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

Great. Thanks, everyone, for joining us this morning. I'm Vijay Kumar, the Life Science Device Analyst at Evercore. Pleasure to have with us Mettler-Toledo. We have CFO Shawn Vadala, and from Investor Relations we have Adam Uhlman with us. Shawn, thanks for the time this morning.

Yes. Hey, thanks for hosting us, Vijay, very good to see you.

Fantastic. So you guys have been -- it's always a fascinating company. I think you guys get tagged with China, macro. But when I look at the long-term execution, it's been the upper quartile, upper decile maybe, of your peer group. When I look at, from that lens, like 3Q was in line-ish with versus where Street models were, some moving parts, maybe labs a little bit better, industrial was a surprise. When you review the quarter, Shawn, was third quarter in line with how you thought it would play out? Any surprises, any phasing issues?

Yes. I mean, hey, we were overall pleased with the third quarter. I mean, like you said, it came in pretty much in line with what we expected. We did feel like we had some very good execution in the quarter. Maybe if I kind of like pick on a couple of highlights here, the lab business grew 5%. So we acknowledge that it was maybe against easier comparisons, but it was really nice to see 5% growth in lab. When you kind of peel that apart, we saw particularly strong growth in the Process Analytics business as well as our Analytical Instrumentation business. Another highlight for the quarter is we felt like Europe was pretty resilient. I mean we've been having -- the European economy has been under arguably more pressure than the rest of the world. I think when we entered 2024, we kind of felt like Europe might be the softer region, and I think it's held up really well. And I think we continue to see really good execution in Europe. And then China, it was nice to see China return to growth. It was modest growth, but it was nice to see growth after a period of like some pretty significant resetting over the past year there. Conditions are still soft, but I think it's nice to see things start to move in the right direction. Our service business was very much a highlight in the quarter. We talked a lot about service in our more recent call, up 9%. We've been leaning into service more, and we see a lot of good opportunity to grow in that business. It's nice because it's above-average margins as well, too. And then if you just look at the margins, the gross margin up 60 bps on the quarter, 40 basis points year-to-date, shows very strong execution on a lot of our margin expansion initiatives. And then if we look at our cash flow on a year-to-date basis, up 7% on a per share basis, very pleased with that. I'm very, very pleased with the team's execution on topics like DSO, inventory. We continue to stay very disciplined, and I think we're seeing good results out of all that.

Fantastic. I think Industrial -- on the Industrial side, like what do you -- where did the surprise come from? It was a little softer in 3Q. Was it Europe? Was it Americas?

Yes. I mean, Industrial was a little softer. I mean if you look at our -- one of the things to think about with Industrial is, okay, first of all, it's been actually pretty resilient over the last few years. I think most people would have expected this would have been the business that would have been softer. Historically, it's a more cyclical business for us. If you look at the business today, it's about 60% is a combination of pharma, food manufacturing and specialty chemical. So it's less cyclical than it was in the past but it's still not immune to the economy. But if you look at that business, we've been benefiting from a lot of trends in terms of like automation, digitalization, and really have benefited from a lot of our Spinnaker programs, benefited a lot from a lot of our innovation. We've come up with like a lot of new terminals to really help companies with their digitalization initiatives, their automation initiatives. We've done a lot of things with like in hazardous areas or hygienic solutions, things that are really fitting needs of customers. And I think we've seen really good responses from a lot of our customers. But when you step back from all that, this business also has more exposure to China. And if you look at like -- and I'm speaking specifically to core industrial, not product inspection, but core industrial is about 25% of our business globally, whereas in China it's over 40%. So clearly overexposed to China. And as we talked about before, China -- the industrial business in China is a little bit softer at the moment. So like -- so that's one area that we do have our eye on as we kind of like look in terms of guidance going forward, we are a little bit more cautious on Industrial for that reason. But kind of longer term, we still remain very optimistic for a lot of the reasons that I just spoke about. But when you then add in opportunities around reshoring and near-shoring, we're in the very early innings of these opportunities. And our team is, I'd say, very excited about maybe what is going to come ahead. And we've been really trying to prepare for that as well, too. Again, with all this innovation, it's been really trying to set us up for the future. And as companies reshore, they are spending -- putting more, I think, emphasis on automation. As they do that, there's increasingly needs for digitalization, and our products really facilitate both of those trends pretty well. So I think there's a lot of optimism for the future. We just need to get through a little bit of the short-term uncertainty.

