Mettler-Toledo International Inc. (NYSE:MTD) Q2 2023 Earnings Call Transcript

Mettler-Toledo International Inc. (NYSE:MTD) Q2 2023 Earnings Call Transcript July 27, 2023

Mettler-Toledo International Inc. misses on earnings expectations. Reported EPS is $9.39 EPS, expectations were $9.97.

Operator: Good afternoon, and welcome to the Mettler-Toledo Second Quarter 2023 Earnings Conference Call. My name is Briana and I will be your conference operator today. Please note that this call 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. [Operator Instructions] I will now turn the call over to Adam Uhlman, Head of Investor Relations. Please go ahead.

Adam Uhlman: Thanks Briana, and good evening, 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 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 evening, everyone. We appreciate you joining our call today. Tonight, we reported our second quarter financial results, the details of which are outlined for you on page three of our presentation. Our sales growth in the second quarter included strong growth in our service business as well as solid performance across our industrial product categories, which was offset in part by softer market conditions in Laboratory and China. Focused execution of our margin expansion and cost control initiatives resulted in good growth in adjusted EPS despite currency being much greater-than-expected headwind this quarter. As we look to the remainder of 2023, there is increased uncertainty in the global economy and our end markets.

In addition, market demand in China has deteriorated. While we have reduced our growth expectations for 2023 due to weaker market conditions, we remain confident in the factors we can control, including execution on our best-in-class sales and marketing programs and our margin expansion and cost-saving initiatives. Our team remains very agile in adapting to changing market conditions, and I’m confident that our efforts will deliver solid results this year. Let me now turn the call over to Shawn to cover the financial results and our guidance, and I will then come back with some additional commentary on the business and our outlook. Shawn?

Shawn Vadala: Thanks Patrick, and good evening, everyone. Sales in the quarter were $982.1 million, which represented an increase in local currency of 2%. On a U.S. dollar basis, sales were flat as currency reduced sales growth by 2%. On slide number four, we show sales growth by region. Local currency sales increased 4% in Asia, rest of the world; 1% in the Americas and were flat in Europe. Local currency sales increased 3% in China in the quarter. On slide number five, we show sales growth by region for the first half of the year. Local currency sales grew 4% for the first six months, with 3% growth in both the Americas and Europe, and 6% growth in Asia, rest of the world. Local currency sales increased 6% in China on a year-to-date basis.

On slide number six, we summarize local currency sales growth by product area. For the quarter, Laboratory sales decreased 3% and Industrial increased 6% with core industrial up 6% and product inspection up 5%. Food Retail grew 17% in the quarter as we benefited from significant project activity. The next slide shows local currency sales growth by product area for the first half. Laboratory sales increased 1%; and Industrial increased 6%, including 6% growth across both core industrial and product inspection. Food Retail increased 25%. Let me now move to the rest of P&L, which is summarized on slide number eight. Gross margin was 59.4%, an increase of 100 basis points as pricing was partially offset by higher cost, business mix and currency.

R&D amounted to $47.2 million in the quarter, which is a 6% increase in local currency over the prior period, reflecting increased project activity. SG&A amounted to $228.6 million, a 6% decrease in local currency over the prior year and includes lower variable compensation and benefits from our cost-savings initiatives. Adjusted operating profit amounted to $307.7 million in the quarter, an 8% increase. Currency reduced operating profit growth by approximately 4%. Adjusted operating margin was 31.3%, which represents an increase of 210 basis points over the prior year. A couple of final comments on the P&L. Amortization amounted to $18 million in the quarter; interest expense was $19.3 million; and other income amounted to $1 million. Our effective tax rate was 19% in the quarter, above our previously guided range of 18.5% for the full year.

This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter. We now expect our tax rate to be 19% for the full year. Fully diluted shares amounted to 22.1 million, which is approximately a 3% decline from the prior year. Adjusted EPS for the quarter was $10.19, a 9% increase over the prior year or a 13% increase excluding unfavorable foreign currency. On a reported basis in the quarter, EPS was $9.69 as compared to $9.29 in in the prior year. Reported EPS the quarter includes $0.23 of purchased intangible amortization and $0.29 of restructuring costs. We also had a $0.02 benefit from tax items. The next slide illustrates our year-to-date results. Local currency sales grew 4% for the six-month period.

