Mettler-Toledo International Inc. (NYSE:MTD) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Good morning, and welcome to the Mettler-Toledo First Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. At this time, I would like to turn the conference over to Adam Uhlman, Head of Investor Relations. Please go ahead.

Adam Uhlman: Thank you, Angela. Good morning everyone. Thank you for joining us. On the call with me today is Patrick Kaltenbach, our Chief Executive Officer; and Shawn Vadala our Chief Financial Officer. Let me cover some administrative matters. This call is being webcast and is available for replay on our website at mt.com. A copy of the press release and the presentation that we will refer to today is available on our website. This call will also include forward-looking statements within the meaning of the US Securities Act of 1933 and the US Securities Exchange Act of 1934. These statements involve risks, uncertainties and other factors that may cause our actual results, financial condition, performance and achievements to be materially different from those expressed or implied by any forward-looking statements.

For a discussion of these risks and uncertainties, please see our recent annual report on Form 10-K and quarterly and current reports filed with the SEC. The company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statements, except as required by law. On today’s call, we will use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in the 8-K and is also available on our website. Let me now turn the call over to Patrick.

Patrick Kaltenbach: Thanks, Adam, and good morning everyone. We appreciate you joining our call today. Last night, we reported our first quarter earnings results and I’m happy to share that we have started the year off strong, with very good sales and profit growth. The details of our financials are outlined for you on page three of our presentation. Our sales growth was again broad-based this quarter, as our team effectively leveraged to identify attractive growth opportunities across a wide variety of markets. I’m also pleased with the strong execution from our team on our margin initiatives and cost control, which resulted in solid earnings growth on top of excellent results in the prior year, despite a very significant currency headwind.

Our outlook for the year is largely unchanged from what we have provided earlier this year, although there is increased uncertainty in the economy and our end markets. However, I’m convinced that our team will continue to capitalize on growth opportunities and manage our cost effectively to help us live with solid results for the year. Let me now turn the call over to Shawn to cover the financial results and our guidance. And then, I will come back with some additional commentary on the business and our outlook. Shawn?

Shawn Vadala: Thanks, Patrick, and good morning everyone. Sales in the quarter were $928.7 million, which represented a local currency increase of 7%. On a US dollar basis, sales increased 3% as currency reduced sales growth by 4%. We estimate that the impact of not shipping to Russia was a headwind of almost 1% to sales growth. On slide number four, we show sales growth by region. We had broad-based sales growth in Q1 as local currency sales increased 6% in both the Americas and in Europe and 10% in Asia/Rest of the World. Excluding Russia, our sales growth in Europe grew 9%. Local currency sales increased 9% in China in the quarter. On slide number five, we summarize local currency sales growth by product area. For the quarter, lab sales increased 5%, industrial increased 7%, with core industrial and product inspection, both up 7%.

Food Retail grew 36% in the quarter, as we benefited from significant project activity in prior year comparisons. Let me now move to the rest of the P&L, which is summarized on slide number six. Gross margin was 58.9%, an increase of a 100 basis points, as pricing was partially offset by higher cost, business mix and currency. R&D amounted to $45.5 million in the quarter, which is a 9% increase in local currency over the prior year, reflecting increased project activity. SG&A amounted to $234.6 million, a 2% increase in local currency over the prior year. Adjusted operating profit amounted to $266.5 million in the quarter, a 10% increase. Currency reduced operating profit growth by approximately 7%. Adjusted operating margin was 28.7% which represents an increase of 180 basis points over the prior year.

A couple of final comments on the P&L. Amortization amounted to $17.8 million in the quarter, interest expense was $18.2 million and other income amounted to $0.4 million. Our effective tax rate was 18.5% in the quarter. This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter and we expect to maintain this rate for the full year. Fully diluted shares amounted to $22.3 million which is approximately a 3.5% decline from the prior year. Adjusted EPS for the quarter was $8.69, a 10% increase over the prior year or an 18% increase excluding unfavorable currency. On a reported basis in the quarter, EPS was $8.47 as compared to $7.55 in the prior year. Reported EPS in the quarter includes $0.23 of purchased intangible amortization and $0.16 of restructuring costs.

We also had a $0.17 headwind due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises that normalizes in the fourth quarter of every year. That covers the P&L and let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $135.3 million, up $60 million helped by better inventory and accounts receivable trends as well as lower incentive payments. DSO was 38 days while ITO was 3.6x. Let me now turn to guidance. To start off forecasting remains challenging and market conditions remain dynamic. As previously mentioned, there is uncertainty in the economy and our end markets. We’re basing our guidance for the second quarter and the full year assuming market conditions remain as they are today.

For the second quarter, we expect approximately 3% local currency sales growth. This level of growth reflects the challenging multiyear sales growth comparisons we faced in the second quarter as well as a growth headwind of approximately 2% from reduced sales in our pipette business. We expect second quarter adjusted EPS to be in the range of $9.90 to $10 representing a growth rate of 5% to 7% or 10% to 11% excluding unfavorable foreign currency. For the full year 2023, we have left our local currency sales growth guidance of approximately 5% unchanged. We expect full year adjusted EPS to be in the range of $43.65 to $43.95 representing a growth rate of approximate — of about 10% to 11% or approximately 12% to 13% excluding unfavorable foreign currency.

