Mettler-Toledo International Q2 2024 Earnings Call Transcript

Yeah, thanks and good morning, Dan. Yes, we are very happy with our position in Europe and how well our team competes there. I mean, a lot of the success is based -- as we also said in our earlier remarks that a lot of our sales team in Europe is through our direct sales channel, and we are competing very effectively with our Spinnaker sales and marketing tools and how we direct our sales force.

On top of that, we have launched a lot of new products over the last two years. And with these platforms, we compete very effectively in Europe. I would say the customers in Europe really appreciate the innovation. We see that also in comparison to many other players in the market, and we are really happy with where we are with these results.

As you know, in the beginning of the year, we were more concerned about Europe, given the impact of the Ukraine war etc. But we are now seeing that we are competing well, especially with our Lab portfolio. And as we highlighted also in the last quarter before the release of our new [Indecipherable] portfolio that is really resonating extremely well for our customers.

Yes, correct. Thanks, Dan. And yeah, I mean, China, as you said, unfolded as we expected in Q2. That said, you also had -- I want to remind you that we still have positive growth in the second quarter last year. When you look at the end markets, it has been soft across all of our end markets. So there's not a single market I would point out here at this point in time. And given the softness, we also think we want to maintain our guidance for the rest of the year. As you rightfully said, we expect high single-digit decline for the full year. That said, it means also that we will see positive growth in the second half and that's based on easier compares.

I would say, when you asked about the stimulus program, you have not yet seen the impact of the stimulus. I mean, what we see is that the stimulus this time is different from the stimulus that have been launched probably last year or the years before. This one seems to be much more focused. I think the Chinese government called [Phonetic] it focused on high-quality segments aiming at segments of AI, new energy, biopharma, and new materials and our teams are working very closely with our customers to also help them prepare for the applications. We have prepared bundles that they can basically can also apply to these applications. We have not built in any effect of the stimulus in our guidance for Q3 and Q4. We think that will be mainly 2025 topic.

You're welcome.

Yeah. Hey, Rachel, this is Shawn. I'll take that one. So like you said, I think the division kind of came in pretty much similar to how we expect to being down 9%. I think a key thing to remember in industrial is that it's very disproportionately weighted by China versus our other product categories. So we did see Industrial business down very significantly in the quarter, kind of similar to the Lab business. As Patrick mentioned, we saw the downturn in China in the quarter, pretty similar across both product categories.

When we kind of look outside of China, we did see, of course, better activity. We see sometimes differentiated performance depending on, like you said, the segments of the market. Certainly, where we see companies that focus on automation and digitalization and process control, we clearly are seeing better opportunities in those segments. There are other aspects of the economy that I think are a little softer at the moment. But I think our teams have been very resilient here. I think our portfolio is very strong and robust.

And I think our go-to-market strategy with our Spinnaker program continues to be really a differentiator in the industrial areas. We've been able to target specific opportunities in the market. And as we kind of like step back from the business. One of the things I think is most exciting is I think a lot of the discussions around restoring and near-shoring opportunities are still yet to come. And so I think as we kind of look to the future, we're a little bit more optimistic here.

Yeah, sure. So, hey, maybe I'll kind of run it down from the top here with the products. So our Laboratory business, our guidance for Q3 is up low single-digit. And for the full year, it would be up low single digits to up mid single-digit. Our product inspection business would be up mid single-digit for the third quarter. And for the full year, up low single-digit. Our core Industrial business would be up low single-digit for Q3 and flat for the full year. And our retail business would be down in the mid-20s for Q3, and down double-digit, which is a little bit of a decline from how we were thinking last quarter for the full year.

By geography, we expect the Americas to be flat in Q3, and up low single-digit for the full year. We expect Europe to be down slightly in Q3 and up mid single-digit for the full year. And we expect China to be up low single-digit in Q3, and as we said before, down high single-digit for the full year.

