. But we do feel -- we feel good about that sitting here today now, things can change, but we do feel good about that. And I think part of it is that we -- fundamentally, we will have better comparisons. We will have a better, I think, year-end seasonality compared to the fourth quarter that we're looking at this year in terms of like what people refer to as a budget flush. We have very low expectations for Q4 this year. As we look to Q4 next year, we certainly expect a more normalized environment. And then if you just think about like a lot of the different headwinds that we would have had this year versus next year, whether there is destocking of consumables and pipette tips or destocking of consumables with bioprocessing and process analytics or even some of the challenges that we're seeing in China, we certainly think that we'll work through a lot of those topics as we go through next year. And of course, underneath all this, we're continuing to execute, right? Like there's a lot of good confidence that we have in terms of our ability to deliver innovation to the market. There's -- I think there's going to be a really good cadence of innovation kind of going into next year. It's something that Patrick has been very focused on since he's been. And I think we'll talk about some of those things that we're going to be launching next year that nothing ever moves the needle individually, but it's having that cadence. And then internally, we also have a lot of programs that we're going to be talking about more next year too, like the next generation of Spinnaker, which will be very important as we try to identify pockets of growth and capture those growth opportunities. And there's always -- in a global business, that's as diversified as our business, there's always going to be opportunities, right? And so for us, it's always been about pivoting to those opportunities and capturing them. And that's something that we're just very highly focused on at the moment.

Lots of stuff to touch on there, and we'll do that. I want to just go back to your comment or your thought on pharma budget flush or budget flush in general in the fourth quarter. There doesn't feel like there are a lot of life sciences that now bake that in. It just -- it seems like it's a nice thing to just happen if it does happen, but not have -- expected to happen going into the quarter. If I remove the COVID period, have there been years where you've had very little of an expectation for a budget flush and actually seeing a meaningful one? You don't have the largest pharma concentration in the group, but you do have some, obviously.

Yes. I mean it's a topic we've historically not spoken too much about.

So we're already breaking new ground right here.

Yes. Exactly. Exactly. You already beat us down. But as we kind of like look at the fourth quarter, given all the focus on it and even for ourselves, just to kind of refine the way that we're thinking about how to estimate, of course, no one places an order and says, "Oh, hey, code this one budget flush." But we do our analytics as you do your analytics. And as we kind of look at what a normal year looks like, a normal year would probably say that the fourth quarter is low double digit higher than the third quarter in terms of sequentials. This year, we kind of look at that just under 5%. Some people might say, well, why is there -- is there any increase? I mean, I don't think it's quite that simple and it's not that quite draconian. I mean if you just look at normal seasonalities of business activity like in the Europe. I mean, Europe, there's a lot of vacations that happened in the third quarter and things like that. But those are the things that we looked at a lot closer in our business, and we did our best to try to flush that out as we were thinking about the fourth quarter for this year.

Okay. There aren't too many Mettler-Toledo conversations in general that don't involve China. So certainly, I'm sure you're getting a fair of dose of them today and yesterday. Revenues were down 25% in this most recent quarter. They were actually up 3% in the prior quarter. So what's going on broadly is certainly happening at Mettler. I think most people have a general understanding of what's going on, which is it's getting worse. But can we maybe just talk about some of the moving parts? Is it useful to draw a distinction between what's happening on the life sciences side versus the applied and industrial side?

Yes, I think so. I mean we -- every time we talk about China, we always start with reminding people that things can change quickly in China. And boy, this is going to be a good example for the future. I don't think we've ever seen a downturn happening quite so quickly. But keep in mind, it's a year ago, we would have been sitting around this time of year just issuing guidance, and we would have been answering questions about one of our biggest uncertainties for this year would have been prolonged COVID lockdowns in China. And then literally a few weeks later, the lockdowns were gone, 80% of our workforce had COVID around the holidays and then we started the year. And then, of course, we started the year with much higher expectations. I think everyone had higher expectations that the government was going to start focusing more on the economy. Obviously, that didn't happen the way that people expected. And I think with that uncertainty, that created kind of an environment where people started to hold back on investments. And then as we kind of got into the year, in the third quarter, we certainly expect the sales to be down in the third quarter, like down like 15% mid-teens they were down 25%. I mean that's very significant deterioration. And what we saw very much though was that the life science spending was down very significantly. Like if you look at like all the spending that happened over the last few years in terms of biopharma and pharma, we just saw a significant decline as we kind of got into the third quarter. And then -- and so our lab business was down in the mid-30s, like over -- between 30% and 35%. And then our Industrial business was down kind of more in the high teens. And so as we kind of like look forward we kind of expect that we'll continue to -- we expect the fourth quarter to be similar to the third quarter in terms of like what we're seeing. We expect the first half of the year to be more similar to the second half but then we expect to start lapping better comparisons as we kind of get into the second half of the year.