This compares to our previous guidance of adjusted EPS in the range of $43.55 to $43.95. Total amortization including purchased intangible amortization is forecast to be $72 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $26 million on a pre-tax basis or $0.92 per share. Now let’s turn to cash flow. For 2023 we continue to expect free cash flow in the range of $900 million and we still expect to repurchase approximately $1 billion of our shares this year. That’s it from my side and I’ll now turn it back to Patrick.

Patrick Kaltenbach: Thanks, Shawn. Let me start with some comments on our operating businesses starting with Lab which had good growth in the quarter considering challenging prior year comparisons. We also had a larger-than-expected sales decline in our pipette business as customers continue to work down their inventories. We believe this headwind will continue in the second quarter and ease in the second half of the year. Outside of pipette, we had strong growth across most of our portfolio particularly as our team pursues growth opportunities in hot segments like lithium-ion batteries and sustainable polymers among others. Turning now to our Industrial business. We had very strong growth across our core industrial products this quarter as we continue to benefit from strong demand for our solutions that automate customer processes and enhance productivity.

Product inspection also had a strong quarter as it capitalized on stronger demand from food manufacturers in the Americas, while we experienced only modest growth in Europe. While we are pleased with the good start to the year, our core industrial business is also not immune from the economy and we expect softer results in product inspection as these customers face increased headwinds and we expect lower growth for the remainder of the year. Finally, Food Retail delivered very strong growth this quarter due to robust project activity in the Americas and Europe. Comparisons were also favorable as sales declined 14% in the first quarter of last year. Our Food Retail sales can be lumpy depending on our customers’ project activity and we would expect lower growth rates for the remainder of the year.

One final comment on the business. Service sales continued to show excellent momentum and grew 15% in the quarter. We continue to be very pleased with the growth in this important and probable part of our business. Now let me make some additional comments by geography. Sales in Europe increased 6% in the quarter or 9% excluding the impact of stopping shipments to Russia. Sales growth this quarter benefited from very strong growth from our food retail business as well as strong growth in our core industrial businesses offset in part by a significant decline in pipette. Sales in the Americas was solid with strong growth across most of our businesses, especially, Food Retail offset in part by a significant decline in pipette. And finally Asia and the Rest of the World had another quarter of good growth led by the Lab business.

China grew 9% against very strong prior year growth rates with particular strong growth in Lab. Now speaking of China at the end of March I traveled to visit our operations in China and I couldn’t be more excited about the strength of the team we have in place and the substantial opportunity ahead of us. I’d like to share a few some additional insights on our business in China and why we are quite optimistic about our long-term growth opportunity there. First as an overview we have a very long track record of operations in China using wholly owned subsidiaries there for more than 35 years. China represents 21% of our total global sales and we design manufacture and distribute products in China for the local market. We have three manufacturing locations in China representing approximately one-third of our global production again over half of which is sold into the local market.

China and the other emerging markets have historically been an important source of growth for our company and we believe this will be a source of future growth. Our business in China overall has grown at a 13% CAGR over the last 20 years including 14% growth in 2022 as the mix of our business has shifted to faster growing and more resilient industries. Customers in China increasingly seek out our most advanced solutions where we have a very strong competitive advantage and leverage our unique go-to-market approaches. Our portfolio is extremely well-positioned to serve the demand for automated solutions — automation solutions drive for productivity aims to help ensure compliance. We also benefit from the government’s focus on developing a broader life sciences industry and other strategic market segments.

Our colleagues in China are very agile to respond to local market needs with local application development and support of China-specific demand. We leveraged this unique approach with our cynical sales and marketing programs to capture growth in hot segments like lithium-ion batteries and I visited a large battery customer and saw firsthand how massive these investments in e-mobility and stationary power solutions are but also how our solutions are excellently positioned to provide substantial value to this rapidly growing industry. Overall, our business in China remained strong during the first quarter and our outlook for Q2 is also positive despite challenging multiyear comparisons. We see continued investments in key segments like lithium-ion batteries, pharma-biopharma, but also healthy investments in industry as our customers look to reduce direct labor and improve productivity with automation investments.

I would note that market sentiment is also optimistic in anticipation of potential further government investments to support growth segments like e-mobility, expanding R&D capabilities with new labs and long-term investments in pharma-biopharma to support better healthcare. Details of these are still limited, but I would note that the government has announced structural changes in its organization responsible for accelerating the pace of scientific development, highlighting the emphasis being placed on this important topic. As we think about these trends and how the impact of our business in China, we remain optimistic about our long-term growth opportunity in the region and would expect our business in China to grow at a faster pace than the overall business.

However, as we always like to remind everyone, while we are optimistic for the long-term and for 2023, China has historically been a more volatile market and things can change quickly in the short-term. In China, like the rest of the world, we believe our unique growth strategies, tremendous diversity and culture of operational excellence and agility position us very well to gain market share and deliver solid financial results in 2023. Now that concludes our prepared remarks. And now we would like to open the call to questions.

