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

All right. Thanks, everyone, for joining us. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team. I'm excited to host for our next session, Mettler-Toledo International, and I'm joined by Shawn Vadala, Chief Financial Officer. Shawn, thanks for being here.

Yes. Thanks for hosting me, Mike. Good to see you.

Good to see you again. We'll do fireside chat, but if anyone has got any questions, just throw your arm up and we'll get a mic over to you. Shawn, maybe just to kick things off, you reported 1Q results recently, gave an update to the fiscal year '25 guide. A lot of moving pieces there. So maybe just run us through at a high level, what were the key points?

Yes, we felt like we got off to a good start this year. When you kind of like look at the underlying growth, excluding this shipping delay topic that we have, which kind of makes the optics look a little bit odd in the first quarter, yes, we grew 3%. We saw a lot of good growth throughout the business. Our Lab business grew mid-single digit, excluding the shipping delay. Kind of a highlight for us was our Process Analytics business, which grew just under 10%. So that's kind of a good read into bioprocessing. Maybe the other side of that, we still saw some softness in terms of like our Liquid Handling business. It was down slightly. And that's kind of like more exposed to some of the areas of like small biotech, academia, those types of things. But overall, we felt like we had a really good quarter. Product inspection was also kind of a highlight. It grew 8%. I feel like the team is executing really well there with some of the new product introductions that we have. If you kind of like dig into the P&L a little bit, the margins came in better than expected. I felt like that was a good sign of like operational execution in the quarter. A lot of the programs we have in terms of margin initiatives, I think, did quite well. And overall, we felt like the team is doing pretty well.

Okay. And then in terms of the update for the fiscal year '25 guide, moving pieces there?

Yes. So I mean the key topic there was like the trade war kind of had already started, right? And so there's a couple of elements to that. There was like the direct cost of the tariffs, but then there was also kind of the uncertainty in terms of our markets. So we adjusted our top line for some of that uncertainty. Some of it is just some cautiousness that we have in terms of how we think the year will progress. If we think about like how we initially thought the year would start off, we thought that things would start off a little slower, but we also thought things were going to get better in the back half of the year. Our current assumption is that from a volume perspective, if you kind of like just take out price increases, we feel like the second half is going to be probably more flattish, which would be more similar to the first half of the year. So we weren't assuming things necessarily got better, but we were thinking things didn't necessarily get worse. And that's on a volume basis. Now of course, the second half of the year will benefit from a little bit higher price increases, which is part of the way that we're mitigating some of these tariffs. From an EPS perspective, we took down our EPS by 2% on the top end and 2.5% in the midpoint. The 2% of that was related to the net impact of tariffs and our mitigation activities. The gross impact on tariffs on a full year basis is -- and this is as of the time we guided, was 7%. And then if you kind of net off the different mitigation activities that we have, whether it's supply chain optimization, some cost savings or pricing. And pricing has kind of a couple of different components. One is some price increases, but also just some surcharges that we're doing there, the net impact of that would have been 2% headwind to the full year in terms of EPS growth. And then the remaining is kind of like a combination of taking down the sales for the uncertainty in our markets, offset a little bit by a little bit better execution on the margins, but also some -- we had some benefits on currency. And then I think there's a couple of smaller opportunities on the upside in terms of some of the below OP assumptions.

Okay. Maybe just on the tariff side since you're talking about that. Obviously, the big news this week, one of the big pieces of news this week was the announcement of a temporary de-escalation of China tariff situation. Could you just talk us through remind us how much of the tariff hit was for China versus Mexico versus Europe? And then in terms of the de-escalation, how do you respond to that in terms of your mitigating actions?