So would you say Industrial, mostly it was China, and ex China, it was more or less in line with the plan?

Yes, pretty much. Our U.S. business was down a little bit, but that was more expected, a little bit comp, a little bit timing. But we are seeing softness in other parts of the world outside of China, too. I don't want to pretend like everything is rosy there. I think there is a reality that projects are being delayed. And I think everyone can speculate as to why they're being delayed. Was it looking for the election? Is it interest rates? Is it inflation? But I -- we do feel like there's a lot of activity out there, and hopefully we can start to see projects getting released as we kind of go forward.

Got you. And when I look at your Q4 assumptions, right, historically Q4 revenues have grown up low doubles, I would think, sequentially from third quarter levels. Your current guidance, I think you're assuming mid-singles, perhaps, sequential step up. Maybe talk about some of the assumptions here on why the current Q4 sequential step-up is perhaps below historical trends?

Yes, totally fair point. I think our Q4 sequential versus Q3 in terms of our guide is up about 6%. And you're right, I think if you look a 5-year, 10-year period, it's probably in the low double-digit range, maybe more around 10%. We are a little bit more cautious here in terms of the sequential. There's probably a couple of things on our mind that's kind of feeding that cautiousness. One is, we are factoring in some level of budget flush, but we're not expecting a full budget flush. If we kind of look at the different regions of the world, when we provided guidance, we felt like we were starting to see a little bit better momentum in terms of like big pharma in Europe. But we felt like things are still a little bit mixed in the U.S. depending on which customer segment you're talking about. And then, of course, we have China, and we still are a little bit more cautious on China. And if you look specifically at the Chinese sequential, that definitely explains a fair amount of the difference.

Got you. And on the year-end budget flush, you did bring up the elections. Have you seen any change in customer behavior post elections? Are we seeing customers being more receptive to sort of spending post elections?

We haven't seen any change or heard anything. I think it's a little bit early at this point in time. I know, I think we all hear [ antidotes ] about people before the election, about hesitation to invest and the uncertainty. Hopefully, now that there's certainty and -- that can lead to an environment where we start to see investments getting released.

Got you. And when we -- historically, when you've seen a year-end budget flush, when does it happen, Shawn? Is that around this time or perhaps late December?

Yes. I mean it's kind of the whole quarter, right? But December, of course, is a very big part of it. So it's still early for me to make a comment on that because December is such an important part of the quarter, but we'll see how it comes together.

Got you. And then sticking onto macro, what is Mettler's exposure to NIH?

It's very insignificant. It's far below 1%. So I'm not so concerned about that one. So with NIH, it's really insignificant for us. And if you look at just our value chain exposures in general, we tend to be less exposed to early research. Our exposures tend to be more kind of going through late-stage development and definitely in the production environment in QA/QC labs.

Got you. And on the tariff part of the equation, what is your imports from China? Do you import products from Mexico, Canada?

Yes. So China, of course, we dealt with the tariff situation during the last Trump administration. At that time, our exports were just over $100 million and about $100 million was subject to tariff. We currently pay a 25% tariff on that $100 million that was imported from China. Today's China exposure is a little bit less than that. And if you think about like last time, I think we were pretty successful in mitigating it. A lot of that had to do with our ability to leverage our pricing program, but we also were able to do some other things. Of course, we import from other parts of the world. We have this Mexican facility that we've talked about and that we acquired with a acquisition about 7 or 8 years ago. Of course, that exposure is a lot smaller than China. We'll see how things play out there with the situation. And I think we'll give everybody kind of an update on the next call if they kind of go through with the tariff there. But we'll, of course, look for ways to mitigate depending on what they do. I think that's the big question is, like, which products, what are the ultimate amounts, and then we can try to work from there and try to mitigate as best as we can.

Got you. And do you -- what about imports from Europe, this chatter about broader tariffs on all imports?

Yes. I mean we definitely import from Europe as well. But all of our competitors do also. So -- or at least most of them do. So I think we take that one as it comes. And of course, we -- a lot of our products are also coming out of Switzerland, which adds another dynamic to the equation as well, too. And so does Switzerland get caught up in some of these tariff discussions, or is it just EU? Is it the U.K.? We'll see how it plays out, so.

Understood. And sorry, on China, if it does go to 50%, 60%, have you quantified the impact on what it could mean?

