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

Good morning, everyone. We're kicking off the UBS -- day 2 of the UBS Healthcare Conference. Happy to have with us Mettler-Toledo, Shawn Vadala, CFO of Mettler. Welcome, Shawn.

Yes. Thanks, Dan. Thanks for having me today.

So another, a little bit of ground to cover this morning. You just reported Q3 earnings. Why don't we start there? What were the highlights from Q3?

Yes. We were -- Q3 pretty much came in as expected. We talked about soft market conditions. We still feel like some of our core markets, we're starting to -- we're continuing to see some projects getting delayed. But if you step back from all that in terms of the macro, I feel like our team is executing really well. And you see it in some of the numbers. Like if you look at -- first of all, we grew in the quarter. So like it's been a more challenging period the last couple of years with our end markets. So it's nice to see that we grew in the quarter. If you look at the different businesses, our lab business was up 5%. Within lab, we had really strong growth in process analytics and analytical instruments. It was also nice to see in lab that we had growth in each region of the world. And so I feel like a lot of the innovation that we've been talking about in the lab is very well received in the market, and it's been -- and we're doing pretty well there. Another area that kind of stood out for me in the quarter was Europe. Europe has faced a much more challenging macro over the last few years relative to other geographies. And I just feel like our business has been very resilient there, really good execution from the team. It's the one area where we have the most direct presence in the market. And I just feel like our Spinnaker sales and marketing strategies are that much more effective because of that. We also hear some positive [ antidote ] from our team in Europe about big pharma. And I feel like projects are getting released a little bit quicker in Europe. I don't know if that's because of some of the challenges they've had over the last few years with the availability of pharmaceuticals or whatnot, but we just feel like there's maybe a little bit more activity in some of our core end markets. China is always an important part of our business. Now it's probably down to about 17% of our global business. I'd say China came in as expected. It was nice to see growth in China in the quarter. But if you kind of like look at the different businesses, we had growth in -- on the lab side, which was nice after a period of very significant resetting over the last couple of years kind of post -- over the past year, post-COVID. But on the industrial side, we're down a little bit. And I think that kind of reflects kind of more macro, still softer conditions. We hear topics like overcapacity in areas like the battery segment. But the team there is actually doing quite well, and maybe we can talk a little bit more about that later in our conversation. And then service. Service was clearly a highlight, grew 9%. We kind of spent a little bit more time talking about service on our quarterly call last week. We just feel like this is a great opportunity for us as a business. And you've seen like very good growth there now kind of consistently for a while, the last few years. I think we're going to continue to see good growth out of the service business. And then in terms of like on the execution side, our gross margins were up 60 basis points in the quarter and up 40 basis points year-to-date. And when you think about the challenges with top line volume, those are really good numbers. And those are numbers that we feel very good about. We're executing really well on all of our margin expansion initiatives, whether it's pricing or SternDrive or some of the things that we're doing on productivity. And then the other thing is cash flow. A lot of times, people aren't asking a lot about cash flow. But on a year-to-date basis, our cash flow per share was up 7%. And again, that's despite challenges on the top line. And so I feel like our teams are executing really well when it comes to working capital topics and those types of things. So in the end, I feel like we're slowly turning the corner here, still a little bit of uncertainty in our end markets. But despite all that, we're executing really well.

One of the highlights of your Q3 report every year is you guide for the forward year. You're the only company in the space to do that. And you do that because your earnings call is coming right off the back of your global budget tour. So you just talk to your teams and have a sense of how they view the forward period. For the audience, could you give an overview of what is your global budget tour? And what were the key learnings from your meetings across -- I think it's across 60 different operating companies, right?

