Operator:

Thank you for standing by, and welcome to the Mettler-Toledo Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background. After the speakers’ remarks there will be a question-and-answer session [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Adam Uhlman, Head of Investor Relations to begin the conference. Adam over to you.

Patrick Kaltenbach:

Thanks, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our second quarter financial results, the details of which are outlined for you on Page 3 of our presentation. Our team continued to execute well and deliver better-than-expected results in the second quarter, including good growth in Laboratory sales in Europe and Americas. As expected, market conditions in China remained weak in both our Laboratory and industrial businesses. We continue to benefit from our productivity and margin initiatives, which helped mitigate the impact of foreign exchange headwinds and protect our earnings. Looking to the remainder of 2024, market conditions are soft, particularly in China. However, we expect our local currency sales to return to growth in the second half of the year, primarily due to easier comparisons as well as execution of our Spinnaker sales and marketing program and leveraging our innovative product portfolio. We remain focused on continuing to strengthen our company for the future and believe we are in an excellent position to continue to gain market share and deliver future growth. Let me now turn the call over to Shawn to cover the financial results and our guidance, and then I will be back with some additional commentary on the business and our outlook. Shawn?

Patrick Kaltenbach:

Thanks, Shawn. Let me start with some comments on our operating businesses, starting with Lab, which grew approximately 1% compared to last year. We had good growth across most of the portfolio, especially in Europe, and we also had good growth in the Americas. We continue to benefit from our refreshed portfolio of innovative solutions and our Spinnaker sales and marketing program as well as our diversity across end margins and applications. Our industrial sales for the quarter were in line with our expectations and were down 5% with sales growth in Europe, offset by a significant sales decline in China. Product Inspection sales were up 3% on good results in both Europe and the Americas, although market conditions with food manufacturing customers are still challenging. We have also seen very good demand for our X-ray inspection technologies, which has benefited from recent innovations. Lastly, Food Retail sales declined in line with our expectations against significant project-driven sales growth in the second quarter of last year. Now let me make some additional comments by geography. Starting in the Americas. Our sales grew 2% in the quarter with good growth across Lab and Product Inspection, while retail declined against significant growth in the prior year. Our results were a bit better than expected and while we observed longer customer purchasing cycles, we see good customer engagement and feel that our team is competing very well. Sales in Europe were better than expected and grew about 6% in the quarter. Our results included very good growth from both Laboratory and Industrial. Our teams continue to compete extremely well considering challenging economic conditions and are doing an excellent job leveraging our updated portfolio of innovative products. Additionally, in Europe, we have the highest proportion of sales through our own direct sales force, and they have shown excellent execution in leveraging our Spinnaker sales and marketing program to achieve these results. Lastly, our Asia and Rest of the World results were in line with our expectations and included the significant sales decline in China as expected. We continue to see soft demand from most end markets in China, but we still expect to return to sales growth in the second half due to much easier year-ago comparisons. Our China team remains agile and has implemented advanced customer mapping and database enrichment to identify potential sales opportunities as they arise. As we have mentioned in the past, strength in China can change quickly and our team remains ready to take advantage of growth opportunities. One final comment on our quarterly results. We continue to see very good growth with service across most business areas and regions. Our service business grew 6% this quarter, which was on top of double-digit growth in the previous year. Those are all my comments on the business for the quarter and now I would like to share with you additional insights on how we are strengthening our business to continue to gain market share and emerge from the market downturn in an even stronger position. Earlier this year, we shared with you how we are rolling out the next wave of various corporate programs, such as our sales and marketing excellence programs, Spinnaker 6, and the sophisticated data analytics being implemented to support our enhanced program. An important enabler of this initiative is our Blue Ocean program, which is our global process harmonization initiative, all built on a single instance of SAP. We have invested in this initiative for over 15 years, harmonizing and centralizing processes that touch all elements of our business. From sales and marketing to service our supply chain, product development, and our finance, HR, and other administration functions. With Blue Ocean, we have been able to harness the significant diversity and complexity of our business and turn it into a very powerful competitive advantage that many smaller private companies in our industry cannot match. Blue Ocean also provides us with valuable real-time business intelligence insights, allowing us to react quickly to changes in the business and operating environment. We have implemented advanced dashboards to ensure real-time reporting of KPIs across our business and are leveraging advanced software solutions to make better decisions faster. Our digitalization efforts have been a source of productivity improvements with much more ahead of us that will allow us to automate many renewal activities creating seamless end-to-end processes with meaningful productivity benefits. Blue Ocean has also enabled global shared service centers that drive process excellence, quality and productivity. In recent years, we have improved our Blue Ocean template to add new features and functionality, including adding e-shops, advanced procurement solutions and sophisticated service pricing analytics. A great example of this enhanced functionality is service technician scheduling, which can be a very complicated manual task. There are several factors to be taken into consideration when scheduling the assignments such as customer location, number of devices, age of the devices durations. We have been able to automate or semi-automate this process and then also apply enhanced real-time traffic imaging to outline the best routes. Now that we have rolled out Blue Ocean to nearly all of our entire organization, we have a strong foundation to push for new capabilities out into the entire organization at a rapid pace. Blue Ocean is the backbone supporting the next wave of several corporate programs including our new Spinnaker 6 sales and marketing initiative. This includes the rollout of advanced version of our Top K program, which are targeted investment alerts we create by using sophisticated data analytics to scan our internal CRM and external databases to identify new growth opportunities. In the past, these alerts were manually qualified and static reports were generated by our sales team in one or two releases per year. Today, our team is integrating advanced software solutions to automatically qualify and feed these leads real time into our CRM for much quicker response by our sales teams. This also enables faster generation of cross lead opportunities across our business units. Additionally, customers utilizing our customer portal today offer standardized purchase recommendations based on items in their cart. In the near future, these recommendations will be tailored to an individual customer's current installed base and application requirements, enabling more personalized suggestions. We are also expanding our capability for self-service, which, today, includes the ability to access calibration certificates or request service or remote diagnostics and remote service. And in the future, our platform will support new business models around consumables reordering and preventative maintenance and supports the rollout of our advanced cloud-based software solutions. Overall, Blue Ocean has been a long journey, starting from a goal to consolidate roughly 70 different ERP systems into one standardized global business system. From there, we have expanded the project to support new features, business models, and advanced productivity initiatives around automation across the company. As we look to the future, Blue Ocean is at the core of enabling new sales growth and margin expansion opportunities we have today. It makes us more agile and supports fast digital innovation as our central implementation allows new ideas and digital business models to be scaled globally at a rapid pace. It provides real-time visibility across the entire value chain and our business units globally to support data-driven decision-making and reallocation of resources. Significant productivity gains are enabled with bots in the AI-supported automation, and it allows for optimization of our global IT footprint with scale cybersecurity, global applications, and life cycle management. Finally, it is a platform to provide value to our customers, which includes connecting to our digital products and service offering while enhancing their empty experience. And as I mentioned earlier, these capabilities are a powerful competitive advantage that many of our -- that many in our industry do not have the ability to or resources available to replicate. Now this concludes our prepared remarks. Operator, I'd now like to open the line for questions.

Dan Arias:

Shawn and Patrick, Europe seems to be doing pretty nicely right now, especially given some of the macro conditions that exist in some of those countries. What do you think is driving that and what do you think is making the biggest difference between that region and the Americas when it comes to revenue performance and growth?

Dan Arias:

Okay. Helpful. And then maybe on China, the message here sounds pretty similar to last quarter. Demand still weak, hope for growth in the back half, but mostly just because of the year-over-year compares and how those change. Can you just expand on the extent to which business conditions have changed at all? And if they have, what you think that might mean for the year? I assume the outlook is still for a high singles decline, but curious if the, is the potential for something slightly different one way or another has increased? And then it would just be great to get your updated thoughts on stimulus from here, just given how topical that is.

Operator:

Your next question comes from the line of Rachel Vatnsdal from JPMorgan.

Shawn Vadala:

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 reshoring 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.

Shawn Vadala:

Yes, 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.

Vijay Kumar:

Hey, guys, congrats on this execution here. I had two guidance-related questions. One on the third quarter, maybe, Shawn, for you. Your comps get 700 basis points easier, right, the 1% seems a little light. Curious on the thought process for 3Q.

Vijay Kumar:

Understood. And Patrick, maybe one for you on -- if you look at the second quarter performance, pretty impressive on the operational side, EPS by $0.60. I think guide raise was at the midpoint maybe $0.20. So, was the guide in the back half assumptions, did it temper down a little bit? I know Shawn mentioned PMI but your business mix has changed quite a bit. Your exposure to PMI is far lesser. So maybe just comment on your back half, how you're looking at it, any change versus three months ago?

Operator:

Your next question is from the line of Jack Meehan from Nephron.

Patrick Kaltenbach:

Yes. 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 are 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 in that segment 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 a 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, et cetera. 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.

Shawn Vadala:

Yes, 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.

Matt Sykes:

Patrick, I just want to touch on something you mentioned when you're discussing the strength you've seen in Europe, which is a higher exposure from your direct sales force in that region. I'm not entirely clear about direct sales force exposure across regions outside of Europe. But I'm just wondering, given the success that team has had in executing Spinnaker and in the quarter, does that make you want to reinvest in a direct sales force where you might have gaps versus indirect or are you -- do you feel pretty good about where you are in terms of direct sales force exposure globally?

Matt Sykes:

And if I could just follow up on that services growth. You mentioned, I think, up 6% in the quarter. You've consistently driven sort of mid-to-high single-digit growth in services sometimes higher. Could you just give the mark-to-market? I remember at the Investor Day, you had a few years ago, that was a key initiative of yours. Could you maybe just talk about how that exposure to services has grown and where you think there still is room to continue to drive that services growth higher as a proportion of overall sales?

Operator:

Next question is from Dan Leonard of UBS.

Patrick Kaltenbach:

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 and, 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.

Shawn Vadala:

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.

Michael Ryskin:

Shawn, maybe one for you. Just looking at the EPS guide through the rest of the year and the quarterly progression, it seems like you're a little bit of a step-up in margins in the third quarter and a bigger jump in 4Q. That's pretty consistent with what you've done historically. There's a lot of volume leverage in the fourth quarter. Just wondering if you could dive into the nuances of that margin expansion now. How much are we seeing on the gross margin line versus SG&A? Just any additional color you can give us on a quarterly basis, just confirming that.

Michael Ryskin:

Okay. That's all really helpful. Thanks, Shawn. And then one more to the guide. A number of other tools, peers talked about, expecting a return to more traditional seasonality as the year goes on and I mean, referring both to a little bit in 3Q in Europe and then maybe a little bit of an end of year bounce. That's implied in your guide as well. But you've also got the weird comps last year from the shipping delay. So if you could just walk us through like what are you expecting from the seasonality perspective? Is there any view on budget flush at this point? I know it's not a huge driver for you, but still just what are you thinking about there?

Operator:

Your next question is from the line of Josh Waldman from Cleveland Research. Please go ahead.

Patrick Kaltenbach:

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.

Patrick Kaltenbach:

Well, let's say, I mean, this is a very broad question. Let's focus on the Lab products right now. I mean, we see them 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 competing effectively in the market. But on a -- 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 U.S. 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.

Patrick Donnelly:

Shawn, this is one for you. You sounded a little more, I guess, optimistic on the Core Industrial outside of China, so maybe we can focus on that piece just for a second. The industrial complex is a little softer in terms of commentary of this earnings season. Just curious what you're hearing in the developed world here, how you're thinking about that core industrial piece, what you're hearing from customers and there's a little bit of optimism, the right way to lead it?

Patrick Donnelly:

Okay. That’s really helpful run through. And then just on the 2H guide, obviously, I’ve gotten a few questions here. I think someone mentioned kind of the implied raise is a little bit less than B. I mean has anything changed in your view in terms of 2H view? Obviously, you guys have the standard network conservatism a lot of times, I think people are used to it, but just how you think about 2H relative to a few months ago, again, just given that the guide change, and Shawn, even one of your answers, because we're not quite back to 100% seasonality just yet. So just how you're thinking about the market relative to a few months ago would be helpful.

Operator:

Your next question is from the line of Catherine Schulte from Baird.

Shawn Vadala:

Yes, 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.

Shawn Vadala:

We're still -- yes, hey, we're still seeing caution in pharma, but maybe the one pocket that was stood out a little bit more it 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 a product perspective, what was maybe encouraging to us as we saw a 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.

Q – Tycho Peterson:

Actually, Shawn, I’m going to pick up right where you left off on bioprocess. I know it's a smaller part of the mix, but can you maybe just give us a little sense on kind of upstream versus downstream what you’re seeing there. Your equipment's obviously kind of lower price points than maybe some of your peers. But just curious, as we've kind of gone through a long period of destock and thinking about restock, where are we in kind of that cycle for you guys?

Patrick Kaltenbach :

Yes, absolutely. I can confirm that. I mean, again, if you want to differentiate a little bit about the regions in the U.S. and Europe. You asked about destocking issues, I would say in Europe and the U.S., 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 customer, that also should be over a quarter or so.

Shawn Vadala:

Yes, 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.

Adam Uhlman:

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.

Operator:

Thank you for standing by. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mettler-Toledo First Quarter 2021 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Adam Uhlman, Head of Investor Relations. You may begin.

Patrick Kaltenbach:

Thanks, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our first quarter financial results, the details of which are outlined for you on Page 3 of our presentation. Overall, our results in the first quarter were much better than anticipated across most product categories and geographies. As discussed last quarter, we also had a benefit this quarter from recovering delayed product shipments from the fourth quarter.

Operator:

[Operator Instructions] Your first question comes from the line of Dan Arias with Stifel.

Shawn Vadala:

Yes. Thanks, Dan. Thanks for the question. I think it's pretty much as you interpreted. It's largely related to doing a little bit better on the shipping delays that we had in Q4. Of course, we did a little bit better than that in terms of Q4 results in general. But even though we're not seeing any negative changes in the business. We also prefer to be a little bit cautious here until we get closer to the second half and have a little bit more visibility.

Patrick Kaltenbach:

I can take this, Dan. Look, we have been definitely pleased that we have seen a somewhat better result in Q1 than we had expected. That said, we still expect it to be quite weak. I mean, as Shawn said, we'll have more than 20% decline in China second quarter based on the very tough compares we see against Q2 last year and the years before where there has been quite heavy investment in China. There was significant spending during COVID and also some, of course, inventory buildup, et cetera.

Operator:

Your next question comes from the line of Jack Meehan with Nephron Research.

Shawn Vadala:

Yes. Thanks, Jack. Hey, the rest of it, we -- despite being down 6%, excluding the shipping benefit, we're pleased we did better than expected. We kind of expected customers to start a little more cautiously this year. I think they did start cautiously, but we're glad that they didn't -- they weren't as cautious as maybe we were thinking at the beginning of the quarter.

Shawn Vadala:

Yes, sure. So let me start by business area. So our Q2 guide for Lab is to be down low single digit and for the full year to be up low- to mid-single digit. Product inspection, I don't know if I could also maybe add, if you exclude the shipping delay for the full year, that would be flattish.

Vijay Kumar:

Congrats on a good Q1 execution. Maybe Shawn, for you, you beat Q1 by 500 basis points, right, at the minimum relative to your expectations. So that's annualized 125 basis points which you've raised guidance by 50 basis points, so did anything changed around the back half assumptions that makes you perhaps want to be a little bit more cautious?

Patrick Kaltenbach:

Thanks for the question, Vijay. Look, as Shawn just said, we have about 1.5 months of backlog. So we have a pretty fast turnover in most of our businesses. When we look at the second half, again, the comps will get much easier for us based on what we have seen last year. So that, of course, implies a positive growth for the second half.

Michael Ryskin:

I'm going to ask another one about market conditions as you go through the year because I think that's where there's the most interest. Just following up on your comments just there. Is there anything in particular you're looking for as you go through the year? I mean is it really just a matter of time of you don't want to call for an improvement until you're only about 3 or 6 months out?

Shawn Vadala:

Yes. Mike, this is Shawn. Maybe not to entirely repeat what we just said, but probably we'll echo it to a large degree. I think it comes back to this sitting on pretty much 1.5 months' worth of backlog. We do see good activity in our pipeline. As Patrick, I think, mentioned before, we are seeing order cycles being elongated a little bit in the first quarter.

Michael Ryskin:

Okay. And I want to ask one on the P&L. I mean, 1Q earnings beat pretty handily, obviously, shipping, recovery and the underlying business being better, probably played a decent role in that. But could you sort of parse that out? I mean you gave a lot of color on what revenues would have been if it wasn't for the shipping recovery. Any color you can give on the P&L in terms of how much benefit was the EPS?

Shawn Vadala:

Yes. So in terms of the first quarter, as we kind of said, we benefited about 6% in terms of sales from the shipping delay benefit. Our expectation was that we were going to benefit about 5%. So we had a 1% benefit. So you can kind of maybe draw your own conclusions of what that would have meant or not. But maybe more importantly, if you just take that reported number of sales in Q1 and you look at our guidance for Q2, regardless of shipping delay benefit. With that benefit, the reported number is actually a very similar dollar number sequentially to what we see in the second quarter.

Rachel Vatnsdal Olson:

So I want to dig into the Industrial performance in the quarter. You mentioned some strength in Americas and 1Q on some project level activity, but then you also said that you expect core industrial to be down high singles in 2Q. So can you just kind of walk us through the drivers of that core Industrial business in the first half of the year? Were there any one-timers that we need to be aware of in 1Q, for example?

Shawn Vadala:

Yes. Maybe just to get to the other part of your question, Rachel. The first quarter in the U.S., certainly, that project activity is lumpy. And so we certainly will not see that in the second quarter. So there's an element of that. And then maybe the other point I make here is that in core Industrial, it has a larger mix of business weighted towards China versus our other businesses.

Rachel Vatnsdal Olson:

And then just for my follow-up, I want to dig into some of the biopharma commentary that you gave. So you mentioned some of slower spending to start of the year, we've been hearing that across the sector this earnings season. But can you just unpack for us what does guidance assume in terms of those biopharma customer budget starting to open up? And then have you seen any activity level from biopharma customers pick up in April and then early May here from that group as well?

