Mettler-Toledo International Inc. ($MTD)

We're going to check off day 2 of the BofA Vegas Healthcare Conference. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team. And I'm excited to be joined by Shawn Vadala, Chief Financial Officer of Mettler-Toledo. Shawn, great to have you.

Hey, great to be here, Mike. Thanks for having us.

Always a pleasure. Format will be a fireside chat. If anyone in the audience has a burning question, don't hesitate to raise your hand and we'll throw you in. Shawn, maybe just to kick things off, you reported 1Q results just a couple of days ago, it feels like in a lifetime, but I think it's a little bit 3 or 4 days. A lot of moving pieces in the quarter. A lot of debate on how it played out relative to expectations and sort of like what the moving pieces are. Maybe you could just start there and run us through high level what happened relative to your expectations or how it impacts your view going forward?

Yes, sure. So maybe a few comments. The first thing I don't want to get lost in the quarter is that we felt really good about our earnings growth in the quarter. We had very strong earnings growth, 9% growth. And I think a more difficult environment. And I think that really comes back to not only execution but really says a lot about the culture and the agility of the organization. And as we kind of talk through things today, we want some of the messages we want to leave people with is that we feel really good about our ability to drive strong earnings growth. When we kind of go to the top line, so we delivered 3% growth. That was in line with our guidance, but we acknowledge it included a little bit more M&A contribution. So, at the beginning of the quarter, we were expecting M&A to be more about 1%. It was 1.5%. And so with rounding, the organic growth was 1% versus our 2% organic guide. But maybe a couple of things I also don't want to get lost in the print is that we're seeing increasingly good trends in China. I'm sure we'll have an opportunity to talk a little bit more about that. But China was really good. Certainly better than our expectations. Our product inspection business, which we talked a little bit on the call, had very strong growth reported but also organically. The service business continues to do well. We've talked a lot about in the past about how important that is as an opportunity. And within lab, there were pockets of some good things, bioprocessing being one of the examples. But of course, there was some softness in some of the other businesses, both in lab but also on our core industrial business. When we started the year, we did expect things to start a little slow, and we -- that's kind of how we communicated. We just felt like after last year, we felt like the companies might be a little bit more hesitant with releasing capital. And clearly, that's what we saw. And there was different things that happened in the quarter, starting with some tariff threats at the beginning. Of course, we had a war in the middle. And those things obviously create a little bit of uncertainty for the market and probably had some effect as well. But when you step back from all that, our organization remains positive. We really do. I know we have a little bit more of a cautious outlook for the second quarter, probably reflecting a little bit the dynamic environment. But also when we look at our internal pipeline, we're very encouraged, and I'm sure we'll talk a little bit more about that in a little bit. But then when you kind of look through all this, we feel like we are well positioned for the future. And we purposely talked about innovation on our call last week. We really believe that, that's the fundamentals, right? And when Patrick became CEO, that was one of the things he wanted to do was accelerate the pace of innovation in the company. It's no coincidence that we're talking more about it. We increased investments over the last few years. I thought we had a lot of nice examples of that. As you know, nothing moves the needle individually at Mettler-Toledo. But these are all good opportunities to also engage customers and to drive sales in the future.

No, that's great. Thanks, Shawn. I'm going to follow up on from there. Maybe a point you made earlier in terms of your thinking and your -- sort of how you laid out the outlook when you're going into the year. You said you anticipate companies will be hesitant to release capital. I think something we've certainly been aware of and kind of tracking closely. Is there any changes in that as you kind of -- you've gone through April and March -- April and May, with the tariff uncertainty with the Iran war, are there any moving pockets where companies are sort of getting over that hurdle and being a little bit more open to stepping up and deploying funds?

Yes. I mean, so maybe a couple of things here. So if you think about like last year, there were disruptions in the first half of the year and it kind of created a little bit of a shift versus normal purchasing patterns last year. I feel like this year, I don't want to say it's the same, but I think there's you can analogize it to it. Like there's more disruptions in the first half. That's probably going to shift things a little bit more to the back half. Maybe that's a little bit more than what we would have expected when we started the year. But what encourages us is when we look at -- not only talk to the organization, but when we look at the pipeline. And earlier in the quarter, we were hearing a lot of great anecdotes about early pipeline building. As we kind of look at the last couple of months, we really see the pipeline really continuing to increase. I'm talking when I say pipeline, the sales funnel, and that's very encouraging for us. And now I know we're a short-cycle business, and I know we still have a cautious outlook out for the second quarter. But probably, what's most important when you look through that is you -- when you look at things like earlier indicators like hot leads, but even more importantly, like opportunities, like the level of opportunities we have is growing very significantly in the organization. And that's something that's very encouraging. And then you kind of combine that with some of the areas where we see momentum building, like keep on talking about China, we really are seeing that developing in a very positive way. I really feel like China is going to be a nice story for us this year. We went through -- we've gone through a little bit of a challenging period here over the last few years. But you really can see a lot of positive signs here. So hopefully, that will continue to play out. Biopharma of course, is another area where we see good momentum as well, too. So there is some optimism. We will lap in Q3, we'll have like a more difficult comp in our core industrial business. But absent that, as we get into Q4, we'll also have some comp benefits as well, too, that will kind of probably be a little bit of a nuance.

