Mettler-Toledo International Q3 2023 Earnings Call Transcript

There are 12 speakers on the call.

Operator

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.

Speaker 1

Thank you, and good morning, everyone. Thanks for joining us. On the call with me today is Patrick Kaltenbach, our Chief Executive Officer and Sean Vedala, our Chief Financial Officer. Let me cover some administrative matters. This call is being webcast and is available for replay on our website at mt.com.

Speaker 1

A copy of the press release and the presentation that we will refer to today is available on our website. This call will include forward looking statements within the meaning of the U. S. Securities and Exchange Act of 1933 and 1934. These statements involve risks, uncertainties and other factors that may cause our actual results, financial condition, performance and achievements to be materially different from those expressed or implied by any forward looking statements.

Speaker 1

For a discussion of these risks and uncertainties, See our recent annual report on Form 10 ks and quarterly and current reports is filed with the SEC. The company disclaims any obligation or undertaking to provide any updates or revisions to any forward looking statements except as required by law. On today's call, we may use non GAAP financial measures. A reconciliation of these non GAAP financial measures to the most directly comparable GAAP measure is provided in the 8 ks and is also available on our website. Let me now turn the call over to Patrick.

Speaker 2

Thanks, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our Q3 financial results, the details of which are outlined for you on Page 3 of our presentation. Market conditions were weaker than expected in the Q3, especially in China, where market demand Almond. Our team has reacted quickly to address the market challenges and adjust our cost structure And we delivered good margin and cash flow performance despite these headwinds.

Speaker 2

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 Stern Drive to manage our costs effectively. Our go to market strategy, innovative portfolio And unique culture have 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 a market recovery. Let me now turn the call over to Sean to cover the financial results and our guidance, and then I will come back with some additional commentary on the business and our outlook.

Speaker 2

Sean? Thanks, Patrick, and good morning, everyone.

Speaker 3

Sales in the quarter were $942,500,000 which represented a decrease in local currency of 5%. On a U. S. Dollar basis sales declined 4% as currency increased sales growth by 1%. On slide number 4, we show sales growth by region.

Speaker 3

Local currency sales grew 4% in Europe, declined 3% in the Americas and declined 14% in Asia Rest of the World. Local currency sales in China were significantly lower than expected and declined 25% in the quarter. On Slide number 5, we show sales growth by region on a year to date basis. Local currency sales grew 1% for the 1st 9 months with 4% growth in Europe and 1% growth in the Americas and a 1% decline in Asia Rest of the World. Local currency sales decreased 6% in China on a year to date basis.

Speaker 3

On Slide number 6, we summarize local currency sales growth by product area. For the quarter, laboratory sales decreased 9% and industrial decreased 6% with core industrial down 9% and Product Inspection up 1%. Food Retail grew 49% in the quarter and benefited from significant project activity. Service sales grew 6% in the quarter. The next slide shows local currency sales growth by product area on a year to date basis.

Speaker 3

Laboratory sales decreased 3% and industrial increased 2%, including 1% growth in core industrial in 4% Growth in Product Inspection. Food Retail increased 33%. Service sales grew 11% on a year to date basis. Let me now move to the rest of the P and L, which is summarized on Slide number 8. Gross margin was 59.4%, an increase of 10 basis points as pricing was partially offset by our volume decline, higher costs, business mix and currency.

Speaker 3

R and D amounted to $46,100,000 in the quarter, which is a 1% increase in local currency over the prior period, including increased project activity. SG and A amounted to $217,400,000 a 9% decrease in local currency compared to the prior year and includes lower variable compensation and benefits from our cost savings initiatives. Adjusted operating profit amounted to $296,000,000 in the quarter, a 4% decrease. Currency reduced operating profit growth by approximately 3%. Adjusted operating margin was 31.4%, which represents an increase of 20 basis points over the prior year.