For China, I'd say right now, our exposure is less than $100 million. And I think once we get into specifics of what's tariff, then we'll provide a more specific update on our exposure. Of course, our numbers are also moving a little bit, too, because we're optimizing our supply chain, and we have moving parts internally too. So I don't want to have numbers changing around too much.

Got you. And maybe one last macro question. A lot of changes here at the various organizations, right, FDA, CMS, [indiscernible]. Does that have any bearing for Mettler or to Mettler's customers? Have you heard any commentary from your early feedback from customers?

No, no. We're not hearing anything at this point in time, no.

Got you. And then sticking onto sort of the macro industrial China theme, you did call out China was perhaps a little bit more modest in third quarter, mostly due to Industrial. You did say a majority of China revenues is Industrial, right? Like maybe can you give us a little bit more color on, within China, what is life sciences, what is government, academia, what is secular? And what is cyclical in China?

Yes. So maybe a good way to look at it is by our divisions. So our lab business in China is about half the business. So that's actually our largest business. So that's a little bit lower than our global average of about 56% in terms of the global mix. Then if you kind of go into the other pieces, like core industrial, I mentioned, is a little bit more than 40% of the business, and that compares to about 25% of our global mix. And then you kind of get into the smaller bits, like process -- product inspection is underpenetrated in China. So that's about 5% of the business, and if you look at our global average, it's around 15%. And then food retail in China is kind of a low single-digit business. So -- but then if you look at like end market exposures, not so different than our global averages. I don't have specific amounts, but not too different there as well, too. But yes -- but I mean I think if you kind of like step back from all that, another -- another way to think about China that I think is interesting is also, like, who are we selling to. Like -- and I think that's an important dimension in all this. And so for us, we're not selling a lot to exporters and we're not selling a lot to multinational companies. Less than 15% of our sales are sold to multinationals. And then out of the percentage that sold to Chinese companies, a large majority of that is sold to private companies. More than 60% of our Chinese sales are to private companies. And then, of course, the difference would be to state-owned companies or the government. And I think that's a nice setup for us in terms of like this environment, because ultimately I feel like we do have a very strong China for China story. Most of our products, as you know, are produced in China for China. We develop a lot of our products in China for China. I think we're very well aligned with a lot of the government's priorities in China about developing their own life science industry. Back to the quarter a little bit, we -- it was nice to see pharma starting to do a little bit better in China. I think we're very well aligned with a lot of the strategic initiatives around semiconductors and new materials. And I think these are going to be hot segments that we can really leverage our portfolio pretty well. And then as you think about China, they're also focused on automation. They're also focused on digitalization. And these are trends that we talk about a lot, but it's because it leverages our portfolio, plays to our strengths. And I think we see that as well in China as well, too.

And that's helpful color on who your customers are in China. When you look at how the year has progressed so far, I think stimulus comes up. We've been waiting for stimulus. How meaningful could stimulus be? Because I think our understanding is it's focused on the macro economy, and you guys do touch some of the industrial pieces. Could this be perhaps more meaningful to Mettler than the average life science tools company?

Yes. No, it's -- definitely. Well, I mean, I think -- and when people use the word stimulus, I think it's important, like, because some of the current stuff, like these incentive programs that are out there, like that's a form of stimulus. That -- the current stuff that's out there, we've talked about. We -- I was just there with Patrick in September recently, the team reviewed the opportunity with us, the different projects they've identified. But when you step back from that, it's really not that significant, at least for us. Now the government has done a lot of other things, too, in terms of kind of cleaning up the balance sheet with the regional debt and other things. They've done some stuff with the real estate market. But I think what everybody is really waiting for is this fiscal stimulus, like a big fiscal stimulus package. And that's very much the traditional playbook that they've had in the past. That's kind of what they -- we saw the last time during the Trump administration to counter some of these tariff situations. That's something that I think everyone is somewhat hopeful for, is that now that we get post election, now that we get into the 2025, hopefully that's going to be part of their playbook. And if we start to see more broader fiscal stimulus into the economy, I would certainly hope that we would benefit from that. We certainly did in the past.

And some of your peers, I think, on recent calls they've noted that they've started receiving stimulus-related orders. From your perspective, -- is this a first half sort of event on China stimulus? What is the ground -- team on the ground...

Yes. So that's more like this program that I was just referring to. Like that's not the broader fiscal stimulus. That's more of a targeted program about equipment purchases and these types of things. And that program for us, I would say, is like -- we have opportunities. We -- there's a list of projects that we've worked on with customers. I'm sure there's some activity there, but it's just not that significant. That program, particularly for us, is not that significant.

