Thanks, everyone, for joining us this morning. I'm Vijay Kumar, the Life Science Device Analyst at Evercore. Pleasure to have with us Mettler-Toledo. We have CFO Shawn Vadala from Investor Relations. We have Adam Uhlman with us. Shawn, thanks for the time this morning.
Yeah, hey, thanks for hosting us, Vijay. Very good to see you.
Fantastic, so you know, you guys have been. It's always a fascinating company, but when I look at the long-term execution, it's been the upper quartile, upper decile maybe of your peer group. You know, when I look at it from that lens, like 3Q was in line-ish versus where street models were. Some moving parts, maybe labs a little bit better. Industrial was a surprise. You know, when you reviewed the quarter, Shawn, was third quarter in line with how you thought it would play out? Any surprises, any phasing issues?
Yeah, I mean, hey, we were overall pleased with the third quarter. I mean, like you said, it came in pretty much in line with what we expected. We did feel like we had some very good execution in the quarter. You know, maybe if I kind of like pick on a couple of highlights here, you know, the lab business grew 5%. So, you know, we acknowledge that it was maybe against easier comparisons, but it was really nice to see 5% growth in lab. You know, when you kind of peel that apart, we saw particularly strong growth in the process analytics business as well as our analytical instrumentation business. You know, another highlight for the quarter is we felt like Europe was pretty resilient.
You know, I mean, we've been having, you know, the European economy has been under arguably more pressure than the rest of the world.
I think when we entered 2024, we kind of felt like Europe might be the softer region. And I think it's held up really well. And I think we continue to see really good execution in Europe. And then, you know, and then China, it was nice to see China return to growth. It was modest growth, but it was nice to see growth after a period of like some pretty significant resetting over the past year there. You know, conditions are still soft, but I think, you know, it was nice to see things start to move in the right direction. Our service business was very much a highlight in the quarter. We talked a lot about service on our more recent call, up 9%. We've been leaning into service more, and we see a lot of good opportunity to grow in that business.
It's nice because it's above average margins as well, too, and then if you just look at the margins, you know, the gross margin up 60 basis points on the quarter, 40 basis points year to date, shows very strong execution on a lot of our margin expansion initiatives, and then if we look at our cash flow, you know, on a year to date basis, up 7% on a per-share basis. Very pleased with that. Very, very pleased with the team's execution on topics like DSO, inventory. We continue to stay very disciplined, and I think, you know, we're seeing good results out of all that.
Fantastic. I think, you know, industrial, on the industrial side, like where did the surprise come from? It was a little softer in 3Q. Was it Europe? Was it America?
Yeah, I mean, industrial was a little softer. I mean, if you look at our, you know, one of the things to think about with industrial is, okay, first of all, it's been actually pretty resilient over the last few years. I think most people would have expected this would have been the business that would have been softer. Historically, it's a more cyclical business for us. If you look at the business today, it's about 60% is a combination of pharma, food manufacturing, and specialty chemical. So it's less cyclical than it was in the past, but it's still not immune to the economy. But if you look at that business, you know, we've been benefiting from a lot of trends in terms of like automation, digitalization, and really have benefited from a lot of our Spinnaker programs, benefited a lot from a lot of our innovation.
You know, we've come out with like a lot of new terminals to really help companies with their digitalization initiatives, their automation initiatives. We've done a lot of things with like in hazardous areas or hygienic solutions, things that, you know, are really fitting needs of customers. And I think we've seen really good responses from a lot of our customers. But when you step back from all that, this business also has more exposure to China. You know, and if you look at like, and I'm speaking specifically to core industrial, not product inspection, but core industrial is about 25% of our business globally, whereas in China, it's over 40%. So clearly overexposed to China. And as we talked about before, you know, China, the industrial business in China is a little bit softer at the moment.