Adjusted operating income increased 9% or 14% excluding unfavorable foreign currency, and our operating margin expanded 190 basis points. Adjusted EPS grew 9% on a year-to-date basis or 15%, excluding unfavorable currency. That covers the P&L and let me comment on cash flow. In the quarter, adjusted free cash flow amounted to $260.5 million, up $52 million, helped by favorable working capital. Year-to-date cash flow per share grew 44%. DSO was 35 days, while ITO was 3.7 times. Let me now turn to guidance. As we look to the remainder of the year, there’s increased caution across our customer base such as pharma and biopharma, chemical companies and food manufacturing. And there’s also greater uncertainty regarding the global economic conditions.

In particular, conditions in China have deteriorated sharply as there is growing uncertainty around the pace of economic growth and limited government stimulus. This is particularly true with our pharma and biopharma customers who are delaying investment decisions in China, but also in the Americas and Europe. In Europe, the outlook remains uncertain in light of the ongoing war in Ukraine and soft general economic growth. Global manufacturing PMIs have also continued to trend lower and have been below the 50 growth — no growth index level for many months. Now turning to our guidance. We expect local currency sales to be down 3% to 4% in the third quarter with a mid single digit decline in Laboratory. This reflects deteriorating conditions in China as mentioned earlier, with particularly soft demand from pharma and biopharma customers.

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We also expect modest sales declines across our industrial businesses in the third quarter. We are implementing actions to reduce our costs in response to the softer sales environment and manage productivity, while maintaining various growth investments that are important for the future. We estimate our operating margin will increase in the 70 to 100 basis point range for 2023 based upon our disciplined approach to margin expansion, productivity and cost savings initiatives. We expect third quarter adjusted EPS to be in the range of $9.55 to $9.85, representing a decline of 3% to 6%. This includes foreign exchange headwind to EPS of approximately 3%. Now turning to the full year 2023. Our local currency sales growth guide is now 0% to 1%, reflecting the factors mentioned earlier.

This is down from our previous guidance of approximately 5% local currency sales growth. We now expect full year adjusted EPS to be in the range of $40.30 to $41.20, representing a growth rate of about 2% to 4% or approximately 5% to 7%, excluding unfavorable foreign currency. This compares to our previous guidance of adjusted EPS in the range of $43.65 to $43.95. There are three factors to our revised adjusted earnings per share outlook. First, the reduced local currency sales growth forecast for the year compared to our previous guidance, partially offset by our cost reduction efforts. Our reduced outlook largely reflects a lower Laboratory sales forecast of a decline of low single digits, down from our previous mid single digit outlook. Additionally, we now see pronounced weakness in our business in China, where we now expect our total business to decline mid single digits for the year compared our prior forecast of high single digit growth.

Secondly, foreign exchange, as mentioned earlier, is now expected to be a 3% to 4% headwind to EPS growth this year compared to 2% the last time we spoke, largely due to the weakening of Chinese renminbi and the strengthening of the Swiss franc versus the euro. Relative to the impact on sales, currency is expected to be a 1% headwind to sales growth for the full year and roughly neutral in the third quarter. And third, we would now expect a higher tax rate of 19% in 2023 compared to our prior guidance of 18.5%. Some final details on guidance as you update your models. Total amortization, including purchase intangible amortization is forecast to be $72 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $26 million on a pretax basis or $0.93 per share.

Interest expense is forecast at $78 million for the year. We now expect free cash flow of approximately $850 million compared to our previous estimate of approximately $900 million, and we’ll also reduce our share repurchase program by a similar amount. 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, where sales were softer than we had expected for the quarter. While we continue to see robust demand on hot segments like lithium-ion batteries, our pharma and biopharma customers have become increasingly cautious with their spending and have delayed investment decisions, particularly in China. As expected, our pipette sales were again weak in the second quarter as customers reduced inventories of chips and instrument sales declined. The impact of the lower pipette sales was in line with our previous expectations, and we continue to expect this headwind to ease in the second half of the year as comparisons become easier.

