Mettler-Toledo International Inc. (NYSE:MTD) Q1 2024 Earnings Call Transcript

Mettler-Toledo International Inc. (NYSE:MTD) Q1 2024 Earnings Call Transcript May 10, 2024

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Operator: Thank you for standing by. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mettler-Toledo First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Adam Uhlman, Head of Investor Relations. You may begin.

Adam Uhlman: Hey, thank you, Sarah, and good morning, everyone. Thanks 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 on today’s call is also available on the website. This call will 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 our 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 statement except as required by law. On the call, we may use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in the 8-K and is 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 financial results, the details of which are outlined for you on Page 3 of our presentation. Overall, our results in the first quarter were much better than anticipated across most product categories and geographies. As discussed last quarter, we also had a benefit this quarter from recovering delayed product shipments from the fourth quarter. However, we recovered more than expected and shipped nearly all of our delayed orders and are glad to have this disruption behind us. While our team executed well this quarter, underlying market demand is still soft, especially in China and there remains considerable uncertainty in the global economic and geopolitical environment.

We continue to maintain a cautious outlook and we will — and we still expect to return to sales growth in the second half of the year, largely due to easier comparisons. Otherwise, we remain focused on executing on our growth and productivity initiatives, so we will emerge stronger as our markets improve. Let me now turn the call over to Shawn to cover the financial results for the quarter and our guidance for this year and then I will come back with some additional commentary on the business. Shawn?

Shawn Vadala: Thanks, Patrick, and good morning, everyone. Sales in the quarter were $926 million, largely unchanged from prior year levels, both on a US dollar basis and in local currencies. Our sales in the quarter benefited by approximately 6% from recovering nearly all of our previously disclosed delayed product shipments from the fourth quarter of 2023, above our guidance of an approximate benefit of 5%. On Slide number 4, we show sales growth by region. Local currency sales grew 6% in Europe and 3% in the Americas and declined 8% in Asia/Rest of the World. Local currency sales in China declined 19% in the quarter. Excluding the benefit from recovering our fourth quarter shipping delays, we estimate our sales in Q1 declined about 6% with the Americas down approximately 1%, Europe down approximately 5%, and Asia/Rest of the World down approximately 12%, including a 21% sales decline in China.

On Slide number 5, we summarize local currency sales growth by product area. For the quarter, laboratory sales increased 2% and industrial sales were flat with core — with both core industrial and product inspection flattish. Food retail declined 9%. Service sales grew 6% in the quarter. Excluding the Q4 shipping delay benefit, we estimate laboratory product sales declined approximately 6%, industrial declined 3% with core industrial down 4%, and product inspection flattish, and food retail declined 15%. Let me now move to the rest of the P&L, which is summarized on Slide number 6. Gross margin was 59.2%, an increase of 30 basis points due to improved productivity, positive pricing, and favorable mix, partially offset by lower volume and currency headwinds.

R&D amounted to $46.4 million in the quarter, unchanged in local currency over the prior period. SG&A amounted to $234.4 million, a 1% decrease in local currency compared to the prior year, and includes benefits from our cost savings initiatives. Adjusted operating profit amounted to $267.3 million in the quarter, approximately flat with the prior year amount. Unfavorable foreign currency was a headwind to adjusted operating profit of approximately 4%. Adjusted operating margin was 28.9%, which represents an increase of 20 basis points from the prior year. A couple of final comments on the P&L. Amortization amounted to $18.2 million in the quarter, interest expense was $19.2 million and other income amounted to $0.3 million. Our effective tax rate was 19% in the quarter.

This rate is before discrete items and adjusted for the timing of stock option exercises. Fully diluted shares amounted to $21.5 million, which is approximately a 3% decline from the prior year. Adjusted EPS for the quarter was $8.89, a 2% increase over the prior year or plus 7% excluding unfavorable foreign currency. On a reported basis, EPS was $8.24 as compared to $8.47 in the prior year. Reported EPS in the quarter included $0.24 of purchase intangible amortization, $0.36 of restructuring costs, and a $0.05 tax headwind from the timing of option exercises. That covers the P&L and let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $182.3 million, a 39% increase on a per share basis from the prior year levels due to favorable working capital, including lower cash incentive payments related to last year’s performance.