Yes, sure. So our -- so we had already made a lot of progress since the beginning of the year to already reduce our gross tariff exposure. So when we kind of reported 1.5 weeks ago, our estimate was that the gross tariff headwind would have been $115 million, and that's on an annualized basis. And then if you kind of translate that into what it means for this year, it was about a 7% headwind to EPS. And so if you kind of do the math on that, it's probably in the 70s or something like that. The assumptions behind that is that China was -- we expect China's imports to the U.S. to be about $50 million, and I'll come back and talk about that. Mexico is now more than China, but less than $100 million. And then the rest of the world would be about $200 million that we import from -- import into the United States. And if you think about it, we probably have 7 countries in the world that produce, including the United States. So this would be a variety of countries, but mostly Europe and within that, the largest exposure, of course, is going to be Switzerland. So -- and when we provided guidance, we're providing at the rates as of that day. So the one thing that's clearly changed is the China assumption. So if you think about China, that 115% change from the 140%, down to where we are now with -- or 145%, I'm sorry, to where we are now, that's probably about -- if you do the math on that, you'd probably get to a number of about $60 million or so. Maybe it's a little bit less than that. We also have a small amount of products that we sell from the United States into China. But if you look at that, that's on an annualized basis. Now if you kind of think about what that means to our EPS this year, that would be about a growth. So there's like 1 month of headwind on that, okay? And so on the higher rates. So if you look at the remaining 7.5 months, you have probably now a benefit versus what we previously said of about 3.5% of EPS or so, okay? So that's the gross benefit, but then some of the mitigation activities also go away. So if you think about like some of the surcharges or things that we're already going to move. So before we had a gross headwind for the year of 7%, and we had a net headwind of about 2%. Now that gross headwind would come down, assuming everything stays the same by about 3.5% and we would think the net benefit would also come down, but it would probably be -- the net benefit to the year would probably be less than 2%.

Okay. A lot of math there.

Yes. Sorry if that's a lot, but hopefully, that provides a little bit of a framework. And I just don't want people to be kind of confused about what it can mean for this year.

No, that's great. I should have just brought my calculator. That's helpful. Okay. I think I got most of that. So -- and then I guess the other question I would have is like you said, you're already implementing some of the mitigation efforts. You're not just going to keep putting them on, taking them off. If I could sort of rank order, what's easiest to change, it would be price surcharges, you can just remove that?

Yes, sure. Yes. I mean, so just to be clear on the supply chain side, we're committed to those actions. Like this was kind of a learning coming out of COVID. We wanted to have more flexibility in our supply chain. There's also a benefit for derisking the supply chain as well. So we're committed to having more regional supply chain. So it created a little bit of redundancy, but we think that's a better structure going forward. Of course, this accelerates all that. And so we're just going to move a little bit faster and accelerate programs. On the pricing side, like I said, there's an element of surcharges. We're in the process of updating some of those surcharges this week, and that was the intention, right? Like we can kind of take them up or take them down as we need to given the dynamic situation and also given the magnitude that we're facing. I mean, it would have been one thing if the tariffs were a smaller number, but at a large number, it creates a situation where we needed to do something bolder on the surcharges. So we're going to have to adjust that as well, too.

Okay. And if I think about other impacts from the tariff change, I think this would impact you probably the most is if you think about underlying China demand, one thing that I think doesn't get talked about enough is the impact of 145% or 135% tariffs to China that would have on the local economy on just underlying demand in the end market. Now that we think there's a de-escalation of the trade war, does that make you feel any better about just Chinese economy market demand for the rest of the year versus where you sat on April 2?

Well, it's definitely a positive development. Now we'll see what -- how it translates into activity in the local market. One of the things we were hearing a lot a couple of weeks ago was that there was a lot of wait and see in the local market in terms of continuing with projects. There was 2 elements to the wait and see. I think the big element was that people wanted to wait and see how these trade discussions kind of went forward. So hopefully, this brings a little bit more clarity. Now of course, there's a 90-day pause. So hopefully, it continues the way it is or it's at least close to where it is. So I think that's a really positive development, but we'll see. The other thing was that one of the things I had heard was on the ground, there was a lot of talk about anticipating that the government was going to be making an announcement at some point about their plans to better support the economy. Since then, you hear things and from public sources as well too. So we'll see what happens in that regard. But I mean, if they did, of course, the combination would be a very strong signal to the local market. I mean we always say that in China, things can move very quickly, and either way. And so I think that combination could be very interesting for us. But right now, we're not updating guidance. We're not assuming anything. But I do think we'll learn a lot more here over the next few months when we update guidance here at the end of Q2.

Remind us what are your expectations for China as of the 1Q call for the rest of the year?

Yes. So for the full year, we initially started the year thinking that China was going to grow low single digit. And now, our updated guidance reflects that it's going to be down slightly. So certainly, that was -- that translates to probably around 1 point of the growth change that we had in terms of our total numbers. So we'll see. In the short term, there's a lot of uncertainty. But going forward, and I don't know if you want to get into the in the future part now, but I think there's still a lot of opportunity in terms of how China can grow in the future.

Yes. Let's touch on that then, especially in light of reduced tariffs and yet still potential for more stimulus. What do you think this means for the Chinese economy and going forward?