That's one area that we do have our eye on. As we kind of like look in terms of guidance going forward, we are a little bit more cautious on industrial for that reason. But kind of longer term, we still remain very optimistic for a lot of the reasons that I just spoke about. But when you then add in, you know, opportunities around reshoring and nearshoring, you know, we're in the very early innings of these opportunities. And our team is, I'd say, you know, very excited about, you know, maybe what is going to come ahead. And we've been really trying to prepare for that, you know, as well, too. Again, with all this innovation, it's been really trying to set us up for the future. And as companies reshore, they are spending, putting more, I think, emphasis on automation.
As they do that, there's increasingly needs for digitalization. And our products really facilitate both of those trends pretty well. So I think there's a lot of optimism for the future. We just need to get through a little bit of this short-term uncertainty.
So would you say industrial mostly, it was China and ex-China, it was more or less in line with that plan?
Yeah, pretty much, pretty much. Our U.S. business was down a little bit, but that was more expected, a little bit comp, a little bit timing, but, you know, we are seeing softness in other parts of the world outside of China, too. I don't want to, you know, I don't want to, you know, pretend like everything's rosy there. I think there is a reality that projects are being delayed, and I think, you know, everyone can speculate as to why they're being delayed. Was it, you know, looking for the election? Is it interest rates? Is it inflation, but we do feel like there's a lot of activity out there, and hopefully we can start to see projects getting released as we kind of go forward.
Gotcha. And you know, when I look at your Q4 assumptions, right, historically, Q4 revenues have, you know, grown up low doubles, I would think, sequentially from third quarter levels. Your current guidance, I think you're assuming mid-singles, perhaps, sequential step-up. Maybe talk about some of the assumptions here on why, in a current Q4, sequential step-up is perhaps below historical trends.
Yeah, hey, totally fair point. I think our Q4 sequential versus Q3, in terms of our guide, is up about 6%, and you're right. I think if you look at a five-year, 10-year period, it's probably in the low double-digit range, maybe more around 10%. You know, we are a little bit more cautious here in terms of the sequential. There's probably a couple of things on our mind, you know, that's kind of feeding that cautiousness. One is, you know, we are factoring in some level of budget flush, but we're not expecting a full budget flush. You know, if we kind of look at the different regions of the world, you know, when we provided guidance, we felt like, you know, we were starting to see a little bit better momentum in terms of like big pharma in Europe.
But we felt like things are still a little bit mixed in the U.S., depending on which customer segment you're talking about. And then, of course, we have China. And we still are a little bit more cautious on China. And if you look specifically at the Chinese sequential, that definitely explains a fair amount of the difference.
Gotcha. And on the year-end budget flush, you did bring up the elections. Have you seen any change in customer behavior post-elections? Are we seeing customers being more receptive to a sort of spending post-elections?
We haven't seen any change or heard anything. I think it's a little bit early at this point in time. I know, you know, I think we all heard anecdotes about people before the election about hesitation to invest and the uncertainty. Hopefully now that there's certainty and, you know, that can lead to an environment where we start to see investments getting released.
Gotcha. And, you know, when we historically, when you've seen a year-end budget flush, when does it happen, Shawn? Is that around this time or perhaps late December?
Yeah, I mean, it's kind of the whole quarter, right? But December, of course, is a very big part of it. So it's still early for me to make a comment on that because December is such an important part of the quarter. But, you know, we'll see how it comes together.
Gotcha, and then sticking on to macro, what is Mettler's exposure to NIH?
It's very insignificant. It's far below 1%. So I'm not so concerned about that one. You know, so with NIH, it's really insignificant for us.
Gotcha.
You know, if you look at just our value chain exposures in general, we tend to be less exposed to early research. You know, our exposures tend to be more in the, you know, kind of going through late-stage development and definitely into the production environment in QA/QC labs.
Gotcha. And on the tariff part of the equation, what is your imports from China? Do you import, you know, products from Mexico, Canada?
Yeah, so China, of course, you know, we dealt with the tariff situation during the last Trump administration. At that time, our exports were just over $100 million, and about $100 million was subject to tariff. We currently pay a 25% tariff on that $100 million that was imported from China. Today's China exposure is a little bit less than that. And, you know, if you think about like last time, I think we were pretty successful in mitigating it. A lot of that had to do with our ability to leverage our pricing program. But we also were able to do some other things. You know, of course, we import from other parts of the world. We have this Mexican facility that we've talked about and that we acquired with an acquisition about, you know, seven or eight years ago.