Speaker 3

A couple of final comments on the P and L. Amortization amounted to $18,300,000 in the quarter, interest expense was $20,300,000 and other income amounted to $1,200,000 Our effective tax rate was 19% in the quarter. This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter. We continue to expect our tax rate to be 19% for the full year and again in the 4th quarter. Fully diluted shares amounted to 21,900,000 which is approximately a 3% decline from the prior year.

Speaker 3

Adjusted EPS for the quarter was $9.80 a 4% decrease over the prior year or a 1% decrease excluding unfavorable foreign currency. On a reported basis in the quarter, EPS was $9.21 as compared to $9.76 in the prior year. Reported EPS in the quarter includes $0.24 of purchased intangible amortization, to $0.27 of restructuring costs and $0.08 from the difference between our quarterly and annual tax rate due to the timing of stock option exercises. The next slide illustrates our year to date results. Local currency sales grew 1% for the 9 month period.

Speaker 3

Adjusted operating income increased 4% or 8% excluding unfavorable foreign currency and our operating margin And it's a very strong quarter for the quarter. Adjusted EPS grew 4% on a year to date basis or 9% excluding unfavorable foreign currency. That covers the P and L and let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $251,700,000 up $27,000,000 helped by favorable working capital. Year to date cash flow per share grew 32%.

Speaker 3

DSO was 37 days while ITO was 3.8 times. Let me now turn to our guidance for the remainder of this year and our initial thoughts on next year. First, forecasting remains very challenging, particularly for our business in China. Our team in China has reacted to changing Almonds. And we feel very good about our market position in the country.

Speaker 3

However, economic conditions remain challenged and there's low visibility. Outside of China, there is also greater uncertainty today with weakness in our core end markets such as life sciences and continued soft economic conditions in Europe and the Americas. We expect lower than normal customer year end spending. The recent Middle East conflict also creates additional uncertainty. Secondly, our organization is not standing still during this period of reduced market demand, a defining attribute of our culture.

Speaker 3

The team has executed exceptionally well to adjust our cost structure to current market conditions, while at the same time reallocating resources to support important investments in our long term growth. Now turning to our guidance. For the full year 2023, we expect local currency sales to decline approximately 1%. This compares to our previous guidance of 0% to 1% growth. We expect full year adjusted EPS to be in the range of to $39.10 to $39.30 This includes an expected headwind to Adjusted EPS growth of approximately 3% to 4%.

Speaker 3

Free cash flow for the year is now expected to be approximately Almas to $875,000,000 above our prior guidance as our reduced profit forecast is more than offset by the favorable timing of tax payments and Working Capital. Share repurchases will now be $900,000,000 in 2023. With respect to the Q4, we would expect local currency sales to decline 7% to 8%. We expect 4th quarter adjusted EPS to be in the range of $10.50 to $10.70 Currency is expected to increase sales by approximately 1%, but decrease EPS by approximately 1%. We have also provided our initial guidance for 2024 and based on our assessment of market conditions today, We would expect local currency sales to be approximately flattish and adjusted EPS to be in the range of $39.10 to $39.80 which represents a growth rate of 0% to 2% or 2% to 4% growth excluding adverse currency.

Speaker 3

Relative to sales, currency is expected to be a headwind to sales growth of approximately 1% in 2024. Underpinning our 2024 guidance are the following assumptions. First, we expect our customers to remain cautious with spending in the first half of the year, reflecting the increased uncertainty in the economy. Our sales in China are also expected to decline in the first half of the year as economic trends are expected to remain weak and we face challenging multi year growth comparisons. We expect our local currency sales to improve in the second half of the year as comparisons become easier and market conditions improve.

Speaker 3

Secondly, we expect our year over year margin performance to be dampened due to lower sales volume and a reset in our variable compensation programs, offset in part by our cost savings initiatives. Lastly, I'll share a few final comments on our 2024 guidance. We expect total amortization including purchased intangible amortization to be approximately $73,000,000 Purchased intangible amortization is excluded from adjusted EPS and is estimated at $25,800,000 on a pre tax basis or $0.96 per share. Interest expense is forecasted $86,000,000 for the year and other income is estimated at approximately $5,000,000 We expect our tax rate before discrete items will remain at 19% in 20 24. We expect free cash flow Almond.