Shawn Vadala:

And the other part of biopharma, of course, pipettes and we certainly have seen improvement in pipettes relative to some of the destocking issues that we were dealing with last year.

Matthew Sykes:

Patrick, maybe -- and sorry if I've missed it, but maybe just some commentary around the services business. I think you mentioned it was strong in Q1, but just any expectations and progress that you've made on your services initiative over the course of this quarter and your expectations for the full year?

Catherine Ramsey:

First, great to see the recapture of the shipping delays coming in above your expectations and recapturing pretty much all of that lost revenue. Just when it comes to the new logistics provider, would you say that situation is fully resolved? You got the protocols and processes in place to move smoothly going forward?

Shawn Vadala:

Yes, sure, Catherine, maybe I take that one. So of course, there was the shipping delay benefit in Q1, but I -- but if you exclude that, I think like the multiyear CAGRs still look pretty similar between Q2 and Q1.

Operator:

Your next question comes from the line of Patrick Donnelly with Citi.

Shawn Vadala:

Yes. And then to kind of feed off that, our team there has just always been such an agile team to pivot to where the growth opportunities are. And certainly, that was a topic we were talking about throughout this week with our -- at the executive level as just some of the programs that they're doing locally to identify those pockets of growth and go after them. So we feel like we're well positioned as things improve.

Shawn Vadala:

Yes. So I kind of mentioned earlier in one of the other questions. Pricing came in pretty much as expected in the quarter at 2%. We're still kind of holding our guide for the full year on pricing at 2%. Of course, we're going to try to do better than that. I think all the things we're doing on innovation certainly continues to enhance our value proposition. And so that always helps. I see good execution on this topic as well, too. So we'll see how it plays out for the rest of the year.

Operator:

Your next question comes from the line of Joshua Waldman with Cleveland Research.

Patrick Kaltenbach:

Yes. Look, I mean I think we saw very good interest in our products and performance, as we said, better than expected throughout the end markets and product portfolio. If I would point to maybe one segment, it could be Food, actually, the food market, we saw really good interest for our product inspection business that also drove a little bit of the better performance there.

Operator:

This concludes the question-and-answer session. I'll turn the call to Adam Uhlman for closing remarks.

Operator:

This concludes today's conference call. Thank you for joining. You may now disconnect.

Operator:

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

Patrick Kaltenbach:

Thanks, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our fourth quarter financial results, the details of which are outlined for you on Page 3 of our presentation. As previously announced, to transition to a new external European logistic service provider, significantly impacted our fourth quarter results, which we expect to largely recapture in the first quarter. Excluding the impact of these delayed shipments, our results were in line with our previous expectations. Market demand has remained weak in China and across our core end markets of pharma and biopharma, food manufacturing and chemicals, but also does not appear to have deteriorated further. Looking forward, we expect market conditions to remain soft in the first half of the year, and we would then expect our sales return to growth in the second half of the year as we begin to let easier comparisons. We are focused on the things we can control, including increasing our competitive advantages through innovation and continuous improvement of corporate programs and nurturing our unique global culture. I'm confident these actions will drive market share gains and help us emerge stronger in market recovery. Let me now turn the call over to Shawn to cover the financial results for the quarter and our guidance for the year, and then I will come back with some additional commentary on the business. Shawn?

Patrick Kaltenbach:

Thanks Shawn. Let me start with some comments on our operating businesses, starting with Lab. As we had expected, demand trends across most of our Lab customers remained weak in the fourth quarter, especially pharma and biopharma. Sales declined across most product categories, and we continue to see soft demand across all geographies, especially in China. While market conditions have been weaker, we continue to focus on the things we can control, which includes bringing new innovations to market, enhancing our sales and marketing programs and expanding our service offering and capacity. This past year saw the launch of many exciting new and upgraded products. We are excited about our innovation pipeline, and we believe organizations that maintain their growth investments during market downturns will emerge even stronger during recovery periods. Our investments have had a particular emphasis on supporting our customers' needs for laboratory automation and data integrity requirements, which we are confident will be a significant driver of continued market share gains going forward, and we are excited to share with you additional developments over the coming months. Switching to our industrial business, sales for the quarter were in line with our previous guidance, despite the headwind from delays from our European logistics hub. Core industrial demand in the Americas and in Europe has been relatively resilient this past year, despite declines in purchasing manager indexes. We continue to see solid interest from customers looking for advanced automation solutions, and we expect to benefit from customer investments in on-shoring and near-shoring over the coming year. Regarding our product inspection business, we have seen weak food manufacturing customer demand in Europe and soft demand in the Americas. We continue to target faster-growing segments and have a focus on engaging new customers with a refreshed portfolio of innovative solutions. Lastly, food retail results were very strong, excluding the negative impact from our European logistics hub. We had solid performance for the year due to strong project activity, particularly in the Americas. Now let me make some additional comments by geography. Sales in Europe, excluding the estimated impact from our European logistics hub delays, were softer than we had expected, following resilient performance for much of the year. As mentioned earlier, weak demand from European food manufacturing customers weighed on our product inspection business. Additionally, we also saw softer than expected demand from our Lab and core industrial customers in the quarter. We remain cautious on the outlook for Europe due to low PMI readings in the region, the continuing war in the Ukraine, and the potential for additional impacts for the economy from the conflict in the Middle East. Turning now to the Americas, our results for the quarter, excluding estimated logistic headwinds, were slightly better than we had expected due to static core industrial demand and robust food retail growth. Going forward, we are well positioned to capture increased demand from emerging growth industries and onshoring activities. Finally, Asia and the rest of the world results were slightly better than we had expected, as our core industrial sales declines in China were less than we had anticipated. Pharma and biopharma demand in China has remained very weak, and we continue to expect reduced demand for the first half of the year. Our team is doing an excellent job adjusting to the current market conditions. We are confident in the long term growth opportunity for our business in the region. That concludes my comments on the fourth quarter results. Now I'd like to share with you some deeper insights on the next wave of sales and marketing initiatives we have introduced to our Spinnaker program and a few examples of enhancements that are on the way. To start, and as a reminder, the significant diversity of our business and the fragmented customer base means we need to set a set of sophisticated tools, analytics and processes to identify, prioritize and pursue the most attractive and profitable growth opportunities for our sales teams, with a specific focus on new customer opportunities and cross-selling opportunities within our existing customers. Spinnaker is our global excellence program in sales, service and marketing that enables us to drive sales growth and gain market share. Continuous improvement is an important part of our strategy and culture, and it is very much at the heart of our Spinnaker program. We constantly enhance and refine our initiatives, releasing new waves of enhancements to the program periodically that build on previous waves of initiatives, reinforcing our strong foundation and increasing our competitive advantages. We are currently launching the sixth wave of Spinnaker, which is focused on leveraging new possibilities offered by digitalization of processes and further enhancing the customer experience. I'd like to share with you some tangible examples of the initiatives we have on the way, starting with our digitalization efforts. This year, we are making multiple improvements to our top K and [ph] salesforce guidance programs. As a reminder, in addition to generating sales leads for various marketing activities, our top K program provides our field teams with tailored and actionable investment alerts about specific sales opportunities that are generated by proprietary data analytics and deep learning software solutions, leveraging external data sources and our own internal databases. These sales opportunity alerts are created fully automatically, qualified and are fed into our CRM. In addition to expanding our top K program to more areas of our business, this next wave of Spinnaker features a significant expansion of data sources to feed our big data warehouse, enabling Spinnaker to provide intelligent prioritization of target sites for our field sales teams. This also enables real time smart profile reports to ensure timely follow up and the most accurate background of potential customers, including data on the digital engagements with us. Other improvements include expanded capabilities to Other improvements include expanded capabilities to optimize and prioritize our marketing activities, including campaigns for replacing aging equipment across our install base. This wave of Spinnaker also features additional big data capabilities to support our sales team cross-selling efforts. With each of our product categories having their own dedicated sales specialists, cross-selling is a very important growth opportunity for us because leads generated by colleagues in other product areas have high conversion rates. Today, our cross-selling penetration to existing customers is still rather low, but big data analytics across our CRM and various processes is helping us unlock sales leads across our businesses, including from our service teams, and Spinnaker is an excellent tool to help provide additional transparency on these sales opportunities. Now, from a customer perspective, we are also advancing several important enhancements to Spinnaker to improve our customer experience. We have previously focused on increasing our digital connectivity with our customers. However, we now see additional opportunities to provide advanced platforms that will create impactful experiences that further strengthen our customer relationship and overall value proposition. Examples include offering customers the ability to gain deep insights across the install base of Mettler-Toledo instruments, be it access to calibration certificates or known last service dates, or contract coverage or renewal agreements. We have also enhanced our integration to do customer systems to streamline the entire procure-to-pay process. By offering various levels and types of integration, from punch out to order and invoice integration, we aim to increase productivity and drive process efficiencies for our customers. We already receive about 40% of product orders, mainly consumables and less complex products, through digital interfaces today, providing a seamless and efficient buying experience for our customers. Our customer portal allows customers to browse personalized product catalogs, review real-time inventory levels, and manage orders all in one place. Our end-to-end order management systems include efficient tracking and management of both online and offline orders, and includes an intuitive product selection and configuration process. For less complex products that do not require support from our specialists, customers can easily find specific products and use our smart configuration tool to simplify their ordering. One element of the next wave of Spinnaker includes improving the order process by leveraging new technologies to facilitate assisted experience with a Mettler-Toledo expert. This includes enhanced chat functionality, click to book a meeting, the Toledo sales representative, or digital sales rooms that automatically guide customers through the product selection process, and provide them all the information they need at any time to make an informed decision. For more complex solutions, in addition to providing on-site demonstrations of our instruments, we also provide virtual demonstrations to customers that are very effective. As part of our continuous improvement, we have revamped the studio setups of our virtual demos, making it more efficient and focused, significantly reducing preparation time by curating a series of demonstration menus based on customers' most frequently asked questions. This helps to a comprehensive demo that addresses customers' questions in a very concise way. Customers have already reported an enhanced experience, gaining a deeper, more intuitive understanding of our instruments and our representatives find it easier to showcase our product features, and it makes technical details more accessible and adjustable with this new approach. Lastly, to ensure we are meeting and exceeding our customers' expectations through every step of their journey with our sales teams, we have also begun to implement customer feedback loops and net promoter scores for product sales, in addition to what we are already doing, or what we already do for our service teams. This has proven to be a very effective source of opportunities for process improvements, and we expect improved results with our expanded program. So, I hope these few examples give you a flavour for the much broader set of new initiatives that are underway with our new Spinnaker program. We believe they will continue to expand our sales and marketing lead over our competition and ensure our teams are spending their time with the most attractive opportunities and optimize our win rates, while further strengthening our customer relationship. So, that is the conclusion of our prepared remarks. Operator, I'd like now to open the line for questions.

Jack Meehan:

Thank you. Good morning. Shawn, just wanted to start. It would be great to get your forecast by segment for the first quarter and for the year.

Jack Meehan:

Excellent. And then just as a follow-up, what does your first quarter guidance assume for EBIT margins, and can you just walk us through the pacing throughout the year, what kind of bridges to the full year forecast?

Operator:

We'll move to our next question from Daniel Arias at Stifel.

Shawn Vadala:

Yeah. Hey, Dan, it's a fair point. Like as you mentioned, we built the -- we expect the shipping delays to largely benefit the first quarter of this year and so we acknowledge there's upside to the full year guidance because in addition to that benefit, there's also like a growth rate benefit as we get to the end of the year in the fourth quarter, given the base that we're kind of growing off of, but when we kind of step back from all that, we just kind of felt like it's still very early in the year and while we're not seeing anything new in the business, Patrick talked about in the prepared marks that yes, there's still challenges in the market, but just want to confirm we're not seeing anything new at this point, but it's still early in the year. We just prefer to be a little bit cautious given various uncertainties and the back waiting of the year, but when we look at the second half of the year, we still feel good. We feel like we're really well positioned for the second half. We talked about some of these new product launches in the prepared remarks. We have a lot of really exciting programs that we're launching. We spent a little bit of time talking about Spinnaker 6 in the prepared remarks, but there's other corporate programs that we're working on as well. So we feel like we are well positioned for the second half and just acknowledge I think there's a little bit of upside. Yeah, we're being a little bit cautious as we start the year, but we just want to see how things play out a little bit.

Shawn Vadala:

Yeah, I think that's fair.

Patrick Kaltenbach:

Yeah, I'll take that. Look, Shawn and I have been in China in December and of course we're in continued conversations with the local team there, sales management team to see if there are any changes. I would say China at the moment is still quite weak, especially in pharma, biopharma, but from our perspective, the situation has not deteriorated from what we reported on at the JPMorgan conference. Clearly they have seen still facing many headwinds. There has been very significant spending and growth during the COVID period, but right now we are facing a situation where there's a lack of stimulus from the government. There's a lot of uncertainty still there. There is some reduced foreign investment as well. So all of the economy that is focused on stabilizing the real estate market and I think that in itself leads to just also softer demand at the moment, but overall it hasn't changed. As I said in my comments, core industrial has been actually a bit better than expected in Q4, but we remain a bit cautious on our outlook, still in the first half of '24 and the second half will be easier for us because we have much easier compares. As a reminder, we had been down 25% in Q3 last year, 23% in Q4. This year, we told you that the first half will be down. So the second half will be now for us in '24, there'll be an easier compare. I think we have a lot of good strategic drivers there. We have a very strong team and we are confident that we will be able to continue getting market share with our programs, our products that we have there and there's also long-term that the market in China has, as we told you before, has high single entry growth opportunities.

Operator:

We'll go next to Derik de Bruin at Bank of America.

Shawn Vadala:

Yeah. Hey, Derek, maybe I'll start off. So maybe I'll start off with the latter part of the question with the Red Sea and the Middle East. Of course we do have things coming from Asia that are on boats or ships going through the Red Sea. So we will have higher freight costs a little bit as we kind of go this year, but I think the bigger thing is really what does that mean to our customers? It's not really directly related to us, as you say. It's really about what does it mean to our customers? So I think there's still an unknown there. I know, especially in Europe, there's been a lot of sensitivity around various inflationary topics over the last couple of years, whether it's all the geopolitics that have put pressure on energy costs or whether it's just inflation in general. This is just another thing kind of in the mix. In terms of our business, just to be clear, you're right. We don't sell very much at all into that region. So it's not a direct impact at all. In terms of what are we doing to improve the logistical situation, Patrick, did you want to take that?

Derik de Bruin:

Got it. And then just one follow-up. Where are we on the stocking issues and pipette tips and sensors and all that? Can you just sort of like give us an update? Is there still waiting for customers to burn down inventory?

Operator:

We'll go next to Joshua Waldman at Cleveland Research.

Patrick Kaltenbach:

Sure, absolutely. And again, I'll probably give you some insights into the different regions, but also the different end markets. So, what we're seeing is a lot of very good activity out there, meaning customers are really interested, especially in the new products that we have launched over the last year and that's why we are so excited also about the future. There is good customer engagement. We have a lot of discussions. Still, it takes longer than normal to close the opportunities to orders, and that's also a sign that our customers are still reluctant to really spend the budgets that they have now at hand, or maybe they have some reduced budgets, but there's really very good activity, and if I look into the leads and the funnel that we have, the opportunities, I think we are quite positive about the momentum we are seeing there and we don't see any further deterioration from what we had seen last year. So, that's why we positioned in saying, hey, the underlying market visions haven't deteriorated further, whether it's in the biopharma market, where it's still soft, whether it's in the industrial space, where we see actually a very good demand for industrial automation and digitalization efforts, and we have a great portfolio as well. We saw a bit softening, especially in Europe, on product inspection towards the -- or throughout Q4, and also now starting into Q1 and that's largely in Europe, and its big customers in the food area that are still holding back budgets. They have projects, but they are not ready to spend the money yet and I think that's also based on the fact that they are under pressure. If you read the news, you hear a lot of news about these packaged food customers that are also under pressure with reduced profits and bigger demand as well. But otherwise, I would say markets are stable. The regions have developed as we expected it, and China, I outlined already, the US, good demand, and Shawn has outlined the growth for the year for the different regions as well. The EU is a bit softer at the moment. It was very resilient last year. At the moment, it's a bit softer than we have seen it last year, especially in Germany.

Shawn Vadala:

Yeah, it's very much related to how we position sales. Like, and I think I go back to Dan's question towards the beginning, it's very much how we position our sales guidance. In terms of margins and costs, there's, of course, some moving pieces within there. There's a couple of nits and gnats, but I'd say in the end, I feel like the margin is actually, I feel good about our margin guidance for the year. I think we'd already mentioned it earlier, but for the operating margin, it should go up about 30 basis points on a full-year basis and if you exclude currency, it's probably about 70 basis points. So, Josh, I kind of go back. It's very much to how we were thinking of a reflection of how we guided on the top line.

Operator:

Next, we'll go to Vijay Kumar with Evercore ISI.

Shawn Vadala:

Yeah, sure, Vijay. I'm happy to answer that one. So, hey, just to clarify, our Q1 guidance and constant currencies is minus 4% to minus 6%. So, it's minus 4% to minus 6% and as we mentioned, there is about a 5% benefit here from the shipping delays, which I can understand asking a question about that. But I think there's also a few things that are very important to our first quarter. The first one is that comps really do matter. Yes, Q1 was our strongest quarter last year. We grew 7%, but I think it's important to kind of go back to the couple of years before that, like what we're growing on top of and we're really cycling a very difficult multi-year comparison. If you kind of go back, we grew 14% in Q1 of 2022, and that was on top of 18% growth in Q1 of 2021. So, I think it's hard for us to ignore that as we're looking at the first quarter here. China, of course, we were happy that it came in a little bit better than what we expected if you excluded the effect of the shipping delay, but nonetheless, it's still down over 20% and as we kind of look here at the first quarter, we have 20% of our business kind of down, low to mid-20s in the first quarter. So, that's another thing that's a bit on our mind and again, that's a bit of a comparison topic as well as kind of like this resetting that's going on in the country. But just to be clear, we're not seeing anything new in our end markets, but we do assume that customers here are going to likely start the year a bit more cautious with a more normalized budget flush at the end of the year, but of course, we acknowledge it's early. It's difficult for us to tell at this point in time. March is a very important month in the first quarter, but that's kind of how at least we were thinking about Q1 at this point in time.