Of course, that exposure is a lot smaller than China. We'll see how things play out there with the situation, and I think we'll give everybody kind of an update on the next call if they kind of go through with the tariff there, but you know, we'll, of course, look for ways to mitigate, you know, depending on what they do. I think that's the big question is like which products, what are the ultimate amounts, and then we can try to work from there and try to, you know, try to mitigate as best as we can.
Gotcha. And what about, you know, imports from Europe? You know, this chatter about broader tariffs on all imports.
Yeah, I mean, we definitely import from Europe as well. But, you know, all of our competitors do also, you know, so, or at least most of them do. So I think we take that one as it comes. And, you know, of course, a lot of our products are also coming out of Switzerland, which adds another dynamic to the equation as well, too. And so does Switzerland get caught up in some of these tariff discussions, or is it just the EU? Is it the UK? You know, we'll see how it plays out, so.
Understood. And sorry, on China, if it does go to 50%-60%, have you quantified the impact on what it could mean?
For China, I'd say right now our exposure is less than $100 million. You know, I think once we get into, you know, specifics of what's tariff, then we'll provide a more specific update on our exposure. Of course, our numbers are also moving a little bit, too, because we're optimizing our supply chain. You know, we have moving parts internally, too. So I don't want to have numbers changing around too much.
Gotcha. And maybe one last macro question. A lot of changes here at the various organizations, right? FDA, CMS, HHS. Does that have any bearing for Mettler or to Mettler's customers? Have you heard any commentary from your early feedback from customers?
No, no. We're not hearing anything at this point in time. No.
Gotcha. And then, you know, sticking on to sort of this macro industrial China theme, you know, you did call out, you know, China was perhaps a little bit more modest in third quarter, mostly due to industrial. And you did say, you know, majority of China revenues is industrial, right? Like maybe can you give us a little bit more color on within China, what is life sciences, what is government academia, what is secular, and what is cyclical in China?
Yeah, hey, so maybe a good way to look at it is by our division. So our lab business in China is about half the business. So that's actually our largest business. So that's a little bit lower than our global average of about 56% in terms of the global mix. Then if you kind of go into the other pieces, like core industrial, I mentioned, is a little bit more than 40% of the business. And that compares to about 25% of our global mix. And then you kind of get into the smaller bits, like process, product inspection is underpenetrated in China. So that's about 5% of the business. And if you look at our global average, it's around 15%. And then food retail in China is kind of a low single-digit business.
But you know, but then if you look at like end market exposures, not so different than our global averages. I don't have specific amounts, but not too different there as well, too. But yeah, but I mean, I think if you kind of like step back from all that, another, well, another way to think about China that I think is interesting is also like who are we selling to, you know, like, and I think that's an important dimension in all this. For us, we're not selling a lot to exporters. We're not selling a lot to multinational companies. You know, less than 15% of our sales are sold to multinationals. Then out of the percentage that's sold to Chinese companies, a large majority of that is sold to private companies. More than 60% of our Chinese sales are to private companies.
Then, of course, the difference would be to state-owned companies or the government. I think that that's a nice setup for us in terms of like this environment. Because ultimately, I feel like we do have a very strong China for China story. Most of our products, as you know, are produced in China for China. We develop a lot of our products in China for China. I think we're very well aligned with a lot of the government's priorities in China about developing their own life science industry. You know, back to the quarter a little bit, you know, it was nice to see pharma starting to do a little bit better in China. You know, I think we're very well aligned with a lot of the strategic initiatives around semiconductors and new materials.
And I think these are going to be hot segments that we can really leverage our portfolio, you know, pretty well. And then as you think about China, you know, they're also focused on automation. They're also focused on digitalization. And these are trends that, you know, we talk about a lot, but it's because it leverages our portfolio, plays to our strengths, you know. And I think we see that as well in China as well, too.