Speaker 3

$850,000,000 representing a conversion of approximately 100% of adjusted net income. We also expect share repurchases will be approximately $850,000,000 That's it from my side, and I'll now turn it back to Patrick.

Speaker 2

Thanks, Sean. Let me start with some comments on our operating businesses, starting with LAP, where our sales teams continue to Good engagement and activity levels with customers, but budget constraints and cautious spending patterns have led to declines in demand across our key to market segments of Life Sciences, Food and Beverage and Chemicals. This is especially true in China where our pharma and biopharma Almas. Our 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.

Speaker 2

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 bioprocessing customers. As we look out to 2024, the market fundamentals for the 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 normal drugs and therapies to be brought to the market. He anticipates to benefit from trends in automation and digitalization leveraging our Webex software. Additionally, Our team remains focused on capturing the significant growth for queuing and hot segments like lithium ion batteries, Semiconductors and Sustainable Materials.

Speaker 2

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.

Speaker 2

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's increased customer focus, the devices used in hazardous areas to be certified explosion proof And to be as simple to use as those in safe areas. Earlier this year, we released a new model of our flagship Industry 500 Weighing For use in hazardous areas that provide powerful process control for our pharma and chemical customers.

Speaker 2

Our new terminals are intrinsically safe and also feature seamless integration into customers' automation systems and deliver state of the art cybersecurity features. Now regarding our Product Inspection business, food manufacturing customers face a 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 As our customers increasingly seek solutions to protect their packaged fruits from physical contaminants and increase 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 additional contamination detection and positions us very well to gain market share.

Speaker 2

Lastly, Food Retail had another quarter of very 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.

Speaker 2

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 Almond. To gradually increase their spend in 2024 as they return to more normal replacement cycles and continue to advance their drug pipelines.

Speaker 2

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 Almas. 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.

Speaker 2

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 Almond. Due to the country's commitment to expanding R and D investment and supporting development of advanced pharmabiopharma, new energy into 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.

Speaker 2

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 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 Founder of technology leadership with new product innovation and our Spinnaker sales and marketing programs will be further enhanced Over the coming year 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 Meta Toledo experience with customers and employees, which will be enabled with the launches of new programs over the coming year.

Speaker 2

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 like I'd now like to open the line for questions.

Operator

We ask that you limit yourself to one question and one follow-up question, please. We'll pause for just a moment to compile any questions. Our first question comes from the line of Dan Arias with Stifel. Please go ahead.

Speaker 4

Hey, good morning guys. Thanks for the questions. Sean, maybe just to start on China, What's the implied performance that you're baking in for 2024? And I know it's hard to sort of predict cadence this far out, but can you just talk about what's assumed 1st 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 We'll be down in the first half, but can maybe grow in the second half.

Speaker 4

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?

Speaker 3

Yes. Hey, thanks, Dan. Yes, so for next year, we're kind of expecting China to be down high single digit, But we're expecting more significant decline in the first half of the year. And frankly, also I think a significant decline in the 4th quarter, probably down in the mid-20s in Q4, kind of similar to what we saw In Q3, but we do we are very optimistic about growth in the second half of the year next year. Like you said, we'll be facing some easier comparisons.

Speaker 3

But I think a lot of different topics in the local market should also be flushed out. I think we also appreciate that there was an element of maybe some Talking at customers that were happening with supply chain constraints during COVID, and some of that inventory is also going to be

Speaker 4

Almas. Okay. And then maybe just on op margins, how do things look there for you just 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.

Speaker 4

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, etcetera.

Speaker 3

Yes, sure. So when we look at our margin for this year, of course, we're very pleased with our margin expansion. On a year to date basis, I think we're up like, what, 140 basis points for the full year. We'll probably be up excluding currency, we'll probably be up Over 100 basis points, but on a reported basis, probably in the 50 basis point kind of a range. As we look to next year, our operating margin will be More flattish, and if you exclude currency, it's probably up by about 20 basis points.