Shawn Vadala:

Yeah. So, our share buyback assumption is $850 million, which I think is the same or similar number as we're thinking free cash flow for this year and that's also assuming plus or minus right around 100% free cash flow conversion. So, we're really happy with the focus around the company on cash flow. It's something we always like to focus on and very pleased with the teams around the world, all the efforts on working capital and all the other things that go into efficient end-to-end processes that can drive an order to cash cycle. So, it's something we're going to continue to focus on this year.

Operator:

We'll take our next question from Dan Leonard at UBS.

Shawn Vadala:

Yeah. So, for Q4, we came in pretty much as we expected. It was about 4%. That put us on a full year basis in 2023 at about 5% and as we kind of mentioned in previous quarters, we were benefiting a bit in the first half of the year from some pricing actions that we did in the second half of 2022, but we're very pleased with how things came together this year. I think it really shows the value proposition that we have to customers. I feel I've said it many times, but I do feel like our value proposition has very much increased over the last few years, especially as the markets have moved towards topics like automation and digitalization. It really plays to a lot of the strengths of our portfolio that can provide tangible paybacks to customers. All the things that we're doing from an innovation perspective also will really help fuel that going forward, too. So, that's something that we feel good about and then in terms of 2024, we're consistent with how we were thinking about pricing with our earlier guidance for the year, and we're expecting price realization to be around 2%.

Shawn Vadala:

No, I'll start and let Patrick jump in if he wants to. I think the challenge with pipettes right now is that there is just weak market demand in general. We don't have at Mettler-Toledo a significant exposure to early research or to biotech R&D, but we certainly do in Pipette Tips, and so we're not immune to those trends right now at the moment. So, there are softer market conditions there, but I think we're more optimistic as we get into the second half of the year. As Patrick mentioned, ordering patterns are looking a little bit better as well and just similar to my comments on innovation, we have a couple things there as well, too, that we were actually out at our facility recently, last month, and it was really fun to spend some time with the team there and look at some of the things they're working on. Some of them are more medium-term, but some of them are things that we have in the market this year.

Matt Sykes:

Hi, good morning. Thanks for taking my questions. Maybe just the first one, just going back to the logistics issue, you outlined the revenue impact, and that seems isolated to Q1. Could you maybe talk about any cost implications that could bleed into Q2? My understanding is there had to be some temporary changes in how things were being shipped out of Europe, and I'm just wondering if there's any lingering costs that could impact margins in Q2 or beyond.

Matt Sykes:

Got it. Thanks for that. And then just on Europe, you've talked pretty cautiously about it, but I still think, unless I misheard, that you're expecting positive growth this year. Could you maybe just talk about sort of your cautious comments versus sort of the growth you're expecting this year in Europe and what's driving that?

Operator:

We'll go next to Catherine Schulte at Baird.

Shawn Vadala:

Yeah, good question. I'd say PI, and I guess you can see that one because it doesn't have as much of an impact, if any, from the shipping delays. So I think we were saying that was up slightly the last time we guided for the full year, and this time we're saying it's about flattish. And then this comment on Europe, Europe is a little bit lighter than what we would have guided before, and then when you kind of break it into divisions, it kind of trinkles into Lab a little bit and so Lab might be excluding the shipping delays more. Instead of saying up slightly, it's probably more flattish.

Shawn Vadala:

Yeah, for the first quarter, we should be down about 40 basis points, and there's a lot of currency in the margin in Q1. So if you excluded the currency, it would probably be up about 20 bps and then if you look at the full year for gross margin, we'll be up, our estimate is we'll be up around 50 basis points and again, currency has an impact on that. So if you excluded that, it would be up probably more like 90 bps.

Rachel Vatnsdal:

Perfect. Thanks for taking the questions, and good morning. So you mentioned that you're expecting customers to be more cautious with investments starting off the year. We've heard that from some of your peers as well. So can you just dig into what you've specifically been hearing from customers in January and now into the first week of February here, and then which markets, geographies, have you been seeing more of that cautious spending to kick off the year as well?

Rachel Vatnsdal:

Great. And then just my follow-up, given that you're expecting most of this logistics issue to really benefit 1Q, can you just walk us through the sequentials on how should we be thinking about 2Q and the step up there, and then kind of leading into the back half on top line as well?

Operator:

We'll go next to Brandon Couillard at Jefferies.

Patrick Kaltenbach:

Yeah, very good question, Brandon, thanks for that. Service, again, I'm super excited about our service opportunity. And by the way, it's also an organization that we continue to invest in throughout 2023 while we had to make some adjustments in other areas. We continue to invest in service because we see a big opportunity out there. Broadening our service portfolio, there's good demand from our customers. We have a large install base. Last year, if you said it, we grew 10%, and we expected to grow in a mid-single-digit range this year again. So another year where you will see services growing ahead of products. We continue to work with our sales teams to make sure that they can sell services at a point of sales, train them about the value of services, that they make sure they have value proposition when they talk to customers, increasing the connect rates and of course, these are different from product category to better product category, but we continue to make improvements there and I still see a lot of opportunity for us moving forward to increase our share of services.

Shawn Vadala:

Yeah. Again, I don't want to get too specific, but I think if you do the math, you probably kind of get into that neighborhood for the second half of this year, but we'll provide more guidance on our next call depending on how we're thinking about the pacing with Q2 and everything. Right now we do see, for the full year, Lab being down more than the industrial business. So, kind of looking at Lab being down more like low teens, while industrial would be down like more mid-single digits. So, the industrial business was a pleasant surprise in the fourth quarter. We're a little bit more cautious on it for Q1, but we'll see how things play out here. Yeah. And just to read correctly, Brandon, that doesn't mean that the algorithm going forward we're expecting double-digit growth in China. We just know that not only they have an easier comp. We know that they're lapping a lot of things in the market. I think, one of the topics, there's a few topics there, right? One of them was all the spending during COVID, potentially an acceleration of replacement cycles. But then the other thing is I think there's just a lot of inventory, throughout the customers and I think just given the nature of the lockdowns during COVID and all the logistical challenges, there's just more people purchasing a lot more inventory than in other regions and I think that's one of the things that is kind of on our mind as well for the second half of the year. So, as we kind of go forward, just to reiterate what we said in the past, we kind of view China as more of a high single-digit growth opportunity more longer term.

Patrick Donnelly:

Hey, guys. Thanks for taking the questions. Shawn, I wanted to pick up on that kind of the ramp question. I think Rachel and Brandon both hit on a little bit there. If we just back out the comps, because that's pretty formulaic, just in terms of the consequential dollar improvement as you work your way through the year into the second half, China being obviously one example. You mentioned the month, month and a half of backlog. Can you just talk about, I guess, the visibility into it? Is it just the confidence level that, there was a lot of inventory in the channel in areas like China, and that just you guys are confident it normalizes as you get to the second half and dollars come back? Maybe just talk about, again, the confidence, comps excluded on that dollar ramp as we work our way through the year, China and otherwise.

Patrick Donnelly:

Okay, that's helpful. And then maybe just on the cost structure, I think you mentioned a few times, you guys want to come out of this stronger. Can you just talk about, I guess, the level of investments you're making currently with the softer backdrop versus, trying to be mindful of protecting the margins? How nimble can you be on the cost side and how are you guys approaching that? Thank you.

Operator:

And there are no further questions at this time. I would like to turn the conference over to Adam Uhlman for closing remarks.

Operator:

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Thank you for standing by and welcome to the Mettler-Toledo Third Quarter 2023 Earnings Conference Call. I would now like to welcome Adam Uhlman, Head of Investor Relations, to begin the call. Adam, over to you.

Patrick Kaltenbach:

Thanks, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our third quarter financial results, the details of which are outlined for you on page three of our presentation. Market conditions were weaker than expected in the third quarter, especially in China, where market demand significantly deteriorated relative to our expectations. Our team has reacted quickly to address the market challenges and addressed our cost structure and delivered good margin and cash flow performance despite these headwinds. As we look to the remainder of 2023, we expect market conditions to remain weak, especially in China. And based on market conditions as of today, we would expect these headwinds to persist into next year. However, we remain confident in the factors we can control, including strong execution of our proven corporate programs like Spinnaker to drive growth and capture market share and SternDrive to manage our costs effectively. Our go-to-market strategy, innovative portfolio and unique culture has been important differentiators during challenging conditions. And I'm convinced our efforts have driven market share gains and will help us to emerge stronger in market recovery. Let me now turn the call over to Shawn to cover the financial results and our guidance. And then I will come back with some additional commentary on the business and our outlook. Shawn?

Patrick Kaltenbach:

Thanks, Shawn. Let me start with some comments on our operating businesses, starting with Lab, where our sales teams continue to see good engagement and activity levels with customers, but budget constraints and cautious spending patterns have led to declines in demand across our key market segments of life sciences, food and beverage and chemicals. This is especially true in China, where our pharma and biopharma customers have significantly reduced their investments and after significant spending during the pandemic. In the Americas, while customer destocking of pipettes has unfolded as we had expected, we still see weaker market demand. We also saw lower-than-expected demand from our automated chemistry business and analytical instruments and process analytics was again challenged by weak demand from our bio-processing customers. As we look out to 2024, the market fundamentals for our Lab businesses are good. While the pharma, biopharma market has slowed this year, we expect a normalization in activity in 2024 and the long-term outlook remains strong as innovation pipelines remain full of novel drugs and therapies to be brought to the market. We anticipate to benefit from trends in automation and digitalization, leveraging our LabX software. Additionally, our team remains focused on capturing the significant growth occurring in hot segments like lithium-ion batteries, semiconductors and sustainable materials. We will also gain from our investments in innovation and software and 2024 will feature many exciting product launches that I look forward to sharing with you over the coming year. Turning now to our Industrial business. Overall Industrial sales declined 6% in the quarter against very strong growth in the previous year. Our core industrial product sales were weaker than anticipated due to a sharp decline in sales in China. And we also had lower sales in the Americas due to very tough growth comparisons and weaker market demand. Product Inspection sales grew in Europe. However, this growth was largely offset by weaker sales in the Americas, as our food manufacturing customers have remained cautious with their investments in new equipment. As we look out to 2024, while our core industrial business likely faces headwinds from a slowing global economy, particularly in China, we should benefit from global trends in automation, digitalization and reshoring investments around the world. We also continue to upgrade our portfolio with new solutions to address our customers' challenges on the production floor. For example, there is increased customer focus, the devices used in hazardous areas to be certified explosion-proof and to be a simple-to-use as those in safe areas. Earlier this year, we released a new model of our flagship industry 500 weighing terminal for use in hazardous areas that provides powerful process control for our pharma and chemical customers. Our new terminals are intrinsically safe and also features seamless integration into customers' automation systems and deliver state-of-the-art cybersecurity features. Now, regarding our Product Inspection business, food manufacturing customers faced more difficult operating environment today, which we expect will lead to limited growth for our Product Inspection business in 2024. We will also continue to focus on innovation in this area as our customers increasingly seek solutions to protect the packaged foods from physical contaminants and increased productivity as they continue to be challenged by labor shortages. We have had great initial success with our new X2 line of x-ray products that have launched over the past year to address demand in both the mid and premium end of the market. This new line provides a wide range of package integrity checks in addition to the digital contamination detection and positions us very well to gain market share. Lastly, Food Retail had another quarter of very strong growth due to the robust project activity in the Americas. Our team has delivered remarkable growth this past year with successful penetration of major grocery and club stores. While we have cultivated an attractive portfolio opportunity pipeline, the strong growth we expect to deliver this year means we face very challenging growth comparisons in 2024, and therefore would expect modest revenue declines. Now let me make some additional comments by geography. Sales in Europe grew 4% in the quarter, with growth across our product portfolio, and across most major end markets against very modest growth in the prior year. While we are pleased to have generated good growth in Europe so far this year, we are more cautious on the outlook for Europe due to soft PMI readings in the region, the continuing war in the Ukraine and potential for disruptions for the economy from the conflict in the Middle East. Turning now to the Americas. Our very strong growth in food retailing customers was offset by a decline in both laboratory products and industrial. Customer feedback in the Americas continues to point to optimism over the coming years from various government stimulus programs like the CHIPS Act and the Infrastructure Bill, as well as reshoring activities. Our pharma and biopharma customers are expected to gradually increase their spend in 2024 as to return to more normal replacement cycles and continue to advance their drug pipelines. Finally, Asia and the Rest of the World sales declined 14%. Our sales in China declined 25% driven by very soft laboratory and core industrial product sales. Pharma, biopharma demand in China has declined significantly after several years of very strong growth. And we have also seen very weak demand across other end markets in China as the economy has abruptly slowed. The economy in China was expected to rebound following the end of the COVID lockdowns almost a year ago, as the central government shifted their focus towards growing its economy. However, the lack of stimulus, headwinds from the real estate sector and declines in direct foreign investments are weighing on business and consumer confidence. While the outlook for China is uncertain in the near-term, the long-term growth opportunity remains significant due to the country's commitment to expanding R&D investment and supporting development of advanced pharma, biopharma, new energy and new material industries. We also continue to see the laboratory market shift towards more advanced automated solutions in China, supported by a desire for highly accurate and reproducible results. Our industrial solutions are increasingly in demand as customers in China look to increase quality, reduce cost and prepare for labor shortages in the years ahead. Our business is very well-positioned to capitalize from these growth opportunities and we expect solid growth over the long-term. Now as we look forward to the remainder of 2023 and 2024, we expect market conditions to remain challenging. Nevertheless, we remain focused on the things we can control through the diligent execution of our initiatives. Our competitive position has grown stronger as we continue to expand our technology leadership with new product innovation and our Spinnaker sales and marketing programs will be further enhanced over the coming years with more sophisticated digital tools to ensure our sales teams are guided efficiently to the best opportunities. We're also stepping up on various strategic pillars and enhancing the Mettler-Toledo experience with customers and employees, which will be enabled with the launches of new programs over the coming year. I couldn't be more excited about what the future holds and fully believe that the best is yet to come. So that is the conclusion of our prepared remarks. Operator, I'd now like to open the line for questions.

Daniel Arias:

Hi. Good morning, guys. Thanks for the questions. Shawn, maybe just to start on China, what's the implied performance that you're baking in for '24? And I know it's hard to sort of predict cadence this far out, but can you just talk about what's assumed first-half versus second-half, just knowing that, obviously, the comps will be easier here in the second-half? It sounds like you think China can be -- will be down in the first-half, but maybe grow in the second-half. Are you able to sort of compare how those two pieces might look next year, and then just all-in what you're baking in?

Daniel Arias:

Okay. And then maybe just on op margins, how do things look there for you, just sort of in the context of the expansion that you're delivering this year on, more or less similar organic growth? I mean, obviously, FX is a headwind. I would imagine there's a pricing headwind too. Can you just talk about that? And then also the dry powder or the gas in the tank whatever term is appropriate there, just when it comes to efficiency and productivity that comes out of things like SternDrive, Blue Ocean, et cetera?

Patrick Kaltenbach:

So, if I might add, because Dan also has asked about SternDrive, just to add data on SternDrive, we, this year -- then I'll talk about stepping up on our strategic pillars. We just launched SternDrive phase three with a strong focus on automation on the shop floor, smart automation and we expect that also to continue to significantly contribute to our performance next year and drive savings both on the automation side, but also back-office sufficiency et cetera. So the program is fully running and the team is very committed to drive additional savings next year.

Operator:

Our next question comes from the line of Josh Waldman with Cleveland Research. Please go ahead.

Shawn Vadala:

Yeah, I think, the one topic we have in Q4, Josh, is that kind of like -- if you look at how we think about market demand in the fourth quarter, I don't think we're going to get like -- I think the market demand is going to be less than it normally is towards the end of the year. Each year, there tends to be a pickup in market demand, especially in the Lab business. And right now, we're -- we're not anticipating much of that pickup, if any, in our fourth quarter guidance. So that's maybe one topic to think about this year versus next year. But then as we kind of like enter the year, we're very much thinking and not to get too specific this early, but we're definitely thinking the first half of the year is going to probably look more similar to the second half of this year. In other words, I think we fully expect to be down in the first half of the year. But we do see ourselves returning to growth in the second half of the year, especially as we face easier comps. I think there's Q4 dynamic, it should be better next year as well. And then, if you kind of like get into parts of the portfolio there's been different destocking issues at different points in time whether it's pipette tips or whether it was consumables and bioprocessing, especially on the single-use side. And then I kind of mentioned in the first question, some of the stuff that we're seeing in China as well.

Patrick Kaltenbach:

Yeah. Thanks. Thanks, Josh, for the question. I mean, I'm extremely proud of our service organization and that's definitely also an area where we continue to invest this year as well. We also had a headcount in services to make sure that we can deliver on the demand of our customers have in our services. As I mentioned in one -- in some of the earlier earnings calls, we increased our portfolio and improved our portfolio of service offerings. That helps us of course to also drive not only more -- to drive more services at the point of sales, getting a higher connect rate, but also good people after our installed base that we have out there and potential products that are currently not yet on the service contract we have established telemarketing campaigns et cetera. So really performing well. In Q3, I think, our growth rate, Shawn, correct me if I'm wrong, was 6%. And that's for the full-year still holds up in the high-single digits and low-double digits growth for the full-year on services. It has been very strong in the first-half. Now, of course, we're also facing tougher compares, because we also had strong growth in the second half of last year. Now, looking forward, again, we still have, I think ample of opportunity to go after our installed base, products that are currently not under contract, making sure that the customers, yes, understand the full benefits of being on a contract with us. We know the customers who are on the service contract are much more likely buy again from us, because they have seen the benefits of being on the service contract with Mettler-Toledo. We continue to look into the offerings we have, more sophisticated services for more complex solutions out there and that will also continue to drive momentum for us in service. I'm -- again, I'm very happy about the long-term opportunity in service and would expect it to continue to grow mid-single digit at least next year.

