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

Okay. Welcome back, everybody, to the 2024 Stifel Healthcare Conference. We are on the life sciences track here. Happy to have Shawn Vadala, CFO of Mettler-Toledo, with us. Shawn, I appreciate you spending some time with us this afternoon.

Yes. Dan, thanks for hosting us. Good to see you.

Likewise, and my pleasure. Maybe we can start off on a somewhat topical note and just talk a little bit about what's transpired since the election. The conversations that are being had about China and tariffs. We've had conversations with you about tariffs before. So maybe we can just think about how it is that this experience compares to the last -- the first time that we talked about this. And then the things that you think you would be able to use in order to offset any impact of whatever might transpire here.

Yes, sure. So the last time we were faced with tariffs, we had just over $100 million exposure in terms of Chinese imports into the United States. And out of that, about $100 million was subject to tariff. At that time, we were pretty successful in mitigating most of the exposure with pricing. This time around, what's changed is that we'll have to see what we can do with pricing. It depends on what product categories they have go after. It depends on the magnitude of what they're doing. But we do feel like we have strong value propositions, and we feel like we were generally pretty successful last time. But what's changed probably more so is that our exposure is a little bit less. It's less than $100 million right now, and we have more manufacturing capabilities. We acquired a company probably 7 or 8 years ago that had a manufacturing footprint in Mexico. And with that manufacturing footprint in Mexico, we've been able to expand our capabilities in Mexico, and we've been able to -- we kind of did it to -- kind of going through COVID, I think every company wanted to try to figure out how to have more flexibility in their supply chain. And then we also wanted to just kind of de-risk our manufacturing footprint. And I think the combination of those 2 things, we've been able to move certain products to Mexico, and I think we'll be able to kind of continue to de-risk our situation.

Okay. So that's a process that's been started and has taken place in earnest. But you still think that should the need arise, there are moves that can still be made.

Yes, exactly. It's not the kind of thing that you can wave a wand and fix in a quarter. But I think kind of directionally, it's something that we can kind of continue to work on.

Okay. And to your point on pricing, I mean, you guys have been refining your pricing strategy for a long time through the initiatives that you have. Has that enabled you to be more nimble in certain areas? Should we think about certain businesses having pricing power that maybe they didn't before. And then ultimately, the question would be do you think that in the future, you can push harder on price than maybe you have? I mean I think you're among the better in the group, but you don't -- I also know you to not be a company that doesn't try to like make life too difficult for your customers.

Yes, exactly. I think you're always trying to find the right balance. And probably, the most important thing with pricing is your value proposition. And one of the things we've done over the last few years is that we've accelerated the rate of innovation in the company. We talked a lot about that during our May conference call, all the different things that we're doing. We talked about this R&D accelerator program that we launched earlier in the year. And by increasing our value proposition, of course, there's going to be a higher willingness to pay. The other thing that's helped us a little bit is the trends in the world. Like if you think about like trends towards automation, trends towards digitalization. These trends have a lot of paybacks to them, but they also pay to the strength of our portfolio. And so I think those are kind of important data points for us as well. Another thing is like just looking at what does our pricing setup look like. In the end, we're typically selling to an end user, and we're selling with a direct sales force, and we're selling at relatively low price points. And so you have somebody who like can articulate the value proposition to a customer. The customer understands it because they tend to be the end user, and then the price point tends to be less than $10,000. So like I just think that setup typically helps us as well, too.

Yes. Do you -- just for clarification, do you have a ballpark estimate of what percent of your products actually are under $10,000? Just to sort of conceptualize the [ low way ], I guess.

Good question, but I don't. Yes, I don't. I don't. Of course, we have things like more than that as well too.

Yes. Well, the average is $10,000.

It's under, yes. But yes, okay.

Okay. And then just thinking about China more broadly, can you talk a little bit about stimulus expectations in the tool space? There are some companies that are starting to talk about seeing some activity on tenders. There are others that have really kind of just put it off on 2025 as something you're likely to see. Where do you fall and what would be the things that you would be looking for in early '25 if that's when the time frame was?

