Good morning, everyone. Welcome to the 2023 Bank of America Healthcare conference, coming to you from the Encore in fabulous Las Vegas. I'm Derik De Bruin, for those who don't know me, and along with my colleague, Mike Ryskin, we cover the Life Sciences and Diagnostics Tools industry. Our next company up today on our agenda is Mettler-Toledo. With us from Mettler is Shawn Vadala, the Chief Financial Officer. Shawn, always a pleasure to have you here. Thank you for making the trip out.
Well, thanks for having us. It's great to be here.
Always a pleasure. You reported Q1 last week, which I have to say was a bit more controversial than is typical for a Mettler quarter.
Mm-hmm.
Do you wanna make some remarks on that, or George, shall we just?
Yeah. No, I mean, I don't mind commenting on it. I mean, I think we actually had a good start to the year. You know, we grew 7%, a little bit better than what we expected. This is despite some headwinds. You know, I'm sure we'll talk about.
Yeah
The stocking issue that we saw with pipettes. We also had a small headwind still from Russia last year. Despite headwinds, we actually, I think, performed very well. You know, we, you know, we've kinda on our call last week, started to try to get people to think about our business in terms of a three-year CAGR right now. You know, on a three-year CAGR basis, we grew 13%, which we think is like, you know, a really good number, much higher than our typical algorithm. You know, if you kinda go through the P&L, though, you know, one thing that also kinda popped up in the quarter was this currency topic.
Yeah.
You know, you know, currency is a significant headwind at the moment. It was, it was an 8% headwind to earnings per share in the first quarter, so if you exclude that headwind, we would've grown 18%. You know what, you know, but it was also worse than we expected. It was about 2% worse than we expected, so maybe the flow-through wasn't quite what people were used to expecting. Otherwise, I think the business is executing very well. You know, I think the culture continues to hold up well. Cash flow is strong. We also are aware of the environment. You know, there is more uncertainty-
Yeah
...in the economy and our end markets. You know, we stay agile and alert to the situation.
Great. I think some of the controversy surrounded upon. I agree, Q1 was very good just given all the headwinds and like that. I mean, yes, you grew. You know, you had the typical.
Mm-hmm
Earnings growth and like that. I think some of the controversy was around the 3% local currency revenue guide, and for the fact that, you know, the EPS guide was below the street, which is unusual. Let's unpack some of the issues there, I've been going on with it. I guess first on the comps you mentioned, you know, Mettler, like many other companies in the tool sector, is coming off several years of above-trend growth. I mean, I think you just said this was stacked comps of this. What would've been sort of the main pockets of outside growth? Where have you seen strength? Where have you all seen a little bit of a headwind?
And I guess, are you worried that some of these headwinds will linger into this year and into 2024?
Yeah. Hey, there's maybe a few things to address there. First of all, this comp issue, right? We still have a very difficult comp in Q2. You know, when we were kinda looking at the year at the beginning of the year, we kinda ourselves were looking at Q2 as a difficult comp quarter, you know. To put it in perspective, we grew 10% in Q2 of last year, but we grew 27% in the year before. Again, on a 3-year CAGR basis, the 3% growth is 13%. Of course, we still have this headwind with the pipette business. If you exclude that, it's actually 5%. From that perspective, I think it looks, you know, frankly a little bit better.
Mm-hmm.
The growth we've been seeing in the business also, I should've mentioned in my opening remarks, is we're seeing a lot of broad-based growth and we can maybe comment on that some more as we go through this. You know, when you say like what's been outperforming, we've really seen very good growth in the lab business throughout most of the portfolio. Like, for example, in Q1, most of our product categories grew double-digit, you know. You know, the headwind that we experienced from the decline in pipettes reduced our overall lab growth by about 4%-5%. That would've put us, you know-
Mm-hmm
Kind of in the 9%-10% kind of a range, excluding that downturn, or decline. The other area that's, you know, over the last few years that's also continued to do very well is our Core Industrial business. I mean, I know a lot of people had concerns about the cyclicality of the business versus the past. I'm sure we can talk more about it, but I would just say like that business continues to do very well. A lot of the trends we talk about in terms of automation and digitalization are really helping, and I think there's still a lot of opportunity to kinda come in the future there.