Got you. And your current guidance for fiscal '25 was low singles China growth. How does that low singles compare to historical China growth rates and when do you think China could get back to, I guess, the new normal and whatever that new normal is?

Yes. I mean that's a great question. We've always said that things in China can move quickly. And if we look over our history, it's always been true. Things can go up very fast and they can go down very fast. I think we're all looking for the "Go up very fast" vector here. But in terms of when that happens, we'll see. I'm not expecting -- our baseline for next year is a gradual improvement. We're not expecting any V-shaped recoveries here. But we'll see. I think, regardless of timing, like I said before, we're optimistic about the future. We probably see it as more of a high single-digit growth opportunity longer term. Historically, there's been periods where we've grown double digit, as you know. Could we have a double-digit year in the future? Sure, but I'm not counting on that. I think we're thinking more high single digit. And we'll see how things play out. Like I think outside of China, of course, there's a lot of other opportunities, too. And like if things are moving around the world, an interesting data point for us also is just emerging markets outside of China. Like if you think about Southeast Asia and India, and Eastern Europe and Central and South America, all those countries are about the same size as China as us, they're about probably in that 15% to 17% of our business. And of course, we see a lot of opportunities in those countries as well, too. And as things move around the world, I think a lot of those regions will also benefit from that.

Got you. And just one more on the China assumptions. The low singles outlook for fiscal '25, does that assume any stimulus contribution for next year?

Not much. No. No, we really didn't factor in very much. So -- and like I said before, it's -- we have taken a bit of a more cautious approach on our China guide for next year. We expect to do a little bit better on the lab side, but industrials, it embeds maybe industrial more in the flattish kind of a range there.

Got you. And since you brought up other emerging markets, I think one of your peers have spoken about how India has grown strong double digits. How big is India for you guys?

It's low single-digit percentage of our business. Like each of these markets, we're more diverse. So if you break out like this, whatever, 15% to 17%, it's -- each one of those different regions tends to be like a low single digit and it just kind of adds up to the total. But India is a really good example. Like for us, we have a specific targeted growth plan for India. Patrick was actually there over the summer, reviewing with the team that plan. We definitely have -- we also see it as a nice opportunity going forward, and we'll kind of continue to invest in that, so...

Got you. Maybe switching gears to labs. It's the biggest segment, 55% of revenues. Your fourth quarter guidance is mid-singles growth ex your shipping comp, right? But your comps do get significantly easier, right? So I'm wondering how much conservatism is being baked into that lab assumptions in the Q4.

Yes. I mean, hey, for us, we're still happy to be growing. I mean, I think if you look at across the space, it's been a more difficult environment here this year. So growing 5% in Q3, we were pleased with that. We were pleased to see it very broadly throughout the portfolio. We were particularly pleased to see the strong growth in Process Analytics and Analytical Instruments, and like you said, if you exclude the shipping delay benefit that we have in Q4, it's a mid-single-digit guide. What we're seeing here is I expect that Process Analytics will continue to do well. I feel like we very much have turned the corner there. Maybe the other side of that is that the pipette liquid handling business still softer. This is the one business that's more exposed to small biotech. And we don't have a large exposure to small biotech in our overall portfolio, but it definitely has a bigger effect on our pipetting business results. So we'll see, I mean I think a lot of it has to do, Vijay, also with the budget flush environment too. And like I said, we're not expecting a full budget flush globally, but we are expecting something better than last year.

Got you. Got you. That's helpful, Shawn. And when you say Process Analytics, right, can you just -- I mean, at a high level, what are the major product categories that you sell within labs?