Speaker 3

Probably one of the as you I think you kind of like highlighted some of the things in terms of like puts and takes for next year. In terms of Maybe I'll start with pricing. Pricing continues to do very well this year. It came in about 4.5% or so for the 3rd quarter. We'll probably be down a little bit from that level in the 4th quarter, probably in the 4% kind of a range.

Speaker 3

But then when we kind of like think about next year, We're probably more in the 2% range, probably more in a more normalized environment for next year. So that has and impact if you kind of compare 23 versus 2024. From a volume perspective, you're right, it's probably kind of similar year on year in terms of the overall volume. But we also Have initiated different cost savings measures. We're very pleased with the progress on that.

Speaker 3

A lot of that's targeted towards to productivity in the organization. So we will have some benefits from that into next year. But we also one of the things we have Going on next year is we also have so if you kind of like think about our overall cost structure, Excluding bonus and incentives, might be down slightly, but we do have to bring back bonus levels to a more normalized level next year. So that's going to be a little bit of a headwind as we kind of go into next year. And then I think maybe the final thing is like when you go through times like this, I think on one hand we're very proactive.

Speaker 3

On the other hand, we're also very mindful. We want to be very mindful of coming out of this situation Almond. I think that's something we've always been good at in the past and we're very thoughtful about how we're trying to balance Our costs and our investments in this environment and we have a lot of things that we're still investing in that we're actually very excited about We'll drive some innovation that we'll see next year, but also beyond next year too. And it's not just innovation, we're continuing to invest in our service organization as well. So I think we have a good balance in the company.

Speaker 3

And I think when we kind of step back, I think we have the right mix going into next year. And maybe I forgot almost forgot, there's one other thing is foreign currency. I think you mentioned in the question, Our currency will be about a 2% headwind to our EPS kind of next year.

Speaker 2

Sean, if I may David, Joseline also has asked about sterndrive. Yes. Just to add to that on sterndrive, this year when I talked about stepping up on our Strategic pillars, we just launched Cernerdrive Wave 3 with a strong focus on automation on the shop floor, smart automation, And we expect it also to continue to significantly contribute to our performance next year and drive savings, both on the automation side, but also back office efficiencies, etcetera. So the program is fully running and the team is very committed to drive additional savings next year.

Speaker 5

Okay. Thank you, guys.

Operator

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

Speaker 6

Hey, good morning. Thanks for taking my questions, guys. Maybe one for Sean and then one for Patrick. Sean, I wondered, can you talk a bit more on the assumptions that went into the guide, particularly as it relates to the Almond. I mean it seems like the guide implies a bit more of a step up than normal on an absolute basis into 2024.

Speaker 6

I mean, anything you're seeing like in the markets that you're trying to capture within the guide suggesting that maybe like 4th quarter is trough and things start to get better as you roll into Q4.

Speaker 3

Yes. 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 Q4, I don't think we're going to get I think 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 not anticipating much of that pickup, if any, in our Q4 guidance. So that's maybe one topic to think about this year versus next year.

Speaker 3

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 this Q4 dynamic 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 was 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.

Speaker 6

Got it. Okay. And then Patrick, can you comment on how the service Business is holding in. I think it's been a bright spot here recently, but I guess any risk that that business starts to slow on the back of software hardware and maybe You know, pressures growth and profitability as we move into 2024.

Speaker 2

Yes. 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 added headcounts and services to make sure that we can Deliver on the demand that our customers have in our services. As I mentioned in one in some of the earlier earnings calls, He increased our portfolio and improved our portfolio of service offerings that helped 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 go deeper after our installed base That we have out there and potential products that are currently not yet under service contract.

Speaker 2

We have established telemarketing campaigns, etcetera. So Really performing well. In Q3, I think our growth rate, John, correct me if I'm 1, was 6%. And that For the full year still holds up in the high single digit on low double digit growth for the full year on services. It has been very strong in the first half.

