Mettler-Toledo International Inc. (NYSE:MTD) Q4 2023 Earnings Call Transcript

Mettler-Toledo International Inc. (NYSE:MTD) Q4 2023 Earnings Call Transcript February 9, 2024

Mettler-Toledo International Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Audra and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Mettler-Toledo Fourth Quarter 2023 Earnings Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator instructions] At this time, I would like to turn the conference over to Adam Uhlman, Head of Investor Relations. Please go ahead.

Adam Uhlman: Thanks, Audra and good morning, everyone. Good afternoon from Switzerland. Thanks for joining our call today. On the line with me 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 on the call is available on the website as well. This call will include forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. 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 discussion of these risks and uncertainties, please see our 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 today’s call, we might 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 fourth quarter financial results, the details of which are outlined for you on Page 3 of our presentation. As previously announced, to transition to a new external European logistic service provider, significantly impacted our fourth quarter results, which we expect to largely recapture in the first quarter. Excluding the impact of these delayed shipments, our results were in line with our previous expectations. Market demand has remained weak in China and across our core end markets of pharma and biopharma, food manufacturing and chemicals, but also does not appear to have deteriorated further.

Looking forward, we expect market conditions to remain soft in the first half of the year, and we would then expect our sales return to growth in the second half of the year as we begin to let easier comparisons. We are focused on the things we can control, including increasing our competitive advantages through innovation and continuous improvement of corporate programs and nurturing our unique global culture. I’m confident these actions will drive market share gains and help us emerge stronger in market recovery. Let me now turn the call over to Shawn to cover the financial results for the quarter and our guidance for the year, and then I will come back with some additional commentary on the business. Shawn?

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Q&A Session

Shawn Vadala: Thanks, Patrick, and good morning, everyone. Sales in the quarter were $935 million, which represented a decrease in local currency of 13%. On a U.S. dollar basis, sales declined 12% as currency increased sales growth by 1%. On Slide number four, we show sales growth by region. Local currency sales declined 7% in the Americas, 16% in Europe, and 18% in Asia, rest of the world. Local currency sales in China declined 23% in the quarter. Excluding the impact of the previously disclosed shipping delays related to a new logistics provider in Europe, we estimate our sales in Q4 declined about 7%, with the Americas down approximately 3%, Europe down approximately 6% and Asia down approximately 14%. On Slide number five, we show sales growth by region for the full year 2023.

Local currency sales declined 3% in 2023, with sales in the Americas down 1%, Europe down 2%, and Asia, rest of the world, down 5%. Local currency sales decreased 10% in China for 2023. Excluding the logistics headwind in Q4, we estimate our full year sales decline approximately 1%, with the Americas flat, Europe up 1%, and Asia down 5%. On Slide number six, we summarize local currency sales growth by product area. For the quarter, laboratory sales decreased 18% and industrial decreased 8% with core industrial down 6% and product inspection down 10%. Food retail grew 9%. Service sales grew 6% in the quarter. Excluding the logistics delays, we estimate laboratory product sales decline approximately 11%, industrial declined 5% with core industrial down 2% and product inspection down 10% and food retail grew 17%.

The next slide shows local currency sales growth by product area for the full year 2023. Laboratory sales decreased 7% and industrial sales declined 1% with core industrial down 1% and product inspection flat. Food retail increased 27%. Service sales grew 10% in 2023. Excluding the logistic delays, we estimate laboratory product sales declined approximately 5%, industrial was flat across both core industrial and product inspection and food retail grew 29%. Let me now move to the rest of the P&L, which is summarized on Slide number eight. Gross margin was 59%, a decrease of 80 basis points due to our lower volume offset in part by positive pricing and our cost savings initiatives. R&D amounted to $46.4 million in the quarter, which is a 3% decrease in local currency over the prior year.

SG&A amounted to $223.4 million, a 4% decrease in local currency compared to the prior year and benefits from our cost saving initiatives and lower variable compensation. Adjusted operating profit amounted to $281.8 million in the quarter, a 21% decrease. Adjusted operating margin was 30.1%, which represents a decrease of 380 basis points from the prior year due to our decreased volume. A couple of final comments on the P&L. Amortization amounted to $18.1 million in the quarter, interest expense was $19.7 million and other income amounted to $1.6 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. Fully diluted shares amounted to $21.7 million, which was approximately a 3% decline from the prior year.

