Mettler-Toledo International Inc. (NYSE:MTD) Q3 2023 Earnings Call Transcript

Mettler-Toledo International Inc. (NYSE:MTD) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Thank you for standing by and welcome to the Mettler-Toledo Third Quarter 2023 Earnings Conference Call. I would now like to welcome Adam Uhlman, Head of Investor Relations, to begin the call. Adam, over to you.

Adam Uhlman: Thank you 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 today is available on our website. This call will include forward-looking statements within the meaning of the US Securities and Exchange Act of 1933 and 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, see our recent Annual Report on Form 10-K and quarterly and current reports as 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 may 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 third quarter financial results, the details of which are outlined for you on page three of our presentation. Market conditions were weaker than expected in the third quarter, especially in China, where market demand significantly deteriorated relative to our expectations. Our team has reacted quickly to address the market challenges and addressed our cost structure and delivered good margin and cash flow performance despite these headwinds. As we look to the remainder of 2023, we expect market conditions to remain weak, especially in China. And based on market conditions as of today, we would expect these headwinds to persist into next year.

However, we remain confident in the factors we can control, including strong execution of our proven corporate programs like Spinnaker to drive growth and capture market share and SternDrive to manage our costs effectively. Our go-to-market strategy, innovative portfolio and unique culture has been important differentiators during challenging conditions. And I’m convinced our efforts have driven market share gains and will help us to emerge stronger in market recovery. 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 $942.5 million, which represented a decrease in local currency of 5%. On a US dollar basis, sales declined 4% as currency increased sales growth by 1%. On slide number four, we show sales growth by region. Local currency sales grew 4% in Europe, declined 3% in the Americas and declined 14% in Asia, Rest of the World. Local currency sales in China were significantly lower than expected and declined 25% in the quarter. On slide number five, we show sales growth by region on a year-to-date basis. Local currency sales grew 1% for the first nine months, with 4% growth in Europe and 1% growth in the Americas and a 1% decline in Asia, Rest of the World.

Local currency sales decreased 6% in China on a year-to-date basis. On slide number six, we summarized local currency sales growth by product area. For the quarter, Laboratory sales decreased 9% and Industrial decreased 6% with core industrial down 9% and Product Inspection, up 1%. Food Retail grew 49% in the quarter and benefited from significant project activity. Service sales grew 6% in the quarter. The next slide shows local currency sales growth by product area on a year-to-date basis. Laboratory sales decreased 3% and Industrial increased 2%, including 1% growth in core industrial and 4% growth in Product Inspection. Food Retail increased 33%. Service sales grew 11% on a year-to-date basis. Let me now move to the rest of the P&L, which is summarized on slide number eight.

Gross margin was 59.4%, an increase of 10 basis points, as pricing was partially offset by our volume decline, higher cost, business mix and currency. R&D amounted to $46.1 million in the quarter, which is a 1% increase in local currency over the prior period, including increased project activity. SG&A amounted to $217.4 million, a 9% decrease in local currency compared to the prior year and includes lower variable compensation and benefits from our cost savings initiatives. Adjusted operating profit amounted to $296 million in the quarter, a 4% decrease. Currency reduced operating profit growth by approximately 3%. Adjusted operating margin was 31.4%, which represents an increase of 20 basis points over the prior year. A couple of final comments on the P&L.

Amortization amounted to $18.3 million in the quarter. Interest expense was $20.3 million and other income amounted to $1.2 million. Our effective tax rate was 19% in the quarter. This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter. We continue to expect our tax rate to be 19% for the full-year, and again, in the fourth quarter. Fully diluted shares amounted to 21.9 million, which is approximately a 3% decline from the prior year. Adjusted EPS for the quarter was $9.80, a 4% decrease over the prior year or a 1% decrease excluding unfavorable foreign currency. On a reported basis, in the quarter, EPS was $9.21 as compared to $9.76 in the prior year. Reported EPS in the quarter includes $0.24 of purchased intangible amortization, $0.27 of restructuring costs, and $0.08 from the difference between our quarterly and annual tax rate due to the timing of stock option exercises.