Some of the inventory dynamics, I mean, you've certainly talked about the pipette issue, and like that. I guess, how long do you sort of think these issues will last and remind us on what's embedded in the full year guide for it?
Yeah. You know, the way we're looking at it is, one, qualitatively and quantitatively. On the qualitative side, most of our sales are sold directly, so we have direct sales force so that we've been talking to customers.
Yeah.
I'm not saying we've surveyed everybody and have an exact number by customer, but basically, the general sentiment from the sales force is that things should improve in the second half of the year. A smaller part of our business goes through indirect distribution, and in that part of the business, it could take a little bit longer to kinda go through. The other thing is looking at it quantitatively. You know, if you just look at basic analytics and you look at run rates and you can look at bar charts and you can look at, you know, where we were a year ago, Q1, Q2 a year ago, you know, we had very difficult comparisons. You can really see that things are starting to, you know, we expect to normalize.
We're gonna start lapping easier comparisons in the second half of the year. Our expectation from looking at the data is consistent with what we're hearing from customers, which is we expect things to stabilize for the most part in the second half of the year. Like I said, maybe it's a little bit slower with indirect distribution, but that's a smaller part of our business.
What about other parts of portfolio like pH electrodes, single-use sensors...
Yeah
Bioprocessing that you acquired from PendoTECH? How What about those items?
Yeah. So far, like, you know, within Process Analytics, we grew double digit in Process Analytics in Q1. You know, that business is doing well. Of course, there's comp issues there too. You know, we do have some comp issues with like vaccine production in parts of the business as well. If we kinda drill into it, the one area that we're clearly seeing a big headwind is in the area of single-use sensors. You know, we're not seeing it necessarily with our like reusable pH meters that you mentioned or pH electrodes, because there's somewhat of a shelf life to some of those sensors. When you get into single use, we're seeing a headwind. Fortunately, it's not a significant part of the overall business.
Right.
We still have a positive outlook generally for Process Analytics.
Is that just roll-off from COVID or people changing just project priorities? Just sort of like what's going on with the sensors?
With the single use?
Yeah, the single-use sensors.
Yeah. hey, I think it was people a lot of stocking during.
Yeah
COVID vaccine production and as those, production, you know, volumes are down significantly, people are just kinda working through that and burning off.
Got it. Any-- I mean, just sort of like you have your fingers all over your customers and, you know, can sort of see what's going on with it. Just anybody more cautious than they were a few months ago when you sort of gave the initial guide?
Well, I mean, yeah. You know, when we gave the initial guide, I mean, there's a couple things that we've seen. One is kind of more a decline in more the economy.
Yeah.
You know, PMIs, have continued to soften, especially in the West. You know, if we look at like Europe, we're in mid-forties in a lot of countries. Certainly has our attention. Same with in the U.S. You know, in terms of the way we think about it is we always feel like the economy kinda needs to be kinda good enough, you know, good enough that people are gonna stick to, you know, kinda replacement cycles, you know. We'll kinda see how that plays out. The other thing is maybe just more headline risk. You know, we're hearing a lot more headline risk from our end markets. We talked about on our call last week about the packaged Food industry-
Yeah
you know, as one. There's a lot of other examples with a lot of other core end markets, whether they're layoffs, facility consolidations, financial challenges, et cetera. None of those things, despite even if a customer has a lot of interest in the pipeline to do a project, you know, there's still a question mark about, you know, the timing of that project.
Yeah
You know, with a lot of with these headlines. We'll see how that plays out in the short- term.
Even if you, I mean, if you look at sort of like the portfolio evolution, I mean, you did, I mean, since the financial crisis, you basically exited some of the more macro exposed-
Yeah
segments. You've added things. You're talking about, you know, growth in you know, next generation economy, things like electric vehicle batteries like that. How would you sort of describe your cyclical exposure today and, you know, if we were to go into a, I don't know, let's call it a moderate recession scenario, how would you. You know, how do you think the portfolio would form?
