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

Thanks, everyone, for joining us this morning. I'm Vijay Kumar, the life science and medtech analyst at Evercore. A pleasure to have with us Mettler-Toledo. Representing the company, we have CFO, Shawn Vadala. And we also have Adam Uhlman from Investor Relations in the audience. Shawn and Adams, thanks for taking the time this morning.

Yes, thanks for hosting this, Vijay. Great to be here.

Tools has been pretty interesting this year. I do have my bunch of questions. But before getting into questions, if you wanted to make some opening remarks about third quarter and then we could proceed to the Q&A.

Yes, sure. So the third quarter certainly didn't come in the way we expected it in terms of sales. A big part of the story was China was a lot weaker than what we expected. I assume we'll talk more about China this morning. But maybe kind of stepping back from it, I also think it's important to remember, too, I think the organization is still executing really well. The resilience and the agility in the organization is still really excellent. And I think the organization's ability to focus on our strategic pillars, our different initiatives, continue to drive margin expansion, protect profitability, but most importantly, positioning the company for the future. And I think this is something that's very much on our mind is how do we make sure that we come out of this a stronger organization. And so there's a lot of thought and efforts kind of put into that, whether it's through innovation, whether it's through continuing to invest in the areas that we see as great growth opportunities for the future, like our service business or whether it continues to be to invest in our internal programs that will, I think, kind of help drive growth in the future.

In 3Q, to be fair, I think the rest of the space has had its fair share of issues. So I don't think like you guys were -- you need -- when I look at the components of what drove your third quarter performance, labs down high singles. And I know you don't look at pharma versus nonpharma necessarily, but I think your peers have been citing the challenges within that segment. So maybe comment on what did pharma do for Mettler in third quarter? And what have you been hearing specific to that customer segment?

Yes. So in addition to China, I mean, our core end markets were also down in the quarter, which kind of led to a more challenging result. But when you look at our core end markets, about 40% of our business is sold into life sciences more broadly. And clearly, pharma and biopharma was down a lot more than the other segments, and we kind of saw that in each region in the world. And one of the things that kind of stood out to us is that we typically benefit a lot from our diversity. If you think about it, we're selling instruments right from R&D through process development right into production. And if we look at the different product categories throughout the portfolio, they were all down in the third quarter, which shows you that there's really a fundamental step back in terms of spending more broadly in that space. And what we kind of continue to hear is things are being delayed. There's a good engagement with customers. There's certainly a lot of interest in customers. There's opportunities with customers, but the reality is that funds are not available and budgets have been cut and -- or things are being delayed.

Sorry, 40% of your revenues is life sciences. Is that a proxy for pharma or what is pharma for Mettler?

So within that number, we would have large molecules, small molecules, CROs, CDMOs and testing labs. The small molecule would be larger than -- or bigger than the large molecule, to maybe -- but as you know, we have a very diverse exposure. On the large molecule side, we would have like liquid handling. So think about pipettes that are used in research, but also in quality labs. We'd also have process analytics that is used in bioproduction. If you think about our process analytics business, we're actually the first company to have in-line sensors and bioreactors. So it's really part of the brand and the history of the company there. And then we've been able to expand that over years with other different sensor technologies. We also provide pure water solutions into to biotech. And then we have like more niche year things like protein aggregation that we can kind of analyze through our automated chemistry business. And then -- but even like on the industrial side, we're selling -- if you think about a lab reactor, there's a lot of process control that goes into weighing and filling the reactors in formulation, that's all kind of connecting weighing technology with terminals and process control. So there's a lot there. And then on the kind of the more traditional small molecule side, of course, we have a very wide range of instruments, whether it's our balances or analytical technologies. But what's also -- what's interesting there is that we sell up to 40% of the instruments on a typical quality lab bench. And we can connect a lot of them with our LabX software. And so that's -- that continues to be a real differentiator for us. We think that, that's going to -- that resonates in the market, and then we think that, that's going to be a really important value proposition going forward. And it kind of goes beyond just the ability to help out companies with data integrity it helps them with automating workflows. And I think that's -- as companies look for more productivity and the LabX is going to be increasingly more important.

And in this overall pharma bucket, was it down in line with your labs, down high singles in the third quarter? And within -- you mentioned large, small CRO, CDMO. We'll keep China side for a second, but were there any differences between these different buckets in a CRO versus CDMO versus a large pharma, small pharma?

