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

[Audio Gap] but there were a couple of real nice bright spots. Like if you look at our service business, our service business was up 6%, and that was on top of 15% growth Q1 last year, and I think we did double-digit growth in the year before that. So we continue to have very good momentum in service, and we continue to see that as a really nice opportunity. We also feel like the organization is executing really well. We see that throughout the business and all different types of facets, and maybe we'll give some examples during today as well, too. But like execution is very well. And we've also been just preparing ourselves quite a bit over the last few years in terms of a lot of investment. We talked about it on this call, we talked about in our last call. And I just feel like we've also set ourselves up well as market conditions improve kind of going forward.

Okay. I want to touch on the logistics component first. So as you said, you had that issue in the fourth quarter with the logistics provider. You saw a resolution to it in 1Q, and it resolved slightly better than, I think, you expected in terms of some of the catch-up of that shipment. But I think it was only maybe an incremental 100 bps versus your expectations. So the rest of the business did beat by 300 bps, 400 bps, something like that. So it wasn't just shipping, the [rest of the beat], the core business did come in better, right?

Yes, absolutely. Our guidance for Q1 was a sales decline of 4% to 6%, so call it 5% at the midpoint. But that included an estimated 5% benefit from the shipping delay. So if you exclude that, the guidance would have been down 9% to 11% with 10% at the midpoint. Of course, we did flat sales on a reported basis with 6% benefit from the shipping delay. So the shipping delays added 1% of that 5-point beat at the midpoint, but the other 4 points was just better than expected. And we kind of -- when we kind of think about last quarter, we all came off that tough Q4, right? And where our end markets were very cautious with their spending. There's a lot of belt tightening going on. We very much expected our markets to start the year more cautiously this year. Of course, it's difficult to determine what degree of cautiousness that was there. But we were frankly pleased that we did much better than what we expected in terms of how we started. The results were relatively broad-based. And as I mentioned, I think the teams are doing also a good job executing. Like we really do try to find those opportunities where there are growth, identify and pursue and capture them I think if we look at the results throughout the organization, we did just a little bit better in a lot of different places. And I think that part of that also is related to good execution.

Okay. And that's helpful. I want to just touch on the logistics one more time just to completely put it to bed. So again, you highlighted last year how the steps you were taking to resolve that and move past that. You recovered a lot of the revenues in the first quarter. Is that completely behind you now? Is that -- that said, we're not going to be talking about the logistics situation ever again, hopefully.

Yes. Absolutely. It's very much behind us. Of course, there's things that we can do to continue to optimize processes going forward with our new service provider. But in terms of getting the backlog down, we're very pleased we were able to get it down. When I reflect on it and I talk internally about it with our organization. We spent a lot of time talking about our culture. And I think culture matters most when you're faced with adversity, and I think this was a really good example of how the culture really stepped up. There was a fantastic teamwork, fantastic collaboration and of course, our new service provider worked well with us and also made a lot of important changes on their side, too. And as we kind of described it last quarter, there was a lot of blocking and tackling here. There was never an issue with integrations or systems. So it was just a lot of process and things that we knew that we could focus on and improve.

Okay. Great. And then turning to the fiscal year guide, as you said, you modestly raised the fiscal year guide, both local currency sales and EPS but you beat 1Q pretty handily. So how much of that did you pass on to the rest of the year? And sort of what is your new assumption for 2Q, 3Q, 4Q? Did you sort of pocket some of that beat?

Well, I mean, we kind of like the increase to the guide largely reflected the fact that we did a little bit better on the shipping delays. But the reality is there's still uncertainty in the world. And we just felt like we would like to get a little bit more time here, kind of get a little bit more visibility into that second half, and then I think we'll be in a much better position to have more clarity in terms of like what the second half of the year looks like. But I tried to make it clear on our call last week. We're not seeing any negative changes in the business. It's just more that we prefer to take a more cautious approach at this time.

Okay. That's good. And in terms of the -- you touched on how in the first quarter, the way you characterized it, I thought was good was -- you did a little better on a bunch of small different little things. Is there any reason to think that any of those won't continue? Or I guess put another way, are any of those true one-timers, in terms of comps or timing or pull forward? Did you have any of that in the quarter or?