Let me now turn to our guidance for the second quarter and the full year. As you review our guidance, please keep in mind the following factors. First, while we do not see any negative change in business conditions today, we continue to take a cautious approach with our forecast and expect our customers will be conservative with their investments in the second quarter. We also expect our sales in China to decline over 20% again in the second quarter before returning to growth in the second half against significantly easier year-ago comparisons. Additionally, there is uncertainty in the economy and geopolitical risks, which also has created volatility in foreign exchange rates. Lastly, as mentioned last year, we will face higher variable compensation this year relative to prior year levels.

Now turning to our guidance. For the second quarter of 2024, we expect local currency sales to decline approximately 4%. We expect adjusted EPS to be in the range of $8.90 to $9.05. Currency for the quarter at recent spot rates would be an approximately — approximate 2% headwind to second quarter sales and adjusted EPS. For the full year 2024, we expect local currency sales to grow approximately 2%, which is up from our previous guidance of approximately 1% to 2% growth. We expect full year adjusted EPS to be in the range of $39.90 to $40.40, which compares to our prior guidance of $39.60 to $40.30. This includes an expected headwind to sales of 1% and adjusted EPS growth of approximately 2% from unfavorable foreign exchange. Lastly, I would like to share a few other details on our 2024 guidance to help you as you update your models.

We expect total amortization, including purchased intangible amortization to be approximately $73 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $26 million on a pre-tax basis or $0.95 per share. Interest expense is forecast at $82 million for the year and other income is estimated at approximately $2 million. We expect our tax rate before discrete items will remain at 19% in 2024. We expect adjusted free cash flow of approximately $850 million, representing a conversion of approximately 100% of adjusted net income. We continue to expect share repurchases of approximately $850 million in 2024. 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. As Shawn mentioned earlier, excluding the Q4 shipping delay benefits this quarter, local currency sales in our Laboratory business declined approximately 6% compared to last year. This was better than we anticipated, but we saw cautious spending patterns from our pharma and biopharma customers, especially in China. We have a very strong product portfolio and pipeline of new innovations that directly address our customer needs for solutions that enhance their productivity and ensure regulatory compliance. Combined with the enhancements we have made on our Spinnaker sales and marketing program. Our go-to-market approach is a significant competitive differentiator during this period of reduced end-market demand.

Our industrial sales for the quarter were also better than we had expected and declined about 3%, excluding the benefit of shipping delays. Our sales of core industrial products have performed better than we would have expected in a soft economic environment, benefiting from our upgraded portfolio of products that enable automation and digitalization in our customers’ production and logistics facilities. We also continue to be optimistic about growth opportunities related to onshoring and nearshoring as customers aim to increase resiliency in their supply chains. Our product inspection business also had better-than-expected performance in a soft market environment with benefits from recent product introductions and strong service growth. Lastly, food retail sales declined in line with our expectations against significant project-driven sales growth in the first quarter of last year.

Now let me make some additional comments by geography. Starting in the Americas. Our sales declined slightly in the quarter, excluding the benefit from recovering of our shipping delays. We benefited from strong project-related growth in industrial, which was offset by a decline in lab and retail. As expected, our customers have been somewhat cautious starting the year, especially in pharma and biopharma, which we expect to improve as we face easier comparisons in the second half of the year. Retail also faced very difficult comparisons related to very strong growth in the prior year. Sales in Europe, excluding the estimated benefit from recovering our European logistics hub delays, declined about 5% and were largely in line with our expectations across each of our businesses.