As mentioned, we also see customers, especially in our key market segments such as pharma and biopharma delaying purchases. However, our pipeline and customer quoting activity has remained strong, and we were pleased to see continued strong service growth across our Lab business in the second quarter. We are hopeful conditions normalize soon, but we have not built this into our 2023 guidance. Turning now to our Industrial business. We again saw strong demand for our automation solutions from core industrial portfolio this quarter. While we expect to continue to benefit from customer investments in automation and localization of supply chains globally, we are not immune to the increased uncertainty around the global economic outlook. Regarding product inspection, it also had good performance this quarter, but our packaged food customers have also become more cautious about making investments in new equipment due to inflation and uncertain economic conditions, and we would expect softer results for the remainder of year.

Finally, Food Retail delivered strong growth this quarter due to robust project activity in the Americas. Our Food Retail sales can be lumpy, and we would expect strong growth again in the third quarter. One final comment on the business. Service sales remained very strong overall and grew 13% in the quarter. We continue to be very pleased with the growth in this important and profitable part of our business. Now let me make some additional comments by geography. Sales in Europe were flat in the quarter with growth in core industrial and product inspection, offset by declines in laboratory products. In the Americas, we saw good growth across our industrial and retail businesses offset by declines in our laboratory product offering, especially pipette.

Finally, Asia and the rest of world had another quarter of good growth. China grew 3% with good growth in Industrial, but sentiment, particularly in Laboratory has become much more cautious as activity has slowed following the COVID reopening, and there has been limited economic stimulus as mentioned before. As of today, we expect a significant decline in sales in in China the second half of the year, but our team in China will remain agile to capitalize on growth opportunities however market conditions unfold. Now, I would like to share with you some updated thoughts about our strategic priorities and how we are investing to drive growth over the long-term. While market conditions have become increasingly challenged over the past year, we have remained at very high level of incremental investment to support the long-term growth of the organization and market share gains.

The hallmark of or culture is the agility and focused execution, and our team continues to respond very well to unexpected changes in the environment to gain market share, expand profitability and make additional important growth investments for the future. Starting with our sales and marketing programs, we have developed increasingly sophisticated digital approaches with our Spinnaker program that more efficiently feeds our pipette — our pipeline with new leads, [indiscernible] alerts with a special focus on customers that we do not do business today. Webinars have been an important areas of investment in sort of new customer leads as we look to increase potential customer interactions in a very efficient format. We can directly show how other solutions address common customer pain points in very specific end-use applications.

We have had strong participation in our webinars, which positions us as trusted subject matter subject experts in specific applications, but also provides a good sales pipeline as customers seek unique solutions to challenging or new applications. This is particularly true in hot segments like lithium-ion batteries, sustainable materials and the semiconductor industry. Our data-centric approach in nurturing and qualifying these leads allows field sales team to prioritize their efforts on hyper potential business opportunities and increase our win rates. We have also continued to invest very strongly in research and development over the past year to maintain and improve our technology leadership and support our growth potential. I am very excited about our pipeline of new and recently released products that enhance our customers’ productivity, but also ensure compliance with regulatory requirements.

This has been a topic of increasing importance for our customers as of late and our innovative solutions like LabX, enhanced productivity through workflow automation, while ensuring full data integrity and traceability across customer entire workload. Earlier this year, we launched a new thermal analysis instrument that allows customers to increase sample analysis throughput through new automation and software features. This is especially important in hot segments like advanced materials and the battery segment. Additionally, our Process Analytics business recently released a new conductivity sensor that is unmatched in the industry for measuring ultra-pure water in the microelectronics industry, helping increasing yields for our semiconductor customers, while reducing the amount of very expensive ultra-pure water required for their operations.