Yes. So Patrick and I were just in China a couple of months ago. I spent a lot of time with the team. This was certainly a topic that we reviewed with them. There's been a lot of, I'd say, activity, a lot of discussions with customers. But when you look at the result of it, to us, it just doesn't look that significant. Like with our offering, we've had to bundle things. We work with customers on applications. There's a list -- but when we step back from it, we just don't feel like it's the kind of thing for our business that's necessarily going to move the needle very much in terms of next year. I mean I think it's -- definitely, there's a positive there. There's a positive signal. But I think what would be a better opportunity is if the government were to come out with a broader fiscal stimulus package that really puts more money behind it. And that would, I think, send a stronger signal, especially like on the industrial side of the business.

Okay. So said another way, the guidance that you've given for 2025, which you just gave with the 3Q call, doesn't really assume anything in the way of China stimulus impact.

Correct, correct.

Okay. Longer term, you've talked about China being -- you've talked about being comfortable with a high single-digit growth rate in China. Does the geopolitical situation change the way that you think about that? Are you any less comfortable with that idea? Just thinking about how things might transpire over the next couple of years if things...

No. I mean we're still -- I mean, we recognize things changed have changed, things are changing. But we're still positive on the long term for China. And I think a lot of it has to do with how we're positioned in China. Like if you look at like who we're selling to, we're selling primarily to Chinese customers. Out of these customers, most of them -- we're not selling very much to exporters. So to break it down a little bit, and we've talked about this in the past, is that more than 60% of our sales in China are sold to private Chinese companies. About 25% is sold to the state or governmental agencies, and less than 15% is sold to multinationals. And then so I think that's a good setup. Out of the Chinese companies, like I said, we don't sell very much to exporters. And if you look at just even in the last Trump administration, over that 4-year period with all the disruptions and distractions, we were still able to grow in China 12% over those 4 years. So we're not looking to grow double digit anymore, but we think we can still grow high single digit. And I think part of it is also if you look at where the government's priorities are. The government is still focused on developing their own life science industry. There's a very rich pipeline in terms of drug development there. They have their own GLP-1 story that they're working on at the moment as well. If you look at a lot of the strategic segments there like semiconductor, new materials, green energy, like these are segments that we can benefit from as well, too. And as they're doing it, they're also focusing on their own automation and digitalization trends, which we -- which plays very well for our portfolio. And then on top of all that, we just have a really good China-for-China position. We've been in China for many years since the mid-80s. Most of the products that we make in China are for China, and we also develop a lot of our products in China for China. And so if you kind of like look at our new corporate program called [ JetStream ], which is about how to get the voice of the customer better into our innovation, a lot of that came out of China, and we've piloted a lot of things in China. So we're very close to the customers there. We have a low cost base there. And for a lot -- in a lot of regards, we're perceived as local there.

Do you think that there are market share gains to come out of China with this sort of dip in growth? I mean there are some businesses that seem like they're able to take advantage of economic conditions. You happen to have a pretty fragmented competitor base when you think about who you're bumping up against and what the scope or the scale of those customers are or those competitors are. Is that something that you think you could see 2, 3 years down the road in a more favorable way, just the ability to sort of push out some of the smaller players?

Well, I mean, I think we compete very well there. If I look -- just look at our like win-loss KPIs, I think we're competing well. I know that during COVID, we took a little bit of extra market share just with our ability to support customers during that time. I think that as the trends in the economy are going towards more sophisticated applications like looking for automated solutions, automated -- ability to automate workflows, if you think about like even in our lab, right, like we can connect a lot of our instruments with our LabX software. It's a real competitive advantage. I mean in the Chinese market, I remember being there, gosh, 5 or 6 years ago and asking them what do they perceive that differentiates us in the market in lab, and they were talking about LabX already that long ago, which shows you how much customers care about topics like data integrity and the ability to automate workflows in a Chinese lab. And I think that those are things that I think, again, play to our advantage and position us well for the future.