Operator:

Our next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead.

Patrick Kaltenbach:

Yeah. Good question, Vijay. I mean, the biggest part of it is, as Shawn also outlined, is absolutely China, because we had initially we had planned for double-digit to mid-double digit declines in China, I'll be facing probably again 25%, 50% decline in Q4. That's what we are planning for. That's certainly one important piece of it. The other piece is the overall budget flush that also affecting mainly the Lab business, which we basically don't account for this year. We see very limited action there from customers and we should see by now, to be honest. So we didn't factor that into the Q4 growth as well. So in that regard, it's kind of a bit unusual Q4 for the margin and I think some of our peers also mentioned that you're seeing similar lack of demand, budget flush demand at the end of the year this year. Customers are just more cautious with their spending, and they're not really using their budgets. I have contact with several key customers out there, and they said, look, we have to hold our budget together this year and we will continue to look into opportunities next year, but don't expect a big budget flush from us in Q4 this year. I think that's probably the biggest things with China together with the lack of a budget flush. In terms of the other industry, I would say no significant changes, whether it's US or Europe. Maybe a little bit in the chemical market in the US, where we saw a slowdown in Q3 and we also factored into Q4. But we have to see how that plays out long-term, unless there is a major disruption in the market, I would expect it to still be with, I would say, normal momentum going into 2024, the chemical market.

Shawn Vadala:

Yeah. So, I mean, yeah, I think, I feel very confident with the 2% for next year. I think there's a lot of factors that go into it. Of course, we have a pretty robust process. I'm sure you're familiar with that we literally start in the summer and we go through the whole portfolio with the organization and we look at different metrics. But, I think when you step back from it all, our value proposition remains very strong. And I think that's always the key and that's why we're always of course investing in innovation to make sure we maintain that leadership in terms of the value proposition. But what we've seen is over the last couple of years is the market actually also move towards our portfolio in a way as customers seek more automated solutions, more digitalization. These are strengths of our portfolio relative to competition. And I think we're very well differentiated in many respects. And so, I think, that certainly helps us kind of maintain our pricing position versus competition. In terms of the operating margin, I mentioned flattish, but if you look at the gross margin, I think it will actually be up a little bit next year.

Shawn Vadala:

Yeah. Thanks.

Derik de Bruin:

Hi. Good morning. Thank you for taking my question. So I guess the first one is, last November, when you had your Analyst Day, you raised the long-term guide to 6% to 5% for revenue growth. Look, I agree with you that China is not going to be down for a long time or not going to be down forever, and it will pick-up some point. But what do you think -- what do you think it looks like once the market sort of rebounds? I mean, we're in a different world today. Politics is different, things are different. How much of that 6% topline assumes that it was just going to be business-as-usual as it had been for those prior years and -- or what did you -- what do you embed in that guide for sort of like that China assumption with it? So I think the broad question -- I know you don't have the crystal ball, but I do think it's important.

Shawn Vadala:

And as a global company, of course, there is opportunities for us as there's changes in the landscape as well too. So we can pick up as companies start to reinvest more in maybe countries outside of China. We've already seen opportunities for our businesses in those kind of areas as well too. So I think the key for us is to always keep an eye on where the opportunities are and make sure we're there, leverage our programs to identify and pursue those opportunities.

Shawn Vadala:

Maybe I'll start and let Patrick kind of add some color. I mean, I think, hey, I understand the point. We're typically only sitting on about a month-and-a-half worth of backlog, so I get that part. But I think if you take a step back too, like if you look at our multi-year CAGRs, kind of like four-year-type CAGRs, I mean, we are starting to see ourselves moderating here. And when you kind of look at the back half of next year versus even like 2019, you start to see more consistency from what we see here in the second half of this year. And so, I think at a high level, we think that that is reasonable. We also think that we are going to have easier comps. We know there -- our topics in China that will flush out with some excess inventory, maybe in the system from coming out of COVID. And then I think as we kind of particularly look at the fourth quarter, I think this year's fourth quarter is setting up to be a more unusual fourth quarter for the Group in terms of like lack of that end of the year uptick that we normally see in terms of market demand. And we can't predict what Q4 of next year is going to be like, but I wouldn't expect it to be the same environment that we're faced right now. You know and I'd say probably maybe one other comment is just talking to the sales organization throughout the world. And just what we hear from customers is that there is still a tremendous amount of interest out there. There's a lot of activity out there. It's just a question of when people will start to reinvest and have the funds available.

Operator:

Our next question comes from the line of Matt Sykes with Goldman Sachs. Please go ahead.

Patrick Kaltenbach:

I'll start with it and -- on Europe, yes, we have seen actually good performance this year in the margin, but -- and Middle East they also had some easier comparisons versus China, US compared to last year, where they had -- where we had seen more growth last year in the market. That said, on the chemical market you referred to, one of our concerns going into the year was that the high-energy prices in Europe, which impacted market much more than we have seen actually it held up quite well also over Q3 for us. And I think it's two factors. Number one, it's our capability to continue to drive market share. Remember, we have a very strong sales team in Europe that goes mainly directed as -- and we leverage our -- also our Spinnaker sales capabilities to direct our sales team to opportunities very quickly and also address hot segments like lithium-ion batteries, et cetera, which help us to compensate some shortfalls in other areas. We are, of course, a bit more cautious on Q4 and expect also much more moderate 2024. You're right, the PMIs also point downwards, it's why we are more cautious next year. The investment sentiment across Europe, I would say, is, if you go to Southern Europe and Spain, for example, or Portugal, which are quite significant market for us, it's quite healthy. On the other hand, Europe -- within Europe, Germany has been slower this year than we thought it would be, but we also see a lot of excitement, for example, in France. France has put a France 2030 plan in place, where they plan to invest in some of these core technologies in pharma, biopharma, in semiconductors, but also into lithium-ion battery and energy market, which I think will continue to drive growth moving forward. So, again, overall for Europe next year, very moderate, but long-term, I think it has still holds our model that we expect low-to-mid single-digit growth from Europe.

Matthew Sykes:

And then just one --

Matthew Sykes:

Go ahead, Shawn.

Matthew Sykes:

Got it. Thank you for that color. And then, maybe just following-up on Derik's question on the second-half next year assumptions. Shawn, if we were to kind of look at the comp impact and then inventory destocking, where there might be some level of visibility that going away. Could you kind of isolate what your assumptions are for just underlying demand growth in the back-half, in the context of the second-half recovery, if that's possible?

Matthew Sykes:

Got it. I appreciate that. Thanks, Shawn and thanks, Patrick.

Operator:

Our next question comes from the line of Patrick Donnelly with Citi. Please go ahead.

Shawn Vadala:

Yeah, sure. So, hey, maybe I'll -- some of this might repeat what I've already said, but I'll just kind of go top-to-bottom just to make sure everybody gets it. So, I think, you know, the overall sales growth for the full-year next year is flattish. And so, if we start with Lab, we expect Lab to be up slightly. We expect, core industrial to be down slightly. We expect Product Inspection to be up slightly. And then we expect Food Retail to be down probably mid-single digit, might be a little bit more than that. From a geographical perspective, we expect, as I mentioned before, China to be down high-single digit with a bigger decrease in the second -- in the first half of the year and growth in the second half of the year. And then we expect the Americas and Europe to be up slightly.

Shawn Vadala:

You know, slightly low-single digit.

Shawn Vadala:

Yeah. I mean, I feel like you're trying to take a low quarter and try to extrapolate. And of course, the fourth quarter has this dynamic that we talked about with not having your typical year-end market demand, you know. And so -- so I'd be a little bit cautious to try to do any correlations off of that and of course, the way we're building it up is a lot more granular. Looking at the different levers and trying to pull it altogether and so we feel good about the guide that we've provided. And of course, there's a lot of moving parts. Things are dynamic, but I think we still stay very committed to operational excellence inside the Company. I mean, the culture is just amazing. The amount of agility and the amount of resilience is really impressive. And the organization is doing very well in that regard. And like I mentioned before, we do try to find the right balance for the medium and long term here too. And I think we were striking that with this guidance.

Shawn Vadala:

Yeah.

Shawn Vadala:

Yeah. Thanks.

Jack Meehan:

Thank you. Good morning.

Jack Meehan:

So, one of your peers called out lab closures is impacting demand as they went through the third quarter and into the fourth quarter. You obviously have really good visibility into this, probably amongst the best in the peer group. I was just curious what you're seeing in that regard, if that's kind of a factor that's playing into the outlook.

Patrick Kaltenbach:

No, absolutely not.

Shawn Vadala:

It's always a lumpy business, you know, like we've had some years where it's been down recently. It's nice to see retail have a great year. But beyond just being lumpy, we've actually won some new accounts in the US and in Europe. So the teams, it's actually done a really great job with that. So you have like the cyclicality of investment cycles, but then, I think we have won a couple of nice -- you know, a couple of really nice projects here. And then we've also have come out with some new innovations in the last couple of years, some new things that have added onto our portfolio or refresh of the portfolio, I should say, that has been really well received in the marketplace as well too. But I would never extrapolate anything from retail, because it's always lumpy. Our visibility into next year is that we see that we should have another really good year of project activity. But given the comparison, it's still going to be down a little bit. And -- but going forward, I think, it's always better to have a long-term view on retail. We still view it as like a long-term a lower-single digit kind of growth business, but pleased to see how well it's doing this year.

Shawn Vadala:

Yeah, welcome.

Rachel Vatnsdal:

Thanks. Good morning and thanks for taking my questions. So, first up, I just wanted to see if you could spend a few minutes talking about your exit rates of how the segments performed in the month of September and then so far into October and early-November here. And then you mentioned during Derik's question four-year CAGR on the volume side is seeing some stabilization there that gives you confidence into the back-half ramp next year. So can you just talk about, are those CAGRs that you are applying referring to really about the overall 3Q CAGR or are you just looking at some of the exit rates here, given it sounds like July and August were likely a bit stronger?

Rachel Vatnsdal:

All right. That's helpful. And then I just wanted to press a little bit more on that first-half, second-half dynamic here. You talked about China being pretty pressured in the first-half and then starting to get optimistic about growth in the back half of the year. But I wanted to press on those types of assumptions around the Lab and Industrial businesses. How much of a meaningful step-up should we see in growth rates in both of those segments next year and then again how much of that is really driven off the easier comp dynamic versus underlying demand accelerating?

Operator:

Our next question comes from the line of Catherine Schulte with Baird. Please go ahead.

Shawn Vadala:

Yeah, maybe I'll start, Catherine, and then I'll let Patrick pick it up. So, you know, so, hey, we've talked a lot about food manufacturing over the last couple of years. I'd say, overall, it's probably exceeded our expectations to a certain degree this year. But we do see a lot of pressure on that segment, kind of going into the fourth quarter and by this time we have enough visibility to say that. So, for the fourth quarter of this year, we're seeing, you know, negative results or declines, I should say, both in the Americas, but frankly, also in Europe. That market segment has been under a lot of pressure in terms of their own cost structure. Their own challenges with inflation and you've seen some of the food companies closing plans, executing restructuring plans, a lot of antidotes from our team say like, like a lot of other things like, hey, there's a lot of interest there, but they're just not getting approved, things are getting held off to a certain degree. But outside of the Americas and Europe, we're also seeing actually good growth at the moment. And as we kind of enter into 2024, this is a really good example, where we have a lot of nice innovation in the portfolio coming out. We have a lot of good products in different areas of Product Inspection, like in the x-ray business, I think we talked about it in our prepared remarks. We have good stuff also coming out in metal detection as well. And in the innovation and the new products are being very, very well-received by the marketplace. We just heard some updates yesterday about some antidotes from a trade show that the guys were recently at and really good market reception of some of the new products. So, we feel good about what we're doing what we can control and how we're positioning. It's just a much more -- it's a difficult market environment, but it's frankly been like that for a little while. It's been a little bit up and down, but the value proposition is still there, right, like the need to help these companies with productivity. We can really help them and I think they recognize that. So I think that's still there. And then just the focus on food safety and brand protection, you know, you see things in the news in that regard. And of course, that we certainly can help companies as they seek to address those needs as well too.

Patrick Kaltenbach:

I can take this. Yes. So PendoTECH again for us has been performing really well over the last years. I mean, integration went really well with PendoTECH. Of course, they are strongly dependent on the underlying biopharma market and we have seen a slowdown compared to the years before. That shouldn't be surprise, but what we have done with PendoTECH is we expanded also the offering there. We have new parts within their portfolio. So that's not only pressure sensors, they also have now UV monitorings -- monitors, et cetera in their portfolio. So while, of course, we see lower demand compared to last year, we think the portfolio is really, really strong, and of course, by expanding it also different application wages, we are quite optimistic on PendoTECH's future, although we are seeing negative growth here.

Adam Uhlman:

Great. Thanks. Hey, thanks for joining us today. A replay of the call will be available on our website. And if you have any follow-up questions, please feel free to reach out to me. And we look forward to seeing you at future events and conferences. Thanks.

Patrick Kaltenbach:

Thank you.

Operator:

Good afternoon, and welcome to the Mettler-Toledo Second Quarter 2023 Earnings Conference Call. My name is Briana and I will be your conference operator today. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Adam Uhlman, Head of Investor Relations. Please go ahead.

Patrick Kaltenbach:

Thanks Adam, and good evening, everyone. We appreciate you joining our call today. Tonight, we reported our second quarter financial results, the details of which are outlined for you on page three of our presentation. Our sales growth in the second quarter included strong growth in our service business as well as solid performance across our industrial product categories, which was offset in part by softer market conditions in Laboratory and China. Focused execution of our margin expansion and cost control initiatives resulted in good growth in adjusted EPS despite currency being much greater-than-expected headwind this quarter. As we look to the remainder of 2023, there is increased uncertainty in the global economy and our end markets. In addition, market demand in China has deteriorated. While we have reduced our growth expectations for 2023 due to weaker market conditions, we remain confident in the factors we can control, including execution on our best-in-class sales and marketing programs and our margin expansion and cost-saving initiatives. Our team remains very agile in adapting to changing market conditions, and I'm confident that our efforts will deliver solid results this year. Let me now turn the call over to Shawn to cover the financial results and our guidance, and I will then come back with some additional commentary on the business and our outlook. Shawn?

Patrick Kaltenbach:

Thanks Shawn. Let me start with some comments on our operating businesses, starting with Lab, where sales were softer than we had expected for the quarter. While we continue to see robust demand on hot segments like lithium-ion batteries, our pharma and biopharma customers have become increasingly cautious with their spending and have delayed investment decisions, particularly in China. As expected, our pipette sales were again weak in the second quarter as customers reduced inventories of chips and instrument sales declined. The impact of the lower pipette sales was in line with our previous expectations, and we continue to expect this headwind to ease in the second half of the year as comparisons become easier. As mentioned, we also see customers, especially in our key market segments such as pharma and biopharma delaying purchases. However, our pipeline and customer quoting activity has remained strong, and we were pleased to see continued strong service growth across our Lab business in the second quarter. We are hopeful conditions normalize soon, but we have not built this into our 2023 guidance. Turning now to our Industrial business. We again saw strong demand for our automation solutions from core industrial portfolio this quarter. While we expect to continue to benefit from customer investments in automation and localization of supply chains globally, we are not immune to the increased uncertainty around the global economic outlook. Regarding product inspection, it also had good performance this quarter, but our packaged food customers have also become more cautious about making investments in new equipment due to inflation and uncertain economic conditions, and we would expect softer results for the remainder of year. Finally, Food Retail delivered strong growth this quarter due to robust project activity in the Americas. Our Food Retail sales can be lumpy, and we would expect strong growth again in the third quarter. One final comment on the business. Service sales remained very strong overall and grew 13% in the quarter. We continue to be very pleased with the growth in this important and profitable part of our business. Now let me make some additional comments by geography. Sales in Europe were flat in the quarter with growth in core industrial and product inspection, offset by declines in laboratory products. In the Americas, we saw good growth across our industrial and retail businesses offset by declines in our laboratory product offering, especially pipette. Finally, Asia and the rest of world had another quarter of good growth. China grew 3% with good growth in Industrial, but sentiment, particularly in Laboratory has become much more cautious as activity has slowed following the COVID reopening, and there has been limited economic stimulus as mentioned before. As of today, we expect a significant decline in sales in in China the second half of the year, but our team in China will remain agile to capitalize on growth opportunities however market conditions unfold. Now, I would like to share with you some updated thoughts about our strategic priorities and how we are investing to drive growth over the long-term. While market conditions have become increasingly challenged over the past year, we have remained at very high level of incremental investment to support the long-term growth of the organization and market share gains. The hallmark of or culture is the agility and focused execution, and our team continues to respond very well to unexpected changes in the environment to gain market share, expand profitability and make additional important growth investments for the future. Starting with our sales and marketing programs, we have developed increasingly sophisticated digital approaches with our Spinnaker program that more efficiently feeds our pipette -- our pipeline with new leads, [indiscernible] alerts with a special focus on customers that we do not do business today. Webinars have been an important areas of investment in sort of new customer leads as we look to increase potential customer interactions in a very efficient format. We can directly show how other solutions address common customer pain points in very specific end-use applications. We have had strong participation in our webinars, which positions us as trusted subject matter subject experts in specific applications, but also provides a good sales pipeline as customers seek unique solutions to challenging or new applications. This is particularly true in hot segments like lithium-ion batteries, sustainable materials and the semiconductor industry. Our data-centric approach in nurturing and qualifying these leads allows field sales team to prioritize their efforts on hyper potential business opportunities and increase our win rates. We have also continued to invest very strongly in research and development over the past year to maintain and improve our technology leadership and support our growth potential. I am very excited about our pipeline of new and recently released products that enhance our customers' productivity, but also ensure compliance with regulatory requirements. This has been a topic of increasing importance for our customers as of late and our innovative solutions like LabX, enhanced productivity through workflow automation, while ensuring full data integrity and traceability across customer entire workload. Earlier this year, we launched a new thermal analysis instrument that allows customers to increase sample analysis throughput through new automation and software features. This is especially important in hot segments like advanced materials and the battery segment. Additionally, our Process Analytics business recently released a new conductivity sensor that is unmatched in the industry for measuring ultra-pure water in the microelectronics industry, helping increasing yields for our semiconductor customers, while reducing the amount of very expensive ultra-pure water required for their operations. Lastly, our Industrial business had great success with our new line of hygienic scales that help customers clean their scales up to 40% faster, but also help eliminate contamination risk in regulated environments like food and pharma. While individual new product launches are not material on their own, given the diversity of our portfolio, they provide a very important compounding element to our growth algorithm, expanding our technology leadership, enhancing our value propositions and helping drive market share gains. Going forward, we have a very exciting pipeline of innovative products that we plan to launch over the coming year that will further extend our leadership position. Turning now to our margin initiatives. Our pricing and SternDrive initiatives have been very effective in supporting our margin expansion this year. As a reminder, SternDrive is focused on improving productivity and driving operational excellence across our manufacturing and back-office operations, with our team executing several hundred projects to reduce material costs and improve productivity. We have excellent opportunities ahead of us with enhanced -- with advanced data-driven approaches around value engineering, smart manufacturing and common platform architectures that we expect to launch in the near future. I hope this provides some context to our updated guidance for the year, but also shows the confidence we have in our ability to continue to execute on our long-term growth initiatives, expand our margins and deliver solid earnings growth this year and beyond. Now that concludes -- that is the conclusion to our prepared remarks. Operator, I'd like to open the line now for questions.