The next slide illustrates our year-to-date results. Local currency sales grew 1% for the nine-month period. Adjusted operating income increased 4% or 8% excluding unfavorable foreign currency. And our operating margin expanded 140 basis points. Adjusted EPS grew 4% on a year-to-date basis or 9% excluding unfavorable foreign currency. That covers the P&L. And let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $251.7 million, up $27 million, helped by favorable working capital. Year-to-date, cash flow per share grew 32%. DSO was 37 days, while ITO was 3.8 times. Let me now turn to our guidance for the remainder of this year and our initial thoughts on next year. First, forecasting remains very challenging, particularly for our business in China.

Our team in China has reacted to changing market conditions very quickly, and we feel very good about our market position in the country. However, economic conditions remain challenged and there’s low visibility. Outside of China, there’s also greater uncertainty today with weakness in our core end markets such as life sciences and continued soft economic conditions in Europe and the Americas. We expect lower-than-normal customer year-end spending. The recent Middle East conflict also creates additional uncertainty. Secondly, our organization is not standing still during this period of reduced market demand, a defining attribute of our culture. The team has executed exceptionally well to adjust our cost structure to current market conditions, while at the same time, reallocating resources to support important investments in our long-term growth.

Now, turning to our guidance. For the full year 2023, we expect local currency sales to decline approximately 1%. This compares to our previous guidance of 0% to 1% growth. We expect full-year adjusted EPS to be in the range of $39.10 to $39.30. This includes an expected headwind to adjusted EPS growth of approximately 3% to 4%. Free cash flow for the year is now expected to be approximately $875 million above our prior guidance, as our reduced profit forecast is more than offset by the favorable timing of tax payments and working capital. Share repurchases will now be $900 million in 2023. With respect to the fourth quarter, we would expect local currency sales to decline 7% to 8%. We expect fourth quarter adjusted EPS to be in the range of $10.50 to $10.70.

Currency is expected to increase sales by approximately 1%, but decrease EPS by approximately 1%. We have also provided our initial guidance for 2024. And based on our assessment of market conditions today, we would expect local currency sales to be approximately flattish and adjusted EPS to be in the range of $39.10 to $39.80, which represents a growth rate of 0% to 2% or 2% to 4% growth excluding adverse currency. Relative to sales, currency is expected to be a headwind to sales growth of approximately 1% in 2024. Underpinning our 2024 guidance are the following assumptions. First, we expect our customers to remain cautious with spending in the first half of the year, reflecting the increased uncertainty in the economy. Our sales in China are also expected to decline in the first half of the year as economic trends are expected to remain weak and we faced challenging multi-year growth comparisons.

We expect our local currency sales to improve in the second half of the year as comparisons become easier and market conditions improve. Secondly, we expect our year-over-year margin performance to be dampened due to lower sales volume and a reset in our variable compensation programs, offset in part by our cost savings initiatives. Lastly, I’ll share a few final comments on our 2024 guidance. 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 $25.8 million on a pre-tax basis or $0.96 per share. Interest expense is forecasted at $86 million for the year and other income is estimated at approximately $5 million.

We expect our tax rate before discrete items will remain at 19% in 2024. We expect free cash flow of approximately $850 million, representing a conversion of approximately 100% of adjusted net income. We also expect share repurchases will be approximately $850 million. 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 our sales teams continue to see good engagement and activity levels with customers, but budget constraints and cautious spending patterns have led to declines in demand across our key market segments of life sciences, food and beverage and chemicals. This is especially true in China, where our pharma and biopharma customers have significantly reduced their investments and after significant spending during the pandemic. In the Americas, while customer destocking of pipettes has unfolded as we had expected, we still see weaker market demand. We also saw lower-than-expected demand from our automated chemistry business and analytical instruments and process analytics was again challenged by weak demand from our bio-processing customers.