Q&A Session

Operator: Your first question comes from the line of Josh Waldman with Cleveland.

Josh Waldman: Morning guys. Thanks for all the detail, and thanks for taking my questions. One for Shawn and then one for Patrick. Shawn, I wanted to start on the near-term organic growth guide and the implications for the quarterly cadence for the full year. Curious how the 3% local currency guide for Q2 compares to what you had previously penciled in for your full year assumptions? And then are there factors beyond destocking that have come into play since your last guide, they’re leaving you more cautious on the second quarter?

Shawn Vadala: Yeah, sure. Thanks Josh. So I think as we mentioned in the prepared remarks, destocking is a factor in Q2. So if you look at our 3% — the decline that we expect in pipette specifically in the second quarter reduces our growth by about 2%. So excluding that headwind, our growth would be 5% and I think another important thing to comment on for the second quarter is that I think it’s important to look at the multiyear comparison. So if we look back the last couple of years, our three-year CAGR with the 3% is about 13% growth. So that’s a CAGR of 13% and that’s actually very similar to what we did in Q1 of this year with the 7% growth. So again to put that in perspective that we grew on top of 10% last year, but that 10% growth was on top of 27% in the prior year.

So that very much is weighing on us as we think about the business. And then maybe to just, kind of, like walk through our typical guidance by business area and region. I can go through that quickly. So when we look at the lab business, we’re looking at low single-digit growth in the second quarter. Keep in mind, of course, lab is dealing with this headwind in the pipette business. So that headwind for Q2 is probably estimated in the 4% a range for the lab business, so it would be high single digit excluding that. And then for the full year, we’re now looking at mid-single digit for the lab business and that’s down a little bit from what we were thinking before because this headwind was a little bit more than expected when you look at the first quarter results of 7% that includes about a 2.5% headwind from the decline in the pipette business.

Product inspection, we’re looking at low single digit in the second quarter and then low to mid-single-digit for the full year. One of the things we’re seeing in PI is we actually had a very good start to the year in PI in the Americas, but we are seeing maybe some more challenges and caution in investment activity in packaged foods. And as you can appreciate there’s, a lot of headlines in that regard for that industry. For core industrial, low-single digit for the second quarter and then mid-single digit for the full year, that’s on a full year basis a little bit better than what we were expecting. We’re just very — continue to be very impressed with the resilience of that business and how well we’ve been executing there. And then, food retailing, we’re looking at mid-single digit for Q2 and then high-single digit for the full year obviously got off to a better-than-expected start with very strong project activity.

And then, for the regions, we’re looking at low-single digit for the Americas in Q2 and then low-to-mid-single digit for the full year. That business is a little bit more disproportionately hit with this headwind in the decline in pipette. Europe, we’re looking at low-single-digit for Q2 and then low-to-mid-single-digit for the full year a little bit better than what we were looking for the full year last time we spoke given the very strong start to the year in Q1. And then, for China, we’re looking at mid-single digit for Q2 and high-single digit for the full year which is consistent with what we were looking at the last time we spoke.

Josh Waldman: Yeah. Got it. Appreciate all that, Shawn. And then, Patrick, I appreciate the comments on China. I wondered if you could provide a bit more context on the cadence through the quarter or maybe what you’re seeing by end-market. And I guess whether or not you guys are seeing the stimulus benefits show up in the order book yet.

Patrick Kaltenbach: Sure. Good morning Josh. Look, at the cadence in China, as you have seen we started off strong in Q1 with 9% growth in China, so very solid results. And that of course was a quarter where as you know we had the COVID rate at the beginning of the quarter and yet our organization really executed extremely well and delivered strong results. As Shawn mentioned, the plan of schedule right now for Q2 mid-single-digit growth for China and that is of course also based on the fact that we have very strong compares, for Q2 and then for the full year, we have China still at high single-digit growth. So that’s kind of the outline in terms of growth. Now, what we are seeing there, again, we have seen very strong growth for the Lab business.

Specifically for analytical instruments, the analytical business is performing really well for us and also benefits from the hot segments. Shawn made a commented on the industrial business the growth has moderated against really difficult comparisons. Again, a reminder, we grew almost 60% in industry in Q1 2021 and over 20% in Q1 2022. So those compares of course will also account for Q2 moving forward. When we break it down say where does the growth come from we still see a lot of interest in solid growth opportunities in the hot segments like, the battery manufacturing for example, it’s really impressive how China is putting emphasis behind building out the industry beyond car. And I mentioned also the power grid and how they start producing large modules that it will place long power grids, next two solar power plants at to take up excess energy and keep it back at night et cetera.

So I think there will be continued investment. And that goes along with the overall investment that we see in automation solutions across Lab industry. China continues to look for productivity gains. They are facing an aging workforce and the fact that they will not have enough workforces moving forward. So they’re proactively really looking for automation and productivity solutions where our portfolio plays really well, that’s where again our overall confidence in the China business comes from. We are extremely well positioned with the team we have. And we are confident that the long-term trends that the government wants to follow-up on them and drive growth and invest in a longer five-year China growth plan whether it’s the health care, whether it’s stronger research and development in China all plays very well into our portfolio.