Yeah. Hey, Vijay. Hey, we felt very good about our performance in the second quarter. We did do better than expected. And we're not seeing any negative changes in the business, but I acknowledge we continue to be a little cautious here. There still are a lot of uncertainties in the macro. We also saw the PMI numbers the other day. In our end markets, we still see longer cycle -- sales cycles. But the other side of that is we do feel like we're competing really well. And I think we are continuing to take a little bit of market share each quarter. These new products have been very well received in the market from what we can see from some initial results. But nonetheless, there's still some uncertainty. And we -- as you know, we typically only have about 1.5 months of backlog. So we'd like to just kind of get through another quarter here and then have a little bit more visibility as we kind of get into the end of the year.

Look, a very good question. And I think we've been trying to say it also in the prepared remarks, we don't see a change from what we have told you in Q2, to be honest. I mean, the markets -- the performance of the end markets have almost rolled out as we expected it. And we also seeded for the remainder of the year. Yes, we are very proud of the fact that we beat Q2 both top and even more on bottom line. You're right. I mean, our exposure on the PMI end markets is probably a little less, but we also need to see getting more momentum in pharma and biopharma moving forward to really benefit even stronger from our strong portfolio.

We are taking -- as Shawn said, we're taking, of course, a bit of cautious stance here to make sure that we also can that will live up to what we told you for the full year. We've maintained the outlook for the full year. We are pretty confident in 2% growth for the full year, but we need a little bit more visibility moving forward, to be honest. Our sales team and the engagement we are seeing of our sales team with customers is excellent. We have a lot of good leads, but sales cycles still take longer. And customers are still also living through the uncertain market environment. Especially in China, the customers are really cautiously spending until we have better guidance also from the government on the path forward.

But also in the rest of the world, in some of the areas where we see with, for example, larger pharma accounts a bit better momentum. We see that smaller pharmaceutical accounts and biotech accounts are still under pressure given the high interest rates. So if you sum all of that up, I think we are still where we have been about a quarter ago in terms of market dynamics. We think it didn't get worse, but we also we still are looking forward to see better momentum, to be honest, to change our guidance. And at the moment, I think we are really well positioned with the 2% guidance for the full year.

Yeah. I mean, especially on Q2, again, we have seen not a huge difference between the different market segments or end customers. They're all being pretty much down the same level with a few percent up and down. I want to remind you that again, our end markets or our end customers in China about 60% or more than 60% are local companies, about 15% are multinationals and about 25% is government state-owned companies. But within that, we want [Phonetic] in that segments and also the underlying end markets, whether it's Industrial or Pharma. Not a big difference. As I said in my earlier remark here is, there is, again, a lot of cautiousness in the end market.

The customers really want to see how the government stimulus plays out and they need to have more confidence before they invest more. I think we are competing very effectively with our portfolio in China. Our local China team is very well connected to our customers. As I said, they are preparing or helping our customers to pay for the application for the stimulus, etc. We set up specific bundles. We have a lot of localized solutions for China. So we are not concerned about the local competition when you look at the end market is really the, I would say, the overall mood in the market and the readiness to increase investment.

Yeah, hey, Jack, maybe I'll take that one. So hey, in terms of like this air pocket topic, we're not hearing that from our teams. Not to say that maybe there's some psychology out there, but we're not hearing that at the moment. And then in terms of BIOSECURE we're not necessarily hearing any impacts of that, maybe a little small. But of course, when you look at the bigger topic, ultimately, we would expect to see opportunities in other parts of the world with other customers as well, too.

Yeah.

Very good question. Thank you for that. Look, I mean, we're constantly evaluating of where we stand in terms of go-to-market strategies and channels that we have in the end markets and what are the best fit for the end markets. And that's true, by the way, for both -- that's true, of course, for our sales. And as I said, in Europe, we have a lot of direct sales force to our end customers. They are using the Spinnaker sales tool sets very well. We also have a strong direct sales team in the US. In other parts of the world, we're using sometimes indirect sales channel, but we are constantly evaluating that.