Okay. Maybe just setting China aside, I mean it's part of the 4Q picture for sure. If I look at where organic growth in the model goes to for 4Q, it steps up to 8%, but that's very obviously a function of some of the European logistics issues. Can you just talk about where biopharma is heading into the end of the year? And then what your expectations would be for either acceleration, deceleration or sort of flatlining in your major customer classes?

Yes, sure. So you're right. So the fourth quarter includes about a 6% benefit year-over-year from the shipping delays that we experienced a year ago. So excluding that, it will be 2%. If you look specifically at biopharma, I'd say it's a little bit mixed. I'd say we started talking about this on our last quarter, and we talked about it a little bit a couple of weeks ago. But we're generally seeing more positive trends in Europe a little bit, a little bit more willingness to release projects. Not sure if that's because of the lack of pharmaceutical availability over the last few years in Europe. And while there's just a higher willingness to invest, I don't know if it's because of maybe not as much exposure to maybe some of the vaccine producers. But generally, we feel like a little bit better sentiment there. They also don't have as much of an exposure to someone like the small biotech research that we have in the United States. In the U.S., I'd say it's a little bit more mixed. I'd say there's -- it depends a little bit on which customer segment you're talking to. I mean I think you kind of have like some that are spending a lot of money like the GLP-1 companies. You have others that are a little bit more cautious at the moment. I think for us, we don't have a significant exposure to like in terms of small biotech. But like we would see that a little bit in like our pipetting business and liquid handling. And I would say, for us at least, it's still a little bit more challenging there.

Yes. Okay. And would you say -- you've provided an outlook for lab for the year that's mid to high, if I remember correctly. Do you think the bias is to the upside or the downside on that outlook?

For the high -- so it's mid to high, excluding the shipping delay. I'm sorry, for -- I'm talking next year here. Hold on a second. So for this year, the guide is mid-single digit for the full year for this year. And then for the fourth quarter, excluding the shipping delay tailwind, it's mid-single digit as well, too. So I mean, hey, I think we always try to be pretty balanced. The bigger -- there's probably 2 big things that could swing. One is China. And then just one is what is the level of budget flush. And so budget flush is a hard thing to define. It's something that we never thought it was as significant in our business maybe versus other businesses. But there's always an element of seasonality. Last year, there was really no "flush." This year, we're assuming more than last year, but not quite a full flush.

And then on the industrial side, low single digits as an outlook. Does that assume any sort of change in the macro picture? Or is that the outlook as you would see it today based on current PMIs and current IP numbers?

Yes. I mean I think -- for next year?

Yes.

Yes. So for next year, we kind of assume like everything will kind of gradually get better during the year. So I think on the lab side, that would be like having a probably a better fourth quarter, where there may be a full budget flush. So just to clarify what I was saying before, so we're talking -- those numbers I was talking about before was '24. For '25, excluding the shipping delay topic, it will be up mid- to high single digit. On the industrial side, we would also assume things would probably gradually get better throughout the year. I wouldn't be surprised if companies start off a little more cautious in the first quarter, especially with some of the uncertainties in the world right now. But definitely feel like there's good opportunities there. I think we're very much in the early innings of topics like re-shoring, near-shoring. As people re-shore, there's a lot of focus on this automation theme. There's also a lot of focus on the digitalization theme. I think that -- and I just think like we're just generally well positioned for that. We take advantage of that with the Spinnaker program. And then if you also look at like our core industrial business, it's also good to remember, like about 60% of that business is a combination of pharma, food, manufacturing and chemicals. So we do have like secular exposures there as well as just the broader -- as well as the broader macro. But we've been competing very well in that business. I think it's been very resilient to the -- relative to the economy versus history. And so we'll see. Probably there, maybe one of the swing factors again will be China. If you think about, that business has a little bit more exposure to China than maybe some of our other businesses, so we'll see how that plays out.