Hey, I think we're clearly better positioned than we were in the past. I mean, if you kind of break down some of the pieces, our laboratory business is I think about 57% of our total company. 10 years ago, it would've been about 45%. The core industrial part, that is historically the most exposed to the economy, used to be about 30%, it's now 25%. Within that 25%, it's a much better mix of business. You know, we estimate about 60% of that business now is sold into pharma, biopharma, food manufacturing, and special... We call it chemical, but it's mostly specialty chem. Like within there, you also have like battery and some of these other hotter segments. Our Service business is now Service and consumables is now like a third of our business.
I think that's up from, you know, about 25%-
Mm-hmm
about 10 years ago. In addition to all those things, there's just trends out there that we haven't seen before. You know, like, automation has always been a topic, but it's really accelerated in the last few years. You know, like, whether it's in laboratories or whether it's in the industrial sector. With all the labor challenges around the world, people are clearly investing in automation. There's a desire for data. You know, bigger desire for data more than ever. Just the connectivity and digitalization, that really, those trends really help us in our areas of strength, you know. Especially in the industrial business, but also in the lab business where we can connect a lot of our instruments with our LabX software. Then you have other trends like, you know, these reshoring trends.
This gets into, you know, supply chains and people just wanting to have more flexibility. Of course, the geopolitical environment probably, you know, adds a little bit more to that as well too. We feel like all those themes position us better than we were in the past. Maybe one final comment is, you know, you kind of allude to some of these, we call them hotter segments, but like lithium-ion battery, right? Like, lithium-ion battery is something that's growing very fast. We're benefiting from it very much in our lab business, especially in the analytical instrument side. It's also a broad exposure for us too.
Yeah.
It's like that's one of the things we like about it. It's a small, relatively small as a percentage of our total business, but in terms of growth it's certainly helping, and it's a very broad exposure. Like, we're helping these companies in from R&D to quality assurance and quality control, all the way to scale-up and production. we have a very broad exposure with a wide range of instruments that can measure things and monitor things from heat capacity to chemical composition, to making sure the weight is correct. high precision is very important for this industry. we were able to get in there very early, you know, in China.
Patrick just visited a key customer just a few weeks ago, and, like, you know, he was just sharing stories about, like, the size of this facilities. Like, this is the largest production facility I've ever been in. Just Adam and I were kind of, you know, looking at some statistics, and I don't want to share them, but it's just mind-boggling how large the scale is with the number of people in R&D and production. This is really a pretty big sustainable trend. It's not just China. We're seeing a lot of activity in Europe, and also in the United States. I think because we were able to get in early, we were able to establish, you know, a level of confidence.
Mm-hmm.
That the market really appreciates. You become kind of this, quote, "trusted advisor," and I think that's really helped with our story here.
A couple of directions to go there. I think let's go on the Services direction first.
Yeah, sure.
It was a big highlight of your analyst day.
Yes.
You know, you're, you like a lot of other companies have moved beyond the break and fix.
Mm-hmm.
You're doing a lot more remote monitoring. Can you sort of talk about your services portfolio and, you know, how that is from a growth opportunity, what your attachments rates are, margins, and just sort of like how you sort of see that unfolding? It is a growing part of your overall business.
Yeah. No. Hey, thanks. Hey, we've got very good momentum in the business. As you said, we featured it at the, we talked about it at our Investor Day. We talked about it in our February earnings release, we actually mentioned in our recent press release about strong momentum. I mean, we grew 15% in Q1 after... I mean, last year, I think we're up 12% in that business. You know, I've never seen a period where we've grown double- digit in service quite before. Excuse me. This is an area where when Patrick joined the company, I think he really said, Hey, I think this is a good opportunity for us. I know we've got stuff, but I think we could do better.
Yeah.
It's really interesting to see how we've really kind of stepped it up a notch here over the last couple years. If you, like, look at the iBase opportunity, right? Like, you say, Okay, look at the install base, what could be serviced, and what are the service dollars associated with that It's probably about a $3 billion or so opportunity. If you look at the size of our Service business, it's about $800 million. We're not... You know, what's happening with the rest of that? Well, a lot of times this might be in-house service, and a customer just really isn't appreciating the value associated with service.