Yes. I mean, of course, for the economy, it's difficult to predict. But I think that for us, we're really well positioned in terms of China. We have a long history there. We develop a lot of our products in China for China, so we're close to the needs of the local market. And we also make a lot of those products in China for China, and we've been doing it for a very long time. So I think we have a very good situation. If you look at who we're selling to, we're mostly selling to Chinese private companies, less amount for state-owned companies and then even fewer for multinationals, and we're not typically selling to exporters. And then if you think about the industries that we're selling to, it's very similar to our global exposures: life sciences; food manufacturing; chemical, which is largely specialty chemical for us. And so then when you look at those industries, we're very well aligned with the Chinese government's strategic priorities, kind of like wanting to have autonomy and a lot more self-sufficiency for their own life science industry, technology in general, but also some of the hot segments like semiconductor being one. So we feel like we're very well aligned with the priorities there. And then when we look at like our whole China for China story, we feel good. Now, is China going to grow like it did, kind of in the -- pre all these, the reset in the last couple of years? Probably not, but we never were considering that on our long-term algorithm. If you kind of look at the updated CAGR for the last 10 years in China, it's probably already moderated to about 6%. And if you look at our long-term CAGR for the company, it's kind of the same number. So it's like in the last 10 years, it's probably more in line. But that's okay. And whether it's high single or mid-single or wherever it is, I think as long as it's in that range, we should be good. The bigger thing too is like it's not just about China, right? Like there's a lot of companies that have adopted China Plus One strategies. So as we now look at the markets outside of China, like Southeast Asia, India, Eastern Europe, Central and South America, like all those other emerging markets are now bigger than China when you put them together. So they're about 18% of our business, where China last year was about 16% of our business. And those markets are now -- have been growing very well. And when people say, like, "Hey, are you seeing any evidence of reshoring and onshoring?" It's hard to answer that question in the U.S. right now. It's still very early innings. But when you look at these geographies, you clearly have seen -- we've clearly seen like some nice growth in those parts of the world. So as a global company, we're also well positioned outside of China.

What's driving that growth in EM ex China? Is it desire to diversify away from China? Is it not onshoring to the U.S. but sort of reshoring?

Yes. I think as people are looking at their supply chains, it's just one of those opportunities. Not everything goes from like from the China to the U.S., right? Like it's going to be -- depends on the company's needs or the country's needs even, but probably each company is looking at this differently. And so some are just trying to have a China Plus One strategy where they're staying in China, they're making stuff in China, but they also want to have a little bit of redundancy in their supply chain. And some of these emerging markets clearly are or opportunities and beneficiaries of that, just given they're -- because they also have a low cost structure.

Okay. Let's move on to some other parts of the market. I want to talk a little bit about academic and government. Not the biggest end market for you, but still one that's been really volatile to start the year. Can you talk us through what you've seen in those specific product areas where you're seeing a little bit better, maybe in consumables or instruments, especially I'm talking about the U.S.?

Yes. So U.S. academic and government together is a low single-digit percentage of our global business. So it's a small part of our business. Now if I kind of like peel back our product categories, one product category that has more exposure there would be our Pipette business, okay? And so when I look at that business, like I mentioned, it was down slightly in the first quarter. That business has been under a little bit more pressure in the last couple of years. I mean they were the ones that also kind of got -- felt some of the headwinds with some of the small biotech funding challenges. That's the one part of the business that would be exposed to early research, which is a smaller part of our offering to the market, but that's the one part that would be exposed there. Kind of during the second half of last year, I would have said we were starting to see actually good activity on the consumables side, which was like a good read into activity in Labs, but the Instrument business was still softer. In Q1, we saw more softness on both sides between consumables and on the instrument side. So clearly starting to see some softer conditions there. And yes, when you talk to the team, I feel like it's a little bit of the academia topic. But also, I think the small biotech for us is still a little bit soft as well, too.

Did you see that -- can you talk about how has that played out through the quarter? Did you see any deterioration? Has it kind of stabilized? We're getting a little bit of a mixed signal in terms of sort of where the trough was.

Yes. I don't recall, yes.

All right. Fair enough. And then maybe let's pivot to biopharma. You talked about smaller biotech and maybe biopharma as a whole, especially on bioprocessing. That's fared a little bit better for you, talk about process analytics. Can you talk about what you're seeing in that end market?