Yes. So in Process Analytics, so for us, this is an interesting business. We've been in this business for many years. In fact, we were the first company to have in-line sensors in bioreactors. So we were first there, and we've always had a very strong competitive advantage because of that. So think about things like pH meters, right? We started off with pH sensors, but then we expanded to a variety of other parameters like oxygen, CO2. And if you think about, especially a bioreactor, where you're trying to monitor that environment, all these things are important for living organisms, right? And so we have a lot of other parameters as well, too. In those parameters, those sensors are connected to terminals, and so then we have the ability to like monitor on a real-time basis. Another thing that we do, which is a big value proposition for a customer, especially when you can connect multiple parameters to single terminals, another thing we do in Process Analytics is pure water applications, and so -- especially ultrapure water. And so that's a strength of ours, and not only is that in the pharmaceutical industry, but it's something that's also important in the semiconductor industry as well, too. And then more recently, 4 or 5 years ago, we acquired PendoTECH, right? So PendoTECH further expanded our footprint in terms of bioprocessing. PendoTECH has a strength in single-use technologies where -- we had single use before, but really helped expand our portfolio. PendoTECH also had more of a strength in downstream bioprocessing, where our historical strength was more in upstream bioprocessing. So that was actually a very nice fit into our portfolio. But other than Process Analytics, if I kind of go back to the question, we also are doing a lot of things throughout the value stream. And that's always one of our strengths is our diversity, and this is just another example of that. If you go to the beginning of research, we have pipettes, we have pH meters, of course we sell -- balances has always been a strength category for us. We just recently came out with a whole new line of precision balances which is extremely well received in the marketplace globally, which is really nice to see. And then we have a variety of analytical instruments, titration, thermal analysis, pH meters I already mentioned. And then we have automated chemistry, which helps companies with scale up to production. And like -- so think about, you've discovered a molecule. Before you go to manufacture it, you want to make sure you can make it efficiently, you want to make sure you can make it safely. And then within AutoChem, not only do we have like these mini reactors with sensors that can kind of monitor a chemical reaction, but we have the ability -- we have software that can simulate the entire thing. So we do a reaction, it goes in the software, and then the software can then basically determine a better way, a more efficient way to do the reaction, and it saves chemists like several hours. And so it's a very strong value proposition. So if you kind of step back from all of that, we have stuff all the way through the value chain from research, late development, quality labs. In the quality labs, we sell up to 40% of the instruments on a typical quality bench, which is important, especially when you can connect a lot of those instruments with our LabX software. And so when you think about lab, that's definitely one of our competitive advantages as well, is the software. So what LabX software allows you to do is it allows you to, first of all, meet data integrity requirements, which is very important and a big part of a lot of FDA warning letters, but it also allows you to automate workflows. And so when you have so many instruments and you can connect them all to a common software, to be able to automate workflows is a significant efficiency in the lab and certainly a trend every lab wants to be more productive these days.

Got you. And maybe your fiscal '25 assumes mid-singles outlook for labs, right? What could -- what are the variables which would either surprise us to the upside or downside when you look at that mid-singles outlook?

For lab in particular, I think our -- yes, so I'd say that we -- I'd say that China will be a big part of it. I'd say China will be a big part of it. That was probably where we were the most cautious in terms of how we guided for next year.

Got you. Switching gears, maybe pharma. Can you give us -- that's almost 40% of your revenue, this end customer. What is your mix to large versus small CRO, CDMO, et cetera?

Yes. So if you think about our pharma exposure globally, and we would -- again, we would define that as pharma, biopharma, we would also include like testing labs, CROs, CDMOs in that number as well, too -- we don't have a specific breakdown, but I would say we're -- we have a higher mix in terms of small molecule than we have large molecule, but our large molecule business is still a meaningful part of the overall business. The examples for large molecule, of course, would be process analytics. Another example would be in our pipette business would be a good example of that as well, too.

Got you. And do you have exposure to GLP-1s? Is that a contributor?

Yes, absolutely. Absolutely, yes.

Some of your peers have quantified the benefit, is that sizable enough for Mettler to [indiscernible]?

We haven't, we haven't summarized it, no.

Okay .

But it's a good example of like when we say things are mixed, and it depends on the customer. Of course, there's a lot more activity with those customers than there are other types of customers.

Got you. And have you tried to look at pharma growth ex China? What is ex China pharma growth versus what's happening in China?

We had pharma growth in China in the quarter. So that was nice to see. If I think about it by region, we felt like we've had more momentum in Europe actually with big pharma. I think the bigger -- the larger customers are doing better than smaller generally. And we've seen more momentum with big pharma in Europe. This is something that we've called out the last couple of quarters as well. Difficult to tell exactly why. I don't know if it's because less exposure to the vaccine producers. There's also been a topic in Europe about the lack of availability of certain pharmaceuticals over the last couple of years. So there might be more of a willingness to invest in onshore things that they were previously importing, but more momentum there. I'd say in the U.S., more mixed, kind of getting into, like, it depends on which companies we're talking about. Also in the U.S., we have a bigger topic with the small biotech funding environment, where I think that's less of a topic or not really a topic in Europe.