As we look out to 2024, the market fundamentals for our Lab businesses are good. While the pharma, biopharma market has slowed this year, we expect a normalization in activity in 2024 and the long-term outlook remains strong as innovation pipelines remain full of novel drugs and therapies to be brought to the market. We anticipate to benefit from trends in automation and digitalization, leveraging our LabX software. Additionally, our team remains focused on capturing the significant growth occurring in hot segments like lithium-ion batteries, semiconductors and sustainable materials. We will also gain from our investments in innovation and software and 2024 will feature many exciting product launches that I look forward to sharing with you over the coming year.

Turning now to our Industrial business. Overall Industrial sales declined 6% in the quarter against very strong growth in the previous year. Our core industrial product sales were weaker than anticipated due to a sharp decline in sales in China. And we also had lower sales in the Americas due to very tough growth comparisons and weaker market demand. Product Inspection sales grew in Europe. However, this growth was largely offset by weaker sales in the Americas, as our food manufacturing customers have remained cautious with their investments in new equipment. As we look out to 2024, while our core industrial business likely faces headwinds from a slowing global economy, particularly in China, we should benefit from global trends in automation, digitalization and reshoring investments around the world.

We also continue to upgrade our portfolio with new solutions to address our customers’ challenges on the production floor. For example, there is increased customer focus, the devices used in hazardous areas to be certified explosion-proof and to be a simple-to-use as those in safe areas. Earlier this year, we released a new model of our flagship industry 500 weighing terminal for use in hazardous areas that provides powerful process control for our pharma and chemical customers. Our new terminals are intrinsically safe and also features seamless integration into customers’ automation systems and deliver state-of-the-art cybersecurity features. Now, regarding our Product Inspection business, food manufacturing customers faced more difficult operating environment today, which we expect will lead to limited growth for our Product Inspection business in 2024.

We will also continue to focus on innovation in this area as our customers increasingly seek solutions to protect the packaged foods from physical contaminants and increased productivity as they continue to be challenged by labor shortages. We have had great initial success with our new X2 line of x-ray products that have launched over the past year to address demand in both the mid and premium end of the market. This new line provides a wide range of package integrity checks in addition to the digital contamination detection and positions us very well to gain market share. Lastly, Food Retail had another quarter of very strong growth due to the robust project activity in the Americas. Our team has delivered remarkable growth this past year with successful penetration of major grocery and club stores.

While we have cultivated an attractive portfolio opportunity pipeline, the strong growth we expect to deliver this year means we face very challenging growth comparisons in 2024, and therefore would expect modest revenue declines. Now let me make some additional comments by geography. Sales in Europe grew 4% in the quarter, with growth across our product portfolio, and across most major end markets against very modest growth in the prior year. While we are pleased to have generated good growth in Europe so far this year, we are more cautious on the outlook for Europe due to soft PMI readings in the region, the continuing war in the Ukraine and potential for disruptions for the economy from the conflict in the Middle East. Turning now to the Americas.

Our very strong growth in food retailing customers was offset by a decline in both laboratory products and industrial. Customer feedback in the Americas continues to point to optimism over the coming years from various government stimulus programs like the CHIPS Act and the Infrastructure Bill, as well as reshoring activities. Our pharma and biopharma customers are expected to gradually increase their spend in 2024 as to return to more normal replacement cycles and continue to advance their drug pipelines. Finally, Asia and the Rest of the World sales declined 14%. Our sales in China declined 25% driven by very soft laboratory and core industrial product sales. Pharma, biopharma demand in China has declined significantly after several years of very strong growth.