I mean I'll stick with the pipeline there and the opportunities you're talking about. Can you talk about visibility into some of that pipeline and the funnel converting? You said you are a short-cycle business, but you tend to have pretty good visibility in customer decisions the 3, 6 months out? Do you feel like broadly, your visibility is better now than it might have been 3, 6 months ago or throughout 2025? Are there pockets where you're feeling a little more comfortable and sort of maybe weight the likelihood of some of those converted.

Yes. I mean it's always difficult in our business, right? Like we still, as everyone knows, we're still short cycle, things can change. But what we see is this momentum that's been continuously building. And the heart of the pipeline or the sales funnel is showing a lot of strength. Our conversion rates are also improving, which also is a sign of strength. So that's encouraging to us. And in terms of -- and then when you kind of combine that with maybe some of the external things, like PMI is getting better. We're -- I think we're less cyclical today than we were 10 years ago, but it doesn't hurt, right, especially on the core industrial side. And then as you think about like replacement cycles and onshoring and all these things like that we didn't build into the guidance this year. They're still out there as opportunities. And especially on the replacement cycle side, and then when you think about, again, where the hot segments the hot opportunities in the market are like trends towards automation as companies are reshoring or anything with inflation. Everyone is looking for more productivity, and we continue to see good growth in those areas as well as digitalization. You think about as companies are doing their own AI programs, they're looking to extract information out of their instruments we're perfect for that. We provide solutions all the way through the value chain, whether you're in the laboratory where we have LabX to really facilitate that. And I think you know on a QA/QC bench, we can sell up to 40% of the instruments on a typical lab bench. And then -- but with LabX, we can automate workflows but also collect data and also ensure data integrity. And then on the industrial side, there's all kinds of things that we're doing with process control with our terminals and enable a lot of things on the digital side. And when you can provide things in a structured manner for your customers, it's very effective. And I think it just is something that's very valued, especially when you can do it in a very cybersecure way, too.

One last point on that sort of like demand funnel and improving early opportunities. Just from a timing perspective, you mentioned second quarter more cautious outlook. Is that a second half opportunity then? You mentioned you do have some comps there. Will we see some of that flow through in the second half? Could that be more of a 1Q, 2Q '27 story, just or which part just the lead times on the improving pipeline?

I mean, hey, I would expect the things that we're seeing in the pipeline will be a second half story. Yes.

All right. Let's touch on some of the slightly more negative data points from the quarter. And one, obviously, the crisis in the Middle East. You talked about why it was an input cost. So both from a P&L perspective but also from a customer demand perspective, just where are you seeing maybe pockets of caution as a result of that? Is it tangible yet? Is it still more on the delay side of things? Maybe let's talk through that, both from a product segment perspective but also from a geographic perspective.