Speaker 2

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 opportunity to go after our installed base products that are currently not under contract, making sure that the customers understand the full benefits of being on a contract with us. We know that customers who are on the service contract are much more likely to buy again from us because they have seen the benefits Office of being on the service contract with Metro 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. Again, I'm very upbeat about the hotel opportunity in Service and would expect it to continue to grow mid single digits at least next year.

Speaker 5

Got it. Appreciate all the detail, guys. Thanks.

Operator

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

Speaker 7

Hey, guys. Good morning and thanks for taking my question. Patrick, maybe one on when you look at this Q4 guidance sequentially stepping down from CQ, It shouldn't be a surprise given your peer commentary. But what is changing from a Metro's perspective, right? Can you comment on end market The pharma versus industrial, like what are you seeing in China versus non China?

Speaker 7

Trying to figure out if this is all China or ex China you're seeing softening?

Speaker 2

Yes, good question, Vijay. I mean the biggest part of it is as Sean has outlined is absolutely China Because we had initially we had planned for double digit to mid double digit declines In China, we're facing probably again 25% -ish decline in Q4. That's what we are planning for. That's definitely one important piece of it. The other piece is the overall budget flush and also affecting Mainly the lab business, which we basically don't account for this year.

Speaker 2

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 market. And I think some of our peers also mentioned that you're seeing similar Lack of demand or budget flush demand at the end of the year this year. Customers are just more cautious with the spending and they're not releasing I had 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.

Speaker 2

I think that's probably the biggest thing for China together with the lack of a budget flush. In terms of the other industry, I would say no significant changes whether it's U. S. For Europe. Maybe a little bit in the chemical market in the U.

Speaker 2

S. Where we saw Slow down in Q3 and be also factored into Q4. But we have to see how it plays out long term. Unless there is, I would say 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.

Speaker 7

Understood. That's helpful. And Sean, maybe one for you. Did I hear you right about pricing Being normalized, you know, two points next year. Like just given Patrick's comments on end markets being A little tougher.

Speaker 7

Does the pricing like what gives you the visibility on pricing for next year? Should we assume gross margins being consistent flattish year on year?

Speaker 3

Yes. So I mean, yes, 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 processes. 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.

Speaker 3

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 relative to competition and I think we're very well differentiated in many respects.

Speaker 3

And so I think that certainly helps us to 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.

Speaker 7

Fantastic. Thanks guys.

Speaker 3

Yes, thanks.

Operator

Our next question comes from the line of Derik De Bruin with Bank of America. Please go ahead.

Speaker 5

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 at some point. But what do you think it looks like once the market sort of rebounds?

Speaker 5

I mean, we're in a different world today. Politics is different, things are different. How much of that 6% top line assumed that it was just going to be Business as usual as it had been for the most prior years and what did you embed in that guide for So like that China assumption with it. So that I think is a broad question. I know you're on the crystal ball, but I do think it's important.

Speaker 2

Yes, it is important. Let me start and then I'll let Sean chime in as well. Look, we think when we talk about a 6% growth Long term growth model for Networkleader. I think that number is still very valid in the mid- and long term. There are several reasons for that.

Speaker 2

Number 1, we have Factoring in China in that equation to be high single digits to long term. So it's not like not the growth rates that we have seen over the last 2 years. But still I would say high single digit is probably not unlikely that we will see this in the midterm again in China. The other big important piece for us and remember that we also shifted our portfolio sequentially into faster growing segments over time and that continues into the lab business, into life science market, in industrial automation. These are all markets that are still where we see will see strong demand just giving the underlying demand in different industries, Whether it's related to aging working populations, lack of flavor out there, driving automation, The whole story around digitalization where we have a very, very strong portfolio both on the lab side, but also on the industrial side.

Speaker 2

And even if you look at product inspection, we call it product software, products software, we have a very unique positioning out there as well. That is something that I think will continue to differentiate us and also give us the opportunity to capture market share. And if you account for an underlying Market growth over the mid and long term in the range of 4% to say 4% to maybe 4.5%. We should get to the to the 6% by taking the market share that we are going after. I think we have the right portfolio.