When it comes to investment in sales channel. We are looking at it from a coverage perspective. Do we really cover all the important end markets around the world? Do we also cover the -- what we call the hot segments well enough either direct or indirect? So it's a very differentiated approach we take worldwide of how we look at this. And if we are thinking about investment, it's, first and foremost, dependent is that underlying market momentum there to increase our sales force. We also look at the same way, for example, services. In services, we see very healthy growth. I would say, in the last quarters, we have continued to invest in services, building out our service capabilities and also strengthening our services team. And that's also a good opportunity for us to moving forward.

Yeah, absolutely. Look, I mean, services, again, is a really strong hold of Mettler-Toledo. It's also one of the key different changes we have against many other companies out there. We have probably the strongest services organization that compared to other competitors of our size. We continue to invest not only in the size of the service team, but also in the portfolio of the services we are offering to make sure that we have unique and differentiated offerings for our customers. We have a large installed base of instrument out there and a good part of that is still untouched with our services. So what we're also investing in at the moment to go after the installed base, with a stronger inside sales and tele-salesforce to make sure that we get in touch with these customers tell them about our updated service opportunities and then moving forward, hopefully, also increase the amount of products that we have on the service contracts.

So I think it's an excellent opportunity. Again, it's definitely something we keep a strong eye on and also invest in, even through the downturn that we have seen last year, we continue to invest in service. And I think it's paying back now. As I said, we had double-digit growth last year. And even this year, based on the tough compares, we're still seeing very good growth with 6% we see. And as a final reminder, you know that services is the most popular part of our business.

That's very -- it's a good question, but it's really hard to say about how much share you gain per quarter. I wouldn't look at as a quarter-over-quarter topic. Of course, we compare our results to what we are hearing from our competitors, and we are very pleased of how we perform even in this difficult environment. But as we also made clear, for example, on the Investor Day, on average, we own probably about 25% market share. So there's ample of room for us to gain additional share. And that's why we're also investing into innovation and driving our innovation to market because this is what customers are looking for and they are looking for products that help them to become more productive, to help them with data integrity, to help them on the automation side. And that will be a path for us to continue the market share gains.

And we don't make big market share gains per year, but we do make small chunks every year whether it's currently accelerating or not, hard to tell, I would say, given the performance of the products compared to many competitors. We are happy with the performance, and we're seeing market share gains.

Hey, Dan, this is Shawn. Maybe I'll take that one. I mean, as you know, we're very -- we think we're a great platform for acquisitions. When something is strategic and makes sense, we usually can move pretty quickly, but we're also very selective. And -- but absent share repurchases, we use our free cash flow to buy back shares. We feel good about how that program has worked over the years. And I think part of the success is our consistency in how we execute it. And so we continue to look at it the same as we looked at it in the past. And I think you'll see us be consistent with our share repurchase program. As a reminder, this year, I think our estimate is about $850 million, which approximates our free cash flow estimate for the year. And absent if we did identify an acquisition opportunity.

Yeah. Thanks, Mike. No, I think you got it spot on. It's going to be very much about the leverage on volume. If we look at our gross margin estimates for the second half of the year, I'd say that probably on a full year basis, we're probably up a little bit from what we were thinking last quarter. As you could see, we did pretty well in the third quarter versus our expectations. And of course, a part of that was also doing a little bit better on the volume.

For Q3, we're kind of estimating gross margin expansion in like the 60 bps kind of a range. And for the full year, and that would be maybe 50 bps, excluding currency. So currencies are a little bit inverse of what we would have seen in terms of how they affect the margins, at least, the moving pieces versus Q2. And then for the full year, our gross margin estimate is about 70 basis points, which, again, is up a little bit from what we were thinking last quarter.

And then in terms of the operating margin, the operating margin for the third quarter estimate is down about 50 bps. And then for the full year, it would be up about 40 basis points. And again, these numbers are also at the midpoint of our guidance, too. So things could be a little bit better or worse depending on how we do.