Daniel Arias:

Afternoon, guys. Thanks for the questions. Patrick or Shawn, maybe just to start on China. Growth there was actually a couple of points above the U.S. and Europe in the quarter. Is the deterioration that you're pointing to for second half showing up in the order book here in early 3Q? Or is it more just sort of reading the writing on the wall when it comes to the big picture direction that things are headed in over there?

Daniel Arias:

Okay. Okay. Just to finish that thought. Did you give a forecast for the year for China, if you did, I missed it.

Daniel Arias:

Yeah. Okay. Okay. And then, just -- maybe just moving to Lab and the destocking activity that you have going on in the pipette business. How much of what you're looking at? Are you attributing to that? Does it feel like that's tracking relative to your expectations last quarter? I mean, do you still think you can kind of normalize in the second half of the year? Or is there a better way to think about it just that takes the remainder of the year to sort of wash that out of the system?

Daniel Arias:

Got it. Okay. Thanks Shawn.

Operator:

Your next question comes from Jack Meehan with Nephron Research. Your line is open.

Patrick Kaltenbach:

Yeah. Jack, this is Patrick speaking. Let me take this. And since Shawn already commented the first part of the question about China. Look, the change is, I think, mainly driven really by the lack of stimulus when after COVID reopening, beginning of the year, there was really strong momentum in China, a lot of expectation on growth, and the government would drive it with additional stimulus. That really didn't happen. And I think it also now led to the fact that a lot of customers really become much more reluctant and waiting for the government to make a decision about the stimulus, so they are clear of how much they can spend and where they can spend the money. We have not seen any significant change in competition locally in China. That's one what we are hearing from the team. The team is really confident in our product portfolio. We have a very experienced sales team and a great product portfolio that helps us to compete efficiently in China. So, it's really about the missing momentum. And I would say the missing confidence in the economy that really leads to the fact that a lot of customers holding back investments and are waiting for the certainty about what's to come. And that's the major slowdown that we are facing now. And it's also the fast drop off that we have seen that. We also didn't expect and our sales team definitely didn't expect as we're going into Q2, but towards the end of the Q2, that really became a big momentum and now early in Q3. We don't see that changing, and that's why we're also careful with the outlook Shawn mentioned. We see China minus double-digit in the third quarter, and we don't really count on that improving in Q4 as well.

Shawn Vadala:

Yeah. Sure. So, maybe the best way to look at it, Jack, is that we're kind of looking at our overall cost structure to be flattish for the full year. So, if you kind of like think about that in terms of the second half of the year, probably down low single digit in the second half of the year. And if we -- if you try to think about that, how it looks on the P&L, SG&A will be lower than other lines. Of course, part of our costs are also above gross profit, which you don't necessarily have broken out separately. But I think as we look at the -- at our program, we are focused on productivity and other discretionary spending. But I think it's also important to emphasize too. We're still continuing very much to grow and invest in -- I mean, invest in the business for growth. I mean, if you look at our R&D, as an example, it's still up 7% year-to-date. We still expect to see growth in R&D for the second half of the year. But then kind of just stepping back from everything too. I think we feel pretty -- like it's the right balance where we can still provide really good operating margin expansion on a full year basis in the 70 to 100 basis point kind of a range. And that's despite some unfavorable currency.

Operator:

Your next question comes from Derik de Bruin with Bank of America. Your line is open.

Patrick Kaltenbach:

Yeah. I'll start with it, Derik, and then I let Shawn chime in as well. Look, we're not seeing a complete freeze. It's not like total pharma business is frozen for us. Of course, we see a decline. And as we said, we see delays in orders. It's not -- and you're right. I mean, our products are in lower CapEx or below CapEx spending. But that said, we see a slowdown in orders in pharma-biopharma, and it's pretty broad based, but it's not a complete going off the cliff, so to speak. But it's a significant decline that we're seeing and slowdown that we are seeing. And for us, of course, the question is as many others ask, how long will this take? And why is that happening? We want to hear from our sales team is, well, we have a lot of quoting activity, actually, what we're seeing, but I'm really happy to see is that we have a strong sales team engagement. We have a lot of sales teams out there with customers that are talking about their plans. They get good leads. Leads are actually up year-to-date. So, we see good momentum on the lease generation side, but they're not turning into orders as quickly they used to do. Now how long this will continue. It will definitely also depend on when more certainty is coming back to the economy. I mean that's what we're hearing from our sales team. I'm pleased with the quoting activity. I'm monitoring that on a daily basis. I see how our sales team is interacting with customers and now often they are out there with customers and discussing projects and investments. But the time to turn these opportunities into orders have definitely increased, and that's part of the slowdown we're seeing in orders.

Derik de Bruin:

Got it. Just as a follow-up. You're taking guidance down by about 4.5%. It looks like about 2.5% of that is China. So, can you quantify what else is that? And just like what's pharma, what's industrial, you're just not having good feelings about that you just want to be conservative on.

Derik de Bruin:

We know the China piece. It's the rest of the piece that I just want. What's what else is baked into that remainder that's not the China cut?

Derik de Bruin:

Great. Thanks Shawn. That was really detailed. Appreciate it.

Operator:

Your next question comes from Patrick Donnelly with Citigroup. Your line is open.

Patrick Kaltenbach:

Sure. Absolutely. Look, I mean, of course, it's too early to make a forecast for 2024. Right now, we will do this in our next earnings call when we report our Q3 and look at Q4. But to say what is transitory right now. I mean, we have -- I would say the easier thing to capture for us is what we have seen on the pipette side. The destocking of pipette. We anticipate that it is normalizing. Again, the consumption of pipette probably to pre-COVID levels in the second half. We see that uptick happening slowly, but steadily. That is normalizing. When it comes to the rest of the industry, it's, of course, very hard to predict to say how is the economy continuing to evolve from here? How long will pharma and biopharma be under pressure and also will the rest of the economy, the Shawn also outlined, the chemical industry suffer from this economic downturn that we are seeing. The elongated time that PMIs are under pressure. It just leads us to -- right now, we look at the second half and say -- this is probably a good forecast for us, given the information we have. It's, of course, a significant downturn. But will it -- when it will turn, will it be early 2024, mid-2024, I think that's too early to call. You may call there, frankly. I mean, we have pockets where we see really still very good momentum as we count on that. They continue to grow. If we take what call the hot segments like the battery segment, for example, is performing extremely well, driving good growth almost across all of our businesses. We've emphasized on some of the Lab businesses like analytical is performing well. We still see pockets of good momentum in industrial automation. And we also see increasing interest -- as I highlighted in the beginning of the earnings call, also in the semiconductor business, we have been successful in some of our form [ph] business when it comes to ultra-pure water, et cetera, sensors. So, there are pockets of still good growth that we capture, and we're really going hard on for this. We have the right tools that we see these pockets of growth and drive our sales team towards the direction. But how long broader economy will under pressure, I think none of us here on the call can really tell you how long it will take. We're looking at the second the second half and forecast for half. And then once we get to Q4, we'll give you a guidance on 2024. But right now, it's too early to be honest.

Shawn Vadala:

Yeah. Sure. So, I mean, hey, I think we still have a really great margin story. I mean, I think, as I kind of mentioned before, for the full year, we're still expecting to deliver an operating margin expansion in the 70 to 100 basis point range. And frankly, I wouldn't be surprised if we end up closer to the higher end of that range, and that's despite some unfavorable currency. And that probably puts us -- the operating margin by quarter might be down a little bit in Q3. It might be up a little bit in Q4. But overall, we feel very good about the ability to continue to expand for the full year. And then I think as we kind of go into next year, like Patrick said, it's a little bit early look at that. Of course, we'll probably have some savings from some of the actions that we did this year. There will be some stuff that goes away as well. And as we think about pricing, we still feel great about our value propositions. But it will also depend a little bit on the inflationary environment. And we'll -- as you know, we'll provide more thoughts and guidance and insights on all that on our next call in November.

Patrick Kaltenbach:

Yeah. Thanks.

Vijay Kumar:

Hey, guys. Thanks for taking my question. I guess, my first one on the third quarter guidance, low single digit declines. You just did 2% in Q2. That's a 500 basis point change. And I think about 300 basis points of the 500 is coming from China. Are you seeing China down mid-teens in July? And if the assumption, it's down mid-teens for the rest of the quarter? And where is the remaining 200 basis points softness coming from, perhaps, from an end market perspective?

Vijay Kumar:

Understood. And then one maybe on the stimulus that you mentioned. If -- what specifically have you heard about from Lynx [ph] about a stimulus? And if there is a stimulus, how long does it take for it to flow through to customers placing orders in purchasing? And on the cost actions here, what is the pacing of cost actions? Is -- what kind benefits are you expecting? It looks like -- I mean, EPS is down more than revenue, maybe perhaps not much benefit in 3Q, but what's the magnitude of the cost actions -- the benefit from cost actions you've taken in Q4?

Vijay Kumar:

Understood. Thanks guys.

Operator:

Your next question comes from Matt Sykes with Goldman Sachs. Your line is open.

Patrick Kaltenbach:

Yeah. Very good question. And hey, I couldn't be more pleased with the performance of our service business. As you probably recall, we grew 14% in the first quarter. It grew 13% now in the second quarter. So, outstanding performance of the service team. And actually, that's also a business just to -- reminder everybody on the call is where we still over hiring people. So, we're adding more service technicians to our team, because we see good business momentum there. We see good demand for our customers. We use the opportunity over the last year or two to also extend our service offering in our portfolio. We increased the emphasis on service sales at the point of sales, making sure that we sell more service contracts. We restructured the quoting process that services are obviously included in the quoting. We trained the service team more team more efficiently on selling, the sales on selling services. So, I think that all really now pays out in the growth we're seeing in services. And looking at the full year also more strong outlook here. I think for the full year, we're forecasting high single digits, at least in terms of service growth. Shawn, am I correct on this one?

Patrick Kaltenbach:

Good. And again, that's driven by the ongoing momentum. And we see -- at the moment, we see really stronger demand than in the product category, and we don't see a lot of pushback on pricing. And so, I would really see continue -- to see that momentum continuing. Of course, we're also having tougher comparisons as we move between the next couple of quarters as Q3 and Q4 last year also had been already quite strong on service growth. But the underlying momentum is strong. We have an extremely strong service team and we continue to invest in services that we can build, continue to build out that team and make sure that we can serve our customers in the best possible way and deliver an outstanding customer experience. That is really what is differentiating us as a [indiscernible] leader from many of our competitors that compete directly with us in the field is the strength of our service organization.

Patrick Kaltenbach:

Yeah. Let Shawn break it down in terms of the size. But I mean, this is what we call the hot segments, right? And it's really -- at the moment, strongly driven by lithium-ion battery segments. We see strong -- really good momentum building up in the semiconductor business with the reshoring and homeshoring of some of the semiconductor plants that is gaining momentum in sustainable materials that are gaining importance. And that is, again, we call these pockets of growth in in itself, they have, of course, not super significant in terms of size, but the growth momentum is important for us to compensate and offset some of the weaknesses that we see in other areas.

Matthew Sykes:

Great. Thank you.

Catherine Schulte:

Hey, guys. Thanks for the questions. I guess, first in China, is the weakness concentrated in any product categories within your Lab business? Or is it more broad-based? And are you seeing the consumables and services side of the business holding up better there?

Catherine Schulte:

Okay. And then, maybe…

Catherine Schulte:

Yeah. Okay. Got it. And maybe on the packaged food side, you've been talking about caution in that category for several quarters now. At what point do you start lapping some easier comps there? And is there anything to point to in prior inflationary environment as to when you might start seeing improvements there?

Catherine Schulte:

Great. Thank you.

Joshua Waldman:

Good evening. Thanks for taking my questions. Maybe, Patrick, just to follow-up on product inspection. I mean, it sounded like it held in the quarter, but seeing signs of softening from CPG, food and pharma seems like it's pulling back. Just curious what level of orders you've seen kind of entering the third quarter and maybe how the guide reflects those maybe softer end markets. It seems like the guide, I mean, only moved down modestly, if I'm correct.

Shawn Vadala:

No. I mean, I think also, if we look at Q2, we actually did better than we expected. So, maybe Q2 was better, but the second half is a little bit worse. And it's kind of like what Patrick says. If you just kind of like look at -- if we kind of just look at how -- what we're hearing from customers and from the organization, especially in the U.S., but also in Europe going into the quarter, we're just seeing a more negative situation than what we experienced in the second quarter.

Shawn Vadala:

Yeah. I'll start and I'll let Patrick add some color -- additional color if he'd like. But in terms of process analytics, we had very, very modest growth in the quarter, but there were definitely different storylines kind of under the covers. On one hand, we did have a very significant headwind in terms of bioprocessing specific more so to the single-use technologies and downstream bioprocessing. We also see softness in pharma and biopharma or more biopharma, I should say, coming off some very strong comparisons in previous years. But then kind of offsetting some of that is also -- have been good growth in some of these hot segments like semiconductors is an important segment for the process analytics business. But nonetheless, we have a more modest expectation here for the second half as well too, just given more pressure that we talked about in general with pharma and biopharma.

Joshua Waldman:

Appreciate the detail, guys.

Rachel Vatnsdal:

Great. Thank you for taking the question. So, I want to follow-up on some of those comments around pharma and biopharma customers. Can you just walk us through, are you seeing any difference in buying trends between your large pharma customers and some of those smaller biotechs. And then can you detail us how are those conversations about decision-making on spending difference between the two? And then as a follow-up, just can you remind us how small is your emerging biotech exposure?

Rachel Vatnsdal:

Great. And then, maybe just a follow-up here on pricing. You said that you'll take roughly around 5% pricing this year. You also had above the average pricing contribution last year as well. So, how should we think about that pricing translating into 2024? Will you guys go back to your normalized range? Could it go below? What are really the expectations there? Thank you.

Operator:

Your next question comes from Liza Garcia with UBS. Your line is open.

Shawn Vadala:

Yeah. Okay. Thanks, Liza. Yeah. So, I'll take that one. The growth in the second quarter, I mean, was more mid single digit for Industrial. So, we're pleased on that. As you know, we've been kind of lapping some big comparisons in that part of the business as well. As we kind of like look to the second half of the year though, we're looking at the industrial business to be down probably mid single digit. We are seeing some decline in that part of the business as well. And I think it's important to remember, like some of these customers are also exposed to a lot of the same end market exposures that we're exposed to in Laboratory as well, too. So, when we say pharma and biopharma is down, it's also affecting our industrial business also. And so, maybe not down as much as what we're seeing pronounced in the Lab business, but still down in the second half of the year and probably more flattish on a full year basis.

Shawn Vadala:

Yeah. So, in terms of Spinnaker, we continue to innovate in Spinnaker -- Patrick, can you hear? We can continue to work. Okay. You’re live though. You’re live. Yeah. So, in terms of -- Liza, can you still hear me?

Shawn Vadala:

Yeah. Hey -- so hey, I think Patrick just lost the ability to hear the question. So, I'll just kind of answer it. So, in terms of Spinnaker, we continue to innovate in terms of Spinnaker. And we are in the process of launching a new wave. We're going to share some of the details on that until we kind of roll it out a little bit further, but something that we're just at the very beginning of doing and kind of very excited about. And I think there's some really interesting opportunities for us kind of going forward to continue the journey that we have in Spinnaker.

Operator:

Your next question is from Tim Daley with Wells Fargo. Your line is open.

Shawn Vadala:

Yeah. Hey, Tim, this is Shawn. I'll take that one. So hey, of course, we didn't -- it's always difficult to be able to judge exactly what his budget flush and quantify it from year-to-year, especially in our business. We did not build in anything specific for budget flush. And I think just like you said, just kind of implicitly, looking at our guidance, we have a much more cautious view in terms of pharma and biopharma as we kind of exit the year. And if you can just kind of like look at how we're thinking about Q4 in general. It's not quite the same, but it's pretty similar to how we're thinking about the third quarter. So, certainly, if pharma and biopharma had a more robust end of year spend, that certainly could be an upside to how we're looking at things.