Adjusted EPS for the quarter was $9.40, a 22% decrease over the prior year. On a reported basis, EPS was $8.52 as compared to $11.86 in the prior year. Reported EPS in the quarter includes $0.23 of purchase and tangible immunization, $0.49 of restructuring costs and a $0.16 tax headwind from the timing of option exercises. The next slide illustrates our year-to-date results. Local currency sales declined 3% for the year. Adjusted operating income decreased 3% or flat, excluding unfavorable foreign currency and our adjusted operating margin was flat at 30.4% for the year. Adjusted EPS declined 4% in 2023, excluding the impact of unfavourable currency for the year. Adjusted EPS declined 1%. That covers the P&L. Let me now comment on cash flow.

In the quarter, adjusted free cash flow amounted to $260.1 million, a conversion of approximately 130% of adjusted net income due to favourable working capital. In 2023, free cash flow was $908 million, up 20% over last year on a per-year basis due to the reduction in working capital with a conversion of approximately 109% of adjusted net income. Let me now turn to guidance for the first quarter and for the full year. First, while we are extremely disappointed by the shipping delays in the fourth quarter from our third-party logistics provider, we have seen good momentum so far this year in catching up on these delayed shipments and continue to expect to largely recover them in the first quarter. Secondly, given the soft trends across most of our core end markets in the global economy, we expect our customers to be cautious with their investments to start off the year.

We’re also closely watching events in the Middle East and other potential impacts the war could have on logistics and other costs for our suppliers and customers. Lastly, as a reminder, we have implemented many cost savings programs during the second half of last year to mitigate the impact of lower demand. We continue to expect to maintain and add to these savings in 2024, but also face headwinds from resetting variable compensation programs and inflation. Now turning to our guidance, for the first quarter of 2024, we expect local currency sales to decline approximately 4% to 6%. This forecast includes an approximate 5% benefit from the delayed shipments in the fourth quarter. We expect adjusted EPS to be in the range of $7.35 to $7.75. Currency at recent spot rates for the quarter would be less than a 1% headwind to first quarter sales, but a headwind to adjusted EPS of approximately 4%.

For the full year 2024, we expect local currency sales to grow approximately 1% to 2%, which is up from our previous guidance of approximately flattish to reflect the shift of our delayed shipments from our European logistics hub from Q4 into Q1 of this year. We expect full year adjusted EPS to be in the range of $39.60 to $40.30, which compares to our prior guidance of $39.10 to $39.80. This includes an expected headwind to adjusted EPS growth of approximately 2% from unfavorable foreign exchange. Lastly, I’ll share a few 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 $26 million on a pre-tax basis or $0.99 per share.

Interest expense forecast at $84 million for the year and other income is estimated at approximately $3 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 continue to expect share repurchases of approximately $850 million in 2024. That’s it for 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 we had expected, demand trends across most of our Lab customers remained weak in the fourth quarter, especially pharma and biopharma. Sales declined across most product categories, and we continue to see soft demand across all geographies, especially in China. While market conditions have been weaker, we continue to focus on the things we can control, which includes bringing new innovations to market, enhancing our sales and marketing programs and expanding our service offering and capacity. This past year saw the launch of many exciting new and upgraded products. We are excited about our innovation pipeline, and we believe organizations that maintain their growth investments during market downturns will emerge even stronger during recovery periods.

Our investments have had a particular emphasis on supporting our customers’ needs for laboratory automation and data integrity requirements, which we are confident will be a significant driver of continued market share gains going forward, and we are excited to share with you additional developments over the coming months. Switching to our industrial business, sales for the quarter were in line with our previous guidance, despite the headwind from delays from our European logistics hub. Core industrial demand in the Americas and in Europe has been relatively resilient this past year, despite declines in purchasing manager indexes. We continue to see solid interest from customers looking for advanced automation solutions, and we expect to benefit from customer investments in on-shoring and near-shoring over the coming year.

Regarding our product inspection business, we have seen weak food manufacturing customer demand in Europe and soft demand in the Americas. We continue to target faster-growing segments and have a focus on engaging new customers with a refreshed portfolio of innovative solutions. Lastly, food retail results were very strong, excluding the negative impact from our European logistics hub. We had solid performance for the year due to strong project activity, particularly in the Americas. Now let me make some additional comments by geography. Sales in Europe, excluding the estimated impact from our European logistics hub delays, were softer than we had expected, following resilient performance for much of the year. As mentioned earlier, weak demand from European food manufacturing customers weighed on our product inspection business.