All right. Thanks, everyone, for joining us. My name is Mike Riskin. I'm on the Bank of America Life Science Tools and Diagnostics team. I'm excited to host for our next session, Mettler-Toledo International. And I'm joined by Shawn Vadala, Chief Financial Officer. Shawn, thanks for being here.
Yeah, thanks for hosting me, Mike. Good to see you.
Good to see you again. Do a fireside chat, but if anyone's got any questions, just throw your arm up and we'll get a mic over to you. Shawn, maybe just to kick things off, you reported one key result recently, gave an update to the Fiscal Year 2025 Guide. A lot of moving pieces there. Maybe just run us through at a high level, what were the key points?
Yeah, hey, we felt like we got off to a good start this year. You know, when you kind of look at the underlying growth, excluding this shipping delay topic that we have, which kind of makes the optics look a little bit odd in the first quarter, you know, we grew at 3%. We saw a lot of good growth throughout the business. You know, our lab business grew mid-single digit, excluding the shipping delay. You know, kind of a highlight for us was our process analytics business, which grew just under 10%. That is kind of a good read into bioprocessing. Maybe the other side of that, we still saw some softness in terms of our liquid handling business. You know, it was down slightly. And you know, that is kind of more exposed to some of the areas of small biotech, academia, those types of things.
Overall, we felt like we had a really good quarter. Product inspection was also kind of a highlight. It grew 8%. I feel like the team's executing really well there with some of the new product introductions that we have. You know, if you kind of dig into the P&L a little bit, the margins came in better than expected. I felt like that was a good sign of operational execution in the quarter. A lot of the programs we have in terms of margin initiatives, I think, did quite well. Overall, we felt like the team's doing pretty well.
Okay. In terms of the update to the Fiscal Year 2025 guide, what were the pieces there?
Yeah, so I mean, the key topic there was the trade war kind of had already started, right? And so there is a couple of elements to that. There was the direct cost of the tariffs, but then there was also kind of the uncertainty in terms of our market. So we adjusted our top line for some of that uncertainty. Some of it is just some cautiousness that we have in terms of how we think the year will progress. You know, if we think about how we initially thought the year would start off, we thought that things would start off a little slower, but we also thought things were going to get better on the back half of the year.
You know, our current assumption is that, you know, from a volume perspective, if you kind of just take out price increases, we feel like the second half is going to be probably more flattish, which would be more similar to the first half of the year. We were not assuming things necessarily got better, but we were thinking things did not necessarily get worse. That is on a volume basis. Now, of course, the second half of the year will benefit from a little bit higher price increases, which is part of the way that we are mitigating some of these tariffs. From an EPS perspective, we took down our EPS by 2% on the top end and 2.5% on the midpoint. You know, 2% of that was related to the net impact of tariffs and our mitigation activities.
The gross impact on tariffs on a full year basis is, and this is as of the time we guided, was 7%. If you kind of net off the different mitigation activities that we have, whether it's supply chain optimization, some cost savings, or pricing, and pricing has kind of a different couple of different components. One is some price increases, but also just some surcharges that we're doing there. The net impact of that would have been a 2% headwind to the full year in terms of EPS growth. The remaining is kind of like a combination of taking down the sales for the uncertainty in our markets, offset a little bit by a little bit better execution on the margins, but also we had some benefits on currency.
I think there's a couple of smaller opportunities on the upside in terms of some of the below OP assumptions.
Okay. Maybe just on the tariff side, since you're talking about that, obviously the big news this week, one of the big pieces of news this week was the announcement of a temporary de-escalation of China tariff situation. Could you just talk us through, remind us how much of the tariff hit was for China versus Mexico versus Europe? In terms of the de-escalation, how do you respond to that in terms of your mitigating actions?
Yeah, sure. So we'd already made a lot of progress since the beginning of the year to already reduce our gross tariff exposure. When we kind of reported a week and a half ago, our estimate was that the gross tariff headwind would have been $150 million. That's on an annualized basis. If you kind of translate that into what it means for this year, it was about a 7% headwind to EPS. If you kind of do the math on that, it's probably in the 70s or something like that. You know, the assumptions behind that is that China was, we expect China's imports to the U.S. to be about $50 million. I'll come back and talk about that. You know, Mexico is now more than China, but less than $100 million.
The rest of the world would be about $200 million that we import from, import into the United States. You know, if you think about it, we probably have seven countries in the world that produce, including the United States. This would be a variety of countries, but mostly Europe. Within that, the largest exposure, of course, is going to be Switzerland. When we provided guidance, we were providing at the rates as of that day. The one thing that's clearly changed is the China assumption. If you think about China, you know, that 115% change from 140 down to where we are now with, or 145, I'm sorry, to where we are now, that's probably about, if you do the math on that, you probably get to a number of about $60 million or so.