Yes. This is a really highlight of our -- this is a highlight of our year-over-year, but also a really important part of our corporate calendar. It's something that we've always had ever since I've been with the company since the IPO. It's really an opportunity for us to spend time with each of our businesses around the world. We go on the road. We don't physically go to every facility, but we kind of mix it up each year in terms of picking different cities that people will join and meet us in. And then over a period of a few years, we'll see most of the different countries. But what's great is we get to spend time with the teams, and we get to hear directly from them about what they're hearing in their markets. It's a great opportunity for us to hear firsthand what they're doing with their initiatives. When we visit a site, we can obviously spend time with the organization at deeper levels and really hear the people that are running initiatives. And so we kind of walk away with a nice pulse of the organization. This year, I'd say a couple of things stood out to us. One is that we've been kind of doubling down a lot on our competitive advantages over the last couple of years. And so what does that mean? So we talked about this in some of our calls earlier this year. One is that we've kind of launched a new version or a new generation, I should say, of a lot of our corporate programs. So think about like Spinnaker, really important program to drive growth in the organization, operational excellence in sales and marketing. Periodically, we launch another generation of a program. In the past year, we launched Spinnaker 6. So that expands our digital capabilities within the Spinnaker umbrella, but it also helps us better enhance the customer experience. If you think about how do you provide better insights to your customer, how do you enhance integrations in their digital journey in terms of how they interact with you. Another element is of corporate programs was the SternDrive. So SternDrive is our operational excellence program in the supply chain. And so there's elements of driving productivity, reducing material cost savings. And each generation has a theme, and this one also has a little bit of a technology bend to it. And so if you think about newer technologies like cobots where you can start to automate processes a little bit more than you previously could have in our manufacturing processes. A lot of our manufacturing processes don't all lend themselves to automation, but with cobots, it's a very easy thing where you can like automate a certain task. So as we kind of received updates on both of those initiatives as well as other initiatives, we feel like the organization is really making really good progress. We're off to a good start with these launches, and that was really great to see. A second part of doubling down is that we've increased our investments in innovation, and we've also accelerated different innovation topics over the past couple of years. And you kind of saw that -- we talked a lot about that in our conference call in May, and we gave a lot of different examples of that. And one of the great things that we could see is we could see -- first of all, experience and see some of these innovations firsthand. But then the other thing is we could hear directly from our market organizations. And so that was just a very common question. "Hey, what are you hearing about this product launch? What are customers telling you?" And it was great for us to hear the consistency throughout the world from Western markets into China about how well these product launches have been received. And I think that's part of like the underbelly of some of the positive results we see against a more challenging environment. So I feel like the innovation is being well received in the market. And then if you kind of look at those 2 categories, what we heard was, I'd say we have probably as rich a pipeline as initiatives in terms of ideas, how to drive incremental growth and how to invest in strategic product categories more than I can remember. And so I felt like that was kind of a fun part of the tour is like we have parts of our process that already start in the spring where we do some strategic reviews and then it kind of cascades with the budget tour in August and September. And throughout that whole process, we were just accumulating just a lot of great ideas, business cases, initiatives, and it was really fun to work with our teams around the world on how to prioritize those, how to fund those, how to reallocate resources. And that's a big part of the budget tour too, right? It's like it's a great opportunity for us to shift resources so that we're always targeting the most attractive opportunities. So I feel like we have a really great balanced rich pipeline kind of going into 2025.

So it wasn't just [indiscernible] about the macro across 60 different operating company meetings?

No. What was interesting is that the energy level was actually quite high. The energy level was really quite high, and that was really great to see. Yes.

Any regions that stood out to you specifically?

I'd say Europe. I think I probably expected their macro to be more difficult than the rest of the world and just the energy that was there about identifying different opportunities was very high. It's always funny because like just when you live in the U.S., we kind of, by default, hear a lot more news from the U.S. We're familiar with the CHIPS Act. We're familiar with the Infrastructure Bill, these types of things. Well, most countries in Europe have very similar things, except you're starting to hear more progress on some of those topics in Europe. And so like the semiconductor industry, like that's a very hot topic in actually most countries there. And so there's a lot of governmental programs going on there. Now I would caveat that to say that I think we're in the very early innings of all that. It's not like a lot of money has been released, but we felt like there's a lot of optimism with those types of programs. And then I'd just say, yes, and then just in general, when we talk about topics like reshoring and nearshoring, we shouldn't forget about Europe as well, too. It's not just our country, but every country has opportunities for nearshoring and onshoring. In Europe, there's topics in Eastern Europe, but there's also topics in Western Europe as well, too. And so I think that creates a lot of exciting opportunities for us.