Got you. Got you. And when you look at the other parts of end markets, food, semi, battery, all of those put together, how large are they as a percentage of revenues? And PFAS testing is something that your peers talk about. How big is that for Mettler, could that be a driver?

Yes. Yes. So maybe I'll start with like our other big segments, and then I'll talk about maybe some of these hot segments, if you will. So like food, for the total business, is about 20% of our business. And I'm talking about food producers. Not food retail, food producers. Most of our business is in product inspection. We have a lower percentage is in the testing labs or the research and development. So if you think about our product inspection business on the industrial side, about -- that's about 15% of our total business and about 70% of that is food manufacturing. And so that kind of gives you a magnitude of what that is for that business. And then of course the rest of that would be a combination of lab and core industrial. On the food side, it's been interesting. On one hand, we're competing really well. We've come out with a lot of new products in product inspection that are particularly meet a lot of the needs of the middle market. Like if you think about some of our things on the x-ray in particular, very, very well received in the marketplace. So we're competing well, even grew this past quarter in China. But the other side of that is that the customer segment is under a lot of pressure. These companies have -- continuously in the news with challenges, cost cutting, restructurings, very much impacted by inflation, probably the higher interest rates haven't helped either. In Europe, of course, the war in Ukraine hasn't helped. So definitely a lot of pressure for these companies more recently. But nonetheless, I think we're competing well. And I think longer term, of course, we feel positive. Especially when you think about outside of the West with aging -- not aging population, but with larger populations like in China, for example. The next largest segment we have is chemical, and that's mostly specialty chemical. We say that's between 10% to 15% of our total business. It's probably erring on the higher side of that range. The chemical companies have been, from our perspective, also under a lot of pressure, somewhat similar, somewhat different reasons. Inflation hasn't helped, but certainly impacted by higher energy costs, especially in Europe. Again, the war in Ukraine and the Middle East hasn't helped that. But we'll see how things play out there. I think the housing market softness around the world probably hasn't helped that market either. And then kind of below that, you have a lot of these, what we refer to as, hot segments. And so hot segments are segments that can really benefit from our broader portfolio. So we don't have to do really anything to the product, but we can use our Spinnaker program to say -- target, say, like, hey, there's a -- like semiconductor, there's a lot of growth opportunity there, let's redirect some of our resources to go after that opportunity. A few years ago, that was battery. Battery was a hot segment. We went after it hard. I think we did quite well kind of growing a business that really wasn't there before. And these businesses tend to be low single digit in terms of a percentage of the portfolio. Battery at the moment, of course, is cold at the moment, particularly in China. China, there's a lot of overcapacity. But you move on to the next hot segment. And I think the next one for us, semiconductor is a really great opportunity. It really leverages a lot of the portfolio. I think people are often surprised how often we play throughout a customer's value chain with all of our analytical instruments. There's a lot of different weighing applications. There's even a lot of pure water applications for process analytics that I referred to before. So that's a good one. New materials is also a good one. You mentioned PFAS, probably less of an opportunity for us there. I mean, yes, there's some sample prep opportunities for us. But maybe more indirectly as companies research and develop and manufacture alternatives, there probably would be more opportunities for us on the other side of PFAS.

Got you. And one on core industrials, 25% of your revenues. What is true cyclical business within the core industrials? And maybe give us a breakdown of what goes in that piece?

Yes. So I mentioned before, like if you think about core industrial, 25% of our total business, about 60% of that is a combination of pharma, food and chemical, which is mostly specialty chemical. So what's that other 40%? So you'll get into topics like transportation and logistics, which is, for the total company, is probably about mid-single digit kind of a number, so you can do your own math on what that means to core industrial. We get into areas like aggregates, we get into areas like what we call MPE, which is metals, plastics and electronics. So this is kind of where that semiconductor number would be. And then I think after that, you get into like a lot of smaller different categories.

Got you. So it really doesn't sound like there's a whole lot of correlation with the PMI. So is that a fair statement?

Yes, a lot less, a lot less. I mean I'm not saying that we ignore PMIs now. We certainly look at them, too, but it's not as correlated as it used to be.

Yes. Got you. Service, you did bring that up, 25% of revenues, grew high singles. What is your current attach rate on services rate? And what is driving this high singles growth?