Speaker 2

We are increasing Our investments and we have increased our investments over the last 2 years significantly to also drive new solutions to the market. You will see a lot of exciting solutions coming also Next year, because I'm a strong believer that differentiation will help us to drive growth, but also profitability.

Speaker 3

And as a global company, of course, there's 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 business 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.

Speaker 5

Got it. And as a follow-up, Your business is relatively short cycle. You don't build tons of backlog. I'm just sort of curious on Where you're getting your visibility from and particularly into that back half ramp, which looks a little aggressive, frankly. And also and sort of goes to the same questions, like you talked about pharma and biopharma returning to a normal relatively normal placement cycle.

Speaker 5

It's like do you I'm just surprised to hear you say that given what my understanding of how the business is and sort of like how your Visibility is for the next couple of quarters. Can you just a little bit more confidence on what's sort of going into this other than sort of like tougher easier comps in the back half of next year?

Speaker 3

Well, maybe I'll start and let Patrick kind of add some color. I mean, I think, hey, I understand the point. We were 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 4 year type CAGRs, I mean, we are starting to see ourselves moderating here. And when you kind of look at the back half Next year versus even like a 2019, you start to see more consistency from what we see here in to the second half of this year.

Speaker 3

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 are 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 Q4, I think this year's Q4 is setting up to be a more unusual Q4 for the group in terms of like a lack of that end of 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.

Speaker 3

Yes. 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's 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.

Speaker 2

Certainly. And if I may add here, The topic around destocking is something that we had seen in pipettes that we had seen in the sensors and our pro business etcetera. We think in the year from our customers that most of that is behind us. I mean you're back to normal order pattern on these consumables and sensors that are used for Almond in Manufacturing. Customers don't build up excess inventory anymore.

Speaker 2

That's also clearly what we hear from them. What we see in terms of the order cycles and that they are back to a normal use model, 50 sensors.

Operator

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

Speaker 3

Hi, good morning. Thanks for

Speaker 8

taking my question. Maybe just first on Europe, where there was some relative strength there. But just on the core industrial side, in particular on the chemical side, just the data points we're getting, things seem to be He's hearing a bit there and you've talked about the PMIs. Could you maybe talk about that as in sort of the context for 2024 Europe and on the core industrial side?

Speaker 2

I'll start with it. And on Europe, yes, we have seen actually good performance this year in the end markets. But And Middle East, you also had some easier comparisons versus China U. S. Compared to last year, where they had where we had seen more growth last year in the market.

Speaker 2

That said on the chemical market that you referred to one of our concerns going into the year was that the high energy prices in Europe would impact that 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 1, it's our capability to continue to drive market share. Remember, we have a very strong sales team in Europe that goes ManyDirect that is and we leverage our also our spinning our sales capabilities to direct our sales opportunities very quickly and also address hot segments like lithium ion batteries etcetera which help us to compensate some shortfalls in other areas. We are, of course, a bit more cautious on Q4 and expect also a much more moderate 2024.

Speaker 2

You're right, PMI is also pointing downwards, that's why we are more cautious next year. The investment Sentiment across Europe, I would say, if you go to Southern Europe, Spain, for example, Portugal, which are also quite significant marks 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 and semiconductors, but also into the lithium ion battery and energy market, which I think will continue to drive growth moving forward.

Speaker 2

So Again, overall for Europe next year, you say very moderate, but long term, I think it has It still holds our model that we expect low to mid single digit growth in Europe.

Speaker 3

Yes. And just to maybe

Speaker 8

answer

Speaker 3

your question specifically for next year, we're a A bit more cautious on Europe and for core industrial specifically, probably expecting it to be more flattish next year. And that's Again, after coming on top of some really solid numbers this year and clearly, frankly, exceeded our expectations for the year. And then for Europe in total for next year since I'm hitting it, we're probably looking at growth up slightly for the year overall.