Where were your meetings in Asia?

Our meetings were in Shanghai and China, which is not unusual. It's such an important market for us. And so we -- a lot of the teams from the other parts of Asia joined us in China. Of course, that was an important meeting for us and just to kind of be there with the team and experience and feel like the environment. I'd say we kind of walked away from China feeling like, one, that it was nice to see growth in lab, felt like we're competing really well there, and it feels like we're starting to turn the corner there. I think no one wants to go out too much on a limb because there's still uncertainty there. But I feel like we're definitely seeing things heading in the right direction. At the same time, we probably walked away also feeling like the industrial markets were still soft. And that's why we kind of communicated that last week. Hey, our core industrial business was just down slightly, just low single digits. So I don't want to be too dramatic here. The other thing is in fairness, lab was down a lot more significantly last year and the downturn started before core industrial. So I think it's not too dramatic, like I said, but there is softness there. We want to be transparent and call it out. I think that our feeling was -- and we spent a lot of time with the team kind of talking through this. And people are -- no one has a crystal ball. People are somewhat trying to read into things, speculate. But one of the things I kind of felt when I was there is that -- and we've said similar things in the past is that I feel like the market is looking for direction. The government has done a lot -- has done a lot of different things over the past year. But one thing that they haven't done is come up with a bold fiscal stimulus package. And I feel like there is -- there are people looking towards that to see like, "Hey, that it's safe to invest again." And I feel like there's been an element of people holding back on investment still. And I can imagine part of it was trying to assess like what the situation looks like post-U.S. election and trying to have a better -- and having a better sense for what the situation is that they're going to be confronting. So hopefully, now that there's clarity on the U.S. election, hopefully, some of those things that are being held back will kind of move forward. But if you look at the industrial sector there, there's still a lot of opportunity for us, lots of investment and opportunities in automation and digitalization, lots of opportunities in hot segments like a lot of the strategic priorities of the government: semiconductor, new materials. These things play well for our portfolio. The government is also very focused on developing its own life science industry. We -- the pipeline that they have for drug development is pretty significant. And so that's very encouraging to us when we kind of talk to pharmaceutical companies there. And so we think that we're really well positioned going forward. Another thing to think about with China is that -- and we've mentioned this in the past, is that who are we selling to? And so less than 15% of our business is actually sold to multinational companies in China. We're primarily selling to Chinese companies. And out of those Chinese companies, about 60% or so or more than 60% are private institutions, and so not the government or state-owned. And then the delta would be the state or governmental agencies, which is about 25%, and I think that's a good healthy mix in this environment. We're also not typically selling directly to exporters either. And so I think that's a good setup for us in this environment. But at the same time, we're not immune to the economy there, and we'll see how things play out.

Did you notice any difference in mood between your teams in China and the teams from the rest of Asia?

In the mood? Yes, I mean, the Chinese organization has been through a pretty significant change over the last year. Their business is down 20% to 25%. We've had to work on productivity topics with them because of that. So -- and they're still working through some of those topics. So those discussions are always going to have a different mood to them than a lot of the productivity topics that have already been addressed in Europe, in other parts of -- in the U.S. And so they are kind of more in the pivoting towards growth phase. So those are always going to be different conversations.

Okay. But did the concept of China Plus One come up at all in that companies that are looking to derisk supply chains or...