No. I mean we talked a little bit about some industrial project activity in the Americas that we didn't expect to see in the second quarter, which I think, explained a little bit the guide difference from Q1 to Q2 on industrial. But other than that, I think the teams are executing really well. We have a really great portfolio of products. We talked a lot about innovation on our call. This time, we have these new corporate programs that we have announced like that next generation on our last call, where we -- I think we have good traction and momentum. I mean it's still early to say that the latest version of Spinnaker 6 is driving incremental share gains at this point in time, but just the focus that it puts on the Spinnaker program in general, I think, is a net positive. And of course, these things are evolutionary, too. And I've just seen like a lot of good work in terms of our progress towards digital processes increasingly advancing our sophisticated analytics to identify opportunities and pursue them. But saying all that, market conditions were still soft in Q1. We expect them to be soft in Q2. But we do face much better comparisons in the second half. And I think that's -- we have seen like a moderation, I think, of longer-term CAGRs here during the last few quarters. And I think we have a much better setup as we kind of get into the second half of the year.

Okay. All right. Let's move on from that. Let's talk about China. You talked about some continued softness there. You're still expecting a high single-digit decline for the year. It's consistent with what a lot of others have called out. You've got really good visibility in China market given your presence and history there. Could you sort of talk us through qualitatively what you're seeing there? Any early signs of recovery, any early signs of stabilization? Or is it just -- what are we waiting for?

Yes, maybe I'll give a little bit of color on Q2 and then -- and how we're thinking about -- I mean, Q1 and then how we're thinking about Q2. So in Q1, we did a little bit better than we expected. I think we were down like 19% in the quarter. If you exclude the benefit of the shipping delay, I think we were down 21%. Our Lab business was down a little bit worse than our Industrial business. I think lab would have been down like low 20s and the Industrial would have been down. I think it was like mid-teens or something like that. Lab, of course, is facing, I think, more challenges over the last year. I think there was just so much spending that occurred during COVID. I think also the nature of the lockdowns, people were stocking a lot more, particularly on the lab side. And then, of course, we all see the headlines with the economy, real estate market and these things. Coming out of COVID, I think we all expected the government to focus more on the economy and to support the economy. I think absent of some of those stronger signals last year, confidence in the country kind of like wasn't particularly high when it came to investing. But I think what's nice at the moment is even though things are down, they haven't gotten worse. And if you kind of look at our Q2 guide, yes, the reported growth is a little bit down, it's going to be down -- our estimate is down mid-20s. But for us, what's kind of nice is that we're finally going to turn the corner on some really, really difficult comparisons. And when I say comparisons, I'm looking over the last 3, 4 years. And so we really feel like the high watermark in terms of comps on a dollar or renminbi basis is going to be in the second quarter. And then those comps get much better in terms of the second half of the year. In terms of the businesses, we kind of view both businesses to be down similarly in the second quarter. I think a lot of that has to do with comps. But then as we get into the second half of the year, we are looking forward to growth again. I was just on the phone with the team again the other night, and they also feel quite optimistic about returning to growth. And a lot of it does have come down to these comps. We're not necessarily building in any big pickup in the economy. We're not building in anything for stimulus opportunities. We just think the comps themselves and maybe a more normalized seasonality of what we would have seen in terms of quarterly progressions kind of on a pre-COVID basis will kind of start to play out a little bit more naturally here now that we've kind of had more of a resetting of the baseline here over the past year.

Okay. You touched on stimulus there briefly. Obviously, a lot of news on that in the last month, but it seems like so far, it's just news and press releases. Any indication on timing delay? And just given some of the stuff -- some of the headlines, we've seen a lot of instrument focus, a lot of CapEx focus. Your portfolio would seem to be really well -- really strong fit for that. Would you agree? And just sort of what's your breakdown of the stimulus potential?

Yes. It still needs to be defined. We view it clearly as a positive data point. A lot of it -- but it's still, I think, too early for us to tell how much. If it's going to move the needle or not. And so we'll see how it plays out. If we see some benefits, I don't think we'd see anything until the latter part of the year. To put it in perspective, though, like when we talked about stimulus in the past, there's all different types of forms of stimulus in China. And so I think that's very important to differentiate. And in the past, we would have benefited from this kind of thing where they're really focusing on our specific end markets, maybe with Life Sciences or technology. But then what we're not seeing necessarily is a lot of the broader economic stimulus that we would have seen. And I think part of that is because of some of the softness in the real estate market, which historically was a source of funds for a lot of those stimulus programs towards economic development. But in the end, it's about confidence. And the more the government can do to reestablish confidence in the end markets, I think that's a good thing for business. And I think that's what the market is kind of looking for. And I think maybe the timing of this as well as everybody lapping maybe the same challenges that we are in terms of like comps and people start to see growth, again, can help the environment overall as we kind of move forward.