Patrick Kaltenbach:

Thank you. I hope you can hear me. I mean, we just got to disconnect -- yeah. Okay. Well, I'll take that question. Okay. With regard to multinational pulling out of China and what we're seeing here, right, as for now, I think we don't see a significant impact yet. But the way I want you to think about it is if multinationals pull out of China and do some reshoring, homeshoring, whether they go from China to India, they go back to Europe or the U.S., we also see this, of course, moving forward as potential opportunity for us to capture these investments as the investments are happening. Then, we have definitely the right market sensing tools market sensing solutions in place to capture these opportunities earlier then guide our sales team and our -- to these companies as they are going -- if they are going to reinvest either in the U.S., in Europe or somewhere else if they're putting businesses out of China. But as of now, I would say that this is not the major driver for the slowdown in China. That's not what is driving it. For us, it's really the overall sentiment, the lack of confidence in the market and the wait mode for stimulus until the companies they really decide on how much budget they have and how much they can invest moving forward.

Operator:

Good morning, and welcome to the Mettler-Toledo First Quarter 2023 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions] At this time, I would like to turn the conference over to Adam Uhlman, Head of Investor Relations. Please go ahead.

Patrick Kaltenbach:

Thanks, Adam, and good morning everyone. We appreciate you joining our call today. Last night, we reported our first quarter earnings results and I'm happy to share that we have started the year off strong, with very good sales and profit growth. The details of our financials are outlined for you on page three of our presentation. Our sales growth was again broad-based this quarter, as our team effectively leveraged [indiscernible] to identify attractive growth opportunities across a wide variety of markets. I'm also pleased with the strong execution from our team on our margin initiatives and cost control, which resulted in solid earnings growth on top of excellent results in the prior year, despite a very significant currency headwind. Our outlook for the year is largely unchanged from what we have provided earlier this year, although there is increased uncertainty in the economy and our end markets. However, I'm convinced that our team will continue to capitalize on growth opportunities and manage our cost effectively to help us live with solid results for the year. Let me now turn the call over to Shawn to cover the financial results and our guidance. And then, I will come back with some additional commentary on the business and our outlook. Shawn?

Patrick Kaltenbach:

Thanks, Shawn. Let me start with some comments on our operating businesses starting with Lab which had good growth in the quarter considering challenging prior year comparisons. We also had a larger-than-expected sales decline in our pipette business as customers continue to work down their inventories. We believe this headwind will continue in the second quarter and ease in the second half of the year. Outside of pipette, we had strong growth across most of our portfolio particularly as our team pursues growth opportunities in hot segments like lithium-ion batteries and sustainable polymers among others. Turning now to our Industrial business. We had very strong growth across our core industrial products this quarter as we continue to benefit from strong demand for our solutions that automate customer processes and enhance productivity. Product inspection also had a strong quarter as it capitalized on stronger demand from food manufacturers in the Americas, while we experienced only modest growth in Europe. While we are pleased with the good start to the year, our core industrial business is also not immune from the economy and we expect softer results in product inspection as these customers face increased headwinds and we expect lower growth for the remainder of the year. Finally, Food Retail delivered very strong growth this quarter due to robust project activity in the Americas and Europe. Comparisons were also favorable as sales declined 14% in the first quarter of last year. Our Food Retail sales can be lumpy depending on our customers' project activity and we would expect lower growth rates for the remainder of the year. One final comment on the business. Service sales continued to show excellent momentum and grew 15% in the quarter. We continue to be very pleased with the growth in this important and probable part of our business. Now let me make some additional comments by geography. Sales in Europe increased 6% in the quarter or 9% excluding the impact of stopping shipments to Russia. Sales growth this quarter benefited from very strong growth from our food retail business as well as strong growth in our core industrial businesses offset in part by a significant decline in pipette. Sales in the Americas was solid with strong growth across most of our businesses, especially, Food Retail offset in part by a significant decline in pipette. And finally Asia and the Rest of the World had another quarter of good growth led by the Lab business. China grew 9% against very strong prior year growth rates with particular strong growth in Lab. Now speaking of China at the end of March I traveled to visit our operations in China and I couldn't be more excited about the strength of the team we have in place and the substantial opportunity ahead of us. I'd like to share a few some additional insights on our business in China and why we are quite optimistic about our long-term growth opportunity there. First as an overview we have a very long track record of operations in China using wholly owned subsidiaries there for more than 35 years. China represents 21% of our total global sales and we design manufacture and distribute products in China for the local market. We have three manufacturing locations in China representing approximately one-third of our global production again over half of which is sold into the local market. China and the other emerging markets have historically been an important source of growth for our company and we believe this will be a source of future growth. Our business in China overall has grown at a 13% CAGR over the last 20 years including 14% growth in 2022 as the mix of our business has shifted to faster growing and more resilient industries. Customers in China increasingly seek out our most advanced solutions where we have a very strong competitive advantage and leverage our unique go-to-market approaches. Our portfolio is extremely well-positioned to serve the demand for automated solutions -- automation solutions drive for productivity aims to help ensure compliance. We also benefit from the government's focus on developing a broader life sciences industry and other strategic market segments. Our colleagues in China are very agile to respond to local market needs with local application development and support of China-specific demand. We leveraged this unique approach with our Spinnaker sales and marketing programs to capture growth in hot segments like lithium-ion batteries and I visited a large battery customer and saw firsthand how massive these investments in e-mobility and stationary power solutions are but also how our solutions are excellently positioned to provide substantial value to this rapidly growing industry. Overall, our business in China remained strong during the first quarter and our outlook for Q2 is also positive despite challenging multiyear comparisons. We see continued investments in key segments like lithium-ion batteries, pharma-biopharma, but also healthy investments in industry as our customers look to reduce direct labor and improve productivity with automation investments. I would note that market sentiment is also optimistic in anticipation of potential further government investments to support growth segments like e-mobility, expanding R&D capabilities with new labs and long-term investments in pharma-biopharma to support better healthcare. Details of these are still limited, but I would note that the government has announced structural changes in its organization responsible for accelerating the pace of scientific development, highlighting the emphasis being placed on this important topic. As we think about these trends and how the impact of our business in China, we remain optimistic about our long-term growth opportunity in the region and would expect our business in China to grow at a faster pace than the overall business. However, as we always like to remind everyone, while we are optimistic for the long-term and for 2023, China has historically been a more volatile market and things can change quickly in the short-term. In China, like the rest of the world, we believe our unique growth strategies, tremendous diversity and culture of operational excellence and agility position us very well to gain market share and deliver solid financial results in 2023. Now that concludes our prepared remarks. And now we would like to open the call to questions.

Josh Waldman:

Morning guys. Thanks for all the detail, and thanks for taking my questions. One for Shawn and then one for Patrick. Shawn, I wanted to start on the near-term organic growth guide and the implications for the quarterly cadence for the full year. Curious how the 3% local currency guide for Q2 compares to what you had previously penciled in for your full year assumptions? And then are there factors beyond destocking that have come into play since your last guide, they're leaving you more cautious on the second quarter?

Josh Waldman:

Yeah. Got it. Appreciate all that, Shawn. And then, Patrick, I appreciate the comments on China. I wondered if you could provide a bit more context on the cadence through the quarter or maybe what you're seeing by end-market. And I guess whether or not you guys are seeing the stimulus benefits show up in the order book yet.

Josh Waldman:

Yeah. Thanks for all the detail guys.

Operator:

You next question comes from the line of Jack Meehan with Nephron Research.

Shawn Vadala:

Thanks Jack. So, pricing came in pretty much as we expected in the 6% kind of a range. We expected to get off to a good start this year given all the different actions that we took last year when we were kind of mitigating inflation. And as we look to the full year we're still expecting about 4% growth for the full year. And as we look to Q2 specifically we're looking at 4% growth. And so the reason why Q2 would be lower than Q1 is because of the timing of some of the actions we put in place last year.

Patrick Kaltenbach:

I can take it. Look I mean the destocking effects not only the testing, COVID testing related markets to be honest. I mean when there was this huge demand in the market last year you should also appreciate that also the pharma biopharma customers and others really loaded up inventory because there was a shortage in the market and I think the whole industry when I talk to whole industry I say everybody who's using pipette actually is suffering from the fact now that they still have quite some inventory that they're working down. We do expect as we said this to be reduced in the second half. So, we will get more back to normal volumes in the second half but it will definitely be still a topic for Q2.

Operator:

Your next question comes from the line of Dan Arias with Stifel.

Shawn Vadala:

Well, I think what stands out this year Dan is we're just coming off of an unprecedented period of growth. I mean like the CAGRs that I mentioned before 13% CAGR for the last three years is much higher than our -- how we envision ourselves for the longer term in terms of our algorithm. So, we've always expected to see some level of moderation at some point during this year. It's hard to compare it to maybe a historical precedent but of course in 2020 we had a slower start to the year when it came to volumes during COVID and then that kind of like reversed in the second half of the year. So, I think we'll see how it plays out, but I think we have the comparisons we've been kind of in a weak macro environment for quite some time now with PMIs below 50. It's hard to -- while we're -- while we've been resilient and executing very well specific particularly in our core industrial business which has been historically more susceptible to the economy we're also not resilient, right? And so as headlines continue to come out in our end markets in particular with some of the challenges that our end markets are facing whether it be food manufacturing companies or chemical companies or other industries like biopharma, we do have a little bit of that on our mind as well.

Shawn Vadala:

Yes, I think our overall exposure to small biotech is relatively small. Of course that affects a little bit of our rein in pipette business but it's is generally a very small part of that business. So, nothing in particular that I would call out.

Operator:

Your next question comes from Patrick Donnelly with Citi.

Patrick Kaltenbach:

Yes. Look, I think the true it's part of -- it's both, right? We, of course, look at historical data, the growth rates and the volumes we have come from. But we also, of course, are in conversations with customers and we have clear signals that Q2 will be another destocking quarter and then they should get back more to normal inventory levels, put it that way. And the overall volumes that we expect, again, will then get back to if you would normalize the growth rate over the last three, four years we would get back to that volume that we would expect for Q3 and Q4. It's a mix of calculation saying, okay, what was the underlying market growth and what is our anticipated market share gains that we have. We have a very strong pipette and pipette portfolio but even unique also to uranium business that has very strong market share, especially in the US. And if you take all these factors into account then we basically look at a picture we say, yes, we will see more headwind again in Q2 but then in Q3 in Q4 getting back to normal growth rates again.

Shawn Vadala:

Yes, sure. So, I think one of the things to kind of keep in mind is that, if we're looking at our gross margin, we grew about 130 basis points, excluding currency. Actually, I think it was 140 basis points excluding currency in the quarter. So that wasn't that much different on a currency-neutral basis to what we were guiding. So currency clearly had an impact. We also had a little bit of unfavorable mix in the quarter between the different businesses. Of course, pipette is a more profitable business and retail is kind of on the other side of that. As we kind of like look towards the rest of the year, we're looking at our guidance for gross margin would be about 60 basis point improvement in the second quarter, and if you exclude currency on a currency-neutral basis that would be about 100% improvement. And then for the full year, we're looking at a 70 basis point improvement and again on a currency-neutral basis, that's about 110 basis point improvement, which is just down slightly like about 10 basis points from the last time that we spoke. And then, on operating margins, we're looking at -- we got off to a very strong start to the year as we kind of expected. We're looking at about a 90 basis point improvement in the second quarter. And again, on a currency-neutral basis that would be about a 180 basis point improvement, so again, another very good number to start the year. And then for the full year, we're still looking at about 130 basis point improvement, which is similar to last time but what's a little bit different is that we on a currency-neutral basis were up about 200 basis points. So that's gotten a lot better.

Shawn Vadala:

Thanks.

Vijay Kumar:

Hey, guys. Thanks for taking my question. Maybe my first one Patrick here. I think you've made some comments on the macro environment. It seems like a bit more cautious tone on this call, but I see your industrial outlook did not change. So when you say, macro taking a more cautious tone, can you give us a sense for -- is this specific regions or perhaps end markets, because industrial is where I would have expected perhaps some change but when you look at the guidance all of the change came from Labs, so how should we think about the macro commentary?

Vijay Kumar:

That's helpful, Patrick. And one follow-up here on -- I know, the customer base that you serve, it's pretty large. So when you look at your daily run rate items like pipettes in order rates, did you do a survey of your customer base on when this -- order rates might pick up. I'm curious on when you thought about 2Q and the back half assumptions what kind of customer feedback have you gotten that gives you confidence in the back half guide?

Vijay Kumar:

Understood. Thanks, guys.

Tim Daley:

Great. Thank you. Just quickly, I know a lot of talk on lab here, but can you guys just help us with the underlying regional forecasts that are rolling up to that growth guidance for the year within lab.

Tim Daley:

All right. Great. And then, just wanted to dig into the service and consumables line. How did, I guess, service grow in the quarter. Can you help us understand how you're thinking about that contract versus value-add services growth for the year? And just, kind of, general commentary. I don't think we touched on that much in the earnings call today.

Tim Daley:

Great. Thank you for the time. Appreciate it.

Operator:

Your next question comes from the line of Derik De Bruin with Bank of America.

Shawn Vadala :

Hey, Derik.

Shawn Vadala :

Yes. Just a second. So -- okay. So FX on Q2 is just under 1%. And then for the full year so that would be a detriment. And then for the full year, it's about neutral maybe up modestly. I think Derik just to make sure you got this one the bigger one from my perspective is the FX impact on EPS. And so that's a 4% headwind we mentioned I think in the press release for Q2 and it's about a 2% headwind to EPS for the full year. In our previous guidance it was like that's like a 1.5% worse than prior guidance.

Shawn Vadala :

Yes. So in terms of the -- yes, in terms of the split our core industrial business is about 60% of our industrial exposure and PI is about 40%. It might be a little bit more than 60% and a little bit less than 40%. I don't know the exact math, but it's probably in that kind of a range. And then as we kind of think about the margin differentials. Our Lab business does have higher margins than the rest of the business. And then within that of course pipettes is a higher-margin business.

Shawn Vadala :

Not seeing any cancellations. Q1 was actually quite good. Of course hard to talk about if there hesitant or not I think we'll see all those types of things play out but in terms of cancellations not seeing anything like that.

Shawn Vadala :

So for pipettes our business was down high teens and pipettes is just over 10% of our business. And what was the other part of you question? Analytics process?

Shawn Vadala:

Process Analytics actually had a very good quarter. I think they were up double-digit in Q1. And if you kind of like get into the – if you're trying to like look for insight on bioprocessing there, because a lot of that business is bioprocessing. A lot of the business is holding up actually quite well. Of course, there are some vaccine production comps that we have to deal with in that business. But the one area where we have seen weakness is in single-use sensors and – but that of course is a much smaller part of our business and portfolio.

Shawn Vadala:

Thanks, Derik

Shawn Vadala:

All right. See you Derik. Take care.

Catherine Schulte:

Hey, guys. Thanks for the question. You talked about services growing 15% in the quarter. How did consumables perform both overall and then excluding pipette tips?

Catherine Schulte:

Okay. And then it sounds like core industrial is trending better than you expected coming into the year. Can you just talk to what kind of trends you're seeing there? And any order book commentary that gives you confidence to raise that full year despite some of the macro weakness that we're seeing?

Catherine Schulte:

Great. Thank you.

Matt Sykes:

Great. Good morning. Thanks for taking my question. Patrick, maybe the first one for you. Just as we're going through this pretty significant normalization, particularly in the Lab business, and then looking at your comments on services and the growth that you've shown last year and then obviously, this quarter, could you maybe help us understand a little bit more the historical three-year CAGR or longer on services, just so we can understand essentially the algorithm post this normalization and the contribution that services could actually make to the overall group growth algorithm, meaning if it's services are sort of 20-ish percent, please correct me if I'm wrong on that but growing at a higher rate without the comp difficulty that the rest of the business has could that actually change the longer-term growth algorithm for Mettler, if services were to continue to grow at the rate it's growing at?

Shawn Vadala:

Yes. Thanks, Matt. So hey, I mean of course, we're very pleased with the growth we've been seeing in service. And as I mentioned before, we see that as a really good opportunity. If we kind of look at how we started the year, it's like a 10%, three-year CAGR. And – but we were kind of exited last year with maybe a 7% CAGR in Q4. So I don't have the full year number in front of me. But I certainly wouldn't want to characterize this as a double-digit business going forward although we're pleased with it and we're going to challenge the organization to do well this year. But I think kind of going forward, I would just characterize it as above corporate average and -- which would imply high single digit. And it certainly will have -- should have benefits and upside to our overall algorithm over time. But nothing that, I would highlight differently than how we've thought about historically other than we're just executing very well at the moment.

Shawn Vadala:

Think it's different. And maybe I'll start and let Patrick jump in. But like a lot of our automation we're selling the system integrators. And so there's a whole business model that has to do with not only quality and all that kind of stuff but how easy are you to integrate into their solutions and so that's an area where we have a lot of competitive advantage as well.

Matt Sykes:

Thank you.

Liza Garcia:

Hey, guys. Thank you. Thanks a lot for taking question. So I guess just talking about customer types even if you -- just more broadly, on the pharma I think there's like a lot of questions on pharma more broadly. I know you spoke a little bit earlier on the sensors. But could you just talk about kind of what you're seeing in the pharma environment more broadly and the growth trends there even if qualitatively?

Shawn Vadala:

Just to clarify his comment on US was excluding the pipette

Shawn Vadala:

We talked about.

Patrick Kaltenbach:

Yes, absolutely. Look I mean, there's a lot of investment in that area and a lot of research going on in the area of sustainable polymers, and new materials that we serve with a broader portfolio. Again, a lot of it is on the lab business. If you look at our material characterization portfolio, we are very closely working with our customers to understand the demand, and the workflows that – there you see and what solutions they are looking for. Given where we are in terms of the overall market trend, I think it's still in the early innings. There's a lot of demand and opportunities to come up with solutions to I would say, standard plastic for example, and also more sustainable materials moving forward. So, we are confident that will be while, it's still a small segment for us. It's one of these hot segments similar to what we see -- what we have seen in and continue to see with lithium-ion batteries that if we are early enough there to customers and provide them with the right solutions, and the right workflows, we can be a leader participating in that growth as they build out research, later on manufacturing and of course also pipette [ph]. That's what we have done in for example, with the battery segment. We have been very early with all these customers to understand, what their needs are and now we are participating really nicely in the growth opportunities, both on the R&D but also now on the manufacturing side in terms of, two or three areas.