Yes, sure. So I mean, like you said, there's two parts to inflation, right? There's your direct cost on that one. Of course, we're seeing inflationary pressures. I think our organization does a great job of responding to those pressures. And whether it's through cost savings initiatives or through our pricing program. When we guided, we acknowledge that we have some benefits from tariffs this year at the lower rate, which is a number that is very similar to what we're seeing on the inflationary side. And then so we -- as a result, we took a more cautious view on how we built in some of the mitigation actions. So as we kind of do those over the summer, we'll provide an update and perhaps that's a little bit of an upside in the second half. But it's a dynamic environment, as you know, too. And so I think it's better to be cautious at this point. The bigger question, I think, is what you kind of get to is what does it mean to our customers? I feel like within certain -- there's two elements is the uncertainty part but then there's also like the real cost, and is their wallet smaller. Segments of the market that have been more affected by that in the past would be like the chemical market. And when I say chemical, for Mettler-Toledo, that means largely specialty chemical, and that's about a low double-digit part of our business. We talked a little bit about that on the call. And I think that could be a softer end market for us this year. We'll see how it plays out. But I would also acknowledge that we've been through higher energy costs in Europe is the one that stands out here. They usually kind of get squeezed on these topics when it comes to energy. And we've seen that in the past like with the war in Ukraine, and we've still done very well. And I think part of it is for us is to, like on one hand, you don't stand still, right? You need to like look for where are the opportunities in the market and pivot towards where there are opportunities. And there are plenty of opportunities still in Europe like biopharma is one of them. The other thing was encouraging to me is that despite that backdrop, I think Europe has actually an improved Q2 outlook. And so -- and when we talk about funnel and pipeline, they're right there. And so it's not like we're looking at the European pipeline and panicking it by any means at this point. So I think as we go through the year, there's going to be some segments that are going to be have a lot more opportunity and hot. And then there's going to be some areas that are maybe a little bit weaker. And then I think comps will play out, too, depending on the quarter with the segment and things like that.

Okay. And especially chemicals a little over 10%, low double digits part of the business. That's global. It's not just in Europe.

Yes. Yes. That's a global number. I don't know the breakdown by region. It might be a little bit larger when we get into to China which is a good example of like maybe that's a weak segment there, but we're much more optimistic on China.

Yes. And you're seeing pressure there a little bit everywhere.

Yes.

Okay. Alright. I mean let's go over to China then. You mentioned a couple of times in your remarks already feeling more and more encouraged there. Can you dig a little bit more into that lab versus industrial where the pockets of strength sort of what's driving that?

Yes. I mean, so Europe has had, I think, a few quarters in a row of showing nice growth kind of improving from -- I'm sorry, did you ask about China?

China.

Yes. Did I say China?

You said Europe.

Sorry, sorry. I was thinking China. I'm sorry. Thanks -- so China has had 3 quarters in a row of increasing growth. Thank you for clarifying. The thing that probably stands out to me the most, we've always said in the past, hey, things in China can change quickly one way or another, I'm really hoping that this one is going in the good direction. We had a bit of a reset here a few years ago in the economy there kind of coming out of COVID and everything. But the one thing that stands out is the industrial business. I would say when I -- when we started last year, 2025, when I was kind of like thinking about what am I really have my eye on. Chinese industrial was one of them because it was like one of those moments where what is going to happen in the economy there. It is going to be a little bit more correlated. And a lot of these other topics are at play there. And this business is actually doing very well. And we've had 3 quarters in a row there. They -- the industrial business grew higher than the 4% that we reported. I think it was like mid- to high single digit. And as we think about China improving throughout the back half of the year, I think industrial will be a leader here. And one of the things that's interesting about that is I know there's been a lot of questions over the past year about local competition. And in China, we have the most local competition on industrial. And so I think it shows the strength of our organization, the strength of our China for China strategy, and the things that we're doing locally to innovate and deliver solutions to the customers. And there's a lot of -- this is a great example of Spinnaker, right? Like I talked about one segment being soft, but you pivot to the ones that grow. And in China, there's a lot of hot segments, right? Like -- and our team is doing a great job of identifying them, pursuing them and capturing them. Like the battery segment is heating up. Again, it went through really a pull back here a couple of years ago, but that's a good example of Clean Energy is another good example. Semiconductor is another good example. Biopharma in general, especially in the manufacturing side is showing improvements. I think there's a lot of opportunities there in the future when you start thinking about GLP-1 and generics going forward. So we're -- we continue to be optimistic here, and it's nice to see it start to show up in the results.

You mentioned a couple of quarters in a row, seeing some strength there. But as you also said, it can change a copilot really quickly. Are you still embedding some caution on the outlook there? Just in case it does turn given some of the...

Yes. I mean in this environment, it's always hard to like get it perfect. But I'd like to think there's probably more upside to that one than there is downside. From what I see right here, like when I think about momentum, when I think about funnel, and what's going on in that market. But like you said, like who knows what happens geopolitically going forward. But I'm more optimistic.

Okay. Sticking on the topic of China, but you also mentioned biopharma, moving beyond industrial, GLPs, local innovation, logo biotech infrastructure. That's been coming up more and more among other tools vendors as well that's -- you're seeing a nice turn there recently. What have you seen from more of the biopharma side of things in China? And we can probably pivot to biopharma.