Josh Waldman: Yeah. Thanks for all the detail guys.

Patrick Kaltenbach: Thank you.

Operator: You next question comes from the line of Jack Meehan with Nephron Research.

Jack Meehan: Thank you. Good morning. I was wondering if you could update us on how much pricing contributed in the quarter? And how is your full year expectation for that changed at all?

Shawn Vadala: Thanks Jack. So, pricing came in pretty much as we expected in the 6% kind of a range. We expected to get off to a good start this year given all the different actions that we took last year when we were kind of mitigating inflation. And as we look to the full year we’re still expecting about 4% growth for the full year. And as we look to Q2 specifically we’re looking at 4% growth. And so the reason why Q2 would be lower than Q1 is because of the timing of some of the actions we put in place last year.

Jack Meehan: Great. And either Shawn or Patrick can you just elaborate a little bit more on the pipette destocking that you’re seeing? Just to be clear like how much of this do you think is specifically related to COVID and just how much visibility do you have into improvement in the second half of the year?

Patrick Kaltenbach: I can take it. Look I mean the destocking effects not only the testing, COVID testing related markets to be honest. I mean when there was this huge demand in the market last year you should also appreciate that also the pharma biopharma customers and others really loaded up inventory because there was a shortage in the market and I think the whole industry when I talk to whole industry I say everybody who’s using pipette actually is suffering from the fact now that they still have quite some inventory that they’re working down. We do expect as we said this to be reduced in the second half. So, we will get more back to normal volumes in the second half but it will definitely be still a topic for Q2.

Jack Meehan: Thank you.

Operator: Your next question comes from the line of Dan Arias with Stifel.

Dan Arias: Morning guys. Thanks for the question. Shawn maybe just following on a question on pricing there. Can you kind of put a 1% volume year that’s implied here with the guide in the context of prior years or prior periods where you had some macro or end market factors moving around. How often did you see flattish volume growth? And as we move through the year here what about this year makes you think that that’s most likely to be true?

Shawn Vadala: Well, I think what stands out this year Dan is we’re just coming off of an unprecedented period of growth. I mean like the CAGRs that I mentioned before 13% CAGR for the last three years is much higher than our — how we envision ourselves for the longer term in terms of our algorithm. So, we’ve always expected to see some level of moderation at some point during this year. It’s hard to compare it to maybe a historical precedent but of course in 2020 we had a slower start to the year when it came to volumes during COVID and then that kind of like reversed in the second half of the year. So, I think we’ll see how it plays out, but I think we have the comparisons we’ve been kind of in a weak macro environment for quite some time now with PMIs below 50.

It’s hard to — while we’re — while we’ve been resilient and executing very well specific particularly in our core industrial business which has been historically more susceptible to the economy we’re also not resilient, right? And so as headlines continue to come out in our end markets in particular with some of the challenges that our end markets are facing whether it be food manufacturing companies or chemical companies or other industries like biopharma, we do have a little bit of that on our mind as well.

Dan Arias: Yes. Okay. And then maybe just as a follow-up small and emerging biotech is obviously getting a ton of attention these days. What would you call your exposure there? And can you kind of just describe your sensitivity to spending by that portion of the customer base? And then anything you would add to the conversation on how that’s likely to evolve this year? Thanks much.

Shawn Vadala: Yes, I think our overall exposure to small biotech is relatively small. Of course that affects a little bit of our rein in pipette business but it’s is generally a very small part of that business. So, nothing in particular that I would call out.

Adam Uhlman: Operator, next question please.

Operator: Your next question comes from Patrick Donnelly with Citi.

Patrick Donnelly: Hey, guys. Thanks for taking the questions. I just wanted to follow-up on — I think it was Jack’s question there on the pipette side. Patrick, can you just talk about I guess the visibility into the normalization in the back half? Is it a comp dynamic? Is it customer conversations that give you some level of confidence on a normalization just given the chatter across the market about this sector? I just want to make sure we have a good feel as to what gives you guys the confidence in terms of that second half run.

Patrick Kaltenbach: Yes. Look, I think the true it’s part of — it’s both, right? We, of course, look at historical data, the growth rates and the volumes we have come from. But we also, of course, are in conversations with customers and we have clear signals that Q2 will be another destocking quarter and then they should get back more to normal inventory levels, put it that way. And the overall volumes that we expect, again, will then get back to if you would normalize the growth rate over the last three, four years we would get back to that volume that we would expect for Q3 and Q4. It’s a mix of calculation saying, okay, what was the underlying market growth and what is our anticipated market share gains that we have. We have a very strong pipette and pipette portfolio but even unique also to uranium business that has very strong market share, especially in the US.

And if you take all these factors into account then we basically look at a picture we say, yes, we will see more headwind again in Q2 but then in Q3 in Q4 getting back to normal growth rates again.