That's helpful color on who your customers are in China. When you look at how the year has progressed so far, you know, I think stimulus comes up, you know, we've been waiting for stimulus. How meaningful could stimulus be? Because I think our understanding is it's focused on the macroeconomy. You guys do touch some of the industrial pieces. Could this be perhaps more meaningful to Mettler than the average life science tools company?
Yeah, no, it's definitely, well, I mean, I think, and when people use the word stimulus, I think it's important, like because like some of the current stuff, like these incentive programs that are out there, like that's a form of stimulus. The current stuff that's out there, we've talked about. We, you know, I was just there with Patrick in September recently. The team reviewed, you know, the opportunity with us, the different projects they've identified. But when you step back from that, it's really not that significant, you know, at least for us. Now, the government's done a lot of other things, too, you know, in terms of kind of cleaning up the balance sheet with the regional debt and other things. They've done some stuff with the real estate market.
But I think what everybody's really waiting for is this fiscal stimulus, like a big fiscal stimulus package. And that's very much the traditional playbook that they've had in the past. That's kind of what we saw the last time during the Trump administration to counter some of these tariff situations. That's something that I think everyone's somewhat hopeful for is that now that we get post-election, now that we get into the 2025, hopefully that's going to be part of their playbook. And if we start to see more broader fiscal stimulus into the economy, you know, I would certainly hope that we would benefit from that. We certainly did in the past.
Some of your peers, I think on recent calls, they've noted that they've started receiving stimulus-related orders. You know, from your perspective, is this a first-half sort of event on China stimulus? What is the ground team on the ground?
Yeah, so that's more like this program that I was just referring to, you know, like that's not the broader fiscal stimulus. That's more of a targeted program about equipment purchases and these types of things. And that program for us, I would say, is like, you know, we have opportunities. There's a list of projects that we've worked on with customers. I'm sure there's some activity there, but it's just not that significant. That program, particularly for us, is not that significant.
Gotcha. And, you know, your current guidance for fiscal 2025 assumes low singles China growth. How does that low singles compare to, you know, historical China growth rates? And when do you think China could get back to, I guess, the new normal and whatever that new normal is?
Yeah, I mean, that's a great question. You know, we've always said that things in China can move quickly. And if we look, you know, over our history, it's always been true. You know, things can go up very fast and they can go down very fast. I think we're all looking for the, you know, the go up very fast vector here. But, you know, in terms of when that happens, we'll see. I'm not expecting our baseline for next year is a gradual improvement. We're not expecting any, you know, V-shaped, you know, recoveries here. But we'll see. You know, I think, you know, regardless of timing, like I said before, we're optimistic about the future. We probably see it as more of a high single-digit growth opportunity, you know, longer term. You know, historically, there's been, you know, periods where we've grown double-digit, as you know.
You know, could we have a double-digit year in the future? Sure, but I'm not counting on that. I think we're, you know, we're thinking more high single-digit, and we'll see how things play out, you know. Like I think outside of China, of course, there's a lot of other opportunities, too, you know. And like if things are moving around the world, you know, an interesting data point for us also is just emerging markets outside of China, you know. Like if you think about Southeast Asia and India and Eastern Europe and Central and South America, all those countries are about the same size as China is to us. They're about probably in that 15%-17% of our business. And of course, we see a lot of opportunities in those countries as well, too.
As things move around the world, I think a lot of those regions will also benefit from that.
Gotcha. And just one more on those China assumptions. The low singles outlook for fiscal 2025, does it assume any stimulus contribution for next year?
Not much, no. No, we really didn't factor in very much. So, and like I said before, you know, we have taken a bit of a more cautious approach on our China guide for next year. We expect to do a little bit better on the lab side, but, you know, industrials, you know, it embeds maybe industrial more in the flattish kind of a range there, so.
Gotcha. And, you know, since you brought up other emerging markets, I think one of your peers has spoken about how India has grown strong double digits. How big is India for you guys?
