The Mettler-Toledo Second Quarter 2023 Earnings Conference Call began with Briana, the conference operator, introducing the call and placing all lines on mute. Adam Uhlman, Head of Investor Relations, then took over, covering administrative matters and introducing the call's speakers: Chief Executive Officer Patrick Kaltenbach and Chief Financial Officer Shawn Vadala. Adam also discussed the call's webcast and replay, as well as the forward-looking statements and non-GAAP financial measures that would be used. Patrick then began the call with a thank you to everyone for joining.

In the second quarter, the company reported strong sales growth in their service business and industrial product categories, offset by weaker market conditions in laboratory and China. Despite currency headwinds, their execution of margin expansion and cost control initiatives resulted in good growth in adjusted EPS. For the remainder of 2023, there is increased uncertainty in the global economy and their end markets, with market demand in China deteriorating. However, they remain confident in their ability to control their sales and marketing programs and margin expansion and cost-saving initiatives, and believe they will deliver solid results this year.

In the quarter, local currency sales in China increased 6%, with Laboratory sales decreasing 3% and Industrial increasing 6%, including 6% growth in core industrial and product inspection. Food Retail grew 17%. Gross margin increased 100 basis points with R&D increasing 6% and SG&A decreasing 6%. Adjusted operating profit increased 8% with an adjusted operating margin of 31.3%, a 210 basis point increase. Amortization amounted to $18 million, interest expense was $19.3 million, other income was $1 million, and the effective tax rate was 19%. Fully diluted shares were 22.1 million, a 3% decrease from the prior year.

The company reported an increase in Adjusted EPS of 9% for the quarter and 9% year-to-date. Cash flow per share grew 44%. However, due to increased caution among customers, global economic uncertainty, and a deteriorating situation in China, the company is expecting a 3-4% decline in local currency sales in the third quarter, with a mid single digit decline in Laboratory sales.

The company expects its operating margin to increase in the 70 to 100 basis point range in 2023 due to its disciplined approach to margin expansion, productivity, and cost savings initiatives. For the full year, local currency sales growth is forecast to be 0-1%, down from the previous guidance of 5%, and adjusted EPS is expected to be in the range of $40.30 to $41.20, representing a growth rate of 2-4% or 5-7%, excluding unfavorable foreign currency. This is lower than the previous guidance of $43.65 to $43.95 due to reduced sales growth forecast, particularly in China where the total business is expected to decline mid single digits.

In the second quarter, Lab sales were weaker than expected due to customers becoming more cautious with their spending and delaying investment decisions, especially in China. Pipette sales were weak due to customers reducing inventories, and this headwind is expected to ease in the second half of the year. Additionally, customers in key market segments such as pharma and biopharma are delaying purchases.

In the second quarter, the Lab business saw strong service growth, while the Industrial business saw strong demand for automation solutions. Product inspection had good performance, but customers have become more cautious due to inflation and uncertain economic conditions. Food Retail had strong growth due to robust project activity in the Americas, and Service sales grew 13%. Europe saw flat sales, with growth in core industrial and product inspection, offset by declines in laboratory products. In the Americas, there was good growth across industrial and retail businesses, offset by declines in laboratory products. Asia and the rest of the world had another quarter of good growth, but sentiment in China has become more cautious due to activity slowing following COVID reopening and limited economic stimulus.

The company has invested in digital approaches to gain market share and expand profitability. They have developed a Spinnaker program to feed their pipeline with new leads, and webinars to interact with potential customers. This data-centric approach allows the field sales team to prioritize their efforts and increase their win rates, particularly in hot segments like lithium-ion batteries, sustainable materials and the semiconductor industry.

The company has invested heavily in research and development to maintain their technological leadership and support their growth. They have recently released a range of products that increase customer productivity, while also ensuring compliance with regulatory requirements. These products include a thermal analysis instrument, a conductivity sensor, and hygienic scales. These individual products are not material on their own, but they contribute to the company's growth algorithm, expanding their technology leadership and enhancing their value propositions. The company has a pipeline of new products to launch in the coming year.

In the quarter, growth in China was two points higher than the U.S. and Europe. However, Shawn Vadala and Patrick have noted a deterioration in the second half of the year, which is visible in the order book for the start of the third quarter. They do not typically carry a lot of backlog in their business.