But otherwise, I'd say that the teams are executing really well. The pricing program continues to do -- be very effective. Pricing came in at 2% in the quarter, which is in line with our expectations. We continue to expect 2% for the full year. And then our teams are doing a really fantastic job working on our various productivity and cost savings initiatives. And then maybe also to comment on our SternDrive program is driving some nice efficiencies and cost savings in the margin line.

Yeah, we are expecting things to start looking a little bit more like seasonal -- typical seasonality if you adjust for the shipping delay topic. Probably the best way. But maybe not 100% back. But if you kind of -- I think the best way to look at that is to kind of take our sales guidance and look at the sequentials. And then you can see the sequentials are, I think, pretty reasonable versus historical results depending on how far back you go, adjusting for the shipping delay topic. So that gives us some confidence for the back half of the year.

In terms of budget flush, as you say, we're typically not a budget flush story. But nonetheless, I think we all did feel Q4 last year. I'd say it's still a bit early to judge. As Patrick mentioned, we still see longer sales cycles with the customers. But at the same time, we're only typically sitting on 1.5 months' worth of backlog. And -- but otherwise, I think we feel like there probably should be something this year versus relative to last year. But the magnitude is obviously difficult to judge, but we do feel good about how we're positioned here for the second half of the year from a sequential basis.

Yeah. Welcome.

Yeah. Good morning, Josh. Product inspection actually we are quite pleased with the result. I mean we know that the end markets are still under pressure, customers are cautious with their investments. We know that deal cycles are longer still, but we have launched a lot of new products over last year, mainly in the X-ray business demand. And we also broadened our product offering from the high end into the midrange portfolio that opens also a lot of stores for us now.

So I think we have a really good healthy engagement of our sales teams around the globe with our portfolio. So we have a healthy funnel there. But I would say the caveat is still that sales cycles are longer and customers in some areas are cautious with investments until they also see the underlying market picking up. The upside for us is the new portfolio. We're competing very effectively. And again, with the broader portfolio also seeing probably more customers than we have seen before.

Well, let's say, I mean, this is very broad question. Let's focus on the Lab products right now. I mean, we see again that with our portfolio, we are competing very well. We have launched a new platform there as well. We saw also some bigger projects and especially in Europe, converting in the first half and the second quarter of the year. So that is, again, I think we are in a good position when it comes to our portfolio and competing effectively in the market.

But on a grand -- I would say in the grand scale of things, it's not like there is a significant change in customer buying behavior right now. The end markets, as we lay it out and the behavior has been laid out, it's still rather soft, especially in China. But in Europe, we have seen good momentum. We also have seen in the last quarter, the Lab business in the US picking up. So I think we're in a good position and the parts of the market recovers, I mean, the more momentum we can capture with this portfolio, to be honest.

Yeah. No, thanks, Patrick, and good question. I mean, I think it depends a lot on what segment of the market we're talking about. And probably what you picked up on in my voice was just that we have -- this is the business historically, right, when people would say, hey, can you talk about your cyclicality? We would say this is historically the part that's been exposed to the economy more than our other businesses.

And then if I look at Europe, I mean, yes, Lab did a lot better than Industrial in the quarter, but we still had growth in industrial. And that's against a backdrop of a relatively weak economy there. And so that's something that we do feel good about is the resiliency there. Part of our industrial business, of course, is supporting the same end markets as Lab like pharmaceutical, but I think it really gets into what we started to see in the quarter and some of the discussions I've had with colleagues, you hear comments around, hey, if we're talking about customers that are in the business of like automation and end-to-end process control and digitalization, those customers are actually doing pretty well.

If you're talking about customers that are in the business of discrete manufacturing, and those types of segments, much more challenging conditions. And I understand what you're saying because I had a similar question to our team as well, too, because we certainly see a lot of the headlines from a lot of the industrial companies this past quarter having more challenging results.