On China? So I'd say lab overall has been slower in China relative to our other areas. Like on the industrial side, we're seeing actually better growth on pharma. On the lab side, I'd say it's not bad, but it's not at the levels that we've seen with industrial. Now when I look at the funnel, the funnel actually looks very good there. and I still think in the short term, industrial will do better. But I think medium to long term, there's a really great opportunity there. Like you said, like with the GLP. And with just the government's focus on developing its own life science industry, I think we have a lot of opportunity there.

Okay. And let's pivot to bioprocessing lab a little bit more globally. You said the lab still remains under pressure for various reasons, but bioprocessing to be a bright spot. You've talked about that a little bit more over recent years. Remind us of your exposure to bioprocessing, sort of where are you positioned in the workflow stream and how well has that been going for you?

Yes. I mean very well. I mean -- so life sciences, in general, is about 40% of our business. That includes small and large molecule throughout the value stream. I think bioprocessing as just a category is probably low double digit. And a lot of our exposure here is in process analytics. And so -- but we also do a lot of things with some instrumentation and then also with our industrial process control solutions. On the process analytics business, we were the first company to have sensors inside of a bioreactor. So we've always had a leadership position here. It's a very significant, more than half of our process analytics business. We're measuring a lot of different attributes in the reactor, PH being like a strong foot, but a lot of other parameters as well. We are upstream and downstream. Our historical strength was upstream with the PendoTECH acquisition. We kind of strengthened our downstream exposure. And then PendoTECH also helped us strengthen our single-use exposure as well, too. So we're we -- like everybody else, I think we're very positive on this as an opportunity. We saw particularly good growth, I'd say, in the United States in Q1. And we were kind of hearing from our team at least that there was a little bit more prioritization on the U.S. in terms of investments from a lot of our customers. But what's encouraging is that when we look at our Q2 outlook, our European forecast for this business is -- looks quite good as well, too. And so I think this will be very much a global theme. I think -- from our perspective, we feel very good about it. And I think a lot of the activity that we're seeing in our business is on the consumable side, and not quite yet getting all the benefits from facility expansion. So that could be a more positive one as we kind of look to the future.

I mean, on that topic, I assume you're talking about reshoring, onshoring at expansion. We have been talking about a lot as an out-year benefit. What are you seeing on that? Is there talk about it? Is -- are we in the planning stage? There's a lot of debate on brownfield refurbishment versus new greenfield opportunities. So what are you seeing in terms of what's happening on the ground?

Yes. I'm hearing more and more stories of engagement with some of the system integrators and the engineering firms that do a lot of these projects. So that's been a really good sign. Timing is still a little bit difficult to tell when it's going to happen. Of course, there's been some activity. Like if you think about like semiconductor investments in like every country in the world, but like the United States as well, we sell a lot of different applications through their value stream, a lot of ultrapure water applications for cleaning, but also analytical instruments, industrial equipment. There's a lot of ways that we can help that industry, and we certainly have seen little pockets of that, and it resonates a lot in our process analytics business as well, too.

Okay. Earlier in your remarks, I think you talked about AI opportunity at pharma, sort of, how it's changing the game in terms of what pharma is able to do, where they're investing, where they're putting money. Are you seeing that being deployed already? Is that a hypothetical discussion? Is that being broadly adopted? Sort of where are we in the pharma leveraging AI? And when you do leverage it, how does Meta come into play? What do you benefit there?

Yes. I mean I don't know if I'm the best source for that one, but I know it's a topic, I know it's a priority. I do hear about conversations in R&D labs about how people want to make investments in this area for obvious reasons. From our perspective, I think Mettler is a great partner for these companies in this regard. When you think about it, like the first step is really collecting data, right? And when you have a very broad range of instruments, at a company, and we have a great software package. And by the way, we just came out with the latest version of LabX, it really facilitates this to really collect information in a very structured and good way. And like data is everything when it comes to any technology, right? And so really, I think we're a great partner and enabler for this. But it's not only in the lab side, right? It's going to be also on the industrial side. And if you like look at our products, we're also doing things to our products to also leverage AI technologies like we'll have like AI wizards in some of our instruments, right, where it can like start to kind of get to the result a little bit faster. We're using imaging technology in a couple of areas in the business. That's like really whether that's AI or not, it's digitalization and which is a broader theme for my perspective and we're doing a lot of great things there, too, that are really providing differentiated solutions that allowing customers to gain new insights and gain productivity. And then we're doing a lot of these things in an automated or semi-automated way, right? And so like that's also the big hot topic in LabX is like we want to do more, but we want to do. But we also want more productivity. And so -- and so I think the companies that do a good job of enabling these trends are the ones that are going to be the most successful in the future.