Maybe it is a little bit less than that. We also have a small amount of products that we sell from the United States into China. If you look at that, that is on an annualized basis. Now, if you kind of think about what that means to our EPS this year, that would be about a gross, so there is like one month of headwind on that, okay?
Yep.
You know, on the higher rates, if you look at the remaining seven and a half months, you have probably now a benefit versus what we previously said of about 3.5% of EPS or so, okay? That is the gross benefit, but then some of the mitigation activities also go away. You know, if you think about some of the surcharges or things that we are already going to move. Before, we had a gross headwind for the year of 7%, and we had a net headwind of about 2%. Now that gross headwind would come down, assuming everything stays the same, by about 3.5%, and we would think the net benefit would also come down, but it would probably be, you know, the net benefit to the year would probably be less than 2%.
Okay. A lot of math there.
Yeah, sorry if that's a lot, but hopefully that provides a little bit of a framework, and I just don't want people to be kind of confused about what it could mean for this year.
No, that's great. I should have just brought my calculator. That's helpful. Okay. I think I got most of that. So, and then I guess the other question I would have is, like you said, you're already implementing some of the mitigation efforts. You're not just going to keep putting them on and taking them off. If I could sort of rank order what's easiest to change, it would be price surcharges. You can just remove that.
Yeah, sure. Yeah, I mean, so just to be clear on the supply chain side, we're committed to those actions. You know, like this was kind of a learning coming out of COVID. You know, we wanted to have more flexibility in our supply chain. There's also a benefit for de-risking the supply chain as well. So we're committed to having more regional supply chain. It created a little bit of redundancy, but we think that's a better structure going forward. Of course, this accelerates all that. You know, we're just going to move a little bit faster and accelerate programs. On the pricing side, like I said, there's an element of surcharges. We're in the process of updating some of those surcharges this week. That was the intention, right?
Like we can kind of take them up or take them down as we need to, given the dynamic situation and also given the magnitude that we're facing. I mean, it would have been one thing if the tariffs were a smaller number, but at a large number, it creates a situation where we needed to do something bolder on the surcharges. We are going to have to adjust that as well too.
Okay. If I think about other impacts from the tariff change, I think this would impact you probably the most if you think about underlying China demand. One thing that I think does not get talked about enough is the impact of 145%, 135% tariffs to China that would have on the local economy, on just underlying demand in the end market. Now that we think there is a de-escalation of the trade war, does that make you feel any better about just Chinese economy, market demand for the rest of the year versus where you sat on April 2 or April 3?
It is definitely a positive development. Now, we'll see how it translates into activity in the local market. You know, one of the things we were hearing a lot a couple of weeks ago was that there was a lot of wait and see in the local market in terms of continuing with projects. There were two elements to the wait and see. I think the big element was that people wanted to wait and see how these trade discussions kind of went forward. Hopefully this brings a little bit more clarity. Now, of course, there is a 90-day pause, so hopefully it continues the way it is or it is at least close to where it is. I think that is a really positive development, but we'll see.
The other thing was that one of the things I had heard was on the ground, there was a lot of talk about anticipating that the government was going to be making an announcement at some point about their plans to better support the economy. Since then, you hear things from public sources as well too. We will see what happens in that regard. I mean, if they did, of course, the combination would be a very strong signal to the local market. I mean, we always say that in China, things can move very quickly and either way. I think that that combination could be very interesting for us. Right now, we are not updating guidance. We are not assuming anything. I do think we will learn a lot more here over the next few months when we update guidance here at the end of Q2.
Remind us, what are your expectations for China as of the one call for the rest of the year?
Yeah, you know, so for the full year, we initially started the year thinking that China was going to grow low single digit. And now our updated guidance reflects that it is going to be down slightly. You know, so certainly that translates to probably around a point of the growth change that we had in terms of our total numbers. So we'll see. You know, in the short term, there is a lot of uncertainty, but going forward, and I do not know if you want to get into the China in the future part now, but I think there is still a lot of opportunity in terms of how China can grow in the future.
Yeah, let's touch on that then, especially in light of reduced tariffs and yet still potential for more stimulus. What do you think this means for the Chinese economy and going forward?