Okay. And that confidence, you haven't seen that come back yet in the broader -- just in the country still?

Yes. I think, hey, the country has gone through a pretty significant adjustment. I think there's a -- I hate to use the word stabilization, but I think people are certainly happy that things haven't gotten worse, I think that starts to create a base that people can now build on and plan for going forward. And -- but I think I can kind of feel like people are looking forward to turning the corner.

Okay. And then one last bit on China is sort of the geopolitical situation, the BIOSECURE Act, things like that. Any way you can characterize your potential exposure there. You've -- you often talked about how your local China brand and your local China presence lets you skirt some of that U.S. China geopolitical tension. Any differences to that this time around? And just sort of how much worse is it getting?

Yes. I mean I feel like we are well positioned on these topics. I think that we -- as you know, we've been there for a long time. We have a lot of success in the country. We manufacture a lot in China for China. Our products tend to be relatively lower priced. So we tend to stay out of the radar on some of these topics as well. And our products are also a pretty niche in terms of what we're doing. So we tend to not get caught up in these things. If you get like more specific like a BIOSECURE Act or something like that, certainly, some of our customers might be affected by that. We certainly -- we're a global company. So we also -- when there's risk in one area, there's often an opportunity in another area. So I think our job is to kind of follow the opportunity and take advantage of it. But maybe just kind of wrapping up China a little bit. Going forward, we're still very optimistic here. Like we feel like China is certainly not going to grow at the levels that it grew in the past but we do feel like it's positioned well for us going forward. A lot of our business, we've talked about in the past is focused on the private companies in China. More than 60% of our business is sold to private companies. Less than 15% is sold to multinational. So we have a little bit less exposure on the multinational piece. And then the difference would be like state-owned companies and the government. And when you look at the country's focus on life sciences and you think about the whole COVID experience and the desire to develop and manufacture their own drugs, I think there's still going to be a lot of investment in China for China when it comes to life sciences. We also see a lot of the focus on strategic end markets, whether it's semiconductors is hot market at the moment. We continue to see a lot of opportunity there as well as some of these other hot markets like new material, alternative energy, et cetera. And as they're doing these things, they're also focusing a lot on automation and digitalization just as much as we talk about it in the West. And our portfolio, I think, is very well positioned for those trends as well, too. So we still view China very positively going forward for the medium to longer term.

When you say -- just a quick one on that. When you say it won't grow as fast as in the past, do you still think it will grow above company average? Something like 10%?

Yes. No, we still think of it as more of a high single-digit. And frankly, that's kind of how we thought about it with our algorithm at our Investor Day, not so long ago. We didn't, of course, anticipate all the zigs and zags along the way. But we just assumed it wasn't going to grow at double digit forever.

Yes. On the Lab business, maybe specifically on pharma and biotech, and we can talk about ANG later. How have budgets from pharma customers started the year? I mean, there's been a lot of talk about how budget release has been slower. And once you got into March, April, it loosen up a little bit. How would you characterize? What would you say?

Yes. I mean we expected it to start slow. Of course, if you think about how the year ended, I kind of mentioned this before, we felt like the belts were pretty tight at the pharma companies to the extent that we didn't really see a budget flush and we saw that throughout our portfolio. We did have a slow start to the year, maybe not quite as slow as we expected, but definitely a slow start. We do see sales cycles to still be elongated. I wouldn't say they're worse than they were last year, but there's still -- I hear things about delays, things getting put off. Now -- but at the same time, I hear there's a lot of interest. And so I think over the next few months, we'll learn more about that interest in those activities translate into orders, and we'll see how it plays out. But still, I think, difficult to tell. But if you kind of step back from it, Patrick referred to this in his prepared remarks last week, I mean, we still are very encouraged with like all the advancements in this end market, all the new products that are coming out. And I just think we're really well positioned here again. If you think about all the focus that they have on productivity and automation and digitalization and with our LabX software. It continues to be a real unique value proposition that we still see continues to differentiate us versus competition and our ability to automate workflows and also serve the entire value chain, like that's part of our diversity, right? Like we're not just in one niche area. We're not overly exposed to early research or we're not overly exposed to bioprocessing, like we have solutions throughout the entire value chain. And I think that's always been a strength of ours. But as companies are looking for insights throughout that value chain, I think that creates a lot of opportunities for us kind of going forward in terms of connectivity and digitalization, too.