Speaker 8

Got it. Thank you for that color. And then maybe just following up on Derek's question on the second half next year assumptions. Sean, if we were to kind of look at the comp impact and then inventory destocking where there might be some level of visibility of 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 that second half recovery, If that's possible.

Speaker 3

Yes. I'm sorry, Matt. I don't have that level of granularity in our model. And of course, It's very early to start trying to give specifics for any quarter for next year. I think we always try to share what we know at this time of the year recognizing it's early, but we feel like it helps everybody to know at least what's on our mind and it helps you to think about How to organize your models, but of course as we get into the year, we'll refine things as we learn more about trends as we enter the year.

Speaker 8

Got it. Appreciate that. Thanks, Sean. Thanks, Patrick.

Speaker 2

You're welcome.

Speaker 5

Yes.

Operator

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

Speaker 5

Hey guys, thanks for taking the questions. Sean, maybe one for you. Just in terms of next year, do you mind just breaking out kind of the segment forecast? It's usually pretty helpful just to hear kind of that sub segment Detail and maybe geographies too. I know you mentioned Europe and China.

Speaker 3

Yes, sure. So maybe I'll some of this might repeat what I've already said, but 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 He's flattish. And so if we start with lab, we expect lab to be up slightly. We expect Core Industrial to be down slightly.

Speaker 3

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. Okay.

Speaker 3

Lightly, it's low single digit.

Speaker 5

Yes. Go ahead. Yes. I got you. And then maybe one on the earnings side, Sean.

Speaker 5

I mean, just looking at 4Q, in typical years, it's about a third of the year in terms of earnings. You're a little bit below $11 here for 4Q. You just take that as a run rate, right? It kind of suggests something like $33 The guidance for next year is more 39%. I guess, is there something holding 4Q down that goes away next year?

Speaker 5

I'm just trying to think about That is a jumping off point and just bridging the gap to get to that guidance for next year on the earnings side relative to what 4Q seems to imply.

Speaker 3

Yes. I mean, I feel like you're trying to take a low quarter and try to extrapolate and of course, the Q4 has this Dynamic that we talked about with not having your typical year end market demand. And So I'd be a little bit cautious to try to do any correlations off of that. Of course, the way we're building it up is a lot more Granular looking at the different levers and trying to pull it all together. 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.

Speaker 3

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're striking that with this guidance.

Speaker 5

Okay. So 4Q seems maybe like a little more of a depressed number than I guess next year, I guess.

Operator

Yes.

Speaker 5

Okay. I appreciate it, guys. Yes.

Speaker 3

Thanks.

Operator

Our next question comes from the line of Jack Meehan with Nephron Research. Please go ahead.

Speaker 9

Thank you. Good morning.

Speaker 3

Hi, Chuck.

Speaker 9

So one of your peers called out lab closures is impacting demand as they went through the Q3 and into the 4th 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.

Speaker 3

Yes, maybe I'll start Jack. So I mean, the only thing I've really heard about is like there There's certainly a lot of small start up biotechs that have gone out of business, some articles on that kind of recently. But as you know, that's not a big part of our business. I mean, it has a smaller effect on maybe our pipetting business, but a lot of our portfolio really isn't geared towards early research. So less of an impact for us.

Speaker 3

But other than that, we're not

Speaker 9

Okay. And then on Food Retail, I just look back over the last decade. This has been give or take a $200,000,000 business here or there. This year, you're obviously trending well above that. Do you view this as pull forward from future years?

Speaker 9

Is there Some risks that this could swing below the trend line before we can get to equilibrium.

Speaker 3

It's always a lumpy business. 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 U. S.

Speaker 3

And in Europe. So the team's He'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 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 on to 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.

Speaker 3

Our visibility in the 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 yes, pleased to see how well it's doing this year.

Operator

Okay. Thank you, Sean. You're welcome. Our next question comes from the line of Rachel Vazdendahl with JPMorgan. Please go ahead.