Yes. Sure. We've always had an open dialogue with our organization. Patrick and I actually hosted a town hall for all Chinese employees. They could ask us these very questions. For us, the message is clear. We're very committed to China. We think of it as a great opportunity for us going forward. We think it's still going to be -- have a lot of opportunity. But at the same time, we look at our own global business. We need to have more flexibility in our own supply chain. And we've been kind of pursuing that now for the last few years. And I think that's a successful strategy for everybody. And even in China, there's opportunities for us to do a little bit more on different things, too. And so we've looked at that. So we have a very significant China for China strategy in China, but there's always 1 or 2 more product lines that we can look at there as well, too. But in terms of China Plus One, we -- I think everyone is familiar, we have a new manufacturing facility in Mexico that we've expanded in the last few years. It creates a great opportunity for us to have more flexibility in our supply chain, but also to derisk given all the different geopolitical topics.

Okay. And before I move off topic from the global budget tour, anything from the product organizations that stood out to you?

Yes, the breadth of innovation. And some of this -- it's kind of neat like this whole digital journey that everybody is on. We're, of course, on our own, and it's kind of neat to see some of the new things that we're starting to see resonate in terms of our own products, in terms of predictive capabilities, in terms of the ability to imaging technology in x-ray detection or retail, just a lot of breadth. But I don't want to go into anything too specific about the future. But in terms of the breadth of innovation, it's been really good. And then maybe I'd just reiterate what I said -- repeat what I said before, the market acceptance of a lot of the new products that we've launched in the past year, has been really well received. And I think that's always important, too, as well for not only accelerating replacement cycles, but also in terms of maintaining our pricing premium in the marketplace. Because if you can continuously enhance your value proposition, I think that's a very important part of our story.

Okay. So you took all that feedback, you whipped it up and you came out with a 3% revenue guidance figure for 2025, and that number is actually higher, 4.5% if you adjust for the -- push into Q1 this year from the distribution challenges the prior year. So let's call it 4.5%. That implies a low single-digit volume growth rate. What do you think are the upsides and downsides to that view?

Yes, yes. So I think you correctly say 4.5% because I think that's how we think about it, and that's also how we planned our cost structure around it. The biggest swing factor typically is always China, and I think that's very relevant right now. Like we were admittedly a bit cautious in terms of how we guided China for next year. We guided, I think, low single digit. I think if you exclude the shipping delay topic for next year, yes, it's probably still low, probably kind of in that low range, low to mid. And so I think there's clearly an upside there if things start to turn. We kind of mentioned that we didn't build in anything special for any stimulus topics there. So that could always be an upside as well, too. But as we've seen from the past, things can always change quickly in China in either direction. So we'll see. But that would be the one thing that I would highlight. Yes.

Okay. And then is the world back to normal in 2026?

We'll see. I think it's a little early for us or anybody else to call 2026. But sitting here today, our base case is that things will continue to improve in 2025. If you think about our business, a lot of our business is replacement business. And so at some point, we're going to get into replacement cycles being delayed and people having to kind of catch up or at least get back on track with replacement cycles. I think during COVID, that was a little blurry because there was so much spending. And -- but now, we're starting to -- each year, we're getting another year away from COVID. And so we do expect replacement cycles to be kicking in at some point. I think all the innovation we're bringing to the market helps to accelerate some of that and certainly would hope that we're starting to exit 2025 with more normalized growth rates.

Okay. Because your long-range plan is 6% growth, correct?

Yes.

Is that still the view? What needs to accelerate to get from 4.5% to 6%? Is it China? Are there other things you have an eye on?

Yes, China is clearly a big swing factor in that. Probably a little bit of uplift across the board, but China would be clearly the biggest swing factor. Yes. I mean, if you want, I can kind of like go into the 6% a little bit.

Let's do that.