Okay. Yes. I mean when you talk about data collection and just sort of more inputs going into the pharma R&D. I think that automation will be sort of the first way to do it, is that where you're seeing the most interest in pharma? Are you seeing any green shoots there?

I mean we already have a lot of things that we're doing with partnerships and collaborations that we've talked about in the past in that area. And I continue to think like those are going to be areas that you'll hear more and more about as we kind of go forward.

Okay. Okay. We've got a couple of minutes left. I want to ask, sort of, a little bit more of a bigger picture, longer-term question. We talked about the various moving pieces as you get through 2026. You've got the comp dynamic which you said a little bit softer 2Q guide, but potentially some opportunities and some better funnel for the second half. As you exit this year and go into next year, Sort of how do you see some of those swing factors for growth shaking out? And can you sort of bridge us from your exit rate this year into '27, '28 and beyond sort of what keeps you optimistic there?

Yes. I mean, I think I mean, of course, we don't want to provide any guidance or any insights on 2027 at this point in time. I mean pharma is going to be a big topic for us, and it's 40% of our business. I think these trends in automation as well as company's digital programs is going to continue to accelerate. We've been talking about it for a while. We continue to see good growth opportunities in these areas. I think that's going to be a really good one for us. I think China, we've talked a lot about today, but also broader emerging markets. Emerging markets last year outside of China were just slightly bigger than China. And we see a lot of momentum in these countries, in India being a good example, Southeast Asia, Korea, and so I think there's a -- that's a good one for us going forward. I think this topic of replacement cycle, like certainly is something that I think we're all looking forward to seeing kicking in more and then, of course, the onshoring topic. Like 50% of our business is sold into the production area of a customer, 20% approximately is sold into QA/QC. We clearly will be a beneficiary as this trend kicks in. As a global company, we move well with these companies. And especially on the industrial side, when you have a lot of local competition, I think it's going to really be a strength for us kind of going forward. So those are the things on our mind, probably no surprises there. And hey, we'll see how things play out. And of course, we'll provide more insights and thoughts as we kind of get to November of this year.

Okay. last comment. Let's talk a little bit about margins and operating leverage despite some of the pressures on top line and you talked about tariffs, input costs, you're still delivering healthy margins and EPS both in the first quarter and for the year. What's driving that what's driving that operating leverage this year? And again, sort of look at a healthy jumping off point for next year.

Yes. I mean -- so our operating margin guidance, just for those who are updating models, it's similar to what it was last quarter. Optically, there's a lot of currency, as you know. I think it's like 50 or 60 basis points on the full year in terms of a headwind. But when you subtract that, I think it actually looks quite good. I feel really great about the programs we have right now, whether it's stern dry, whether it's our cost, our productivity and cost savings programs but also our pricing program. Like in the pricing program is great because it really is a great indicator of our value proposition and what customers appreciate. And if you're delivering value, then someone's going to be willing to pay because they're getting a payback on it. And I think that our whole setup has always been great where we're selling often directly to the end user, where our average price point is less than $10,000. That user -- when you sell directly, that person can articulate that value proposition. When you're selling to the end user, they understand it. And like I said earlier, we've been investing into that. And I think that whole flywheel has worked really well for us. And of course, we have a really good program around it with a lot of analytics and stuff where we try to make sure we get the right price point, and we have a lot of our own digital tools that can help us make sure that we're providing the right point to our customer.

Okay. We're pretty much on the top of the slide, Sean. Any last concluding remarks or anything we missed anything you want to leave investors with as they will go ahead?

Yes, we fully recognize this as a dynamic environment, and it can be a little bit distracting. I hope people can look through that. And as we look to the future, we feel like we're really well positioned. I think Mettler-Toledo has a long history of execution. We have really great corporate programs that help drive these opportunities. But probably most important, we have a great culture. I think the culture of Mettler-Toledo, I've been around for not quite 30 years. I'm getting there. Hard to believe, but I'm not the only one, right? And I think it says a lot about people are really passionate about our company, and there's a really great spirit of collaboration. And I feel like a lot of companies around the world, we've certainly become a lot more agile in the last 5 or 6 years, and I think that's going to ultimately be key for any company going forward is that agility muscle and just like, hey, things are going to change. It's okay. But how do you respond to it? That's what matters. And I feel -- that's what I feel best about.

Okay. Great. That's a good point on it. Thanks so much, everyone. Shawn, thank you.

Thanks, Mike. Appreciate it. Thanks.