Yes. And is it -- yes, absolutely. Is the potential or the hope for acceleration in the second half of the year -- one of the questions on the call was, hey, is it just comps that you're pointing to that are going to have the growth rate look better. So can you kind of talk a little bit about the confidence in that second half growth that you can envision? And the follow-on or related thought would be, is it fair to have confidence in that, just given that what we're talking about is the government typically stepping in, propping up these companies, allowing them to feel better about spending. And so far, it doesn't really feel like that's about to happen, although you guys have good folks in China. I'd love to get your opinion just on whether...

Yes, I don't -- I mean, I think everyone would like to see stimulus but I don't think anyone's counting on it right now. I think the government's focus from what we can see is going to be to more stabilize the real estate sector, try to add confidence generally to the economy. And while that will not directly benefit us, we do feel like that should help. I think right now, people are looking for signs of stability. I think they're looking for signs of the government's going to protect the bottom. I think they're looking for signs that it's okay to invest again. And so I think those things will help. I don't think they're going to be as quite as good as like maybe a direct stimulus. We could see some more benefits on the industrial side of the business as we kind of get into the year. But I think anything that they can do to like reestablish confidence in the country. I think that's going to be the -- probably the key as we kind of navigate the next year.

Okay. Maybe from a segment perspective and just thinking about lab, which has historically just been, quite honestly, I would say, an above average grower when you think about some of the products that you have. And I don't mean that to be in a disparaging way, but it's a pipette business, and there are a lot of pipette businesses or some of it anyways. Do you think that on the pipette business and the other businesses that have been part of the destocking conversation, we really should be in a place in the beginning of the year to think about growth reflecting a lack of a headwind there?

Yes. I mean, certainly, pipettes will have a better comparison in the first half of the year, especially on the tips. What we started to see in the second half of this year is a decrease in instruments. So I think that implies also just the reduced spending environment generally in terms of biopharma. But lab overall, I think we did have a lot of headwinds this year and that we won't see next year. And I think at some point, we are more optimistic here. I think as we kind of like monitor the business, like we're not -- we're still competing well, we feel like we're still gaining market share. I think we're very well positioned with our LabX software. We have a lot of new innovation coming out next year as well, too. We're selling personal instruments. And as people kind of get back at some point to more normalized replacement cycles, I think we should start to see some benefits. And I think all the themes in the lab around automation and automating workflows and productivity, I think we facilitate those a lot, whether it be with LabX or some of our other solutions that we have in the lab.

Yes. Maybe just touching on that point because one of the things that you talk about is sort of an overarching driver of demand beyond what maybe the macro picture would have your thinking is about to unfold. Is just this idea that there are companies looking for more automation for more seam line solutions? You're talking about it in the pharma side, you definitely talk about it on the product inspection side when it comes to the industrial business. Is the theme -- is the answer that the theme is kind of well represented in both? Or should we think about that being more focused on 1 part of the business versus the other?

No, it's a great question. It's definitely in both. And I think that's why you've also seen our industrial -- our core industrial business holding up so well. I think as people have been rethinking their supply chains and investing in their own production, there's a cost to that, but then they've also been seeking more productivity, more automation, more connectivity, more digitalization. All these things play very well to our product portfolio. If you think about like inside a facility, whether it be a pharma facility, a food facility, a chemical facility, there's just a lot of batching and filling and formulating and you can automate a lot of that activity and a lot of our terminals and way modules. They're all connected and to like a greater process control system as well, too. And so we've just seen a lot of resilience in that business because of that over the last few years. And we think that, that's clearly going to be a theme as we kind of see going forward.

Yes. Okay. And just on the Industrial business, mid-single-digit decline is the outlook for '24. China is a part of that, but I think Americas also saw a little bit of softening in the quarter as well. Where is that? Is that mainly food manufacturing? Or was it broader than that?

Yes. So in the third quarter, our product inspection business was down. We've just come off of a period of some good growth and investment with packaged foods and product inspection in the U.S. Third quarter was down. We expect the fourth quarter to be down as well. Also, by the way, in Europe. I mean, that segment is under a little bit more pressure. Now I've been kind of like saying that the last few quarters and overall, I think we've done a little bit better than what we had expected. But I think as we kind of go in the fourth quarter, we certainly see more challenging conditions there. But then if you kind of look at our guide for next year, I think we might have guided down just to clarify, down low single digit for core industrial. So maybe it's not quite as bad as you might have been thinking. But the other thing -- but the other thing that happened in the third quarter is that we were lapping some really challenging comparisons to the prior year. So we're a little bit more optimistic for but we're not -- even though the mix of the business is better than the past, we have these positive themes. There's also a theme on reshoring and near-shoring. We're not immune to the economy. But as you've kind of seen over the last year or so, we've been able to sustain a situation with relatively low PMIs. I mean it's very impressive to me to see like in Europe where PMIs were below 40 a bit in a few countries, and we were able to still sustain that. Now we're not immune. I think we are cautious as we look to next year, but it's something that stands out a little bit to me. And then the other thing on core industrial to keep in mind is probably about it's more disproportional way towards China. So as China is down, that business is going to be a little bit more.