Patrick Donnelly: Okay. Understood. And Shawn maybe one following up on the pricing piece. On the margin side, can you talk about the expectations for 2Q? Obviously, the earnings came in a little light of where the Street was. And then just that similar to that ramp in the second half, just the moving pieces on the margins would be helpful.

Shawn Vadala: Yes, sure. So, I think one of the things to kind of keep in mind is that, if we’re looking at our gross margin, we grew about 130 basis points, excluding currency. Actually, I think it was 140 basis points excluding currency in the quarter. So that wasn’t that much different on a currency-neutral basis to what we were guiding. So currency clearly had an impact. We also had a little bit of unfavorable mix in the quarter between the different businesses. Of course, pipette is a more profitable business and retail is kind of on the other side of that. As we kind of like look towards the rest of the year, we’re looking at our guidance for gross margin would be about 60 basis point improvement in the second quarter, and if you exclude currency on a currency-neutral basis that would be about 100% improvement.

And then for the full year, we’re looking at a 70 basis point improvement and again on a currency-neutral basis, that’s about 110 basis point improvement, which is just down slightly like about 10 basis points from the last time that we spoke. And then, on operating margins, we’re looking at — we got off to a very strong start to the year as we kind of expected. We’re looking at about a 90 basis point improvement in the second quarter. And again, on a currency-neutral basis that would be about a 180 basis point improvement, so again, another very good number to start the year. And then for the full year, we’re still looking at about 130 basis point improvement, which is similar to last time but what’s a little bit different is that we on a currency-neutral basis were up about 200 basis points.

So that’s gotten a lot better.

Patrick Donnelly: Understood. Thanks for the color.

Shawn Vadala: Thanks.

Operator: Your next question comes from Vijay Kumar with Evercore ISI.

Vijay Kumar: Hey, guys. Thanks for taking my question. Maybe my first one Patrick here. I think you’ve made some comments on the macro environment. It seems like a bit more cautious tone on this call, but I see your industrial outlook did not change. So when you say, macro taking a more cautious tone, can you give us a sense for — is this specific regions or perhaps end markets, because industrial is where I would have expected perhaps some change but when you look at the guidance all of the change came from Labs, so how should we think about the macro commentary?

Patrick Kaltenbach: Sure. Very good question, Vijay. So, if you look at the macro economy and the end markets, a couple of things I want to highlight to you. First, as you probably watch also the PMIs continue to really be very soft. And that’s historically has been an indicator for us that the industry business might slow down. We are not yet fully hinting at fortunately, because we have a strong portfolio, but it’s a concern for us that the PMIs stayed pretty low. We have seen also more, I would say, negative headlines, for example, in the packaged food market. We said in Q1 that Europe is already a problem. Now, we’re hearing also in the US that some of the customers actually are slowing down their investments and also their results are not as good as they used to be.

Those headlines are also not too promising. And then, the overall comment that already was made about biotech, why they’re not broadly exposed in biotech, but as there’s still, in terms of end market, who commented out there. There is concerns about biotech. And we, of course, factored it in our total macroeconomic pictures as well. When you look at the regions, I think, Shawn outlined it before, Europe in the first quarter performed better than expected from our prospect. It was really strong, but we’re still cautious about the impact of the war in Ukraine and what it might mean for the economy moving forward. So, also there we — again, we keep our forecast for you still quite moderate. And then, the US with potential recession ahead, I think, it’s also you need to be a bit cautious about the outlook in the US overall.

Vijay Kumar: That’s helpful, Patrick. And one follow-up here on — I know, the customer base that you serve, it’s pretty large. So when you look at your daily run rate items like pipettes in order rates, did you do a survey of your customer base on when this — order rates might pick up. I’m curious on when you thought about 2Q and the back half assumptions what kind of customer feedback have you gotten that gives you confidence in the back half guide?

Patrick Kaltenbach: I think if I mainly refer here to number one, the compares will of course be easier for us all in the second half in terms of growth rate. We certainly had very strong growth last year in the second quarter. That’s why we see a stronger decline this year. And then, in terms of customers we talk to, a lot of them are, in pharma, biopharma research areas, their use of pipettes quite intensely. And from them actually — from some of the customers that we can really get good indications that overstocking issues will be less of an issue in the second half.

Vijay Kumar: Understood. Thanks, guys.

Operator: Your next question comes from the line of Tim Daley with Wells Fargo.

Tim Daley: Great. Thank you. Just quickly, I know a lot of talk on lab here, but can you guys just help us with the underlying regional forecasts that are rolling up to that growth guidance for the year within lab.

Shawn Vadala: Yes, sure. Hey, I think, as we kind of like look at Q2, so we had low single-digit growth for lab as a division. And I think we’re kind of like looking in that low single-digit range for the Americas and Europe. Again, Europe — I mean, Americas is going to be the most impacted region by this decline in pipette. So we’ll probably see the softer growth in that region versus the other ones. And then, China will probably be in the kind of mid to high-single digit kind of a range there. And I think a lot of the lab business too, it’s also important that we — if you look at like the first quarter as an example, we had actually double-digit growth in most of the other product categories. And we are still seeing good growth in a lot of these hot segments. It’s just these multi-year comps and then this topic that we talked about with the headwind in pipette as we kind of enter the rest of the year.