I mean nothing that -- nothing to point out from my perspective, yes, nothing to point out. I mean, I'm sure there were certainly differences like, for example, we know that bioprocessing was down. There were some destocking issues with single-use sensor technologies. I mean that certainly stood out during the quarter. But broadly, I wouldn't want to try to paint a picture that there's a good part here. I think there was just -- everything was kind of down some -- maybe a little bit worse than others.

Understood. So you would say bioprocessing was a tad worse in the other areas.

Yes, yes.

And why -- and just taking a step back, different companies have cited different reasons for in a form of cautiousness when you speak with your customers, what's been the feedback on why customers have turned cautious?

Yes. I mean I think that's the question everyone is kind of looking for, right? And of course, it's complicated. One of the themes that I kind of hear and that I kind of think about myself and might be a little bit more of my own theory is that I just feel like people entered the year with a different expectation. They entered the year assuming business levels, we're going to be at a much higher level, and I'm talking about it from our customers' perspective. And then when the business conditions change, they had to change and adapt, just like we have to change and adapt. And I think as a result, people had to focus on their own productivity and their own cost savings initiatives and kind of just revisited what they were intending to spend during the year, and they had to revisit that. So I feel like there is an element of just kind of rethinking through spending and budget flows and -- but that's -- it's dynamic, and we'll see how that plays out as we kind of get into next year.

Understood. And I think look at your fourth quarter guidance, I think guidance is -- for revenue it's down high singles. How would you characterize the macro environment relative to that guidance? Have things been playing out in line with the sort of your -- I know your earnings is fairly decent, so it's a little bit of a moot question, but I have to ask.

Yes, sure, sure. No, I understand, of course, like you said, there haven't been too many working days since we provided guidance just a couple of weeks ago. But maybe it's good to maybe reflect on what was on our mind when we provided that guidance. So first of all, we expected China to be down similarly in Q4 as we saw in Q3. Now the comparison gets a little bit better there. But we we're still a little bit cautious on China here for the fourth quarter. And then the other big assumption was the year-end budget flush. We typically don't talk a lot about budget flush in our business, but the reality is there's some level of year-end seasonality to the fourth quarter each year. And it's kind of hard to estimate what that means or what that is. We kind of looked at it by the different product categories. And typically, for the group, our seasonality would be something like the sequential from Q3 to Q4 would increase by low double digit in a typical year. This year, our guidance is more in the -- like that 4% to 5% kind of a range. So we did take a more cautious view on it versus historically, but that's certainly something that we'll see kind of how that plays out in the fourth quarter.

And so that up mid-singles versus historical double-digit sequential ramp-up essentially the delta is no budget flush, is it right?

Yes. Yes. I mean I'm sure there's other things about like weak market conditions in China, weekend market conditions. But certainly, there's an element -- a large element of that would be the budget flush, yes.

And in a typical year, when do we start to see a budget flush? Should it be around this time? Or is that late in December.

I mean a lot of it is in December. I mean some of it would already start around this time. Of course, we knew the October results when we provided guidance. But I don't really have any new insights like I said, at this point in time.

Got you. And so no perhaps it is a delayed start, but we haven't seen anything so far from a customer activity level, that's a fair comment?

I'm sorry, can you repeat that?

We haven't seen a pickup in customer activity level from a budget flush perspective? Typically, it starts around this time period, but we haven't seen a pickup so far.

Yes, yes. I mean, I don't want to give too many insights with just a few working days since we last provided guidance. But yes, it's I think it's a fair comment.

And you did bring up China. That's been another big copy for the tools companies. I think, in down double digits for fiscal '23 and all of it almost driven by second half weakness, right? What is -- I guess, you guys are probably close to customers in China as anyone else, what are customers telling you in China? What's driven this almost an about turn.