Yes. So like for us, we feel very confident about the 6% over the long term. If you think about that -- so why do I say that? So it starts with fragmented markets, being a leader in fragmented markets. So about -- probably about 75% of the time, we have the #1 market position. But at the same time, our market shares are only in the 25% kind of a range. So there's so much market opportunity for us to gain. And that's why we have the Spinnaker program. If you think about the size of that market, let's call it, a $15 billion or $16 billion market, we only have about a few thousand salespeople. So we need to provide them really sophisticated tools, processes, analytics to make sure that they're going after the best, most attractive opportunities. But just gaining a little bit of share in these fragmented markets allows us to grow. The second thing is our service business. We talked about service a lot on our call last week. But if you think about it, if you look at our installed base of instruments and you look at what is serviceable, at kind of like a top value, it's about $3 billion. And so currently, our service business is just under $1 billion. So there's more than $2 billion of opportunity just to penetrate our own instruments in terms of service. And so that's a significant opportunity, and we recently are launching accelerated initiatives within service to kind of go after that opportunity. Then if you look at like the mix of our businesses, today, like life science, pharma, biopharma, that would represent about 40% of our mix. 10 years ago, that was probably closer to 30%. And so we feel like that's going to be a faster-growing segment versus our other end market segments. So I think that will help us as well, too. And then you have all these megatrends. You have these supply chain disruptions, you have the reshoring topic, the near-shoring topic. we feel like we're in the very, very early innings of these topics. I mean we've sold a few truck scales to one of the big semiconductor companies recently because there's a lot of concrete in the facility. But we're still -- all the equipment and instrumentation that they're going to buy is still off into the future. And I think that those are -- that's just one example of a lot of, I think, where we sit with the onshoring and the reshoring. And then all the trends towards digitalization and automation. As people look at the challenges of labor productivity and these things, they're seeking more automation and digital solutions. And I think that plays really well in terms of our portfolio.

When does the margin expansion start to asymptote?

We don't -- I mean, of course, there's going to be a mathematical answer to that eventually, but we feel like we have a long runway on the margin expansion story. I think as we get back to growing volume, I think that's going to be a big part of the algorithm and how people will start to see our margins start to expand again. Like I mentioned, even in this year, you saw -- you've seen our gross margins on a year-to-date basis are up 40 basis points, and they were up 60 basis points in Q3. And that will flow to operating margins once we kind of get back to a more normalized level with volume. But the initiatives we have to drive margin, I'd say, are just as strong as they've ever been. If you think about pricing, so we talk a lot about pricing. And why is pricing so successful at Mettler? Well, I think there's a great foundation, and I think we have a great program and a great culture for it. In terms of the foundation, most of what we're selling, especially in the lab side, are personal instruments, personal instruments at relatively low price points. So you're the end user, we're selling directly to you most of the time. We're selling it with a dedicated direct application specialist who can articulate the value of this product. You on the receiving end understand that value. So that value proposition really resonates with you, but the average selling price is less than $10,000. So it's not a significant financial decision for you. And I think that's a great setup for the program. And then, of course, we have all these tools and analytics and processes around that, that helps support the program around the world. And then I talked a little bit about SternDrive before. I think that's a really important program for helping to drive productivity and efficiency. And then we talked about Blue Ocean on our last quarterly call.

Everything is nautical with you.

Yes. Even our new program, [ JetStream ] has a nautical tie because the wins of the world are like trying to get the voice of the customer in our innovation, which is also a great program, too. But Blue Ocean, it's the foundation of everything, right? It enables -- it's about harmonizing our processes globally. We've enabled that with a single instance of an ERP CRM system. And once you do that, you're in a position where you can automate your processes, leverage shared service centers and these types of things. And then on top of all that, our fastest-growing businesses are our highest margin businesses, and we're not seeing margins peak in any of our businesses yet.

What's the best margin, not product line or region, but if you looked at the best operating margin within your different opcos, what is that figure? 40% -- like is that something the balance of the fleet can aspire to?

We have stuff higher than that.

Okay.

Yes, we have stuff higher than that. I don't want to get too specific...

But it suggests...

Yes. In our history, I've been around a long time, and I've seen us also go through these mental milestones of hitting 30s and 40s and 35s and whatever. And it's really great to see. Hey, we know how to drive margin expansion. We have really strong, great incrementals, and we have a lot of good things that we're doing in the company to drive margins.