We continue to see soft economic indicators across most of Europe and acknowledge the potential risk to the European economy and energy prices from the conflict in the Middle East. However, we had a very strong team and go-to-market approach that positions us very well to capture growth opportunities. Lastly, Asia/Rest of the World results were also slightly better than expected, although demand in China remains very weak relative to very strong growth over the past few years. We continue to target pockets of growth opportunities, including semiconductor and new energy industries, and our approach to the market has remained a significant competitive advantage against the competition. Those are all my comments on the businesses for the quarter, and I’d now like to share with you why we are so optimistic on the long-term growth opportunity for our company.

First, I have been in the life science and analytical tools industry for a long time and believe the exciting advancements our customers are bringing to the market will continue to support healthy market growth in our industry over the long term. We also see many new opportunities in fast-growing segments such as sustainable materials, semiconductors, and alternative energy. Our customers also continue to look to us to help them achieve their goals, including improving productivity and quality, while supporting their efforts in automation and digitalization. Our very broad and diverse portfolio of solutions is an important differentiator and we lead the industry with new innovations for our target markets. Innovation is at the heart of our culture and is essential to our continued success.

We are constantly coming out to market with new products and have accelerated our rate of innovation over the past few years. New products help stimulate replacement cycles, support market share gains, and enhance our value proposition that support our pricing. We are uniquely positioned to serve customers throughout the value chain from R&D through production and logistics. This also creates a tremendous opportunity for us to add automation and digitalization features to our products and drive productivity and provide insights throughout the value chain. Over the past three years, we have invested over $0.5 billion in research and development into three key areas. First, technology advancements to support new products and features that increase the value of our products.

Second, application and software development to complement our products. And third, design enhancements to simplify manufacturing and serviceability of our products. The significant investments we are making have been an important contributor to expanding our innovation leadership and market share gains. I’d like to share a few examples of innovations we have recently brought to market and why we are so excited about our future. I’ll start with our biggest launch of the year, our entirely new and redesigned portfolio of standard and advanced level laboratory balances, which you may have seen featured in our annual report. We are the global market leader in laboratory weighing, but also have ample room to gain further market share that includes expanding our access to growth segments.

Our new range of balances address this opportunity with the best products for entry-level applications all the way up to advanced weighing requirements. They feature increased robustness, seamless data management, a harmonized user interface, and up to 30% better measurement and performance. Our design approach also improves sustainability, and using improved packaging and reducing their power consumption. Weighing is a critical step in the sample preparation process and our LabX software connects our higher-end balances to our broad portfolio of analytical instruments to help automate workflows and ensure secure and compliant data capture. This is a very important competitive advantage considering we provide about 40% of the instruments that are found in a typical quality control lab and we recently introduced several new analytical instruments with new automation and digitalization features.

For example, we are the global number two player in titration and last month, we launched two completely new Karl Fischer titrator models. Our new EVA titrators are ideal for efficiently determining the water content of challenging samples and our new control algorithm speeds up reaction rates and allows for faster analysis and cycle times. It also has an automated solvent exchange system that ensures safety by minimizing exposure to potentially hazardous chemicals. Importantly, our new titrators have full compatibility with our LabX software to enable automated seamless workflows with secure data management, all while complying with data integrity regulations. Hot segments have been an important driver of growth for analytical instruments and water determination through titration is an important part of lithium battery production.

Our Voice of Customer program, Jetstream uncovered a specific customer need in the market to be able to analyze multiple samples with only one titration instrument. To address this, our team developed a new automated sample prep solution, the InMotion Karl Fischer Six that is used with our titrator. With our InMotion Six, customers can process up to six samples fully automatically and unattended with only one titrator, addressing our customers’ need for a cost-effective solution on a very small footprint. Automation has also been an important differentiator for our thermal analysis customers in fast-growing markets such as development of new materials, and we recently introduced a new thermal analysis instrument called the DSC 5+ with a fully automated sample changer.