Yes. We always say things in China can change quickly. We've said that many times in the past, and I'm sure you've heard me say it. And sometimes, it changes for the good and sometimes it changes for the bad. I mean, a year ago, I think we would have been sitting not in the same location, but we would have been sitting together, and you would have been asking me about our outlook for 2024. And I would have probably told you that one of the things on our mind was that we're concerned about these prolonged COVID lockdowns in China and what effect that would have on the country. Literally, just a few weeks after that, the lockdowns ended about over 80% of our workforce got COVID in a few weeks. I mean, it was crazy. We got through it, and then we all kind of entered 2023 kind of optimistically. I think everyone viewed that as a signal that the government was going to focus less on COVID and was going to focus more on the economy. And so there was this expectation kind of in the year that there would be a lot more investment and more stimulus and everyone was asking questions in that regard. And I think we all expected something to happen and then nothing really happened. And then I think what -- if you look at China, people do tend to, or companies tend to look more towards the government for direction. And then what was happening is that uncertainty started. And as uncertainty started about like what the government -- they were going to focus on the economy or not, they started to kind of hold back in terms of their investments. And then what we started to see is kind of an acceleration of that happening in the third quarter. And what we saw in our business was that there was a lot of spending that happened during COVID, especially in the lab space, like the government really spent a lot of money not only in testing, but through development and everything. And so there's a lot of spending. So it's hard to like necessarily really get your arms around like what was that let spending for? Was that maybe somewhat of an acceleration of a replacement cycle, or was it really truly spending on COVID. And so I think there was some element of some stocking also that went on because with the lockdowns, there was a lot of focus on supply chain. And so there was an element to that. Now our products aren't typically the kind of products that you would stock, but I think there might have been more of that in China than there would have been in other parts of the world. And like I said, there was an expectation of the stimulus that didn't happen. And then with some of the geopolitics, right, there's lower levels of foreign investment at the moment. And then there were other topics going on in the country that we're creating uncertainty. And so it's just not a very good investment climate. But if you kind of like pivot from that, right, and you say, okay, well, what does our business look like there? What we're hearing is that there's a lot of delays. We're not necessarily hearing cancellations. I mean the team there still has some optimism, believe it or not, despite the numbers being down so much because I think there is a strong pipeline of activity in the country. The government still is very committed to life sciences. And I think that's important. And if you think about it, this is a country that really was focused on having their own vaccine. They wanted to develop their own vaccine. They wanted to produce their own vaccine. And I think that's a strong signal for how they think about life sciences going forward. So I think there will be a lot of focus on research and development. There will be a lot of focus on the production of pharmaceuticals and biologics in the country as well, too. At the same time, there's also a lot of focus on being self-dependent on a lot of strategic end markets like lithium-ion battery, like semiconductors, like new materials. And these end markets are very important to us because we provide solutions throughout the entire value chain from R&D, through -- all the way through production. And we've seen very good growth opportunities in those different industries. So I think as the government continues to focus on that, that will be important for us. And then we talk a lot about trends in automation and digitalization. China is no different. They're looking for more automated solutions. They're looking for more connectivity. They're very interested in collecting data. And so our instruments really help them with those types of trends as well, too. And so we've seen very good growth in those types of areas over the last few years as well. So I think once we kind of get through this reset, I think there is a lot of opportunity there. If you look at our business, we're not that exposed directly to foreign investment. About 15% of our business is sold to multinationals. Out of the rest of the mix, about 60% is to private companies in China, with the other 25% being on the state-owned companies. And is that 60% that still looks to the government for direction that we're just looking to have more confidence. Like -- and I think at some point, the government is providing some types of support to the economy now. There's clearly -- priority is on the real estate market and just kind of supporting the general economy, not directly are in our business. But indirectly, I think that still helps to kind of provide some more confidence in the overall economy.

Lots of helpful details out there, Shawn. But maybe one on your comment about hearing a lot about delays in China but not seeing cancellations yet. Have you looked at the funnel and that order book or at least stale, or -- I'm curious, has sales been having conversations with customers, and how robust is that funnel or I guess, staleness of that funnel, if you will?

Yes. I mean, we typically are only sitting on about 1.5 months' worth of backlog. So like what -- kind of what you see is what you get to a certain degree. And -- but like I say, like we're -- nothing I would read into any of that. But I'd say that there is -- we're going through a challenging reset at the moment. But I think coming out of that reset, there's still optimism for the future.

And you gave the breakout between MNCs and private companies and government-owned entities in China. And when you look at third quarter, China overall was down 25%. Were all these different buckets down a similar magnitude, or did you see any plus or minuses between those buckets?