Okay. All right. Let's talk about tariffs. A two-pronged topic. You mentioned your own effort -- or you alluded to your own efforts on supply chain with the Mexico facility, but I'd love to hear how you're different than during the 2019, 2018 time frame where tariffs were a topic. And then -- so that's prong #1. Prong #2 is that Mettler-Toledo serves the global manufacturing industry. And if I remember from the stock market last Wednesday, the manufacturing industry wasn't one of the Trump trades. It wasn't like large-cap banks or any other things that went vertical that day. And your customers have to be thinking about their supply chains and knock-on impacts and how do you fold that into your thinking? So those are in 5 minutes or less, I'd love your advice on two-pronged question?

Yes, yes, sure. So I hit the first part, so the last time we had to handle this situation, we had about $100 million exposure on tariffs in terms of Chinese imports to the U.S. Today, that number is less than $100 million. And what's different today versus before is that we have more manufacturing flexibility than before. I'm not saying we can just wave a wand and take the whole balance and put it and move it in a day. Of course, it takes time to do these things. We're already on a path to be able to optimize the situation and derisk the situation. We will still have some exposure after our derisking. But I also feel like the exposure itself will be less than what we had before. And so that's number one. Number two is last time, it's hard to do game theory these things. But I think in the end, we're going to have to be really agile. And that's what we've always been. We can never dictate which way the wind blows to use another sailing metaphor, but we can also try to make sure that we're optimizing the situation, and that comes from agility and resilience in the culture. And I think the organization has demonstrated that a lot in the past. One of the tools we've had in the past is pricing. So we'll have to see the -- what do they target, what's the magnitude of what they target, and then we'll assess that, and we'll look at opportunities to mitigate some of that with pricing. And so probably the combination of some pricing as well as continuing to derisk the manufacturing supply chain would be kind of our base case strategy to react to it. But again, it will depend on the magnitude of what we're confronted with there. Probably the bigger risk I see is what does it do to customers? What does it do to China. During the last Trump administration, we actually grew really nicely in China during those 4 years. We grew low double digit. So you can grow in China despite this. And I think if you think about my comments earlier, we're not selling a lot to -- directly to exporters in China. And if you think about that mix of business and a more likely scenario in China is that the Chinese government is going to -- that's probably when we start seeing more fiscal stimulus packages to try to support their own industries and accelerate their own autonomy on different things. And that actually could be a real good positive for us. So we'll see how that plays out, but that's kind of what they did last time, and I think that could work out pretty well. And then in the U.S., we'll see how things play out with customers here. I mean, in the end, we have pretty significant secular exposures, too, like about 40% of our business, as I mentioned, is pharma -- biopharma; about 20% or so is going to be food manufacturing; and less than 15% -- in that 10% to 15% range would be chemical, which is primarily specialty chem. So we're not immune to the economy, but we also have these secular exposures. And if you look at the part of our business, you mentioned manufacturing. That's most kind of tied to manufacturing, would be our core industrial business. And our core industrial business is about 25% of our business today. 10 years ago, that probably would have been closer to 30%. But if you look within core industrial, about 60% of it is sold to a combination of these core markets, pharma, food and chemical. And so while it's not immune to the economy, it certainly has, I think, a better mix of businesses to be a little bit more resilient than we've seen in the past. And I think you've seen our industrial numbers actually holding up quite well compared to other companies.

Okay. Final question. Anything on the M&A front of interest?

I mean we're always looking. I mean, I think everybody knows we're primarily an organic story because of these fragmented markets. But we also feel like we're a good home for M&A. When we find the right adjacencies, the right technologies, that can really leverage our global breadth. So we're always looking at stuff. We always have some interesting things out there, but nothing different than the past.

Okay. Well, with that, Shawn, thank you for joining us today.

Thank you, Dan. Bye-bye.