Yeah, I mean, of course, you know, for the economy, it's difficult to predict, but I think that for us, you know, we're really well positioned in terms of China. You know, we have a long history here. We develop a lot of our products in China for China, so we're close to the needs of the local market. And we also make a lot of those products in China for China. And we've been doing it for a very long time. I think we have a very good situation. If you look at who we're selling to, we're mostly selling to Chinese private companies, you know, less amount for state-owned companies, and then even fewer for multinationals. We're not typically selling to exporters.
If you think about the industries that we're selling to, it's very similar to our global exposures, you know, life sciences, food manufacturing, chemical, which is largely specialty chemical for us. When you look at those industries, we're very well aligned with the Chinese government's strategic priorities, you know, kind of like wanting to have autonomy and a lot more self-sufficiency for their own life science industry, technology in general, but also some of the hot segments like semiconductor being one. We feel like we're very well aligned with the priorities there. When we look at like our whole China for China story, you know, we feel good. Now, is China going to grow like it did, you know, kind of in the, you know, pre all this, you know, the reset in the last couple of years?
Probably not, you know, but we never were considering that in our long-term algorithm. You know, if you kind of look at the updated CAGR for the last 10 years in China, it's probably already moderated to about 6%. And if you look at our long-term CAGR for the company, it's kind of the same number. So it's like in the last 10 years, you know, it's probably more in line. But that's okay. You know, and whether it's high single or mid single or wherever it is, I think as long as it's in that range, we should be good. The bigger thing too is like it's not just about China, right? Like there's a lot of companies that have adopted China plus one strategies.
As we now look at the markets outside of China, like Southeast Asia, India, Eastern Europe, Central and South America, all those other emerging markets are now bigger than China when you put them together. They are about 18% of our business, where China last year was about 16% of our business. Those markets have been growing very well. You know, when people say, like, hey, are you seeing any evidence of reshoring and our shoring, it is hard to answer that question in the U.S. right now. It is still very early innings. When you look at these geographies, you clearly have seen, you know, we have clearly seen, like, some nice growth in those parts of the world. As a global company, we are also well positioned outside of China.
What's driving that growth in the EM ex-China? Is it desire to diversify away from China? Is it, again, not onshoring to the US, but sort of reshoring?
Yeah, I think as people are looking at their supply chains, you know, it's just one of those opportunities. You know, not everything goes from like from China to the U.S., right? Like it's going to be, depends on the company's needs or the country's needs even, you know, but probably each company is looking at this differently. Some are just trying to, you know, have a China plus one strategy where they, you know, they're staying in China, they're making stuff in China, but they also want to have a little bit of redundancy in their supply chain. You know, some of these emerging markets clearly are opportunities and beneficiaries of that just given they're all, because they also have a low-cost structure.
Okay. Let's move on to some other parts of the market. I want to talk a little bit about academic and government. Not the biggest end market for you, but still one that's been really volatile to start the year. Can you talk us through what you've seen in those specific product areas where you're seeing a little bit better, maybe in consumables or instruments? Especially I'm talking about the U.S.
Yeah, US, academic, and government together is a low single-digit percentage of our global business. It is a small part of our business. Now, if I kind of like peel back our product categories, one product category that has more exposure there would be our pipette business, okay? When I look at that business, like I mentioned, it was down slightly in the first quarter. That business has been under a little bit more pressure in the last couple of years. I mean, they were the ones that also kind of felt some of the headwinds with some of the small biotech funding challenges. You know, that is the one part of the business that would be exposed to early research, which is a smaller part of our offering to the market, but that is the one part that would be exposed there.
Kind of during the second half of last year, I would have said we were starting to see actually good activity on the consumable side, which was like a good read into activity in labs, but the instrument business was still softer. In Q1, you know, we saw more softness on both sides, you know, between consumables and on the instrument side. Clearly starting to see some softer conditions there. You know, when you talk to the team, you know, I feel like it is a little bit of this academia topic, but also I think the small biotech for us is still a little bit soft as well too.
Did you see that? Can you talk about how that played out through the quarter? Did you see any deterioration? Has it kind of stabilized? We're getting a little bit of a mixed signal in terms of sort of where the trough was.
You know, I don't recall. Yeah, yeah.
Okay. All right. Fair enough. Maybe let's pivot to biopharma. You talked about smaller biotech, but maybe biopharma as a whole, especially, you know, on bioprocessing. That’s fared a little bit better for you. You talked about process analytics. Can you talk about what you're seeing in that end market?
Yeah, so we had a really good start to the year, like I mentioned in the opening comments. You know, process analytics are the inline sensors that we have in the reactors. One of our competitive advantages is that we were the first company to have inline sensors in bioreactors. So we've always had like a strong brand in this area. It started with our pH sensors, which was kind of like coming from the analytical instrument side. But then over the years, we've expanded a wide range of parameters. And if you think about these parameters, they're kind of monitoring the environment, right? Especially with living organisms, oxygen levels, CO2 levels, pH levels, etc. And so that part of the business, we saw we had a good quarter. The part that actually did the best was probably the area that had benefited from single-use technologies.