Yes, I didn't see -- that's a good question. I didn't see the breakout in terms of private versus MNC numbers. But when I look -- when we -- but maybe the way that we did see it is like in terms of product category, about 50% of our businesses is lab and about 40% is industrial or core industrial. And that core industrial would have been like 60% like 10 years ago. And within that core industrial, I'd say we have a much better mix of business than we did in the past. But the lab business was down over 30%, probably closer to like mid-30s in the quarter, where the core industrial business would have been down high teens. So I think that says a lot about like where the biggest weakness was, which was pharma, biopharma. But it wasn't like the industrial business was insulated. Now our industrial business does sell into pharma and biopharma as well too. But I think some of the other core end markets were also under a bit of pressure in the quarter.

Based on your current guidance or outlook for China, what's the implied CAGR when you look at the China revenues versus pre-pandemic 2019 levels? Are we back at trend line levels? Has the ectasis of spending that's been flushed out of the system?

Yes. I mean I think the way we look at it is like when we provided our view on like medium- to long-term growth a year ago, when we did that, we didn't assume China was going to continue to grow the way it historically grows. Our expectation that it would grow high single digit. And that's still our expectation for the reasons that I mentioned a few minutes ago, like we do think that there's going to be a lot of investment in China for China, and we were very well positioned to capture those opportunities in the country.

Or maybe to ask the question slightly differently. How long are these cycles in China last? Is that 6 months, 12 months? Is there more pain to come in China?

Yes. I mean, of course, it's difficult. Given the -- historically, we don't have too many reference points with China slowdowns fortunately, but probably the most recent one was like that '13, '14, '15 kind of a range where it was like a slower, more elongated recession. But there was also a lot of change fundamentally going on in the economy, like this was, I think, probably the beginning of how they -- when they wanted to pivot more towards a consumer driven economy and then some of the 5-year plan started coming out of that, that started focusing on a little bit more of the end markets that are more strategically aligned with us. And so -- and that was a great opportunity for us. Back then -- pre that time, our business was probably 60% core industrial with a mix much more towards heavy industrial, we exited some of those businesses, and now we have a much more favorable mix of businesses within that 40% of core industrial. But if I look at our business historically, whenever we've had sharp declines, usually, things have come back in a shorter time period. Now I'm not trying to call anything here on that. And I certainly don't want to call a V-shaped recovery here. But I would just say, historically, when things have gone down suddenly, the recoveries come back a little bit quicker.

What triggered those historical recoveries? Like was that typically associated with some sort of government stimulus program, is that what we should be looking for?

Well, I mean, I'm kind of talking a little bit more globally here when I say that. But usually, a lot of these things are when there's -- sharp declines usually happen when there's a lot of uncertainty. And then when that uncertainty is removed, you start to see the strong recoveries. And so if you apply that to China, a lot of the uncertainty is around the things we talked about, whether it's lack of stimulus or even just government support, people questioning where the government's focus is. Certainly, some of the geopolitics in our play with some of the -- with foreign investment and topics like that. But in the end, it will come down to, I think the government has so much influence on their own economy there and just kind of like giving the signals that eliminate some of the uncertainties that have been there for the last few months.

And just given the macro issues that China is facing, is there any reason to believe any stimulus programs, this time around, perhaps might be different from prior cycles. As in any stimulus programs might be less favorable to life sciences, would that makes sense?

Yes. I mean it could be a little bit -- I think their priorities right now are -- if you put yourself in their shoes, right, you have the real estate topic, which is a pretty big issue for the country. There's a lot of wealth associated from a personal side with real estate there. So that affects ultimately consumption. Real estate also historically is a source of funds for a lot of their stimulus programs. And so rightfully so, there's a lot of focus on the real estate market. And then they have broader issues with their economy that they need to focus on, too. I do think -- I mean, I think that does not mean that they're going to ignore life sciences. I think life sciences and the health of their society is still a priority to them. And so I think we will see some benefits, but it just won't be from a priority perspective, the first couple of things on the list. So I wouldn't -- I'm not expecting anything in terms of a direct benefit here in the short term, but I'm more optimistic about the medium and long term.

And I think you were in China recently, correct, Shawn?

Well, I'm actually going in a couple of weeks, yes, so...

I wish I've had the sapphire side [Indiscernible]. I'm sure it will make for an interesting JV Conference Sapphire side. Maybe going back to pharma, is -- a lot of your peers speak about destocking. Is destocking done, or how does Mettler track destocking phenomenon?