And we have also seen very weak demand across other end markets in China as the economy has abruptly slowed. The economy in China was expected to rebound following the end of the COVID lockdowns almost a year ago, as the central government shifted their focus towards growing its economy. However, the lack of stimulus, headwinds from the real estate sector and declines in direct foreign investments are weighing on business and consumer confidence. While the outlook for China is uncertain in the near-term, the long-term growth opportunity remains significant due to the country’s commitment to expanding R&D investment and supporting development of advanced pharma, biopharma, new energy and new material industries. We also continue to see the laboratory market shift towards more advanced automated solutions in China, supported by a desire for highly accurate and reproducible results.

Our industrial solutions are increasingly in demand as customers in China look to increase quality, reduce cost and prepare for labor shortages in the years ahead. Our business is very well-positioned to capitalize from these growth opportunities and we expect solid growth over the long-term. Now as we look forward to the remainder of 2023 and 2024, we expect market conditions to remain challenging. Nevertheless, we remain focused on the things we can control through the diligent execution of our initiatives. Our competitive position has grown stronger as we continue to expand our technology leadership with new product innovation and our Spinnaker sales and marketing programs will be further enhanced over the coming years with more sophisticated digital tools to ensure our sales teams are guided efficiently to the best opportunities.

We’re also stepping up on various strategic pillars and enhancing the Mettler-Toledo experience with customers and employees, which will be enabled with the launches of new programs over the coming year. I couldn’t be more excited about what the future holds and fully believe that the best is yet to come. So that is the conclusion of our prepared remarks. Operator, I’d now like to open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Dan Arias with Stifel. Please go ahead.

Daniel Arias: Hi. Good morning, guys. Thanks for the questions. Shawn, maybe just to start on China, what’s the implied performance that you’re baking in for ’24? And I know it’s hard to sort of predict cadence this far out, but can you just talk about what’s assumed first-half versus second-half, just knowing that, obviously, the comps will be easier here in the second-half? It sounds like you think China can be — will be down in the first-half, but maybe grow in the second-half. Are you able to sort of compare how those two pieces might look next year, and then just all-in what you’re baking in?

Shawn Vadala: Yeah. Hey, thanks, Dan. Yeah, so for next year, we’re kind of expecting China to be down high-single digit, but we’re expecting more significant decline in the first half of the year. And frankly, also expecting a significant decline in the fourth quarter, probably down in the mid-20s in Q4, kind of similar to what we saw in Q3. But we do — we are very optimistic about growth in the second half of the year next year. Like you said, we’ll be facing some easier comparisons, but, I think a lot of different topics in the local market should also be flushed out. I think we also appreciate that there was an element of maybe some stocking at customers that were happening with supply chain constraints during COVID. And some of that inventory is also going to be flushed out by the time we get to the second half of next year.

Daniel Arias: Okay. And then maybe just on op margins, how do things look there for you, just sort of in the context of the expansion that you’re delivering this year on, more or less similar organic growth? I mean, obviously, FX is a headwind. I would imagine there’s a pricing headwind too. Can you just talk about that? And then also the dry powder or the gas in the tank whatever term is appropriate there, just when it comes to efficiency and productivity that comes out of things like SternDrive, Blue Ocean, et cetera?

Shawn Vadala: Yeah, sure. So, yeah, so when we look at our margin for this year, of course, we’re very pleased with our margin expansion. On a year-to-date basis, I think, we’re up like, what, 140 basis points. For the full-year, we’ll probably be up, excluding currency, we’ll probably be up over 100 basis points. But on a reported basis, probably in the 50 basis point kind of a range. As we look to next year, our operating margin will be more flattish. And if you exclude currency, it’s probably up by about 20 basis points. Probably one of the — as you — I think you kind of like highlighted some of the things in terms of like puts and takes for next year. In terms of — maybe I’ll start with pricing, pricing continues to do very well this year.