So I guess it's a little bit of both. I think we're really well positioned on some of these more favorable trends, but it doesn't mean that we're necessarily immune to the economy. But in the meantime, I think we always try to focus on what we can control, and I think the teams are executing very well, both on the sales and marketing side, but also on the product development side. And we feel very good about some of the R&D investments that we've accelerated over the last few years in that business to lean into some of these market trends. And certainly, we have a great pipeline of opportunities going forward as well.

Yeah. I mean, I think we're -- I mean, I think we're -- we always sit on one-and-a-half months of backlog. So I think that always makes it a little challenging for us when we start going out beyond the current quarter. I think we tried to acknowledge like we're executing well. We did better than expected in the second quarter, but we're not just assuming that we should add that to the second half. We do see soft market conditions out there. But we do benefit also from easier comparisons. We feel good about the sequentials. There is an element of us being a little bit cautious going in the second half, but I think it's prudent to be cautious too.

Like I think there really are a lot of different aspects to this uncertainty in the environment. I think we're all looking forward to seeing more robust signs of things turning, but no one really can say exactly when that's going to happen. And of course, we're a pretty diverse business by product, by end market and by region of the world. And so -- but I think when we kind of step back and look at how we're guiding, we actually feel -- we feel good about our guidance to everybody. And of course, we're always going to look to do better. But right now, we feel like this is an appropriate way to position the forecast.

Yeah. No, good question, Catherine. I mean, I think some of this is also noise with how some of the currencies have changed over the last quarter. But certainly, we are doing a little bit better on the gross margin side that I talked about earlier. And then in terms of like the opex side, we're still investing in the business, too. And we have such a great pipeline of investment opportunities, and we're just trying to find the right balance and the right mix between realizing productivity gains, but also reinvesting in the business at the same time.

Yeah, hey, we're still seeing caution in pharma, but maybe the one pocket that was stood out a little bit more was in Europe. Patrick mentioned it in his -- one of his previous responses. When we talk to the team, you do hear that there has been some projects on the sidelines for a bit, and we started to hear some of those projects converting, so that was a positive sign.

But I would say that, hey, we're not out of the woods. We do hear comments about big pharma performing better than smaller companies or even getting into small biotech, where I think there's still some challenges there. But when you look at it from a product perspective, what was maybe encouraging to us as we saw pretty good growth throughout the portfolio, with the only exception being product inspection, which was still kind of down a little bit from some -- I mean, not product inspection, process analytics, with process analytics being down a little bit because of our exposure to bioprocessing, but when we look at the second half of the year, we feel a little bit better about that one.

I think we feel pretty good. Maybe I'll start and Patrick wants to chime in. But like I'd say we're, I don't know if you'd say, 8th [Phonetic] inning, Patrick or so, but we're getting pretty close there. I mean, we definitely feel very encouraged as we kind of go into the second half of the year, if you think upstream and downstream, we were seeing a lot of particular headwinds in our downstream business. For us also, that was where we're more exposed on the single-use side. So that could have been part of it as well, too. But when we kind of look to the second half of the year, all the data and even just the qualitative discussions we're having with the team and more importantly, customers points to a much more favorable situation for the second half.

Yes, absolutely. I can confirm that. I mean, again, if you want to differentiate a little bit about the regions in the US and Europe. You asked about destocking issues. I would say in Europe and the US, we have the destocking issue behind us. There's some residual stocking issue that we're still facing in China. But what we are hearing from [Technical Issues] customer that also should be over in a quarter or so.

Yeah. Hey, Tycho, I understand the question, but I think it's probably a little bit earlier for us to kind of think about how we would guide for next year on pricing. And hey, just to also maybe remind of like how we historically guided, we typically were -- I don't think we've ever necessarily -- expect for the last few years during this inflationary environment, we're never typically guiding more than 200 basis points even in the more historical inflationary environment. So hey, if we can do better than that, of course, we will. But I kind of look at 200 basis points as a mid to long-term guide is probably a reasonable assumption.

Yeah. Thanks.

Hey, thanks, Paul, and thanks, everybody, for joining our call this morning. Please feel free to reach out to me if you have any further questions. And I hope you all have a great weekend. Take care. Bye.