Lastly, our Industrial business had great success with our new line of hygienic scales that help customers clean their scales up to 40% faster, but also help eliminate contamination risk in regulated environments like food and pharma. While individual new product launches are not material on their own, given the diversity of our portfolio, they provide a very important compounding element to our growth algorithm, expanding our technology leadership, enhancing our value propositions and helping drive market share gains. Going forward, we have a very exciting pipeline of innovative products that we plan to launch over the coming year that will further extend our leadership position. Turning now to our margin initiatives. Our pricing and SternDrive initiatives have been very effective in supporting our margin expansion this year.

As a reminder, SternDrive is focused on improving productivity and driving operational excellence across our manufacturing and back-office operations, with our team executing several hundred projects to reduce material costs and improve productivity. We have excellent opportunities ahead of us with enhanced — with advanced data-driven approaches around value engineering, smart manufacturing and common platform architectures that we expect to launch in the near future. I hope this provides some context to our updated guidance for the year, but also shows the confidence we have in our ability to continue to execute on our long-term growth initiatives, expand our margins and deliver solid earnings growth this year and beyond. Now that concludes — that is the conclusion to our prepared remarks.

Operator, I’d like to open the line now for questions.

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Q&A Session

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

Daniel Arias: Afternoon, guys. Thanks for the questions. Patrick or Shawn, maybe just to start on China. Growth there was actually a couple of points above the U.S. and Europe in the quarter. Is the deterioration that you’re pointing to for second half showing up in the order book here in early 3Q? Or is it more just sort of reading the writing on the wall when it comes to the big picture direction that things are headed in over there?

Shawn Vadala: Yeah. Hey, Dan. This is Shawn. Maybe I’ll start, and I’ll let Patrick add some color. But basically, as we were kind of exiting — largely related to how we’re exiting the quarter, but probably even more importantly, how we were starting the third quarter. And as you know, don’t typically carry a lot of backlog in our business. But certainly, as we kind of started the third quarter, we started to really see a significant deterioration in conditions that we also started to see towards the end of Q2. And as kind of we mentioned before, it’s largely in the area of Lab. Our Lab forecast for China is down very significantly in the third quarter. We’re kind of like looking at literally something that could be in excess of a 20% decrease.

Now, of course, as you know, we’ve had some extremely strong growth over the last couple of years. If you kind of look at, we grew 20% last year in Lab in China and almost 40% in Q3 and the year before that. But we’re also seeing a little bit of slowdown in Industrial as well. And so, overall, we’re just kind of seeing a lot of hesitancy in terms of customers placing orders. Not sure how much of it’s related to a lack of clarity in terms of like stimulus in the country. I mean, there’s some very recent talk of additional stimulus. But that’s something that we have not built into our guidance for Q3 or for the rest of the year. And kind of just sitting here looking at this very sudden decrease — and as we’ve said many times in the past, things in China can change very quickly.

We feel like we’re observing something that’s a very negative quick pivot going in the wrong direction and with the fact that it’s kind of just starting to happen so significantly, we don’t feel like we’re in a position to necessarily try to build anything in necessarily for the fourth quarter at this time. So, we’re kind of building in also a negative outlook for Q4.

Daniel Arias: Okay. Okay. Just to finish that thought. Did you give a forecast for the year for China, if you did, I missed it.

Shawn Vadala: Yeah. So, down mid single digits for the full year. And then for Q3, down mid-teens. And then, so if you kind of think — step back and you look at that full year guidance of down mid single digit, I mean that’s a very significant difference than what we’re looking at last quarter when we provided guidance. We’re looking at high single digit for the full year. And if you just kind of like do the quick math on that, that’s kind of, I think, more than half of our decrease in our guidance is related specifically to China.

Daniel Arias: Yeah. Okay. Okay. And then, just — maybe just moving to Lab and the destocking activity that you have going on in the pipette business. How much of what you’re looking at? Are you attributing to that? Does it feel like that’s tracking relative to your expectations last quarter? I mean, do you still think you can kind of normalize in the second half of the year? Or is there a better way to think about it just that takes the remainder of the year to sort of wash that out of the system?