If you kind of like look at the value proposition of, like, uptime to a, you know, a company, a food manufacturing company for product inspection, or if you're looking at the accuracy of your research or if you're looking for waste, you know, these are all very important topics. Like, you know, the idea of having to go back and redo your research or throwing out, you know, the ingredients in a bioreactor. It's very important to make sure you have accurate results that are documented appropriately. Helping these companies with these different topics has been very important. We can also validate, like, entire processes and certify processes. We've seen a lot of opportunity. How do we go after that?
You know, there's a couple ways. We've been pursuing it with our big data analytics, which you've heard us talk about a lot in the past. We have a lot of information on our install base. We know the age of the equipment. We know the service history, the last time it was serviced, when it comes off warranty, and then we can run a lot of different campaigns, you know, on that data. That's been successful. The other thing that we've done more recently is we've talked a lot about point of sale, and so selling service at the point of sale. You know, historically, we would've encouraged the sales force to sell service at the point of sale. We might have incentivized them to sell it at the point of sale.
Now we're kind of forcing that discussion a little bit more by having it automatically included in the quote. We're kind of almost requiring them to have that discussion with the customer. Because of that, we've seen, you know, attachment rates, you know, increase more recently. Maybe one final comment on service is that I'm really proud of our global organization here because, you know, we've historically had good net promoter scores, and of course, we track that. If you look at recent data, like, each year for the last four years, it's actually gotten better, and we're at an all-time high in terms of net promoter score. I think our service organization is also doing a really great job taking care of customers.
Mm-hmm.
Which is also important for the brand.
One of the other things you mentioned in the prior comment was the China exposure and the China footprint. Obviously some geopolitical tensions there. I mean, are you worried about that, or is Mettler seen more as a Swiss company? How do we sort of think about competition in that market?
Mm-hmm.
You know, is the quality getting better? I mean, some of the things you called out would say that there's still a shortage of competitors within that region. If you can just sort of talk about that bigger topic of China.
Yeah, sure. I mean, as you know, we've been in China for over 35 years. With that history, we're considered a very strong local employer. We have a strong brand in terms of the local marketplace, especially in Chang zhou, where we have most of our facilities. We also make You know. China's about, you know, 20%-22% of our total business, but most of the sales are produced within the country. I think that also helps us out a lot in terms of retaining more of a local image. In terms of, like, our leadership, you know, our leadership there has always been local, you know? It's not the kind of business where we've kinda had to fly in expats every few years.
We've always had.
Yeah
You know, local leaders. Which I think is also important in terms of, like, you know, perception in the local market, but also, you know, staying close to some of these topics. Then if we're not considered local, you know, people do tend to think of us as more of a, of a Swiss company there. You know, so from our perspective, you know, I don-.
Yeah
I don't see a significant topic there, but certainly something that we kinda keep an eye on. You know, if anything, you know, I think it's gonna create a lot of investment in China over the next, you know, handful of years that are frankly local opportunities for us.
Got it. always been a leader in price. I mean, you've historically gotten.
Mm-hmm.
If you look at the other companies that we cover in the life sciences space, you historically have had, you know, pricing that's twice on average.
Mm-hmm
what most of the other peers in the group have. You got 6% price in Q1. That's versus 2%-3% historically. I guess, what's embedded in pricing for this year? More importantly, when you think about your 2022 Analyst Day, where you guided to 6% local currency sales growth, were you assuming a higher level of sustainable pricing, or is that incremental upside?
Yeah. Hey, we're very pleased with our performance with pricing. Like you said, we did 6% in Q1. Our, you know, You know, in terms of this year, our full- year guide is 4%. We're gonna start lapping some of these pricing actions we did last year, when we were trying to mitigate inflation. Otherwise, the team's executing well. One of the things that I observe with pricing and I really There's a lot of reasons why I like pricing, but one of the things I like about it is that it gives you an opportunity to realize the value that you produce, you know?