It's low single-digit % of our business. Like each of these markets, we're more diverse, you know. So if you break out like this, whatever, 15%-17%, you know, each one of those different regions tends to be like a low single-digit %, and it just kind of adds up to the total. But, you know, India is a really good example. Like for us, we, you know, we have a specific targeted growth plan for India. Patrick was actually there over the summer reviewing with the team that plan. We definitely have, we also see it as a nice opportunity, you know, going forward, and we'll kind of continue to invest in that, so.
Gotcha. Maybe switching gears to labs. It's a bigger segment, 55% of revenues. You know, your fourth quarter guide assumes mid-singles growth, you know, ex your shipping comp, right? But your comps do get significantly easier, right? So I'm wondering how much conservatism is being baked into that lab assumptions in Q4?
Yeah, I mean, hey, we, you know, for us, we're still happy to be growing, you know. I mean, I think if you look at across the space, it's been a more difficult environment here this year. So growing 5% in Q3, we were pleased with that. We were pleased to see it, you know, very broadly throughout the portfolio. We were particularly pleased to see the strong growth in process analytics and analytical instruments, you know. And like you said, if you exclude the shipping delay benefit that we have in Q4, you know, it's a mid-single digit guide. You know, what we're seeing here is I expect that process analytics will continue to do well. I feel like we've very much have turned the corner there. Maybe the other side of that is that the pipette liquid handling business is still softer.
You know, this is the one business that's more exposed to small biotech. And, you know, we don't have a large exposure to small biotech in our overall portfolio, but it definitely has a bigger effect on our pipetting business results. So we'll see. I mean, you know, I think a lot of it has to do, Vijay, also with the budget flush environment, too. And I, you know, like I said, we're not expecting a full budget flush globally, but we are expecting something better than last year.
Gotcha. Gotcha. That's helpful, Shawn. And when you say process analytics, right, can you just, I mean, at a high level, what are the major product categories that you, you know, sell within labs?
Yeah, so in process analytics, so for us, this is an interesting business. We've been in this business for many years. In fact, we were the first company to have inline sensors in bioreactors. So we were first there, and we've always had a very strong competitive advantage because of that. So think about things like pH meters, right? We started off with pH sensors, but then we expanded to a variety of other parameters like oxygen, CO2. And if you think about especially a bioreactor where you're trying to monitor that environment, all these things are important for living organisms, right? And so we have, you know, a lot of other parameters as well, too. And those parameters, those sensors are connected to terminals. And so then we have the ability to like monitor on a real-time basis.
Another thing that we do, which is a big value proposition for a customer, especially when you can connect multiple parameters to single terminals. Another thing we do in process analytics is pure water applications. And so especially ultra pure water. And so that's a strength of ours. And not only is that in the pharmaceutical industry, but it's something that's also important in the semiconductor industry as well, too. And then more recently, you know, four or five years ago, we acquired PendoTECH, right? So PendoTECH further expanded our footprint in terms of bioprocessing. PendoTECH has a strength in single-use technologies where we had single-use before, but it, you know, really helped expand our portfolio. PendoTECH also had more of a strength in downstream bioprocessing where our historical strength was more in upstream bioprocessing. So that was actually a very nice fit into our portfolio.
But other than process analytics, if I kind of go back to the question, we also were doing a lot of things throughout the value stream. And that's always one of our strengths is our diversity. And this is just another example of that. If you go to the beginning of research, we have pipettes, we have pH meters. Of course, we sell, you know, balances has always been a strength category for us. We just recently came out with a whole new line of precision Balances, which is extremely well received in the marketplace globally, which is really nice to see. And then we have a variety of analytical instruments, titration, thermal analysis, pH meters already mentioned. And then we have automated chemistry, which helps companies with scale-up to production. And like, so think about you've discovered a molecule before you go to manufacture it.
You want to make sure you can make it efficiently. You want to make sure you can make it safely, and then within AutoChem, not only do we have like these mini reactors with sensors that can kind of monitor a chemical reaction, but we have the ability, we have software that can simulate the entire thing. So we do a reaction, it goes into software, and then the software can then basically determine a better way, a more efficient way to do the reaction, and it saves chemists like several hours, and so it's a very strong value proposition. So if you kind of step back from all of that, we have stuff all the way through the value chain from research, late development, quality labs.