Tim Daley: All right. Great. And then, just wanted to dig into the service and consumables line. How did, I guess, service grow in the quarter. Can you help us understand how you’re thinking about that contract versus value-add services growth for the year? And just, kind of, general commentary. I don’t think we touched on that much in the earnings call today.

Shawn Vadala: Yes. No, great question. I mean, service is kind of really good story. We featured it on our last call. We grew last year at 12% and we got off to a really good start this year with 15% growth. We continue to see great opportunity here when you kind of look at the overall installed base that we serve. And when you kind of put dollars to that in terms of what it could mean to our service business, it’s a very significant opportunity. We have a very strong value proposition here with helping companies with uptime and compliance and accuracy of their results and reducing waste. And that — those value propositions really are resonating very well in the marketplace. And we can also do a lot of very value-added activities like validating and certifying processes.

And as we kind of go after these opportunities with our big data analytics program and how we penetrate that iBase or whether we have gotten better at selling service at the point of sale by embedding these into our quotation process. We’ve seen very good traction in terms of the ability to capture this opportunity. And then maybe one other final comment on services like our Net Promoter Scores have continue to be at like all-time highs and they were already high before. And so it just shows you how well our team executes around the world. And as we kind of look towards the rest of the year we continue to be positive here. I wouldn’t be surprised if we’re in the 10% range again for Q2. And then for the full year we’ll see how it plays out.

Tim Daley: Great. Thank you for the time. Appreciate it.

Shawn Vadala : Yes. Thank you.

Operator: Your next question comes from the line of Derik De Bruin with Bank of America.

Derik De Bruin : Hi. Good morning.

Shawn Vadala : Hey, Derik.

Derik De Bruin : Hey. Apologies if I missed this, but can you remind us what your FX assumptions are for the revenue impact in Q2 and for the full year now? Has that been updated?

Shawn Vadala : Yes. Just a second. So — okay. So FX on Q2 is just under 1%. And then for the full year so that would be a detriment. And then for the full year, it’s about neutral maybe up modestly. I think Derik just to make sure you got this one the bigger one from my perspective is the FX impact on EPS. And so that’s a 4% headwind we mentioned I think in the press release for Q2 and it’s about a 2% headwind to EPS for the full year. In our previous guidance it was like that’s like a 1.5% worse than prior guidance.

Derik De Bruin : Yes. Got that. And can you remind us the split in PI versus core industrial and also just sort of like the margin differentials between Lab and Industrial. Just trying to once again sort of like think back about the margin activity — the margin progression for the year?

Shawn Vadala : Yes. So in terms of the — yes, in terms of the split our core industrial business is about 60% of our industrial exposure and PI is about 40%. It might be a little bit more than 60% and a little bit less than 40%. I don’t know the exact math, but it’s probably in that kind of a range. And then as we kind of think about the margin differentials. Our Lab business does have higher margins than the rest of the business. And then within that of course pipettes is a higher-margin business.

Derik De Bruin : Right. Great. And have you seen I guess any cancellations? I mean, I know your business is more short cycle and quarters are sort of build a buyback of backlog. But have you seen any sort of cancellations particularly in any of your instruments people not buying PH meters just hesitation at all in buying, or does the — are things still looking relatively healthy?

Shawn Vadala : Not seeing any cancellations. Q1 was actually quite good. Of course hard to talk about if there hesitant or not I think we’ll see all those types of things play out but in terms of cancellations not seeing anything like that.

Derik De Bruin : And then just one final one. What was the actual growth percentage in pipette and price of analytics in the first quarter?

Shawn Vadala : So for pipettes our business was down high teens and pipettes is just over 10% of our business. And what was the other part of you question? Analytics process?

Derik De Bruin: Process analytics. Yes.

Shawn Vadala: Process Analytics actually had a very good quarter. I think they were up double-digit in Q1. And if you kind of like get into the – if you’re trying to like look for insight on bioprocessing there, because a lot of that business is bioprocessing. A lot of the business is holding up actually quite well. Of course, there are some vaccine production comps that we have to deal with in that business. But the one area where we have seen weakness is in single-use sensors and – but that of course is a much smaller part of our business and portfolio.

Derik De Bruin: Yes, that’s exact – and that is exactly where I was going with that process analytics question.

Shawn Vadala: Thanks, Derik

Derik De Bruin: Sure. Absolutely. Thank you very much. See you next week.

Shawn Vadala: All right. See you Derik. Take care.

Operator: Your next question comes from the line of Catherine Schulte with Baird.

Catherine Schulte: Hey, guys. Thanks for the question. You talked about services growing 15% in the quarter. How did consumables perform both overall and then excluding pipette tips?

Shawn Vadala: Yes. So good question. So our – let me just make sure I get the right number here. So our consumable business was down about 12% and that was almost entirely due to the decline that we saw in pipette. I think we had growth in all of our other consumable categories.