If you're producing, creating value for a customer, there's a willingness to pay for it if you can tap into that, you know? We've spent a lot of time trying to make sure that we are investing in innovation and that we're keeping that value proposition where it is. I think we've been fortunate that the markets have moved upstream a little bit in terms of requiring more quality, automation.
Mm-hmm
Digitalization. We also spend a lot of time working with the sales force to make sure that they can articulate that value proposition. I wouldn't underestimate that, 'cause that's where the rubber really hits the road. Because we largely have a direct sales force that can articulate that value proposition, and we're often selling directly to the end user who understands and appreciates it, and this direct sales force, Frank, is also application specialists. You know, we don't have generalists.
Mm-hmm.
It's a very good situation. As you know, our price points are typically below $10,000, so it's a nice foundation to do pricing on top of. I think that's worked out pretty well for us, and I think our value proposition has increased over the last few years with some of these trends that we talked about. As we think about, like, the algorithm for the future.
Yeah
of the top line growth, you know, A lot of it will of course depend on the inflationary environment.
Yeah.
You know, assuming that things kinda get back to somewhat the way they were, we probably think about pricing being more in the 2% range, kinda, you know, into the future, as kinda like a medium to longer term number. Again, it will largely depend on the inflationary environment.
I mean, I always like to joke that Mettler was big data before anybody knew what big data was.
Hmm.
Just remember visiting your facilities for the first time in 2003 and Olivier looking at, you know, trying to drive Blue Ocean. Looking at some of those products.
Mm-hmm
and sort of going with this, and just, like, how you had this sort of, like, grasp on data. This sort of, like, this guided pricing strategy that you have there.
Mm-hmm.
I mean, it sounds like that still is being very effective in terms of finding the customers that you know where you go. This also comes just having exquisite knowledge of your customer base and your installed base.
Mm-hmm
of where the products are. You know who to target, when to target, what the age of all this is. When to upsell, when you can do, right?
Well, it's all In the end, it's about which data attributes are the most correlated to price, you know? You can get into a lot of different types of segmentation of the business, and then there's machine learning involved now. We've gotten more sophisticated, and based upon that, we can, like, literally recommend a price to the salesperson at the time of quotation.
Mm-hmm.
You know? Just think about that. There's a lot of efficiency involved with it.
Yeah.
We don't. It's not a black box. We actually let them click and see why the price is being recommended here. It actually educates the sales force too, so that they can then defend the price better. Not only do we get a, you know, have seen, like, a little bit of benefit in terms of price realization, but we've also seen a little bit of benefit in terms of our win rates, you know? It's kinda like the best of both worlds, because you're pricing more correctly. This is something that we're methodically rolling out.
Yeah
you know, country by country. We start with telesales before we go to the sales forces to make sure that the data sets are what we expect them to be. We see the results before we roll it out to the broader organization. This is something that is coming over time, but it's a. Yeah, for me, it's a great next evolution of the journey, and it shows you that we're continuously improving. It all starts with having the processes and the data. You know, you can't do something like this without the systems and the processes and the data.
Is that one of the reasons why you when you go back and look at your Analyst Day, you upped the sort of like margin expectations for sort of like this. I think you went like, 70%- 100% to, like, 100% sort of thing...
Yeah
at the margin. Is this a driver of it? I guess, I mean, I was joking with a client that you actually have-- I mean, given you have a business that's only 30% consumables, your margins are better than Illumina's right now. If you sort of exclude GRAIL and looking at this, it's like. Which is just staggering when you think about what your business is in doing this. How much more margins are there? I mean, is this a 40%-
Yeah.
margin business?
Yeah. I mean, we're, you know, we did talk about it at the analyst day. It was intentional, right? Because we think it's an important part of our story.
Yeah.
We do think there's a lot of runway here. Like anything at Mettler, there's a lot of things that are contributing.
Yeah
to the end result. I mean, yes, pricing is part of it. Our SternDrive program, you know, operational excellence in the supply chain is a big part of it. Blue Ocean is a big part of it. Blue Ocean is, for all the stuff we've done with the foundation, there's so many cool things ahead, you know, like in terms of what we can do internally with our processes, automating our processes, becoming more, you know, digital-centric with our customer experience and things like that. There's a lot of things there. The mix helps us, you know. Like our fastest-growing businesses are our most profitable businesses. Service is another example of that. Service is accretive to our operating margins. Might be a little detrimental to gross margins, but accretive to operating margins.