Patrick Kaltenbach:

Thank you.

Brandon Couillard:

Hi, good morning. Thanks for squeezing me in. Just one for you Shawn. Do we split out the Lab versus industrial business in China in the first quarter? And any update on the forecast for those two subsegments for the year. And then Patrick, any change in local competition or dynamics on the ground there that you care to call out?

Patrick Kaltenbach:

Great. Thanks. Brandon maybe from my side you asked about the competitive situation in China with the market, but there's a significant change. I would say no. Look it's a very competitive market. We have local players there as well but you have to -- I want to remind you we have a really strong history in China. We have a strong R&D and manufacturing base there. We -- as I said in my remarks we manufacture a lot of the products locally in China and also tailor some of the applications to the local market needs. That helps us to really effectively compete with the product portfolio and our sales and marketing team uses the very same Spinnaker sales and marketing approach to really go after the growth opportunities identify those in the China market. I mentioned that example about the battery segment and they have been very successful to do those. So, yes, the market is competitive, but I would say it hasn't changed dramatically for us. Our team is well-positioned to continue to compete and we made from my perspective also a lot of good investments to make sure that we have the right portfolio to compete effectively in the market.

Operator:

With no further questions, we will conclude today's conference. Thank you for your participation. You may now disconnect.

Operator:

Good morning. My name is Audra and I will be your conference Operator today. At this time, I would like to welcome everyone to the Mettler-Toledo fourth quarter 2022 earnings call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star, one again. At this time, I would like to turn the conference over to Adam Uhlman, Head of Investor Relations. Please go ahead.

Patrick Kaltenbach:

Thanks Adam and good morning everyone. We appreciate you joining our call that we are doing from Switzerland. 2022 was another year where our company’s unique strength and culture of execution led to strong performance and success in overcoming significant external challenges. Our teams’ resilience and agility to quickly react and adapt to the changing environment allowed us to meet customer demand, gain market share, and deliver robust financial results. We also finished the year with excellent sales growth in the fourth quarter and benefited from very good broad-based growth across geographic regions and product categories. The highlights of the fourth quarter performance are detailed on Page 3 of the presentation. Local currency sales in the quarter increased 9% as compared to the prior year with broad-based growth across all regions and most of our product portfolio. Strong sales growth combined with benefits from our margin initiatives and good cost control contributed to excellent growth in adjusted operating profit and adjusted EPS, offsetting very significant currency headwinds. As we look ahead to this year, we expect continued uncertainty regarding the global economy and face challenging multi-year sales growth comparisons. I’m confident that the diligent execution of our growth and productivity initiatives will again position us very well to gain market share and deliver solid financial results. Later, I will have some additional comments on our business, but let me now turn it to Shawn to cover financials and the guidance.

Patrick Kaltenbach:

Thanks Shawn. Let me start with some comments on our operating businesses, starting with lab, which had strong sales growth in the quarter with strong growth across most of our product portfolio, especially in analytical instruments and process analytics, while our pipette business was down due to a decline in pipette tips. Overall, we continue to see growth with pharma and biopharma customers as well as the faster growing segments, such as lithium batteries and others, and expect favorable results in 2023. Turning now to our industrial business, where core industrial had solid growth in each region and continues to benefit from market trends towards automation and digitalization. Our outlook for this year is positive, although I’d note this business is not immune to potential changes in the economy and will require us to remain agile to identify and target growth opportunities. Product inspection sales were stronger than expected this quarter with very strong sales in the Americas. Europe had modest growth as we saw better customer activity compared to the last quarter. Overall, we expect to have a positive start in 2023 in product inspection with good growth in the Americas, however we remain cautious in Europe with softer conditions in packaged foods. Finally, food retail delivered very strong with project activities in the Americas and Europe offset in part by a significant sales decline in China due to disruptions from the pandemic. Now let me make some additional comments by geography. Sales in Europe increased 9% in the quarter, better than we had expected and inclusive of a 4% headwind from stopping our shipments to Russia. We saw good growth across most product categories in Europe, particularly in process analytics and retail. The potential energy crisis and related impact on customer demand has also been better than expected, but we of course still need to get through the rest of the winter. Sales in the Americas was again strong with especially good growth across product inspection and food retail. Finally, Asia and the rest of the world had another quarter of good growth, led by our lab business. China grew 11% with particularly strong growth in lab. Switching now to our service business, we continue to see excellent momentum, and service sales grew 11% in the quarter and 12% for the year. Service remains an important contributor to our profits and a key advantage versus our competition. Also, customers that use our service are more likely to buy instruments from us again in the future. Given the importance of our service business, I’d like to share with you more details on our strategy and initiatives. To start off, as a reminder, service represents 20% of our revenues and is a key part of our solution offering. Our service offering is comprehensive and includes installation, qualification, calibration, preventative maintenance, spare parts and repair services. Over 50% of our service represent service contracts that support our customers’ ability to maintain uptime, improve productivity, and comply with regulatory requirements. An important piece of our business is calibration services, and our comprehensive and audit-proof electronic calibration certificates are fully traceable and available on demand from a secure database. This makes it very easy for our customers to comply with regulatory requirements. We have very strong competitive advantages with our service business and excellent opportunities to accelerate our growth. We believe we have the largest installed base of weighing instruments in the world and the largest service network across our direct competitors with over 3,000 service technicians around the world. We have a stand-up global service offering with dedicated service sales experts. This global coverage is increasingly important as customers look for consistent service around the world. Our ability to serve customers during the pandemic has proven to be a strong competitive advantage and our service offering was especially important to customers in regulated environments. The introduction of new service levels, 24/7 support, and remote diagnostics have been helpful in supporting customers. We have seen continued improvement in our net promoter scores in recent years and throughout 2022, which measure customer satisfaction after a service event. We are focused on accelerating our service growth given these competitive advantages and strong customer satisfaction, and over the medium term would expect our service sales to outpace our product sales. To achieve this, there are two important elements of our growth strategy besides continuously upgrading our offering

Josh Waldman:

Thanks for taking my questions. I have one for Patrick and one for Shawn, if I may. Patrick, Europe came in solidly above the low to mid single target for the fourth quarter. Just curious, any other color you can provide on what drove the upside and how durable do you think this is? Do you think it was something Mettler is doing different, or just a stronger market outlook?

Josh Waldman:

Got it, good to hear. Then Shawn, was wondering if you could walk us through the though process on the 6% local currency guide for the quarter, but reiterating the 5% for the full year. This set-up obviously implies a bit of a decel in the latter three quarters despite an easing comp. Just curious if it’s something in the order book. Was there push-outs from the fourth quarter that hit in the first, or is it just Mettler being prudent?

Josh Waldman:

Got it, really helpful. Appreciate all the detail.

Operator:

We’ll move next to Dan Arias at Stifel.

Shawn Vadala:

Yes, thanks Dan. Maybe a few comments. One, we’re very pleased with the quarter we’re coming off - you know, 11% growth in China, and then when we look at China for 2023, we feel very good but we’re coming off two very strong years. We grew 14% in 2022 but we grew 25% in 2021, so that’s always on our mind and I’d like to remind everybody of that. But as we look at the cadence for this year, very pleased with how the team was able to manage through different dynamics with COVID. We’ve always said that things can change quickly in China, and this is another example with the reopening. We had quite a bit of the organization infected with COVID around the holidays, but we’ve been back up in terms of full capacity now for a few weeks, I’d say, and things are back to normal. Of course, they just also came off the Chinese New Year as well, so we’re actually looking at it quite favorably in terms of the reopening. There could be some short term uncertainty in terms of what it could mean to certain customer segments, but as we kind of look to the second half of the year, certainly there could be--you know, we’re looking at higher growth in the second half of the year than we’re looking at for the first half. Then in terms of stimulus, I think we’re all looking forward to what comes out here over the next month in terms of the magnitude of stimulus, but our expectations certainly are that stimulus dollars will be most likely directed towards a lot of the programs under the five-year plan, and then I’m sure some of these strategic industries within the country will also benefit as well too. We continue to see really good momentum in a lot of these hot segments, like lithium batteries, like semiconductors, and then just these overall arching trends towards automation and digitalization continue to play out well. We continue to feel like we’re very well positioned for China for the medium to long term. Of course, in the short term, always a little bit more difficult to call, but I’d say that’s it. Patrick, any other comments from your side?

Dan Arias:

Yes, okay. Thank you for that. Then just maybe on pricing, Shawn, I don’t know if I missed it, but did you give the refreshed price realization assumption that you’re making for the year, and then as you’re dialing in your pricing expectations for ’23, I’m just curious if there are business segments or geographies that maybe we should think of as being more or less than the company average when it comes to realization, or do you think that everyone kind of just moves up in sort of the same range?

Dan Arias:

Okay, very good. Thank you guys.

Jack Meehan:

Sorry, I was muted. Good morning. I wanted to ask about the product inspection business, so 9% core, nice beat versus the guide, and I think the CAGR accelerated in the year end too. The service piece is usually pretty steady. I was just curious if you could talk about the trends there, what you’re seeing on service versus the product side - was there any acceleration?

Shawn Vadala:

In terms of trends, we saw improvement both in service and the product business, Jack, kind of going from Q3 to Q4, but service has been growing faster than product this year.

Shawn Vadala:

For lab, we’re talking--if I said it incorrectly, I apologize. We expect to grow mid to high single digits for the full year, which is consistent with what we said before. For Q1, we’re at mid single digit, and Q1 is going to be a little bit impacted by some of the topics like pipette tips and customer stocking, so.

Operator:

We’ll go next to Vijay Kumar at Evercore ISI.

Shawn Vadala:

Yes, I think we--if you look at it, we’ve always been concerned a bit by multi-year comparisons and uncertainty in the macro, and I don’t think it’s really that different than what we’ve been saying about the full year results. I think right now, it’s a new year, we’re very early in the year. I think we need to see how the next couple months play out and then we’ll be able to have a lot more insight in terms of how not only the first quarter went but how the year starts to have--what kind of momentum we have going into Q2 and the rest of the year.

Shawn Vadala:

Yes, good question. Our free cash flow, you might not remember but we updated our guidance for that last quarter, so we actually came in line with our revised guidance from last quarter and we revised down 2022 primarily because we were carrying more inventory in--or we carried more inventory in 2022, giving more safety stocks just to kind of mitigate some of the challenges in the global supply chain. As we look towards 2023, we expect to benefit and reduce a lot of those inventory levels, and so you’ll see from a one-year growth perspective, you’ll see pretty significant growth but a lot of it has to do with timing of working capital.

Operator:

Our next question comes from Tim Daley at Wells Fargo.

Shawn Vadala:

Yes, so our consumables business, in terms of total mix on the business, is about 10% in the quarter. For the full year, it was about 12% of our business. Consumables, as a reminder for everybody, about half of that is probably pipette tips and then the other half is a combination of process analytic sensors, as well as other consumables for other categories. As a total group, consumables were down about 5% in the quarter, and for the full year they were up 5%. But if you kind of dug into the details, of course, the one area where we saw a decline was pipette tips, which would have been down over 20% in the quarter, and that’s topic related to customer stocking that you’ve heard about from other companies. Fortunately for us, it’s not a significant impact to our overall results, and we’ll probably continue to see that trend play out here in the first quarter and maybe even in the Q2.

Shawn Vadala:

Yes, sure. If we look at our--you know, rather than going through each line, maybe I’ll give you a little bit of flavor in terms of gross profit and then, of course, there’s a lot of other ingredients in terms of R&D and SG&A. But in terms of the first quarter, we’re looking at gross margin expansion of about 140 basis points, and for the full year we’re looking at about 100 basis points, so that number is a little bit lower than the last time we spoke and the reason is it purely--you know, almost entirely related to just currency translation. On a currency neutral basis, it’s pretty consistent with our previous guidance. Then for the full year, our operating margin’s up 190 basis points, and then for the full year we’re estimating about 130 basis points.

Shawn Vadala:

Yes, you’re welcome.

Matt Sykes:

Hi, good morning. Thanks for taking my questions. Patrick, maybe just on the services business that you talked about on the call, just reflecting back from the investor day, you talked about that services mix being about 50/50, contract versus value-added services. Could you just maybe talk about the importance of that mix shift as you move forward and where you see that mix over the medium term developing into?

Matt Sykes:

Got it, and then just maybe a follow-up, just staying on services, Patrick, you mentioned that the majority of instruments are not serviced by Mettler. Maybe if you could give us a little bit more color on what that percentage is and where you think that could go to. Then Shawn, just given that services--and you commented that it’s going to be growing faster than group, and I’m assuming it’s higher margin. Could you talk about the medium term impact on margins from a larger services business over the next few years?

Patrick Kaltenbach:

Yes, and back to your question regarding the service opportunity overall, of course we have millions of instruments in our database and that is a very competitive advantage for us to have that visibility. Our served market for services is over $3 billion, so we have significant opportunity to expand our market share in there as well. If you look at the total share of instruments of the installed base, of course you never know--we know to a good extent about which instruments are still under operation and then, based on the lifetime inspections and the database we have for instruments, we make some assumptions in terms of how many instruments otherwise would be still operational, but we think it’s probably more than 60% of the instruments out there are not yet under full service coverage from us.

Operator:

Our next question comes from Brandon Couillard at Jefferies.

Shawn Vadala:

Yes, sure Brandon. For Q4, lab was up over--I’m sorry, I’m looking at the wrong year here, but still good results. Lab was up about 20% in the fourth quarter and industrial was up low single digits. As we look towards 2023, we’re expecting double digit growth in lab for the first quarter and the full year, and we’re expecting industrial to be more flattish, you can imagine more impacted by some of the disruptions over the last few months. Then for the full year, we’re a little bit more conservative there with low to mid single digit growth, so obviously expecting more growth in the second half of the year.

Shawn Vadala:

Yes, so for the quarter, Brandon, if you play out the math, the data points that I kind of mentioned earlier, that’s probably in the 1% or so to the group, so it probably would have been in the 2% or more to the lab division and probably looking at similar type trends here in the first quarter. Then at some point, we expect it to stabilize during the second quarter.

Brandon Couillard:

Great, thanks.

Catherine Schulte:

Hey guys, thanks for the question. I guess first, I wanted to go back to the services business. You talked on the penetration side in Matt’s question, but on the other area of opportunity you mentioned of selling contracts at the point of sale, can you just elaborate on what your attach rate is today and where you’d like to see that go over the next few years and longer term?

Catherine Schulte:

All right, great. Then on Europe, you mentioned there’s maybe some conservatism in your low single digit guide for the year. What do you view as the swing factor there - is it mostly on the packaged food side, or are there other areas where you’re trying to be a bit more prudent as you start that initial guide?

Catherine Schulte:

Great, thank you.

Michael Ryskin:

Great, thanks for taking the question. This is Mike on for Derik de Bruin. Sorry if I missed this earlier, but I want to drill a little bit into core industrial. I know you kind of anticipated a little bit of a step-down in the fourth quarter, but it still seems like a sequential decline from the first three quarters of the year where you had really strong 10% growth, and then looking at your guide for low to mid single for 2023, anything in particular you’d want to call out, how that’s trending? Is that mostly a reflection of macro or how much conservatism is built into that? Are you seeing any change in order patterns with those customers or is there anything by geo you could call out there? Thanks.

Michael Ryskin:

Okay, that’s fair. Maybe just a follow-up, tying up a loose end on modeling - the 18.5 tax rate, is that a one-year dynamic for 2023 or is it safe for us to assume that going forward beyond?

Michael Ryskin:

Great, thanks so much. Congrats on the quarter again.

Patrick Kaltenbach:

Thank you.

Liza Garcia:

Hey, good morning guys. Thanks for squeezing me in. Kind of an opex question on kind of how to think about [indiscernible], maybe diving in there a little bit. So R&D up 7% in local currency in the quarter, obviously you offset that with SG&A declines. As we think about broader--your investment strategy, how should we think about the R&D line and kind of modeling that out?

Liza Garcia:

Great. I know obviously the Mettler story has been predominantly organic, but you’ve definitely made some notable tuck-ins, like PendoTECH, Biotix. Can you just provide me the update on the M&A environment and what you’re seeing in the market, maybe in terms of incremental opportunities to enhance the portfolio?

Liza Garcia:

Great, thanks so much.

Rachel Vatnsdal:

Great, thanks for taking my questions, guys, and congrats on the quarter. I wanted to follow up about some of the earlier questions around the consumables dynamic and some of the pipette inventory stocking as well. You flagged that consumables were down 5% during 4Q due to that pipette dynamic, so can you just walk us through your expectations for consumables growth in the first quarter and then for the full year? Then kind of within that, what’s embedded for that consumables growth between pricing versus volume?

Patrick Kaltenbach:

Yes, absolutely Shawn, and think again, as I said before, some good indicators for us is the demand for our pipette itself, for the instruments. It should give us continued growth. We are playing very well in the biopharma research space with our product portfolio, so the COVID tailwinds, I think will hopefully not be any topic for us as we go into the second half of the year. The rest of the portfolio that we have in consumables, the sensors that go into biopharma, some of their probe sensors or even some of the lab products, have consumables. They are still doing quite well.

Shawn Vadala:

We still see that as a really good opportunity for the company in the medium to long term, but in terms of 2023, we didn’t really build anything specific into our guidance.

Patrick Donnelly:

Hey guys, thanks for fitting me in. Maybe just one, obviously a lot of ground covered here. Shawn, maybe on the supply chain in general, you talked about inventory, obviously you ran a little high in ’22 because of some of the stocking impacts. Can you just talk about expectations to kind of wind that down? Are you seeing normalization in the supply chain? Some thoughts on how you’re thinking about that piece.

Patrick Kaltenbach:

Yes, absolutely. I only can confirm that semiconductor issues that we talked about last year are mostly behind us with very few exceptions. The team has been also very agile to change some of the designs of the instruments so we are not so dependent on some of the exotic components there. But clearly, our supply chain is--I would say it’s almost back to normal in terms of transportation times, availability of materials, and that should not get in our way to make a successful business in 2023.

Patrick Kaltenbach:

Absolutely.