Yes. So we have a really good start to the year, like I mentioned in the opening comments. So process analytics are the in-line sensors that we have in the reactors. One of our competitive advantages are that we were the first company to have in-line sensors and bioreactors. So we've always had like a strong brand in this area. It started with our pH sensors, which was kind of like coming from the analytical instruments side. But then over the years, we've expanded a wide range of parameters. And if you think about these parameters, they're kind of monitoring the environment, right, especially with living organisms, oxygen levels, CO2 levels, pH levels, et cetera. And so that part of the business, we saw -- we had a good quarter. The part that I actually did the best was probably the area that benefited from single-use technologies. So if you think about like our PendoTECH acquisition a few years back, very good results in the quarter. And in general, we just felt like we saw good trends on the single use. And so we're definitely optimistic about this business going forward. And we feel in just conversations that we've had recently, I'm not talking this week, but just kind of leading up to our guidance, we felt pretty good about the market. And just like all the new modalities out there and the opportunities for production in the world, I just think that as people think about their supply chains, we're going to benefit. If you step back and just look at our life science exposure in total, right? And so I'll pivot a little bit here, if you don't mind. So like -- so life sciences, which, for us, is like traditional pharma and then biopharma, we would also put CDMOs in that category in testing labs, that's about 40% of our business. And -- but if you look at that, I'd estimate that about 2/3 of that is related to a combination of production in QA/QC labs. And so we very much think that we can benefit from these trends of investments in manufacturing around the world. The other 1/3, of course, would be research and development. But within that, we're going to be more exposed on the development side, late-stage development than on the early research side. But then kind of back to bioprocessing and process analytics, we feel pretty good. And keep in mind, within bioprocessing, it's not just process analytics, right? We also provide other solutions like including from our Core Industrial business, like just the whole process of filling and formulation that goes into the bioreactors, we provide a lot of process control there. So we have load cells that are underneath the reactor. They're connected to our terminals with software and then that software helps to determine the formulation of the ingredients, the pace and everything and then it can also act as a monitoring device, a mechanism, I should say, during the process.

Do you think that end market has turned a corner here in the first quarter or they'll still be volatile the last couple of quarters, or?

Yes. I mean for us, we've seen gradual improvement here over the I think, the past year. And certainly, it's going in the right direction. I mean, with all the noise in the market right now, we'll see how things play out. But I'd be surprised if this one wasn't -- didn't do better. Like if we look at our portfolio -- if we look at our lab portfolio, I'd be surprised that, that is an above average at the end of the year.

Okay. Maybe pivoting to industrials briefly. You called out some delays in the quarter, some timing components. Can you give us a little bit more color on that and sort of what's your outlook on that?

Yes. I mean, so if you think about it -- so when you say industrial, I mean, there's 2 parts in industrial. There's Core Industrial and then there's Product Inspection. I think you're referring to Core Industrial. So Core Industrial is 25% of our business. About 60% of Core Industrial serves a combination of pharma, biopharma, food manufacturing and chemical, okay? And so it's a little bit more secular than it would have been 10 or 15 years ago. And I think that's part of the reason why it's been a little bit more recently in the last few years with like weaker PMIs. But despite that, we're not immune to the economy. And so I think we definitely have felt a little bit of softness here at the start to the year and then in terms of how we thought about our guidance for the full year. I think our guidance for the full year is flattish for the Core Industrial business overall and then for the full year. The other thing about Core Industrial is that it has a much higher mix of China than the rest of the business and so -- than the other divisions. And so of course, that's part of it, too. So then when we entered the year, we were definitely hearing about things kind of delayed and kind of put off, but especially on the China side, especially on the China side. So we'll see how it goes. I mean if you kind of look at the different end markets, chemical certainly is an area that's softer relative to the other end markets, probably a little bit more cyclicality there. Even though our business is mostly specialty chem, I'm sure there's a more cyclical nature there than you would get with the other core end markets that we have.

Okay. You touched on this topic a couple of times throughout the chat. You talked about reshoring and impact that would have. We're starting to see some press releases, some announcements, but I don't know how much of this has already been done versus planning for the next 1, 2, 3 years. So can you talk about what you would see from a way of reshoring, if that's one of the effects of this tariff?