Catherine Schulte: Okay. And then it sounds like core industrial is trending better than you expected coming into the year. Can you just talk to what kind of trends you’re seeing there? And any order book commentary that gives you confidence to raise that full year despite some of the macro weakness that we’re seeing?

Patrick Kaltenbach: Yes, I’ll take that Catherine. Good morning. Look, again an industry comes down to our portfolio and solutions to help customers automate processes. And we see still a very healthy investment and interest in our product portfolio and I think we compete extremely well. Especially, also with the new products that we released last year with the Industry 360, I think we talked about it at the Investor Day, a very successful product and also the overall OEM business for us is doing really well. We see strong demand. I think again around the world, there’s still a lot of interest in building out automated solutions. And we play a significant part as a supplier in this segment. So that gives us quite some confidence moving forward that industry will besides a very negative PMI trend will not be affected as badly as the PMI looks but again, we are pointing to low single-digit growth in Q2 because it’s also tough compares.

Don’t forget we are really looking at super tough compares on a three-year basis here for industry. We have massive growth in China over the last three years in the industry. We had very good investments in Europe in the US. And of course, this compares to put additional positive growth in it means quite something.

Catherine Schulte: Great. Thank you.

Operator: Your next question comes from Matt Sykes with Goldman Sachs.

Matt Sykes: Great. Good morning. Thanks for taking my question. Patrick, maybe the first one for you. Just as we’re going through this pretty significant normalization, particularly in the Lab business, and then looking at your comments on services and the growth that you’ve shown last year and then obviously, this quarter, could you maybe help us understand a little bit more the historical three-year CAGR or longer on services, just so we can understand essentially the algorithm post this normalization and the contribution that services could actually make to the overall group growth algorithm, meaning if it’s services are sort of 20-ish percent, please correct me if I’m wrong on that but growing at a higher rate without the comp difficulty that the rest of the business has could that actually change the longer-term growth algorithm for Mettler, if services were to continue to grow at the rate it’s growing at?

Patrick Kaltenbach: Yes. Actually I forward you to Shawn on this question because he has the growth numbers in front of him.

Shawn Vadala: Yes. Thanks, Matt. So hey, I mean of course, we’re very pleased with the growth we’ve been seeing in service. And as I mentioned before, we see that as a really good opportunity. If we kind of look at how we started the year, it’s like a 10%, three-year CAGR. And – but we were kind of exited last year with maybe a 7% CAGR in Q4. So I don’t have the full year number in front of me. But I certainly wouldn’t want to characterize this as a double-digit business going forward although we’re pleased with it and we’re going to challenge the organization to do well this year. But I think kind of going forward, I would just characterize it as above corporate average and — which would imply high single digit. And it certainly will have — should have benefits and upside to our overall algorithm over time. But nothing that, I would highlight differently than how we’ve thought about historically other than we’re just executing very well at the moment.

Matt Sykes: Got it. Thanks for that. And then just on automation that space. You guys typically compete against within fragmented markets. Is automation any different from that? I’m just thinking of sort of the larger European players or Japanese players automation as you sell into China and other regions. Is that a different type of competitive landscape that you guys are facing in automation, or is it similar, or are you going to find other ways to compete.

Shawn Vadala: Think it’s different. And maybe I’ll start and let Patrick jump in. But like a lot of our automation we’re selling the system integrators. And so there’s a whole business model that has to do with not only quality and all that kind of stuff but how easy are you to integrate into their solutions and so that’s an area where we have a lot of competitive advantage as well.

Patrick Kaltenbach: I agree, I mean, it’s about how easy our sensors and our terminals plug in and both into the system but also the overall software environment that the end user has and I think we have a very strong portfolio there and very up-to-date portfolio that resonates very well with the system integrators.

Matt Sykes: Thank you.

Operator: Your next question comes from Liza Garcia with UBS.

Liza Garcia: Hey, guys. Thank you. Thanks a lot for taking question. So I guess just talking about customer types even if you — just more broadly, on the pharma I think there’s like a lot of questions on pharma more broadly. I know you spoke a little bit earlier on the sensors. But could you just talk about kind of what you’re seeing in the pharma environment more broadly and the growth trends there even if qualitatively?

Patrick Kaltenbach: Yeah. I can start with that, yes. And when you look at pharma and biopharma the first thing you should appreciate is our diverse exposure given the broad portfolio there so we serve customers in R&D with broad-based analytics portfolio was also with pipette. But when you go downstream with solutions to scale up manufacturing other Autocam business is pretty strong in pharma as well. And then the whole pro business bio-processing that we have plastic industry portfolio when it comes to downstream in industry. So I think we have a really broad-based exposure. What we are seeing I think is continued investment — long-term investment anyway into pharma biopharma. Yes, there was a slowdown in of course manufacturing and we see — we saw some of that exposure in biopharma and I think Shawn related referred to this as well.