Operator:

Good afternoon. My name is Audra, and I will be your conference operator today. At this time I would like to welcome everyone to the Mettler-Toledo Third Quarter 2022 Earnings Call. Today’s conference is being recorded. All lines have been placed on-mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Adam Uhlman at Investor Relations. Please go ahead.

Patrick Kaltenbach:

Thanks, Adam, and good evening, everyone. We appreciate you joining our call. I am pleased to report another quarter of strong results as our sophisticated sales and marketing programs, our innovative product portfolio and that supply chain agility continues to be strong competitive advantages. The highlights of our third-quarter performance are detailed on page three of the presentation. Local currency sales in the quarter increased 10% as compared to the prior year. We have particular strong results in the Americas and in China. Yet, it’s very good growth in our Laboratory and Core Industrial businesses. Our robust sales growth and effective execution of our margin initiatives resulted in very good growth in adjusted operating profit and adjusted earnings growth despite significant foreign exchange headwinds. As we look towards the remainder of the year and on to 2023, forecasting remains challenging and we acknowledge there is greater uncertainty in the macroeconomic environment. These uncertainties will require us to remain agile and focused on factors we can control, namely, leveraging our strong strategic programs to identify and target profitable growth opportunities. We continue to strengthen our market position and benefit from the strong execution of our growth initiatives, as well as favorable market trends such as automation and digitalization. Based on market conditions today, we believe we will generate good sales growth for the remainder of the year and in 2023. Continued execution of our margin and productivity initiatives will support strong financial results. Later I will have some additional comments on our business. But let me now turn it to Shawn to cover the financials and guidance. Shawn?

Patrick Kaltenbach:

Thanks, Shawn. Shawn and I recently completed our annual global budget tour, meeting with our colleagues around the world for in-depth reviews of strategic frameworks and key initiatives of our operating units. Those of you that have followed us closely know, this is an important element of our annual planning process as it allows us to spend considerable time with our colleagues to discuss and analyze the opportunities across our diverse business. Although, uncertainty exists in the outlook for the global economy over the next year, I feel very good about the underlying strategies we have in place and believe we are well-positioned to enhance our market position going forward. We are quite confident that we can continue to gain share and generate good earnings in 2022 and 2023. Let me share with you some comments on our operating results, as well as more details on our outlook for 2023. Starting with Lab business. I am very pleased with the strong sales growth we have delivered this quarter and year-to-date, and we saw good results across most of our portfolio. We expect good sales performance continuing in the fourth quarter and next year. As we think about our Lab business over the medium-term, we expect investments by pharma and biopharma into new drug modalities will provide great opportunities for us to support them with our solutions. The trend of digitalization in Labs has also accelerated and our solutions helps customers realized productivity gains and address growing compliance and data validation requirements. We also will look to talk the significant growth occurring in hot segments like lithium-ion batteries, semiconductors, green hydrogen and sustainable polymers to name a few. We leverage a highly agile approach to capture growth in these segments, applying a systematic voice of the customer approach on a segment and application level to identify attractive opportunities and ensure we have the correct strategies, product roadmaps and marketing efforts in place to take advantage of them. Switching now to the Industrial business. Core Industrial had very strong results in the third quarter and year-to-date. There is good demand particularly for our automation solutions as our customers look to improve productivity and increased yields. We have also seen good interest from pharma and biopharma customers as they utilize our solutions to efficiently bring new drugs to production. Like our Laboratory business, hot segments are important for our Core Industrial business as well and we have seen very strong activity from customers serving lithium-ion battery industry in China, Europe and the Americas. While we are seeing good demand to date in Core Industrial and our business has shifted over the years to more resilient industries, our business is not immune to changes in the economy. High energy cost and softer economic activity may weigh on our customers in Europe and particularly in the chemical customers. Nevertheless, we expect to deliver solid growth in our Core Industrial business in the fourth quarter and next year. Over the long-term, labor shortages and the trend of nearshoring and reshoring to establish more resilient supply chains is expected to benefit our Core Industrial business over the coming years. Additionally, new product development has been critical to our success in meeting customer needs for automation solutions and we provide equipment that is very easy to integrate into customer’s control systems and also meets the most stringent data integrity and cyber security requirements. We are also optimistic about our product portfolio and exciting innovations we have brought to-market and new products to come. For example, in addition to a strong growth we have seen before contact automation offering, our new line of hygienic bench and floor scales positions us well to win the pharma and food customers in the coming years. Turning now to Product Inspection business, we had good growth with strong demand in the Americas, which was offset in part by more cautious investment activity in Europe. Some of our packaged fruit manufacturing customers face more challenging operating environment and are focused on mitigating margin pressures from inflation and supply chain disruptions. However, we would still expect overall growth in the fourth quarter and into 2023. While the pandemic, high input costs and the war in Ukraine have resulted in lower relative sales growth for Product Inspection in the recent years, we remain convinced that the long-term growth dynamics remain strong. We are not standing still and continue to seek out pockets of growth including check weighing in with industry, pharma and confectionery customers, and we have expanded our mid-range or our mid-market coverage with new product offerings in X-ray and metal detection. I’d also want to remind you that service is very important to our Product Inspection customers and we have new initiatives underway to support our customer’s uptime, while at the same time improving our service technician productivity. These include augmented reality for remote customers support and advanced remote diagnostics to identify and recommend quick repairs to keep our food manufacturing customers up and running. Lastly, our Food Retail business delivered strong results in the third quarter, with strength in the Americas offset by weakness in China due to the pandemic related lockdowns. Our team has built good momentum recently and has an attractive product pipeline for 2023 and we are optimistic that we can generate profitable growth over the next year. Let me make some comments by geography. We had very good performance in the Americas, again strong growth in last year’s third quarter with strong growth across Product Inspection, Core Industrial and Retail. We have a favorable outlook for the remainder of the year and in 2023. Switching to Europe, our sales grew about 5% excluding the impact of Russia. The war in Ukraine has led to sharply higher energy costs across the region and as weighed on some of our customer’s investments appetite, particularly packaged food manufacturers and some chemical customers. We still see good investment level from other customer segments, including biopharma and firms involved in the development and production of electric vehicles. We expect moderate growth in Q4 and next year. Finally, for Asia and the Rest of the World, they had very strong growth in the third quarter as our team successfully navigated challenging operating conditions with the pandemic and COVID 19 lockdowns and also executed very well on our strategic initiatives. Going forward, we look to continue to optimize our sales force guidance activities in China to pursue attractive opportunities and we will also increase our focus on leveraging digital approaches to generate customer leads. Our Lab and Industrial business have performed very well this year, which we expect to persist for the rest of the year and in 2023. We remain optimistic about several key long-term market drivers in China, including the continued development of pharmaceutical, biotechnology, electrical vehicles, micro electronics and new material industries. We are very well-positioned to take advantage of these growth opportunities and have continued to invest in our sales and marketing efforts to support our growth in China. While we remain optimistic about the long-term, we acknowledge days and uncertainty in the short-term, and we know from the past that economic conditions can change very quickly in China requiring us to remain agile. So that is a summary of our outlook for the fourth quarter and next year. As you think about our longer term -- as you think about the longer term years, we very strongly believe that favorable market dynamics, our growth initiatives and our improved business mix is supportive of our long-term growth algorithm of 6% plus local currency sales growth and mid-teens earnings growth. This will be accomplished by gaining additional market share through strong execution of Spinnaker, which includes optimizing our sales force guidance and cross-selling initiatives, increasing customer engagement with digital tools and selling services at the point-of-sale. Our team will continue to pursue the most attractive, fast growing and resilient market segments. We will also continue to invest in new product innovations and will be -- that will be the foundation of future growth and I would note that our portfolio and go-to-market approach is uniquely positioned to deliver on customer requirements for automation and digitalization. Our strategies and initiatives are well-developed and well ingrained throughout the organization, and we will continue to be critical in gaining market share and driving sales and operating margin growth. That concludes our prepared remarks and I now want to open the call for questions.

Unidentified Analyst:

Hi. Thank you. This is Peter [ph] on for Derik. Just real quick. Could you guys just maybe walk through your assumptions by segment for the fourth quarter and next year as well, and also by geography, too?

Unidentified Analyst:

Okay. Thank you. And could you guys give us an update on pricing? I guess, maybe comment on what you did on the third quarter and updated expectations for 2022 and what’s embedded for 2023?

Unidentified Analyst:

Super helpful. Thank you so much.

Patrick Kaltenbach:

Welcome.

Josh Waldman:

Hey. Thanks for taking my questions. Shawn, I appreciate your talking through the segment and geo assumptions. I guess though at a high level, I am assuming the 5% is more of a base, just given where we are to start the year, how much variance do you think there is to that 5% number. I mean, given you expect 4% price next year, I guess, only a point of volume, it seems like that’s fairly conservative?

Josh Waldman:

Got it. And then, Patrick, for the first time in a while, I didn’t hear you talk about LabX. I wonder if you could provide an update there. We hear it come up in the research quite often but, wondered if you could talk through maybe the opportunities you see forthcoming and maybe talk around metrics that you kind of gauge against internally?

Josh Waldman:

All right. Appreciate it guys.

Operator:

We will go next to Vijay Kumar at Evercore ISI.

Shawn Vadala:

Yeah. Hey. I will take that, Jordan. So, like, I said before we -- we were very pleased with our performance with pricing, Q3 and I have already provided guidance for Q4 and for next year. I think that’s certainly a key lever in our margin assumption. If you kind of look at Q3, we expanded our gross margin by 90 basis points. As we kind of look to Q4, we are looking at about 150 basis points of gross margin expansion. We are looking at a similar amount in 2023 of about 150 basis points and then if you kind of dropped down to operating margin, we expanded our margin by about 250 basis points in Q3, as we kind of look to Q4 we are going to be just under 300 basis points, probably, about 290 basis points. As we look at next year, we are looking at about 160 basis points. And a key ingredient will be our price realization as we go forward as we kind of look towards Q4, we still will see some elevated headwinds in terms of up inflation on material costs, but maybe to a slightly lesser degree than what we saw in Q3.

Shawn Vadala:

Yeah. So in terms of orders, as you are probably familiar, we don’t -- we only typically have about a month and a half or so of backlog, so we typically don’t comment on orders or backlog. But of course, we consider that in our guidance for the fourth quarter and for next year. In terms of Europe, I don’t know if I’d add too much to what Patrick said in our opening remarks. I mean one area that we have seen some slowdown to a certain degree is in packaged foods, in particularly the impact on our Product Inspection businesses, companies are delaying investments in CapEx in that area and Product Inspection would fit into CapEx, which is not the typical part of our portfolio, a lot of our -- most of our sales are and below $10,000, but Product Inspection is above that. And then as we kind of look at the energy crisis, I mean, we still hear good things from our organization, but we are also mindful of the overall situation and the potential impact on industries like the chemical industry.

Operator:

We will go next to Tim Daley at Wells Fargo.

Patrick Kaltenbach:

Yeah. Look, this as Patrick. We are very pleased with our results in China. As you said, we are 15% in the quarter and we also have forecast double-digit growth for the fourth-quarter. So we are really happy how China is supporting for us. We have a very strong organization there and it’s really performing extremely well. We have not been affected big time by the corporate lock towns, our manufacturing sites continue to manufacture restrictions, but they have been operational. We see our sales team, as we said in the remarks, also really fully leveraging the Spinnaker tools to really reach out to customers and capture the fast growing segments in China, as well as a lot of momentum behind for some electrical vehicles, battery segment, the lithium-ion segment, but we are also seeing still very good growth in pharma and biopharma in China. So we are -- actually we have continued to be very pleasantly surprised by the performance, again, we have been optimistic for Q3. It totally came in as expected or even better and our outlook for China is still positive long-term, of course, so anyway positive. Short-term, there always risk in China, of course, as we all acknowledge that can be short-term lockdown impacts or others, but I think, you should look at China from a long-term growth perspective. It’s very promising. I think we will continue to see growth. We have organization there that is very strong both on the sales and marketing side, but also don’t forget we have manufacturing and R&D Day as well. And from that perspective, I think, we have a really good understanding about what drives market momentum in China and can also quickly adopt to fast growing segments and capture those.

Shawn Vadala:

Yeah. Hey. Good questions, Tim. Hey. So the first one -- let me start with this -- I will kind of end with the second one -- I will start with the second one first. So, I think, the best way, I mean, I recognize what you are saying the relationship between sales and EPS. But I would say, probably, the best way to think about it is our -- to look at our major exposures, so our largest exposure would be the U.S. dollar to the renminbi. And so for about every 1% change in the renminbi to the U.S. dollar that would affect our operating profit of about $3.5 million to $4 million. And then if you -- the second largest exposure would be our Swiss franc to the euro. So, if you think about it we are long in euro, but we are short in franc and that kind of creates inherent natural hedge within the company and so we look at the cross rate. And so as the Swiss franc changes are the or the -- as that cross rate changes every 1% has an effect of about $2 million on our operating profit. And so I think that’s how I would probably look at it and then I don’t have a really good proxy for the dollar against the rest of the basket of currencies, but those are the two major impacts on our earnings. In terms of -- what was the first price costs, okay, yeah.

Shawn Vadala:

If the certainly in terms of price cost, I mean, I think, you saw that we were able to respond very well to inflationary headwinds in 2022. Of course, it can take a quarter or two for us to be able to actually get the actions into the market. But if we were confronted with a similar situation next year, I think, we would react exactly the same way and I think that the market understands inflation, our organization was able to do a great job articulating and explaining that to the market. And then, I think, most importantly, we are providing really strong value propositions to the market that they appreciate and the ability to support them and provide these value propositions is highly appreciated and also supports our price realization going-forward.

Shawn Vadala:

Yeah. Thank you.

Alonso Garcia:

Evening, guys. Thanks so much. So, I guess, to start-off with. I just wanted to actually dig into a little bit with kind of, you have obviously talked a little bit about kind of supply chain and kind of the challenges that you have been able to kind of manage and how to think about the cadence. But if you could kind of help us understand kind of you have talked about electrical components and -- previously and how that’s improving the kind of how to think about through the balance of 2023 kind of how to think about kind of maybe the impact to margins and the improvement there and what you are kind of expecting into the guidance?

Alonso Garcia:

Okay. Great. And I know PendoTECH is at this point part of the organic number, but it would be great to kind of just trying to get a contextual update on performance in the quarter and how the company is maybe performing relative to kind of…

Alonso Garcia:

… your expectations?

Alonso Garcia:

Great. Thanks so much.

Operator:

We will move next to Patrick Donnelly at Citi.

Shawn Vadala:

Yeah. Thank you. I will take the question. Look, in Europe and Product Inspection, a lot of them are large international, multinational companies and what we are seeing is that, they are not canceling projects, but they are delaying projects. I think, overall, they have become a bit more cautious with the projects and how they are spending their money at least in this quarter, and probably, also in Q4, so they are postponing projects and they have, I would say, better line-of-sight of how things develop in Europe. It’s not specific to any particular country in Europe. So, I would say, you can see just from most are from several customers but it’s not linked to one country overall.

Shawn Vadala:

Yeah. I think you will see an update on our business and our different initiatives. We will walk you through that and then we will kind of also talk about some of our exciting opportunities to continue to expand our margins through supply chain and pricing. And then it’s going to be -- the Investor Day is going to be based, actually we are here right now in Massachusetts at our Process Analytics business and so we are going to feature that business and so show you -- showcase that business in a lot more detail and then kind of also show you kind of how we serve the value stream of a typical biopharma customer.

Operator:

We will go next to Matt Sykes at Goldman Sachs.

Patrick Kaltenbach:

Let’s see.

Patrick Kaltenbach:

We are flipping a coin. Okay. As it is -- as we did, of course, there are still ongoing multiple risks and it’s not only Europe and in China, we are talking potentially about continued lockdowns related to COVID-19, but it is not yet clarity of how that will evolve further, talk maybe for -- I mean, it’s about Europe, I mean, again the war in Europe, it related to energy crisis, et cetera, just shows quite some uncertainty in the outlook of 2023. Of course if that would be resolved we would see upside to our current projection. But who knows? I mean, it’s -- there is no short-term resolution in sight and that’s actually also not really clear about how big those impacts will be, right? How many of the chemical customers will be affected, will there be like program…

Matt Sykes:

Energy outages, what does this mean for the entire strategy, we -- it took of course that all into consideration and try to make it very reasonable forecast for 2023. But we can’t know -- we cannot neglect these risks right and they are now in our forecast. If those would go away, and of course, there would be upside, right?

Patrick Kaltenbach:

But how much is really hard to quantify.

Patrick Kaltenbach:

It also how -- again how customers will respond to these crisis.

Patrick Kaltenbach:

Yeah.

Patrick Kaltenbach:

Yeah.

Patrick Kaltenbach:

I mean, what I want to say is, also looking back just the last crisis, we went into COVID-19 and in our organization really demonstrated incredible agility to adjust the market conditions and we will apply similar same measures as moving forward if any new crisis comes up. I think we are very well-trained and very agile and have demonstrated actually how we can react to changing market conditions and the flexibility of organizations and the tools we have in place, as I have said, also in my remarks at the beginning, we have the tools in place where we can very quickly identify pockets of growth in the market and send our sales team to those and capture those opportunities as they come up.

Patrick Kaltenbach:

Well, look as you rightfully said, it’s a smaller part of our business, it’s about 5% of the total business. We are -- we have seen really good projects over the last couple of months, where we have been really successful. We are also looking at rollout often upgrade portfolio of products and we are optimistic of the product we have. But in terms of the overall volatility in the market, we don’t see any short-term changes. Again, I mentioned also in the markets that we have in China we are currently facing an issue with the lockdown, which affects a lot of the retail customers there and we don’t know exactly how long that will continue. If that eases up there is probably some upside. But volatility I don’t expect a total significant change in 2023. What we do, I want to say is, that we have, again, with the strong portfolio and also the number of projects we have won over the last couple of months, it also gives us confidence in the portfolio.

Operator:

And our next question comes from Rachel Vatnsdal at JPMorgan.