You know, in the quality labs, we sell up to 40% of the instruments on a typical quality bench, which is important, especially when you can connect a lot of those instruments with our LabX software. And so when you think about lab, that's definitely one of our competitive advantages as well is the software. So what LabX software allows you to do is it allows you to, first of all, meet data integrity requirements, which is very important and a big part of a lot of FDA warning letters. But it also allows you to automate workflows. And so when you have so many instruments and you can connect them all to a common software to be able to automate workflows is a significant efficiency in the lab and certainly a trend. Every lab wants to be more productive these days.
Gotcha. And maybe, you know, your fiscal 2025 assumes mid-singles outlook for labs, right? What could, you know, what are the variables which would either surprise us to the upside or downside when you look at the mid-singles outlook?
For lab in particular, you know, I'd say that China will be a big part of it. You know, that was probably where we were the most cautious in terms of how we guided for next year.
Gotcha. You know, switching gears, maybe pharma, you know, can you give us, you know, that's almost, you know, 40% of your revenue is end customer. What is your mix to large versus small, you know, CRO, CDMO, et cetera?
Yeah, so if you think about our pharma exposure globally, and we would, you know, again, define that as pharma, biopharma. We would also include like testing labs, CROs, CDMOs in that number as well, too. We don't have a specific breakdown, but I would say we have a higher mix in terms of small molecule than we have large molecule. But our large molecule business is still a meaningful part of the overall business. The examples for large molecule, of course, would be process analytics. You know, another example would be in our pipette business, a good example of that as well, too.
Gotcha. And do you have exposure to GLP-1s? Is that a contributor?
Yeah, absolutely. Absolutely. Yeah.
Some of your peers have quantified the benefit. Is that sizable enough for a measure to quantify?
We haven't summarized it, no.
Okay.
But it's a good example of like when we say things are mixed and it depends on the customer, of course, you know, there's a lot more activity with those customers than there are other types of customers.
Gotcha. And have you tried to look at pharma growth ex China? What is ex China pharma growth versus what's happening in China?
You know, we had pharma growth in China in the quarter, so that was nice to see. You know, if I think about it by region, you know, we felt like we've had more momentum in Europe, actually, with big pharma. You know, I think the larger customers are doing better than smaller generally. And we've seen more momentum with big pharma in Europe. This is something that we've called out the last couple of quarters as well. Difficult to tell exactly why. I don't know if it's because less exposure to the vaccine producers. You know, there's also been a topic in Europe about the lack of availability of certain pharmaceuticals over the last couple of years. So there might be more of a willingness to invest in onshore things that they were previously importing. But more momentum there.
I'd say in the U.S., more mixed, you know, kind of getting into like it depends on which companies we're talking about. Also, in the U.S., we have a bigger topic with the small biotech funding environment where I think that's less of a topic or not really a topic in Europe.
Gotcha. Gotcha. And, you know, when you look at the other parts of end markets, you know, food, semi-battery, all of those put together, how large are they, you know, as a percentage of revenues? And, you know, PFAS testing is something that your peers talk about. How big is that for Mettler? Could that be a driver?
Yeah, yeah, so maybe I'll start with like our other big segments, and then I'll talk about maybe some of these hot segments, if you will, so like food for the total business is about 20% of our business, and I'm talking about food producers, not food retail, food producers. Most of our business is in product inspection. We have a lower percentage is in the testing labs or the research and development, so if you think about our product inspection business on the industrial side, that's about 15% of our total business, and about 70% of that is food manufacturing, and so that kind of gives you a magnitude of what that is for that business, and then, of course, the rest of that would be a combination of lab and core industrial. You know, on the food side, it's been interesting. On one hand, we're competing really well.