This instrument also increases the efficiency of the entire workflow from sample handling to result assessment, generating reproducible results with less resources. Our Artificial Intelligence Wizard software automatically detects and evaluates many types of thermal effects, saving valuable time and providing consistent and reliable measurement results regardless of the user’s level of experience. Our software also has a — has different neural networks that are trained on dedicated data, so customers can download the most appropriate package for their experiment. Our core industrial business has been very successful in integrating advanced automation and connectivity features into its products and has focused its new product development on terminals and digital load cells that provide seamless integration into factory automation systems.

A great example of this is our Industry 360 terminal, which is an ultra-fast weight indicator for automated filling, dosing, and tank weighing applications across a variety of industries from biopharma to food manufacturing. The terminal connects our scales and weighing sensors and seamlessly integrates our pre-programmed ready-to-use weighing applications into a customer’s programmable logic controllers for process control automation. It also seamlessly feeds data to customer IT systems and because of our unique ability to combine IT and operations technology communication on a single network, it saves customers integration and programming cost and time and eliminates the need for an additional gateway to the server or cloud. This product line has been very successful and new derivatives like our Industry 700 and Industry 400 have been very recently launched to further expand our portfolio.

We have also expanded our capabilities in pharma manufacturing IT systems, helping customers by having a simplified and standardized integration of our weighing solutions. These advanced terminals also connect to our new PHD low-profile hygienic floor scale family that offers unmatched hygiene and safety features. Our new scales are very well suited for industries like pharma where cleanliness is paramount. These scales offer a unique fully sealed design that reduces contamination risks and simplify cleaning procedures and also has a state-of-the-art digital load cell. We have had great success with the 2023 launch of this product and we believe this and other new core industrial products have been very important contributor to the relative resilience of this business over the past year.

We have also recently launched several new products across our product inspection business over the past year that are highly differentiated and bring considerable value to the customers. We expect these innovations, including our new series of X-ray inspection technology to help drive market-share gains, especially in the mid-market segment. We have an excellent pipeline of new — of innovations of product inspection that will further build on our market leadership. Lastly, we are also pleased with our success of food retail business that — they have seen with new product introductions like our FreshBase scales, which has an important — which was an important contributor to the market share gains and strong sales growth last year. Additionally, our new FreshBase Plus AI scale with advanced image recognition technology is an exciting innovation we are looking forward to bringing to additional markets outside of China.

So that is a brief overview of a few new products we have launched over the past year. And we have many more to come this year as we have accelerated certain innovation investments to capture growth opportunities. These investments continue to provide a portfolio that is stronger than ever and continues to increase our value proposition and most importantly help our customers gain new insights, increase their productivity, and ensure regulatory compliance throughout their value chain. That is the conclusion of our prepared remarks. Operator, I’d like to turn — to open the line now to questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Dan Arias with Stifel. Your line is open.

Dan Arias: Good morning, guys. Thanks for the questions. Shawn, the 50 bps or so that you’re raising on the organic guide and then $0.20, I believe, on the bottom line. Is that just feeling better about the logistics issue given that last quarter you sort of held back a bit given that it was early in the year, or is that reflective of better results that you saw in 1Q and maybe the way that the year might unfold on demand?

Shawn Vadala: Yeah. Hey, thanks, Dan. Thanks for the question. I think it’s pretty much as you interpreted it. It’s largely related to doing a little bit better on the shipping delays that we had in Q4. Of course, we did a little bit better than that in terms of Q4 results in general. But even though we are not seeing any negative changes in the business, we also prefer to be a little bit cautious here until we get closer to the second half and have a little bit more visibility.

Dan Arias: Okay. And then maybe on the outlook for China, you pointed to continued challenges there in 2Q. That’s not exactly a surprise just given the way that things have unfolded this quarter. But it does sound like you expect some deceleration on what is an easier comp. I think the China comp gets 6 points easier next quarter. Is there something to that? And are you seeing any of the green shoots that have been discussed a little bit across the earnings cycle this quarter? Thanks.