There's 2 areas that were more pronounced in our business. The first was pipette tips. If you think about all the COVID testing, people are having a hard time getting a hold of tips. And so there was a lot of stocking that was associated with that. And you think about it tips can store, and there's a long shelf life, they're plastic. So it kind of makes sense. The other area was in process analytics. As people were producing the vaccine and the sensors that are in the reactors there was concerns about supply chains globally, just more broadly in terms of production. And so people were starting to stock some of those consumables. And what we -- some of our consumables -- a lot of our consumers have shelf lives to them, so they couldn't stock too many. But when you start getting into single-use sensors, which are plastic. There's no shelf life and people could stock them for a lot longer. So on the pipette tip topic, I feel like we've pretty much lapped that issue that started about a year ago or so. And then -- but in terms of like the process analytics sensors, specifically the single-use sensors, I think we still have a little bit more time to go. And then kind of beyond those categories, it's always kind of hard for us to say if people were stocking something or not, like typically, you wouldn't stock our product so much. But like I said, in China, there might be a little bit of that.

Understood. And then one, switching gears to industrial. I think 40% of your revenues are industrials. But it's a little bit of a misnomer, right? Not everything is cyclical. Just give us a high-level overview of what goes in the industrial bucket? And what is true cyclical exposure?

Sure. So if you think about our Industrial business, there's really 2 parts to it. There's the is the core industrial part, which is 25%, and then you have the product inspection business, which is about 15%. So together, that makes up the 40%. On the core industrial side, this is a business that historically was more cyclical out of our whole portfolio. And whenever PMIs were down, people will always ask us about our core industrial business. And probably a year ago, people were asking a lot of questions about that. It's really interesting for me to see how resilient that business has continued to be over the last few years. And now right now, it had a tough quarter, a lot of that had to do with China because it's disproportionately exposed to China. We also had some tough comp issues in the Americas. And it's not immune to the economy. I think it's still a valid question and something that we're looking at. But when you look at the business, it also is serving a better, healthier mix of end markets in general. We've really -- about 60% of that business now is sold into a combination of pharma, biopharma, food manufacturing and chemical for us is more specialty chemical. And that didn't happen by accident, right? Like this gets into Spinnaker. And so when you think about Spinnaker. Spinnaker Is taking this great opportunity of fragmented markets. We're the leader -- global leader maybe 75% of the time, but we still only have about 25% market share. And in core industrial, it's probably in the low 20s. And so there's a lot of market share to be gained in core industrial. But as we're gaining -- looking for the market share, we're trying to target the industries that we think are going to be the most favorable. And so -- and that's what Spinnaker is about is. It's about not only how do you use your sales resources in the most efficient manner to go after this opportunity. And so we target certain industries that we think are more favorable, have higher growth opportunities, provide more -- and are more profitable and sometimes we're getting into some of the spot segments that we talk a lot about, but they're also just the core segments. And so we do that by starting and looking at territories. So if you like look at a territory like in the old days, someone would have had a territory and you would have been given a quota. And as long as you meet your quota, everybody was happy. Well, part of Spinnaker is looking at that territory and saying, "Hey, what's the real potential in that territory. What can we do better with cross-selling in that territory? What are customers that we don't even serve in that territory?" And through all those analytics, we come up with an account plan for the sales rep. And then we might take away certain customers that are going to repeat customers. We know certain customers tend to buy certain things each year. We can service them more efficiently from the inside. And then so we start off with territory planning. Then the second thing is then, okay, now how do we help you go after that opportunity. So now we run analytics, and we provide individual profiles. And like last year, to put it in perspective, we probably had something of 130,000 of these profiles that look at specific investment opportunities for either new accounts, investments with the existing accounts or maybe cross-selling opportunities. And then we produce these profiles that then provide a lot of information about the customer, the opportunity, their tendencies, testimonials, maybe internally about the customer analytics about the penetration opportunity, all different types of information, even Google Maps, and -- so there's a lot of information there about the opportunity. And then the last thing we do is we say, "okay, the sales person's job is now harder, right?" You're having to really penetrate something, maybe cross-sell or go after a new customer. So we have a library of all kinds of digital tools to help them to convert that sale and like value selling guides and things like that. And what we've seen over the last few years is that the result of all this is that we've been able to guide the sales force. We literally call it sales force guidance. We guide them towards the best opportunities. And we've also seen conversion rates going up over the last 3 to 4 years as we've been kind of like really doing this. And more recently, this whole program is much better integrated into Blue Ocean into something that's now more dynamic, fully integrated into our CRM program. So it's actually pretty exciting. Sorry for a little bit of the sidetrack on Spinnaker, but I just think industrial is such a great opportunity about what we do with Spinnaker, and it's a lot of -- it helps to better understand the success there. Now of course, there's a lot of good innovation that's happened also in our Industrial business. I think we've certainly benefit from trends in automation and digitalization. We've invested a lot in our portfolio in that regard. And I think kind of going forward, this is an area that will benefit also from a lot of the different on-shoring and near-shoring opportunities. The other part of industrial is our Product Inspection business, which is about 15%. Product Inspection is much more of a secular exposure. About 70% of that business is sold into packaged food companies with the remainder largely pharma. And so this is a business that's a customer group that's focused on brand protection, food safety. Any time you see a recall, that's what they're trying to -- they buy equipment like ours to try to avoid that. But they're also looking for productivity, too, and so we can help them with that. And so we have a very broad range of offerings at the end of the line to help them meet those needs. The packaged food business is a little bit more under pressure these days. I've been saying that for the last few quarters, and it's kind of held in there better than what we would have expected, but we're a little bit more cautious as we look at the fourth quarter. I think we started to see some of the -- some of the more challenging results in Q3. And then I think in Q4, we'll see -- I mean, in the U.S., and I think as we look to Q4, we're expecting to see more challenging results in Europe as well too. And this business is -- these customers have been under a lot of different pressure from inflation and input costs and topics like that.