We've come up with a lot of new products and product inspection that particularly meet a lot of the needs of the middle market. Like if you think about some of our things on the X-ray in particular, very, very well received in the marketplace. So we're competing well. Even grew this past quarter in China. But the other side of that is that the customer segment's under a lot of pressure. You know, these companies have, you know, continuously in the news with challenges, cost cutting, restructurings, very much impacted by inflation. Probably the higher interest rates haven't helped either. In Europe, of course, the war in Ukraine hasn't helped. So definitely a lot of pressure for these companies more recently. But nonetheless, I think we're competing well.
I think, you know, longer term, of course, we feel positive, especially when you think about, you know, outside of the West, you know, with aging, you know, not aging population, but with larger populations like in China, for example. The next largest segment we have is chemical, and that's mostly specialty chemical. We'd say that's between 10%-15% of our total business. It's probably erring on the higher side of that range. You know, the chemical companies have been, you know, from our perspective, also under a lot of pressure, somewhat similar, somewhat different, you know, reasons. You know, inflation hasn't helped, but, you know, certainly impacted by higher energy costs, especially in Europe. Again, the war in Ukraine and the Middle East hasn't helped that. We'll see how things play out there.
I think the housing market, you know, softness around the world probably hasn't helped that market either, and then kind of below that, you have a lot of these, what we refer to as hot segments, and so hot segments are segments that can really benefit from our broader portfolio. You know, so we don't have to do really anything to the product, but we can use our Spinnaker program to say, target, say like, hey, there's a like semiconductor, there's a lot of growth opportunity there. Let's redirect some of our resources to go after that opportunity. You know, a few years ago, that was battery. You know, battery was a hot segment. We went after it hard. I think we did quite well, you know, kind of growing a business that really wasn't there before.
And these businesses tend to be, you know, low single digit in terms of a percentage of the portfolio. You know, battery at the moment, of course, is cold at the moment, particularly in China. You know, China, there's a lot of overcapacity. But, you know, you move on to the next hot segment. And I think the next one for us, semiconductors, is a really great opportunity. It really leverages a lot of the portfolio. I think people are often surprised how often we play throughout a customer's value chain with all of our analytical instruments. There's a lot of different weighing applications. There's even a lot of pure water applications for process analytics that I referred to before. So that's a good one. New materials is also a good one. You mentioned PFAS. Probably less of an opportunity for us there.
I mean, yeah, there's some sample prep opportunities for us, but, you know, maybe more indirectly as companies research and develop and manufacture alternatives, there probably would be more opportunities for us on the other side of PFAS.
Gotcha. And one on core industrials, you know, 25% of our revenues. What is true cyclical business within the core industrials? And maybe give us a breakdown of what goes in that piece.
Yeah, so I mentioned before, like if you think about core industrial, 25% of our total business, about 60% of that is a combination of pharma, food, and chemical, which is mostly specialty chemicals. So what's that other 40%? So you'll get into topics like transportation and logistics, which for the total company is probably about, you know, mid-single digit kind of a number. So you can do your own math on what that means to core industrial. You know, we get into areas like aggregates. We get into areas like what we call MPE, which is metals, plastics, and electronics. So this is kind of where that semiconductor number would be. And then I think after that, you get into like a lot of smaller different categories.
Gotcha. So it really doesn't sound like there's a whole lot of correlation with the PMIs. Is that a fair statement?
Yeah, a lot less, you know, a lot less. I mean, I'm not saying that we ignore PMIs now. We certainly look at them too, but it's not as correlated as it used to be. Yeah.
Gotcha. Service, you did bring that up. 25% of revenues grew high singles. What is your current attached rate on services rate and what is driving this high singles growth?
Yeah, so for us, you know, we talked a lot about it on our most recent call. It's an area that we're very excited about. When Patrick and I were kind of traveling on our annual budget tour recently, this was an area where we just felt like there was just so much support broadly throughout the organization in terms of like an opportunity. So it's very high on our list in terms of areas where we're investing at the moment. If you think about the opportunity, if you look at our install base of instruments and you said, okay, what, you know, if I could service everything, what does that mean in terms of service dollars at kind of like the maximum, you know, higher end value? It would be about $3 billion, you know, $3 billion.