Yes. When we think about the tariffs, we think about 3 elements, right? We think about the direct cost and we have mitigation plans in place for that. We think about the short-term uncertainty, and we've updated our guidance for that. But then we think about the future, right? And I really believe that there's a lot of opportunity for us going forward here. Now there's a lot of numbers and commitments out there in terms of intentions to invest in the U.S. Of course, that can change. Some of that might have been planned anyhow. But regardless, my sense is it's going to be more than it would have been in the pre-COVID days. If you think about our business pre-COVID, probably 80% to 90% of that business would have been replacement in the West, in the U.S. and in Europe. And we have a replacement cycle that's going to kind of catch up at some point here. We're kind of in a very interesting situation because typically, replacement cycles occasionally would have gotten delayed as economic conditions softened and then there was a pent-up demand afterwards. During COVID, we had a little bit,, maybe an acceleration of replacement cycle, which has kind of caused us longer cycle of softness over the last 2 to 3 years. At some point, this replacement cycle is going to kick in and we thought we were starting to see the early signs of that as we exited last year. If you think about our analytical instruments during the second half of last year, we were really starting to see some good growth. Now I think things have maybe paused again on that but at some point, that will come back. And the average age -- the average life, I should say, of our instruments tends to be around 7 years. So we're 5 years out from COVID. So at some point, this is going to turn in -- this will come back. But on top of that, we have investments. So the way I'm -- a long way of answering is whatever we get is going to be a benefit on top of what we normally would have gotten in the pre-COVID days. And I feel as global company, we're really well positioned for that. We literally have had companies asking us, even from China, can you help us out in other countries in the world? Of course, we have a lot of strength in Europe. We have a lot of opportunities to move with some of these companies that they want to bring things. But it's also not things all coming here. They're going in all different directions, and we can move with them. And again, as a global company, we're well suited for that. And then another thing is as people move things, there's going to be a tendency to look for more automated solutions because things probably will cost a little bit more after you move it. You're going to have a little bit more redundancy. And so they're going to look for ways to achieve more productivity. And as they do that, they're going to look for more automated solutions. And so that's the strength of our portfolio. We really do well there, and I think that we'll benefit from that.

When you think about whatever assuring cycle will or won't happen, where would Mettler participate the most? If I think sort of like chronologically, are you in the -- very early in the build out? Are you later stage because it's going to [ marry ]?

It's going to be -- yes, it's going to be. I mean, I could give you an example of what we are in early stage, but it's a very small part of the opportunity. I mean, it's going to really come to when they when they buy out, purchase all the instrumentation and equipment for the facility. And then kind of like all the QA/QC labs in the facility as well, too. So the timing is a difficult one to answer. It depends on if it's a total greenfield and they actually have to build a building first or whether they have a facility that they can move into rather quickly.

Okay. I want to -- a couple of last comments. I want to touch on the P&L and margin expansion opportunity. You see some impressive margin expansion over time. You've obviously got some near-term headwinds in 2024 and 2025. As you think beyond that, can you sort of walk us through the various levers of the P&L?

Yes. I mean in terms of the P&L -- you want to talk about how to expand margins?

Yes, the margin runway.

Yes. So I mean, I think one of the strengths of our organization is that we have a lot of different programs to attack these challenges. And so like we have -- and then we have a strong culture of, I would say, continuous improvement and agility. And so I think if you kind of look at it, growing volume is the #1 thing, right? And so you need innovation to grow volume. So we have a lot of programs around that, the Spinnaker program helps us do that. The pricing program is a reflection of the strong value proposition we have, and then that starts again with innovation. And so the pricing program realizes that value that we provide to customers. Our products tend to be an average price of less than $10,000. We're typically sending -- selling to the end user who understands and appreciates that value. And then we have someone who's a direct salesperson who can articulate it. So we have a lot of success in that program as well. We have the Spinnaker -- I mean the SternDrive program, which is operational excellence in the supply chain. And then we have -- and we have a lot of different things there. We have some new sophistication in terms of how we're using technology to do topics like strict cost analysis to help us get smarter about diagnosing opportunities and identifying opportunities. And then we have the Blue Ocean program, which helps us harmonize processes around the world. And as we do that, we can automate them and also leverage our shared service centers. So we have a lot of different things at our disposal to help us continue to improve margins. And then we have a natural mix benefit. The products that are growing the fastest tend to be our highest margin businesses as well, too. So we feel very good about that. But I think it also comes back to the culture of continuous improvement behind all of that.

We got about 30 seconds left. I'll just go straight to my concluding question. What do you think is most underappreciated or misunderstood about Mettler?

Yes. No, I'd like to think we're pretty well understood. We try to be as clear as we can in our communication. If I'm asked a question like that, I'd like to remind people about our strong cash flow. We tend to convert cash flow at about 100%, plus or minus, depending on the year. But in these times, too, I think we also benefit from our diversity. There's a lot of ways to look at our diversity, but the way that we provide solutions throughout a customer's entire value chain. And as there's opportunities that arise, we can kind of lean into those opportunities. And with all this reshoring, it's probably a good example of how we can do that with the solutions that we provide through the value chain.

Okay. Great. With that, I think we'll end it there. Thanks so much, Shawn.

Yes. Thank you.