All that stuff helps us. Then when I kinda step back from all that, you know, when I can look at our portfolio on the ins ide, I still am not seeing a ceiling. You know, like I see our most profitable businesses contiue to expand margins each year. Now it might not be the same pace as, you know, one that's, you know, on the other end of the spectrum, but we have this mindset of continuous improvement and leverage and just leveraging all these programs. Of course, we're reinvesting along the way, which is also really important. Like I said, with pricing, you. Price, if you don't have the value proposition, people aren't gonna have the same willingness to pay. We're, we're definitely reinvesting in the business.
But I think we, you know, we know how to do this.
Mm-hmm.
It's a lot of singles that generate the runs. It's not going up trying to hit a home run every time you get up to the plate. I think that, I think that all kinda helps us kind of for the future and gives us a lot of optimism.
Let's talk a little bit about capital deployment. I mean, you've done a few deals, but why not do some larger deals and sort of like take that?
Mm-hmm
knowledge and just like, you know, make these businesses so much better than like this.
Mm-hmm.
Basically, it's like, you know, you've got this expertise, you know, companies call it their own business systems where they call it like this.
Yeah.
You can call it whatever it is, but you've got this strategy where you can do this. Why not hunt bigger game and?
Yeah. I mean, it's never been us, right? Like we've always been. In the end, we still feel like we have a lot of organic opportunity. You know, we're still serving very highly fragmented markets. All we need is a little bit of market share each year to grow. We know how to take that and deliver, you know, mid-teens EPS growth. We do that with really strong free cash flow conversion, with really strong return on invested capital. We feel like we're, you know, comfortable with, you know, with who we are. If we're looking at acquisitions, I mean, you know, of course, there's a place for them.
Adjacencies and bolt-ons have always served us well, where we can really take advantage and plug something into like the Spinnaker sales and marketing program, or we have similar end-market exposures where we can really, truly cross-sell or something that maybe we can even leverage with our LabX software. There's plenty of opportunities for synergies. If we can do that with an adjacency, that usually works out the best versus trying to add a new vertical or to do.
Got it.
something transformational.
You've been doing this long enough to know my next question, which is my closing question.
Mm-hmm.
Which is, I mean, you know, I always laugh. It's like whenever we're on your earnings calls, there's only so many questions we can ask Mettler, right? I mean, seriously, there's only so many ways we can ask the China question. There's only so much way you can ask the lab question. What's misunderstood about the company, right? What do you think is that when we have all these conversations, look at this, what don't people get about Mettler and the secret sauce that sort of drives the business?
Yeah. Like you said, I think people understand this pretty well, but maybe it's an opportunity to remind everyone of our diversity. You know, like in times like this, when there's uncertainty, you know, our diversity can sometimes be difficult to understand from the outside because of our complexity. On the inside, it creates a lot of opportunity for us to pivot and to be agile, you know, and pursue different opportunities. I think our diversity has always served us well historically, and I'm optimistic it will kinda continue to serve us well going forward. Then the culture, right?
Yeah.
Like, you know, like, we have a tagline inside the company, that we've kinda like started to embrace over the last year. Patrick and I heard it on our annual budget, global budget tour last summer. We both loved it. He's using it in a lot of his internal slides. It's, "Who we are is why we win." You know?
Mm-hmm.
Who we are is why we win. In the end, it does come down to culture. It's not a cliché, you know?
Yeah.
It's this culture of continuous improvement, this culture of collaboration, this culture of resiliency and agility, and people really, you know, caring for each other and trying to work together for the common good. I really believe in that, and I think it's been a differentiator in our story.
Great. Thank you, Shawn. Thank you, Adam, for being here. Thanks, everybody, for listening. Here's my shameless reminder that ISI season's coming up, so we appreciate your support. Have a great conference.
Yeah. Thank you very much. Take care.