Yes. China as a swing factor, not news.

Yes, right.

Okay. I want to ask about Spinnaker in a second. But before I do, just sort of a clarification on the logistics issue as it pertains to 2025. What drives the 300 basis point or so decline in op margins in 1Q? Is it really just a function of comps? And then can you just remind us how much of lab was impacted there? And then the last question would be, is that generally out of the numbers come 2Q?

Yes. So -- okay. So hey, I'll walk through the whole thing. So like -- and let me go back to the beginning. So in Q4 of last year, we had a shipping delay that moved sales from Q4 to Q1. That was about $58 million, and we recaptured almost all of it in the first quarter of this year. So that -- so then our first quarter of this year had a 6% benefit. In Q4 of this year, we're going to have a 6% -- we'll also have a 6% benefit from the comp. But then for Q1 of next year, we'll have a 6% headwind. And so that 6% headwind in Q1 of next year is a 1.5% headwind to the full year results. One of the things we talked about on our call a couple of weeks ago was a little -- trying to help people understand the impact on earnings and margins. So for this year, for the -- for next year, for the full year, it's about a 4% headwind to our EPS growth, okay? But if you back up and you go to like what was that Q1 headwind for sales, that's about -- it's just under a 300 basis point margin headwind to Q1 operating margins. It's kind of between 250 to 300 basis points in terms of margin headwinds year-over-year. So you kind of saw that if you looked at Q4 last year, the margin going down versus the previous year, you kind of see it this year in Q4 in terms of the margin going up. In Q1, it wasn't maybe as evident just because the sales in Q1, excluding the shipping delay benefit, were minus 6%, so we had on one hand a significant volume decrease that was kind of like offsetting all the benefit we had from the sales coming in. And I think that's maybe what people weren't appreciating fully when they were looking at quarter-over-quarter. But I think once we get this behind us after the first quarter, we'll start to see things more normalize as we go into next year kind of after that. And like we said, we expect things kind of to gradually improve throughout the year. So the way to think about maybe seasonal models, not that we want to get into specific quarterly guidance, is that if you exclude the shipping delay effect, our sales next year would be -- our guidance is to go up by 4.5%. We expect to do probably lower than that in the first half, higher than that in the second half. And then you can start to work on your math for like what you assume for margin expansion with different sales scenarios.

One of the things that I do when I sort of think about what the setup is for any given year is just say, what historically has EPS growth been like in a year where organic growth has been X, Y or Z. I can't go back and find a year where on an organic growth level that's 3% to 4%, you don't do double-digit EPS growth. 3% to 4% organic EPS growth this year gets helped by the 4% that you tack on if you don't have a logistics issue. So that puts you in the high single-digit earnings growth range. Is there anything that you think would sort of break that mold or make that historical perspective less true going forward?