Yes. Okay. And then maybe just on pricing because that does tend to be a component that's meaningful for you. You have the ability with some of these lower ASP items that you have in the portfolio to push a little harder than some peers. The outlook was for a more normalized pricing environment, I think, for 2024. Where are the levers there? Do you feel like if you pushed a little harder this year, you really would be borrowing from some capability in the out year? What's the flexibility around price in 2024, just realizing where the last couple of years have been?

Yes. I mean, hey, we've, of course, come off 2 really strong years in pricing. I think our guidance implies about 5% price realization this year. We did a similar amount last year. Now a lot of what we benefited from this year was also due to the inflation we saw last year where we had put in place some actions last year that were started to get the full year benefit for this year. For next year, we're looking at a more -- I would call it, more normal situation like 2% kind of a range. We still feel great about the portfolio. Our value proposition, I feel, has increased over the last few years. I mean as companies have moved towards these more automated solutions, more digitalization, they seek more productivity, and they're focusing more and more on the return of their investment. I think we have a great value proposition that really is resonating in the market. And I think our pricing is holding up quite well in that regard. In terms of like levers. I mean we're always looking at opportunities as we kind of go through a year. I think a little bit will depend on what the exact inflationary environment looks like, whether it's by country or whether it's by input costs. And then based on that, maybe that could give us some rationale to maybe go back to the market if we need to. But other than that, the tools that we have in place where we are continuously optimizing things through pricing signatures and value price maps and this whole active price guidance initiative that we talked about a year ago at our Investor Day, like those are all things that really I think, help us out in terms of making sure that we're optimizing things in a good way.

Yes. You are investing in all of these new products like LabX that is designed to help the pharmaceutical industry. As the pie chart presumably shifts towards more pharma and I guess the question would be, do you think that's going to happen. If so, does pricing power increase in any small way, just knowing the way that pharma tends to be with price in some of these situations, which is a little bit more tolerant?

Yes. I mean there's a higher willingness to pay there. And I think a lot of it is because our value proposition resonates the most in a laboratory environment. And so if you think about it, like -- if there were like -- just to use an example, if there were like 10 features of a product or a solution, if all 10 of them play out in pharma then they're going to be willing to pay for all 10 of them. If only 7 of them play for another industry, they're only going to be willing to pay for the 7. So to oversimplify, there's a higher willingness to pay because our value proposition resonates there. So I do think there is a favorable mix benefit when you look at our end market exposure and what's growing faster versus others. That's actually a good way to look at it.

Okay. Maybe just on market share gains. I know no life sciences company that I've covered has ever looked to get too specific on talking about share shift, but it is something that you talk about and that you've talked about more in recent years. Can you just spend a second on where the opportunities are? And then I guess I'm curious whether you view share gain opportunities as easier in easy times because there's just a lot of money floating around or harder times because, for instance, in China, it feels like there have to be some of these local competitors that are going to get kind of shaken out given this -- given what the economy is going through.

Yes. I mean share gain is definitely part of the secret sauce. Like we're -- about 75% of the time, we would consider ourselves a market leader globally, but we still only have about 25% market share or so. A lot of our product categories are probably in the 20% to 25% range. So there's plenty of market to be gained. We kind of go after that with our Spinnaker program. Also services, by the way, too. If you look at services and you look at our installed base of instruments, I'd say about -- we'd estimate about $3 billion of that is serviceable in our service business is probably $800 million. So there's more opportunity for us to better penetrate the installed base. But getting more back on market share gains. We've seen -- and we don't -- no one has precise numbers on these things. But if you look throughout the portfolio, I feel like we've done a very good job of gaining share pretty broadly in most product categories. You can kind of go category by category and look at our results and kind of make a case like, hey, we're gaining share, maybe even a little bit more than we have in the past. And keep in mind, we just need a little bit of share gain to move the needle in terms of our growth rates. So we feel good about that. So we feel like Spinnaker certainly accelerates our ability to do that. We feel like the innovation that we put into the company helps in that regard to. I think we're doing a lot of good investments that keeps us differentiated versus competition. And as we think about the future, I mean, there's no product category or opportunity, I'd point out specifically, but we feel broadly we should continue to be able to take share. And then the other part of your question, I do feel like there's always more opportunity and tough times to take share. I think that we were mindful of that. And we don't do it with price, but we do it with our analytics to target those opportunities and really using the tools that we have inside to be able to really value sell, articulate our proposition. Because in tough times, people are looking a little closer at how to become more productive, right, have a better return on their investment. And when they do that, I think it shines an opportunity for us. And so I think we'll hopefully be able to see some of that as we kind of navigate this economy.