It came in about 4.5% or so for the third quarter, we’ll probably be down a little bit from that level in the fourth quarter, probably in the 4% kind of a range. But then, when we kind of like think about next year, we’re probably more in the 2% range, probably more — in a more normalized environment for next year. So that has an impact what you kind of compare ’23 versus ’24. From a volume perspective, you know, you’re right, it’s probably kind of similar year-on-year in terms of the overall volume. But we also have initiated different cost savings measures. We’re very pleased with the progress on that. A lot of that’s targeted towards productivity in the organization. So we will have some benefits from that into next year, but we also — one of the things we have going on next year is we also have — so if you kind of like think about our overall cost structure, you know, excluding bonus and incentives, might be down slightly.

But we do have to bring back bonus levels to a more normalized level next year. So that’s going to be a little bit of a headwind as we kind of go into next year. And then, I think, maybe the final thing is like when you go through times like this, I think, on one hand, we’re very proactive. On the other hand, we’re also very mindful. We want to be very mindful of coming out of this situation stronger than when we entered it. I think, that’s something we’ve always been good at in the past and we’re very thoughtful about how we’re trying to balance our costs and our investments in this environment, and we have a lot of things that we’re still investing in that we’re actually very excited about. We’ll drive some innovation that we’ll see next year, but also beyond next year too.

And it’s not just innovation, we’re continuing to invest in our service organization as well. So, I think we have a good balance in the company. And I think when we kind of step back, I think, we have the right mix going into next year. And maybe I forgot — almost forgot, there’s one other thing is foreign currency. I think you mentioned in the question. You know, our currency will be about a 2% headwind to our EPS kind of next year.

Patrick Kaltenbach: So, if I might add, because Dan also has asked about SternDrive, just to add data on SternDrive, we, this year — then I’ll talk about stepping up on our strategic pillars. We just launched SternDrive phase three with a strong focus on automation on the shop floor, smart automation and we expect that also to continue to significantly contribute to our performance next year and drive savings both on the automation side, but also back-office sufficiency et cetera. So the program is fully running and the team is very committed to drive additional savings next year.

Daniel Arias:

Operator: Our next question comes from the line of Josh Waldman with Cleveland Research. Please go ahead.

Joshua Waldman: Hey, good morning. Thanks for taking my questions, guys. Maybe one for Shawn and then one for Patrick. Shawn, I wondered can you talk a bit more on the assumptions that went into the guide, particularly as it relates to the sequential progression from Q4 into ’24. I mean, it seems like the guide implies a bit more of a step-up than normal on an absolute basis into ’24. I mean, anything you’re seeing like in the markets that you’re trying to capture within the guide, suggesting that maybe like fourth quarter is trough and things start to get better as we roll into ’24?

Shawn Vadala: Yeah, I think, the one topic we have in Q4, Josh, is that kind of like — if you look at how we think about market demand in the fourth quarter, I don’t think we’re going to get like — I think the market demand is going to be less than it normally is towards the end of the year. Each year, there tends to be a pickup in market demand, especially in the Lab business. And right now, we’re — we’re not anticipating much of that pickup, if any, in our fourth quarter guidance. So that’s maybe one topic to think about this year versus next year. But then as we kind of like enter the year, we’re very much thinking and not to get too specific this early, but we’re definitely thinking the first half of the year is going to probably look more similar to the second half of this year.

In other words, I think we fully expect to be down in the first half of the year. But we do see ourselves returning to growth in the second half of the year, especially as we face easier comps. I think there’s Q4 dynamic, it should be better next year as well. And then, if you kind of like get into parts of the portfolio there’s been different destocking issues at different points in time whether it’s pipette tips or whether it was consumables and bioprocessing, especially on the single-use side. And then I kind of mentioned in the first question, some of the stuff that we’re seeing in China as well.

Joshua Waldman: Got it. Okay. And then, Patrick, can you comment on how the service business is holding in? I think it’s been a bright spot here recently. But, I guess, any risk that that business starts to slow on the back of software, hardware, and maybe pressures growth and profitability as we move into ’24?