And if you look at our service business today, it's less than $1 billion. And so, you know, you can think about attachment rates and all these other things, but that's probably the best way to look at the opportunity, you know. And so we feel like there's plenty to penetrate there. Of course, we're not going to go to 100%, but there's a lot we can do in between. And if you look at who we're competing against, most of the time you're going up against in-house maintenance. And once we get the opportunity to talk to a customer about our value proposition versus in-house maintenance and what we can do to make sure that they're getting the most out of their instruments, you know, it's actually a conversation that, you know, we're very successful with, you know.
So we have very good conversion rates when we do that. So, you know, so we are investing in areas like telemarketing. We have programs with service technicians, of course, when they're in the field to convert things. But we are investing there and we're adding resources into the field as well too. And we also are adding some resources in terms of our analytical support to identify some of these opportunities as well too. So it's an area where we see a lot of opportunity to penetrate that installed base. We also are doing a lot in terms of how to better sell service at the point of sale too. And so we've had a lot of initiatives around that as well.
So is the math here of install base or volumes, if you will, grow low singles with increasing attached rate service should now be mid-singles plus or maybe even high single sustainable grower?
We definitely see services above corporate average growth, which would kind of put us in over the long term, which would put us at a high single digit over the long term.
Gotcha.
Or medium to long term, yeah.
What is the margin profile of service? Is that accretive to gross margins?
Yes, it's accretive. It's above average. Yeah.
Did you quantify?
No, we don't disclose it, unfortunately. So it's a little, if you look at the gross margins, which are in our public filings, the gross margins are lower, but that's because all the costs of service are largely in cost of goods sold. Like your whole field service organization is in cost of goods sold.
Gotcha, and you know, sticking on with margins, I think fiscal 2025 was unusual. I think, you know, gross margins are expanding, but operating margins, I think you're assuming flattish, right? That's unusual for Mettler. Maybe walk us through on why op margins can be better.
Yeah, hey, so this is unfortunately one of the challenges we have with the optics of these shipping delays, you know. So as you know, in Q4 last year, we had about $58 million of sales that kind of shifted out of Q4 and was largely recovered in the first quarter of last year, or I'm sorry, of this year. So now for next year, that's going to create a comp issue that we have going into next year. And so that comp issue is going to reduce sales by about 1.5% for the full year. It's going to reduce our operating margin by about 60 basis points. So our operating margin would probably be up 60-70 basis points if it wasn't for the shipping delay. And it's going to also reduce our EPS next year by about 4%. So that's also bringing down the EPS.
What's important is as people are thinking about their Q1 models, all those effects are going to happen in Q1. It's going to have a headwind of about 6% to our Q1 sales growth. It's going to have a headwind of about 250-300 basis points in terms of our operating margin. If you think about that 4% EPS number, if you try to extrapolate that to what it means for Q1, it's going to be a high teens number in terms of a headwind to Q1 EPS. Just to make sure people don't get kind of caught off guard by all those different comps. The good news is once we get on the other side of Q1, I think you'll start to see more, you know, more normal type Mettler, you know, growth numbers and margin expansions.
Keep in mind, we also have kind of, as we kind of outlined a framework for next year, we've also tried to remind people that we expect the first half of the year to start slower than the second half of the year.
Gotcha. Hey, maybe last quick 10, 15 seconds. FX has been volatile. Any change in FX assumptions?
You know, I mean, we'll update everybody in terms of February. I mean, clearly it's been dynamic, a little volatile. You know, probably the best way to think about it for us is that if you think about the Swiss franc, the Swiss franc euro is kind of a cross exposure for us. And so for every 1% change in the Swiss franc versus the euro, because we're short franc, we're long euro, it's about a $2.5 million change in terms of operating profit. And if you think about the Chinese renminbi, you know, our exposure for every 1% change in the renminbi versus the dollar, you know, so if, and we're of course long there, you know, that would have about a $2.5 to just under $3 million change.
So clearly those rates have been more volatile recently, a little bit worse than when we provided guidance, but we'll see how things play out and update everybody in February.
Great. With that, we're out of time. Shawn, thank you so much for the time.
Yeah, thank you, Vijay. Yep, take care.