Are share gains something that you think about when you set an outlook for a year? I mean, to your point, you've been a consistent share taker. So does it factor into the growth equation for a particular year? Or do you let share gains be share gains when they're had and that ends up being...?

I mean it's not so precise, but it's certainly part of the thinking. Like when we think about like our algorithm for the future, right? Like it's certainly part of the thinking. we feel like we can outgrow the market a little bit. And it comes down to highly fragmented markets that I talked about. It comes down to the service penetration opportunity. It comes -- and then we also have, frankly, a better mix of business too. And now I'm kind of transitioning into algorithm. And then we have like these themes about automation, digitalization, reshoring, nearshoring, all those things are things that we are either trends that have been accelerated or trends that have really -- like relatively new, like think about growth in the West right now. Like we've never really experienced a time when it's more than just replacement cycles. And so that, to us, is very exciting opportunity. As we think about maybe risks in China, there's also opportunities in other parts of the world, and capturing those is going to be important to us. And then broadly throughout the world, there also are opportunities in a lot of these hot segments, whether it be lithium-ion batteries, semiconductors, some of the new materials, new energy type investments like those types of industries, we can we can really support them pretty end-to-end through the research labs, all the way through production, with our various analytical technologies, and that helps us as well, too. And so -- and there's -- so part of it is share gain, but then part of it is just all these favorable trends that I think we're also well positioned to capture.

Okay. Okay. So maybe just touching on margins. The guidance for 2024 is basically a flattish year on margins. There's an FX component there. So I think a for you being up a couple of bps if we're on a currency-neutral basis. But it comes off of a year where you had a similar FX headwind and you did grow margins 50 to 60 basis points, I think, in my model, 50 plus for the year. What do you have working for you and working against you next year? Some of the obvious ones seem like they're price and then again, FX. But what might contribute to the margin equation beyond those things. And then the follow-on question is, which is something that we get a lot, how much gas is left in the tank on things like SternDrive and Spinnaker and Blue Ocean? It's been a productive effort for you over time. And I think people have a hard time of conceptualizing why that would continue to pay off.

That's a good question. Hey, I'll hit the margin, and then I'll transition to the other one. So on the margin side, we feel still really good about our margin expansion story for the future, with pricing, SternDrive, our culture around continuous improvement, Blue Ocean, all these things. But if I look specifically at next year, you're right, there's a -- it's a little bit different for us. We're coming off a period where we've had very strong margin expansion. As we look to next year, we will have a benefit from pricing. It won't be the same benefit that we had this year. We'll also have a benefit when it comes to cost savings programs. And I think we're doing something meaningful on the cost savings side, but it also is helping us to mitigate some of these other headwinds. Volume will be down a little bit next year. Foreign currency will be a headwind that you mentioned. And then our variable comp, bringing back variable comp to normalized levels will be a headwind. So when you balance out all those things, plus we still have inflation and particularly it's on the wage side and we're investing in the business. And as we kind of like think about balancing the cost structure, to us, it's very important that we come out of this stronger. And where R&D is still up 5% year-to-date, maybe it's only up 1% in Q3, but we're still investing same with our service business. So getting that right balance is very important to us. But then when we think about the future, we're actually in the process of launching the next wave of a lot of these initiatives. There is a new wave of SternDrive that we're in the process of just launching that will focus more on smart automation as kind of a theme. And if you think about like our business of like -- with a very diverse mix of manufacturing and low-volume batches, like getting the right automation technology is very important. And those technologies are now available in the market. So there's some really neat things that I think we can do in the SternDrive thing side. When it comes to Spinnaker, this last wave has been really successful. And as you know, every wave builds on the previous wave. We're in the process of -- and we'll talk more about it next year is launching the next wave of Spinnaker, which is really going to accelerate how we think through the customer experience and how we better digitalize that experience. And so I think there's some exciting things there. And then there's some other even newer programs that we're going to be talking about as well next year. So I think as Patrick likes to say, the best is yet to come. And I do believe there's a lot of really exciting things going on inside the company that will help us navigate whatever, whether we have to navigate next year. The organization remains very resilient, very agile. And whatever we're dealt with, I feel like we'll navigate it. And I think we have a lot of good opportunities ahead of us.

Okay. I think I'm going to leave it there. That's a great finishing point. Thanks, Shawn. I appreciate you being with Us.

Thanks, Dan. Take care.