No. I mean I feel very strong about our margin expansion ability. The way we were thinking about next year is that we kind of exclude the shipping delay from our own mines, 4.5% growth. We have a cost structure that supports a 4.5% growth business. And of course, we just felt like we also have a lot of kind of rich things in the pipeline to invest in. We kind of came off this budget tour feeling very positive. We have a very good balance of growth initiatives, a good balance of product development opportunities. Of course, we challenged the organization to mitigate and offset a lot of that with reallocations in the business. So we work a lot on those types of topics, which is part of our normal cadence. But kind of then going forward, so if you kind of like look beyond all that, yes, there's a couple of smaller headwinds like whether it's a little bit of variable comp or a little bit of currency. And if you adjust for that kind of stuff, we would have been in the double-digit range for next year. But I think more importantly, it's like, okay, what are we going to do going forward, and we feel very confident about the ability to expand margins. I mean it starts with growth for sure. A lot easier to grow margins when you're at 6% than it is 3%. If we're at 3%, we're going to have to reduce costs. So there's a conscious decision about whether it's appropriate to do that or not. As we go more than that, then you start to slowly get like leverage. If you just think about like what a -- what's typical like inflation in the world, and you can kind of start to make your own assumptions as to like when does leverage kind of kick in. But we feel like there's a great opportunity to grow the business going forward. We talk a lot Spinnaker. We talk about being a leader in highly fragmented markets. That really gives us the opportunity to gain just a little bit of market share to hit our numbers. We talk a lot about all these trends that I already kind of mentioned. I think that our end market exposure is better today than it was 10 years ago, and we just have a better mix of businesses. And then you start to throw in things like the service business. So we talked a little bit more about that recently. I think that's a great opportunity for us. That's part of one of the things that we're going to lean into a little bit more in terms of how we invest. And then you kind of work on what are the margin expansion initiatives. We talk about pricing. We talked about that a little bit earlier, about the value proposition, about the setup. We continue to innovate in that area with our analytics and our tools. And then we have our SternDrive program. And SternDrive is a great opportunity. There's just a lot of new things that we're doing with SternDrive. With newer technologies, we can automate things that maybe we couldn't have automated in the past. There's also new insights that we have. So -- and this is where these programs start to kind of all come together like the Blue Ocean program. So the Blue Ocean program kind of harmonizes our processes globally. When you do that, you start to get much better data, okay? And then when you have better data, then you can actually use it to gain insights, take actions and everything. And so with Blue Ocean, the supply chain team has a rich source of data that they can now start running very sophisticated analytics on like should cost analysis. And so they'll look at a manufacturing process or they'll look at a bill of material and they'll say, what should it have cost from their analytics. And then from that, they can do follow-up actions. They can like look at any kind of lack of any opportunities to optimize efficiencies and like look at disturbances, if you will. They can talk to suppliers or they can look at products and look at maybe product redesign opportunities. So there's just lots of little things that we're doing in the company that allow us to continue to expand margins. And then Blue Ocean -- back to Blue Ocean, that gives us the opportunity to automate processes, and it also gives us the opportunity to lean into off-shoring opportunities as well.

Have you thoroughly canvassed the portfolio and the business with those 2 programs? Or is part of the iteration development for these 2 to point in a new direction that maybe it hasn't been in the past?

So I mean, for us, it's just an ongoing journey, right? Like so when we kind of come out with SternDrive 3, it's not just a switch that we go on. It's like there's a whole process where we roll it out to every producing organization in the company. We -- there's workshops. They develop local work plans. Like anything, they're going to prioritize on where they see the biggest opportunities. And then there's just a -- it's just a journey of evolution. And I think the theme of continuous improvement is something that resonates in the company and is part of our culture.

Okay. So it's not a matter of this corner of Mettler-Toledo hasn't been fully fleshed out from a Blue Ocean or SternDrive perspective.

Oh, sorry.

Let's go back and see what we've done across the business in previous iterations and now what we can do on top of that.

Okay, got you. So there's still about 5% of the business that has to do Blue Ocean, but it's largely rolled out. But there's always a continuous improvement in terms of like refining the template and like going to that next level of excellence. And sometimes, it comes from adding on additional technologies. Or just when you have a best practice, it's easy to like leverage that throughout the entire portfolio. But I think with Blue Ocean, a lot of it -- yes, there's a lot of -- a lot of it has efficiencies. But a lot of it is also about the data that you gain and then using that data to become better at making decisions, being more efficient and effective with your decision-making, in general.

Okay. So in general, it will be a fair statement to think that you feel as good about op margin not just opportunities but performance going forward [ as it had in the past ].

Oh, absolutely. Yes, absolutely. And then on top of all that, we have, I think, a more favorable mix. Our higher-margin businesses are the ones that are growing the fastest.

Okay. I got lots more for you, but we're out of time. So I'm going to say thanks. Happy Thanksgiving to you, Shawn, and I'll talk to you soon.

Same to you. Thank you.