You mentioned some of the hot areas in industrial. I think battery testing is something you've spoken better in the past, but we're seeing some headlines about investments being scaled back in that area. Does that have an impact for Mettler just given pause and investment, if you will?

Yes. I mean, hey, we still see a lot of opportunity there. Like I mean, we think it's a great growth opportunity. We've seen that in China. Now China is an area where we have seen things scale back when it comes to battery. But when we look at other parts of the world, like just from a -- just from an internal perspective, I sign off on any deals that are over a certain threshold, like $1 million. And from a pricing perspective. And we continue to see some interesting opportunities out there in Europe and as well as the U.S. when it comes to battery. And it just shows you the magnitude of some of these projects. Those are really good sized projects for us. And so we're still optimistic. We still think that there's a lot of opportunity. And it's just amazing to me when I look at like literally recently for the -- we just presented our annual plan to the board a few weeks ago. And we had a slide in the deck that just showed the end-to-end value chain of battery and it just mapped out like all the different instruments to the different applications. And it's just so interesting to see how many things we can touch right from like the lithium ore, like with industrial scales and all the way through the value chain. And so there's a lot of opportunity there, all the way through production. And so we think it's a good opportunity. Now it's not a huge business for us, but certainly one that we think has good growth prospects. And it's just a good example of the things we do, right? Like we're never -- like we're not the kind of company that has to rely on one thing to get a result. Like let's say, it's no longer going to be an opportunity a year from now. Well, there's going to be other opportunities, right? And that's part of the whole -- that's part of Spinnaker is just having a pulse on where the opportunities are in pivoting. It's not like we had to develop new products for battery. We can leverage our existing portfolio and our marketing capabilities and really try to target them towards these opportunities.

Understood. And just from a big picture perspective, longer term, in a normalized environment, right? I think historically, you've characterized Mettler as a mid-single-digit company. Should it be like a mid-single-digit plus given some of these newer opportunities that change in the mix over the past few years?