You know, so if you think about like our PendoTech acquisition a few years back, you know, very good results in the quarter. In general, we just felt like we saw good trends on the single-use. We are definitely optimistic about this business going forward. You know, and we feel in just conversations that we have had recently, I am not talking this week, but just, you know, kind of leading up to our guidance, we felt pretty good about the market and just like all the new modalities out there and the opportunities for production, you know, in the world. I just think that, you know, as people think about their supply chains, you know, we are going to benefit. You know, if you step back and just look at our life science, you know, exposure in total, right?
I'll pivot a little bit here if you don't mind. Life sciences, which for us is like traditional pharma and then biopharma, we would also put CDMOs in that category and testing labs. That's about 40% of our business. If you look at that, I'd estimate that about two-thirds of that is related to a combination of production in QA/QC labs. We very much think that we can benefit from these trends of investments in manufacturing around the world. The other third, of course, would be research and development, but within that, we're going to be more exposed on the development side, late-stage development than on the early research side. Kind of back to bioprocessing and process analytics, we feel pretty good. Keep in mind, within bioprocessing, it's not just process analytics, right?
We also provide other solutions, like including from our core industrial business, you know, like just the whole process of filling and formulation that goes into the bioreactors. We provide a lot of process control there. We have load cells that are underneath the reactor. They're connected to our terminals with software. That software helps to determine the formulation of the ingredients, the paste, and everything. It can also be a monitoring device, a mechanism, I should say, during the process.
Do you think that end market has turned a corner here in the first quarter? It's been a little bit volatile the last couple of quarters, or?
Yeah, I mean, for us, we've seen gradual improvement here over the, I think, the past year. And certainly, you know, certainly it's going in the right direction. You know, I mean, with all the noise in the market right now, we'll see how things play out. But I'd be surprised if this one didn't do better. Like if we look at our portfolio, if we look at our lab portfolio, you know, I'd be surprised if that isn't above average at the end of the year.
Okay. Okay. Maybe pivoting to industrials briefly. You called out some delays in the quarter, some timing components. Can you give us a little bit more color on that and sort of what's your?
Yeah, I mean, so if you think about it, when you say industrial, I mean, there are two parts in industrial. There is core industrial and then there is product inspection. I think you are referring to core industrial. Core industrial is 25% of our business. About 60% of core industrial serves a combination of pharma, biopharma, food manufacturing, and chemical, okay? It is a little bit more secular than it would have been 10 or 15 years ago. I think that is part of the reason why it has been a little bit more resilient in the last few years with like weaker PMIs. Despite that, we are not immune to the economy, you know? I think we definitely have felt a little bit of softness here at the start to the year.
In terms of how we thought about our guidance for the full year, I think our guidance for the full year is flattish for the core industrial business overall. For the full year, the other thing about core industrial is that it has a much higher mix of China than the rest of the business and the other divisions. Of course, that's part of it too. When we entered the year, we were definitely hearing about things kind of delayed and kind of put off, especially on the China side. We'll see how it goes. If you kind of look at the different end markets, chemicals certainly is an area that's softer relative to the other end markets. Probably a little bit more cyclicality there.
You know, even though our business is mostly specialty chem, I'm sure there's a more cyclical nature there than you would get with the other core end markets that we have.
Okay. You touched on this topic a couple of times throughout the chat. You talked about, you know, reshoring and the impact that would have. We're starting to see some press releases, some announcements, but I don't know how much, you know, of this has already been done versus this is planning for the next one, two, three years. Can you talk about what you would see from a wave of reshoring, if that's one of the effects of this tariff?
Yeah, you know, when we think about the tariffs, we think about three elements, right? We think about the direct cost and we have mitigation plans in place for that. We think about the short-term uncertainty and we have updated our guidance for that. Then we think about the future, right? I really believe that there is a lot of opportunity for us going forward here. Now, there are a lot of numbers and commitments out there in terms of, you know, intentions to invest in the U.S. Of course, that can change, you know? Some of that might have been planned anyhow. Regardless, my sense is it is going to be more than it would have been, you know, in the pre-COVID days.