Speaker 10

Great. Good morning and thanks for taking my questions.

Operator

So first up, I just wanted to see if you could spend

Speaker 11

a few minutes talking about your exit rates of how the segments performed in the month of And then so far into October early November here. And then you mentioned during Derek's question for your CAGR on the volume side and 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're 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 August were likely a bit stronger?

Speaker 3

Yes. Hey, Rachel. So maybe I'll start with the second part of your question. So from a CAGR perspective, we're kind of looking at what we saw in Q3 And how we're guiding Q4 and then just kind of taking a step back and applying our own judgment as to like that looks reasonable to us, as kind of a moderation or normalization rate as we kind of think about next year. And then in terms of like exiting and entering, we usually don't try to comment too much on individual months.

Speaker 3

But I would say that we certainly understood both of those numbers as we were providing guidance on the Q4 here. And if it helps at all, maybe I haven't really touched upon guidance for the Q4, but I could maybe just run through that by segment just to Provide a little bit more color in terms of how we're thinking about the different parts of the business. So we're looking at for the Q4 lab being down in the 10% kind of a range. We're looking at core industrial being down mid single digit, product inspection being down high single digit, But with retail growing in the 20% kind of a range. And then from a geographic perspective, I've already mentioned China being down like mid-20s.

Speaker 3

And then from a geographic perspective, the Americas being down mid single digit with Europe being down low single digit.

Operator

Got it. That's helpful.

Speaker 11

And then I just want to touch a little bit more on that first half, second half dynamic next year. 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 want 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 I'm 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?

Speaker 3

Yes. I mean, like I said before, I mean, I think we expect lab for the full year to be up slightly. And then we expect on the industrial side. Overall, it's going to be flattish with core industrial down slightly and product inspection up slightly. I think China of course is going to be a big part of like the seasonality next year.

Speaker 3

And so I would expect Things to be relatively down in the first half of the year and then up in the second half of the year. But like I said earlier, we don't have Specifics to share regarding some of the other granularity of how we would arrive at that. And as we like I said Before as we enter the year, we'll have more visibility and can provide help you refine models and provide more color.

Operator

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

Speaker 10

Hey, guys. Thanks for the questions. Maybe first, you mentioned food manufacturing customers in Americas remained cautious with spend on new equipment. I know you talked about product inspection being up slightly next year, but maybe talk about the outlook for that customer group in 2024 And what gets them to start being a little more constructive around spend?

Speaker 3

Yes. Maybe I'll start, Catherine, and then I'll let Patrick, pick it up. 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 Q4 and by this time we have enough visibility to say that. So for the Q4 of this year, we're seeing negative results or declines, I should say, both in the Americas, but frankly also in Europe.

Speaker 3

That market segment has been under a lot of pressure in terms of their own cost structure their own challenges with inflation. You've seen some of the food companies Closing plans, executing restructuring plans, a lot of antidotes from our team say 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.

Speaker 3

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 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.

Speaker 3

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?

Speaker 3

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 Food Safety and Brand Protection, you see things in the news in that regard. And of course, You know that we certainly can help companies as they seek to address those needs as well too.

Speaker 10

Okay, great. And any update on how Pendotech is performing and your thoughts on it going forward?

Speaker 2

I can take this, yes. So Pentatec again for us has been performing really well over the last years. I mean, integration went really well with Pentatec. 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 a surprise, but what we have done with Penntek is we expanded also the offering there.

Speaker 2

We have new parts within their portfolio, so it's not only pressure sensors, they also have now UV monitors Etcetera in the 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 ranges we are quite optimistic on Pendotech's future I thought we are seeing negative growth here.

Operator

I would now like to turn the call over to Adam Allman for closing remarks.

Speaker 1

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.

Speaker 1

Thanks. Thank you.

Operator

Thank you. I would like to thank our speakers for today's presentation and thank you all for joining us. This now concludes today's call and you may now disconnect.

Earnings Conference Call
Mettler-Toledo International Q3 2023
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