Patrick Kaltenbach: Yeah, I can take this Dan. Look, we have been definitely pleased that we have seen a somewhat better result in Q1 than we had expected. That said, we still expect Q2 to be quite weak. I mean, as Shawn said, we’ll have more than 20% decline in China’s second quarter based on the very tough compares we see against Q2 last year and the years before, where there has been quite heavy investment in China. There was significant spending during COVID and also some, of course, inventory buildup, et cetera. For the second half of the year, the comps will become much easier for us. So we expect positive growth. And regarding your questions regarding the stimulus that was announced, I think this is definitely a positive sign for the market.

We have not yet seen an impact yet and we have to see whether it will move the needle, but I think it helps to reestablish also confidence in the market. So the stimulus will help. But I think most importantly, you need to understand that we think we are really well-positioned with our product portfolio. We have a local team that is executing really well with also developing local products for the Chinese market. I think we are in a great position to compete in this market and as a market recovers to gain even more momentum.

Shawn Vadala: Yeah. And just to maybe specifically address the comment about potential deceleration. I think it’s important to also just look at maybe the multi-year comparisons here. And if you just like look at the trends in terms of like dollar terms or renminbi terms, we’re kind of hitting a high watermark a year ago in Q2 in terms of what we’re lapping in terms of comps. So actually, the comp level that we have in Q2 is a more difficult comp than we had in the first quarter.

Dan Arias: Okay. I got you. Thanks, guys.

Shawn Vadala: Yeah.

Operator: Your next question comes from the line of Jack Meehan with Nephron Research. Your line is open.

Jack Meehan: Thank you. Good morning, guys. I was wondering if you could just reflect on the first quarter a little bit. You posted flat local currency growth. You were guiding to down 4% to 6%, about a point came from better capture of logistics. Where did the rest of the upside come from? Can you just walk us through that?

Shawn Vadala: Yeah. Hey, thanks, Jack. Hey, the rest of it, we are pleased — despite being down 6% excluding the shipping benefit, we were pleased we did better than expected. We kind of expected customers to start a little more cautiously this year. I think they did start cautiously, but we are glad that they didn’t — they weren’t as cautious as maybe we were thinking at the beginning of the quarter. If you look at kind of the where — like where did it come from, it was actually pretty broad-based, whether it be by region or by product area. And I think if we look internally, Patrick and I just came out of some executive meetings earlier this week, we just really walk away feeling very good about the things that we are controlling.

The execution and the organization, I would say, is very high. We talked about a lot of different corporate programs that we are rolling out on our last call, whether it be Spinnaker 6 or other programs. Today, we talk a lot about innovation and all the things we’re doing in terms of launching new products. And so I have to also believe that the teams are just executing well and we’re seeing some benefit from all that good work.

Jack Meehan: Great. And then do you mind just walking us through in terms of the guide for 2Q and the full year just by segment, what the expectations are? Thanks.

Shawn Vadala: Yeah. Sure. So let me start by business area. So our Q2 guide for Lab is to be down low-single digit and for the full-year to be up low to mid-single-digit. Product inspection, I don’t know if I could also maybe add if you exclude the shipping delay for the full year, that would be flattish. If we look at core industrial, it would be up low-single digit in Q2. I’m sorry, that was project inspection. Product inspection would be up low-single digit in Q2 and up low-single digit for the full year and that would be the same if you exclude the shipping delays for the full year. Core industrial would be down high-single digit for Q2 and flattish for the full year and it would be down slightly excluding the benefits of the shipping delays for the full year.

And then food retail would be down about 10% for Q2 and down mid-to-high single digit for the full year and similarly down mid-to-single — high-single digit for the full year, excluding the shipping delay benefit. And then in terms of the Americas, we would be flat for Q2. We would be up low-single digit for the full year and then we would be up slightly for excluding the shipping delay benefit. Europe would be up low-single digit for Q2, up mid-single-digit for the full year, but flattish excluding the shipping delay benefit and then China would be down mid-20s in Q2, down high-single digit for the full year and similarly down high-single digit excluding the shipping delay benefit.