But for example with PendoTECH we saw for single-use sensors with acupressure that are used in biopharma process we saw a slowdown there. But we see still really healthy demand on the R&D side healthy investment and also on the QA/QC side there’s a huge installed base of instruments out there that we also serve. And there’s a continuous replacement business that we also addressed on our portfolio that addresses pharma on a broader scale. Regionally, I would say, we see no big slowdown at the moment of pharma biopharma in the US in sales in Q1, but in China it looks similar. We had actually quite good sales in Q1 into the segment. Now, what it means moving forward, whether there will be a change in biopharma, which could be one of the segments in China that you could look at that on a more pressure.

But again, given the broad portfolio we have, I think we are very well positioned to capture the growth opportunities.

Shawn Vadala: Just to clarify his comment on US was excluding the pipette

Patrick Kaltenbach: Excluding the pipette

Shawn Vadala: We talked about.

Liza Garcia: Okay. Helpful. And then just — you talked about lithium-ions, and sustainable polymers in that business and I know it may be a bit of a smaller. But can you talk about kind of, how you think about a bit of a longer-term question like, how you think about the runway there? And how many — how we should think about the growth outlook there?

Patrick Kaltenbach: Yes, absolutely. Look I mean, there’s a lot of investment in that area and a lot of research going on in the area of sustainable polymers, and new materials that we serve with a broader portfolio. Again, a lot of it is on the lab business. If you look at our material characterization portfolio, we are very closely working with our customers to understand the demand, and the workflows that – there you see and what solutions they are looking for. Given where we are in terms of the overall market trend, I think it’s still in the early innings. There’s a lot of demand and opportunities to come up with solutions to I would say, standard plastic for example, and also more sustainable materials moving forward.

So, we are confident that will be while, it’s still a small segment for us. It’s one of these hot segments similar to what we see — what we have seen in and continue to see with lithium-ion batteries that if we are early enough there to customers and provide them with the right solutions, and the right workflows, we can be a leader participating in that growth as they build out research, later on manufacturing and of course also pipette . That’s what we have done in for example, with the battery segment. We have been very early with all these customers to understand, what their needs are and now we are participating really nicely in the growth opportunities, both on the R&D but also now on the manufacturing side in terms of, two or three areas.

Liza Garcia: Thanks so much, Pat.

Patrick Kaltenbach: Thank you.

Operator: Your next question comes from Brandon Couillard with Jefferies.

Brandon Couillard: Hi, good morning. Thanks for squeezing me in. Just one for you Shawn. Do we split out the Lab versus industrial business in China in the first quarter? And any update on the forecast for those two subsegments for the year. And then Patrick, any change in local competition or dynamics on the ground there that you care to call out?

Shawn Vadala: Okay. Good. Brandon, I’ll take the first part of that question then. So for Q1, we actually had a really good start to the year in our Lab business. We were up mid-teens. We saw a lot of growth throughout the portfolio with the exception of they also have a pipette headwind, but it’s a smaller part of their business. In the Lab business in China, we — like a lot of our other businesses we also have been benefiting from a lot of these hot segments that we were just talking about like lithium-ion batteries, is a good example, in which really felt a very strong growth in our analytical instrument business. And then on our industrial side, we grew low single digit in the quarter and I think that’s important to put that in context, with the comparison.

So that’s on top of about 24% growth in Q1 of last year, but on top of 63% growth in the year before that. So China is lapping some very, very challenging comparisons in the first half of the year for their industrial business. And as we kind of like look towards Q2 and the rest of the year we’re kind of looking at low single-digit again in Industrial for Q2 given challenging comps also in the second quarter, but we’re expecting better results in the second half as the comparisons improve. So probably still thinking of that business is low to mid for the full year which is kind of similar to how we were thinking before. And then Lab might have some moderation also because of some comp topics on a multiyear basis in Q2. Maybe it’s more in the mid or mid to high single-digit kind of a growth range, but still optimistic for the full year, especially, given the strong start in Q1.

So still thinking that double-digit for the full year on the Lab side. I think a topic there like a lot of other regions, but especially in China it’s going to be how to — with all the investment that they’ve had in COVID what is that looking like for the rest of the year. And given the fact that they just went through the reopening we’ll kind of see how that plays out.

Patrick Kaltenbach: Great. Thanks. Brandon maybe from my side you asked about the competitive situation in China with the market, but there’s a significant change. I would say no. Look it’s a very competitive market. We have local players there as well but you have to — I want to remind you we have a really strong history in China. We have a strong R&D and manufacturing base there. We — as I said in my remarks we manufacture a lot of the products locally in China and also tailor some of the applications to the local market needs. That helps us to really effectively compete with the product portfolio and our sales and marketing team uses the very same cynical sales and marketing approach to really go after the growth opportunities identify those in the China market.

I mentioned that example about the battery segment and they have been very successful to do those. So, yes, the market is competitive, but I would say it hasn’t changed dramatically for us. Our team is well-positioned to continue to compete and we made from my perspective also a lot of good investments to make sure that we have the right portfolio to compete effectively in the market.

Brandon Couillard: Very helpful. Thank you.

Operator: With no further questions, we will conclude today’s conference. Thank you for your participation. You may now disconnect.