Well, yes, historically, we would have said mid-single. About a year ago, we started saying we were a little more precise, right? We said 6 plus, right? And we still feel good about the 6 plus. It's -- and it's all these opportunities. I mean it starts with "hey, historically, we've been doing this level of growth for quite a while." If you look at the mix of our business today versus what it was 10 years ago, it is a better mix of business. I mean we all know pharma and biopharma is going through a tough time right now. But I think we also feel like this is going to be a really good end market to be exposed to going forward. It's about 40% of our business. We feel like we also have good exposures in other core end markets. We have these hot segments that we talk about in addition to lithium-ion batteries. We also have semiconductor, which if you think about most countries in the world or have some kind of a program that's focused on developing their own autonomy when it comes to semiconductor production. And we have a lot of different solutions in semiconductor as well, too. It's not new to us. It's always been part of our process analytics business with pure water solutions, which is really important from a cleaning perspective of the wafers, but we also have a lot of different things that we do throughout semiconductors on the industrial side as well as the lab side, like titrators or actually use on every semiconductor line as well, too. In addition to that, we have like the trends we talked about in terms of automation and digitalization. They're important not only in labs, but on the industrial side. And then I think this onshoring and reshoring opportunity. I think it's going to be a real unique opportunity for this generation of business that we haven't seen in the past. And I think we're in the very early innings of that. I think there's certainly risk as things move around, but I see a lot of opportunity. And that's something that we're super focused on internally, something that we spend a lot of time during planning meetings when we meet with different businesses around the world, challenging the teams about how are they monitoring these opportunities and making sure that we're capturing them because I think there really is a really good opportunity there. Yes, and then you kind of then also just look at the fragmentation of our business that we talk a lot about, right? Like this only having about 25% market share, that gives us the ability to just getting a little bit of market share allows us to kind of grow each share. And then we haven't even talked about services, right? So like if you look at our installed base of instruments, we probably have about $3 billion of serviceable installed base in terms of service dollars and our service business is probably about $800 million. So there's a lot of opportunity for us to continue to penetrate that, sell services, whether it's at the point of sale, whether it's through analytics and looking at that installed base and reaching out to customers. So we feel like there's a lot of opportunity.

Definitely. I mean that services sounds fascinating. But before we get to services, I think if we look at your fiscal '24 guidance, flattish revenues, is the assumption first half down mid-singles back half, up mid-singles. Is that sort of a...

We haven't gotten so precise yet, but clearly, we have kind of indicated that we expect the first -- we'll provide more precise guidance a little bit about Q1 on our next call, but we certainly have kind of indicated that we're expecting the first half to be similar to the second half of this year, which kind of -- would kind of get you to your math there, so...

And I think margins is one where I do get some questions, Shawn, because historically, Mettler has shown a leverage even in challenging market environments with the current operating margins at close to 30%, are we at peak margins is that why your EPS guide is flattish for next year? And related to that, should we still continue to expect 75 to 100 basis points annual OMX in a normalized environment? What is peak margins for Mettler?

We feel really good about our margin story. It's hard to answer, of course, when volumes are down because like -- it's -- we're not going to expand margins by 100 basis points when our volumes are down the way they are. But just the fact that even in Q3, we were able to have some margin expansion I thought it was a good testimony of what we do in terms of the -- inside the organization in terms of execution. Margins will be down for the next couple of quarters -- volumes are down. But I think our guidance overall for next year is still reasonable guidance in terms of like margin expansion. And then when you -- well, I guess, we'll probably flattish in terms of operating margin. I was thinking about gross margin. But kind of going forward, we still feel very good about our ability to increase margins. And we do -- we say that for a few reasons. One is -- we feel like our organic growth story is a big part of that to the pricing program, we feel like the value proposition that we have has been enhanced during COVID. And we feel like the program remains very strong with all the analytics and the tools. But more importantly, just the fundamentals. If you're thinking about it, we're selling personal instruments at relatively low price points. often directly to the end user. So we have somebody who's a direct sales force that's dedicated to that application, who is an expert in that application. They're not a generalist. And then they know how to articulate the value proposition to the end user. And that's something that like resonates very well in terms of the program and it allows us to achieve the results we do. And then SternDrive. I mean SternDrive is a program where -- we just launched the third wave of it. This is like our operational excellence programs in the supply chain. And if you think about all the energy that the supply chain team has been focused on over the last few years with COVID and kind of redeploying all that energy towards pursuing productivity projects. There's a lot we can do that we're excited about in areas like smart automation. In our business, it's historically been hard to have a lot of automation. There's exceptions like pipettes, but there's new technologies that we can now leverage to automate like different processes that Adam and I were talking about, like we literally got a demo this summer and the 2 of us could figure out how to program and automate something within a matter of 10 minutes. So I think that shows you how easy the tools are to use. So there's a lot of need opportunities there. And then, of course, we have the Blue Ocean program that enables a lot of these opportunities as well, too, whether it's automating processes or just leveraging the different analytics we have for better insights into the business.

Fantastic. I think with that, we're out of time here, Shawn. Thanks for the time this morning.

Great. Thank you, Vijay. It's great to spend time with you as well, too.