You know, if you think about our business pre-COVID, probably 80-90% of that business would have been replacement, you know, in the West, you know, in the U.S. and in Europe. And we have a replacement cycle situation because typically replacement cycles occasionally would have gotten delayed as economic conditions softened. And then there was a pent-up demand afterwards. During COVID, we had a little bit maybe an acceleration of replacement cycle, which has kind of caused this longer cycle of softness over the last two to three years. At some point, this replacement cycle is going to kick in. And we thought we were starting to see the early signs of that as we exited last year. If you think about our analytical instruments during the second half of last year, we were really starting to see some good growth.
Now, I think things are maybe paused again on that, but at some point that will come back. The average, you know, the average age, the average life, I should say, of our instruments tends to be around seven years. You know, so we are five years out from COVID. At some point, this is going to turn in, you know, this will come back. On top of that, we have investments. The way, I am long way of answering is whatever we get, it is going to be a benefit on top of what we normally would have gotten in the pre-COVID days. I feel as a global company, we are really well positioned for that. You know, we have literally had companies asking us, even from China, you know, can you help us out in, you know, other countries in the world?
Of course, you know, we have a lot of strength in Europe. We will, you know, we have a lot of opportunities to move with some of these companies if they want to bring things. It is also not things all coming here. They are going in all different directions and we can move with them. Again, as a global company, we are well suited for that. Another thing is as people move things, there is going to be a tendency to look for more automated solutions, you know, because, you know, things, you know, probably will cost a little bit more after you move it. You are going to have a little bit more redundancy. They are going to look for ways to achieve more productivity. As they do that, they are going to look for more automated solutions. That is a strength of our portfolio.
You know, we really do well there. I think that will benefit from that.
When you think about whatever reshoring cycle will or won't happen, where would Mettler participate the most? If I could think of sort of like chronologically, are you, you know, are you in the very early in the build-out? Are you later stage? I guess it's going to marry.
It's going to be, I mean, you know, I could give you an example of where we are in early stage, but it's a very small part of the opportunity. I mean, you know, it's going to really come to when they, you know, when they buy out, purchase all the instrumentation and equipment for the facility. And then kind of like all the QA/QC labs in the facility as well too. The timing is a difficult one to answer. It depends on if it's a total greenfield and they actually have to, you know, build a building first or whether they have a facility that they can move into rather quickly.
Okay. I want to last couple of minutes on the P&L and margin expansion opportunity. You know, you've seen some impressive margin expansion over time. You've obviously got some near-term headwinds in 2024 and 2025. As you think beyond that, can you sort of walk us through the various levers of the P&L?
Yeah, I mean, you know, in terms of the P&L, you want me to talk about how to expand margins or?
Yes, the margin runway.
Yeah. I mean, I think, you know, one of the strengths of our organization is that we have a lot of different programs to attack these challenges. I mean, we have a strong culture of, I would say, continuous improvement and agility. I think if you kind of look at it, you know, growing volume is the number one thing, right? You need innovation to grow volume. We have a lot of programs around that. The Spinnaker program helps us do that. The pricing program, you know, the pricing program is a reflection of the strong value proposition we have. That starts again with innovation. The pricing program realizes that value that we provide to customers. Our products tend to be an average price of less than $10,000.
We're typically selling to the end user who understands and appreciates that value. We have someone who's a direct salesperson who can articulate it. We have a lot of success in that program as well. We have the Spinnaker program, I mean, the StarDrive program, which is operational excellence in the supply chain. We have a lot of different things there. We have some new sophistication in terms of how we're using technology to do topics like shared cost analysis to help us get smarter about diagnosing opportunities and identifying opportunities. We have the Blue Ocean program, which helps us harmonize processes around the world. As we do that, we can automate them and also leverage our shared service center. We have a lot of different things at our disposal to help us continue to improve margins.
We have a natural mix benefit. You know, the products that are growing the fastest tend to be our highest margin businesses as well too. We feel very good about that. I think it also comes back to the culture of continuous improvement behind all of that.
We got about 30 seconds left. I'll just go straight to my concluding question. What do you think is most underappreciated or misunderstood about Mettler?
Yeah, no, I'd like to think we're pretty well understood. We try to, you know, be as clear as we can in our communication. You know, if I'm asked a question like that, I'd like to remind people about our strong cash flow. You know, we tend to convert cash flow at about 100%, plus or minus depending on the year. But in these times too, I think we also benefit from our diversity. You know, there's a lot of ways to look at our diversity, but the way that we provide solutions throughout a customer's entire value chain. As there's opportunities that arise, you know, we can kind of lean into those opportunities. You know, with all this reshoring, it's probably a good example of how we can do that, you know, with the solutions that we provide through the value chain.
Okay. Right. With that, I think we'll end it there. Thanks so much, Shaun.
Yeah. Thank you.