Yes. So for us, we talked a lot about it on our most recent call. It's an area that we're very excited about. When Patrick and I were kind of traveling on our annual budget tour recently, this was an area where we just felt like there was just so much support broadly throughout the organization in terms of like an opportunity. So it's very high on our list in terms of areas where we're investing at the moment. If you think about the opportunity, if you look at our installed base of instruments, and you said, okay, what -- if I could service everything, what does that mean in terms of service dollars at kind of like the maximum higher-end value? It would be about $3 billion. And if you look at our service business today, it's less than $1 billion. And so you can think about attachment rates and all these other things, but that's probably the best way to look at the opportunity. And so we feel like there's plenty to penetrate there. Of course, we're not going to go to 100%, but there's a lot we can do in between. And if you look at who we're competing against, most of the time you're going up against in-house maintenance. And once we get the opportunity to talk to a customer about our value proposition versus in-house maintenance and what we can do to make sure that they're getting the most out of their instruments, it's actually a conversation that we're very successful with. So we have very good conversion rates when we do that. So we are investing in areas like telemarketing. We have programs with service technicians, of course, when they're in the field to convert things. But we are investing there, and we're adding resources into the field as well, too. And we also are adding some resources in terms of our analytical support to identify some of these opportunities as well, too. So it's an area where we see a lot of opportunity to penetrate that installed base. We also are doing a lot in terms of how to better sell service at the point of sale, too. And so we've had a lot of initiatives around that as well.

So is the math here, if installed base, or volumes, if you will, grow low singles with increasing attach rate, service should now be mid-single plus or maybe even high single sustainable grower?

We definitely see services above corporate average growth, which would kind of put us in -- over the long term, which would put us at a high single digit over the long term or medium to long term.

Got you. And what is the margin profile of service? Is that accretive to gross margins or operating margin?

Yes, it's accretive. It's above average. Yes.

Did you quantify...?

No, we don't disclose it, unfortunately. So it's a little -- if you look at the gross margins, which are in our public filings, the gross margins are lower, but that's because all the costs of service are largely in cost of goods sold. Like your whole field service organization is in cost of goods sold.

Got you. And sticking on with margins, I think fiscal '25 was unusual. I think gross margins are expanding, but operating margins, I think you're assuming flattish, right? That's unusual for Mettler. Maybe walk us through why op margins can be better?

Yes. So this is unfortunately one of the challenges we have with the optics of these shipping delays. So as you know, in Q4 last year we had about $58 million of sales that kind of shifted out of Q4 and was largely recovered in the first quarter of last year -- I'm sorry, of this year. So now for next year, that's going to create a comp issue that we have going into next year. And so that comp issue is going to reduce sales by about 1.5% for the full year. It's going to reduce our operating margin by about 60 basis points. So our operating margin would probably be up 60 to 70 basis points if it wasn't for the shipping delay. And it's going to also reduce our EPS next year by about 4%. So that's also bringing down the EPS. And what's important is, as people are thinking about their Q1 models, all those effects are going to happen in Q1. And so it's going to have a headwind of about 6% to our Q1 sales growth, it's going to have a headwind of about 250 to 300 basis points in terms of our operating margin. And if you think about that 4% EPS number, if you try to extrapolate that to what it means for Q1, it's going to be a high-teens number in terms of a headwind to Q1 EPS. So just to make sure people don't get kind of caught off guard by all those different comps. But the good news is, once we get on the other side of Q1, I think you'll start to see more normal type of Mettler growth numbers and margin expansions. Keep in mind, we also have kind of -- as we've kind of outlined a framework for next year, we've also tried to remind people that we expect the first half of the year to start slower than the second half of the year.

Got you. Maybe last quick 10, 15 seconds. FX has been volatile. Any change in FX assumptions?

I mean, we'll update everybody in terms of February. I mean, clearly, it's been dynamic, a little volatile. Probably the best way to think about it for us is that if you think about the Swiss franc, the Swiss franc/euro is kind of a cross exposure for us. And so for every 1% change in the Swiss franc versus the euro -- because we're short franc, we're long euro -- t's about a $2.5 million change in terms of operating profit. And if you think about the Chinese renminbi, our exposure for every 1% change in the renminbi versus the dollar, so -- and we're, of course, long there -- that would have about a $2.5 million to just under $3 million change. So clearly, those rates have been more volatile recently, a little bit worse than when we provided guidance, but we'll see how things play out and update everybody in February.

Great. With that, we're out of time. Shawn, thank you so much for the time.