Shawn Vadala reported that conditions in China have significantly deteriorated in the third quarter, particularly in the Lab sector, with a forecast of a 20% decrease. Industrial is also seeing a slowdown, with customers displaying hesitancy in placing orders due to a lack of clarity in terms of stimulus. Vadala does not feel confident in building anything into their guidance for the fourth quarter. For the full year, they are forecasting a mid-single digit decrease, and for the third quarter, a mid-teens decrease.

Shawn Vadala explains that the decrease in guidance from high single digits to mid single digits is largely due to the situation in China. He also explains that the destocking activity in the pipette business is playing out as expected, with a 2.5% headwind in Q1 and a 2% headwind in Q2. He predicts that the headwind will be low to mid single digits in the second half of the year, especially in China.

Patrick Kaltenbach explains that the rapid deterioration in China is mainly due to the lack of stimulus from the government, which has caused customers to become reluctant and wait for a decision on the stimulus before investing. There has been no significant change in local competition, and the sales team is confident in their product portfolio. The missing momentum and confidence in the economy has led to customers holding back investments and waiting for certainty about what is to come, resulting in a fast drop off in sales.

Shawn Vadala explains that the company is expecting their cost structure to remain flat for the full year, with a low single digit decrease in the second half of the year. SG&A will be lower than other lines and they are focusing on productivity and discretionary spending. Despite some unfavorable currency, the company expects to see operating margin expansion of 70-100 basis points for the full year. They are still investing in R&D and expect it to grow in the second half of the year.

Patrick Kaltenbach states that although there is a slowdown in orders in pharma-biopharma, it is not a complete freeze. There is a significant decline, but there is still quoting activity and leads are up year-to-date. He is monitoring the quoting activity on a daily basis and is pleased with the sales team engagement. The length of the slowdown will depend on when more certainty comes back to the economy.

Shawn Vadala discussed pricing in the quarter, which was up 6% compared to expectations, and the value proposition has resonated with customers. He expects pricing to be up 4% for the full year. Derik de Bruin followed up by asking what else is baked into the 4.5% guidance cut, other than the 2.5% attributed to China.

Shawn Vadala is discussing the moderation of growth in the Americas and Europe. In the Americas, growth is flattish and is expected to be low to mid single digit for the full year. This is because of pressure in the core end markets such as pharma, biopharma, food manufacturing, and chemical. In Europe, growth is expected to be low single digit for the full year, which is lower than the previous guidance. This is due to the low PMIs and pressure on the end markets such as chemical companies, which have reduced their forecast for the year by double digits.

Patrick Kaltenbach explains that it is too early to make a forecast for 2024, but that the easier thing to capture is the destocking of pipettes. He mentions that Lab, core industrial, and products inspection are all expected to be down low single digits for the third quarter and up low single digits for the full year. Additionally, retail business is expected to be up high-teens in the quarter for Q3 and for the full year.

The consumption of pipette is slowly returning to pre-COVID levels, but it is difficult to predict how long the economic downturn will last. There are pockets of good growth in the battery, lab, industrial automation, semiconductor, and ultra-pure water sectors, and the company is focusing on these areas to drive sales. The forecast for the second half of the year is optimistic, but it is unclear when the broader economy will recover.

Shawn Vadala of the company discussed the expectations for operating margin expansion for the full year, expecting to be closer to the higher end of the 70-100 basis point range, despite unfavorable currency. He also mentioned that they feel good about their ability to continue to expand margins and that they will provide more insight and guidance on their next call in November. He also discussed pricing levers and their value propositions, noting that it will depend a bit on the inflationary environment.

The company is expecting a 500 basis point decline in their third quarter guidance, with 300 of those points coming from China, which is expected to be down mid-teens. The remaining 200 basis points of softness is expected to come from a delay in pharma and biopharma, with pipettes and single-use bioprocessing also playing a role. Low single digit growth is expected in the Americas.

In response to a question about stimulus, Vadala states that there have been some comments from the government about stimulating the economy, but no specific details have been provided. He believes that it is too early to comment on the possible effects of the stimulus and how long it will take to be seen in the economy. He also mentions that cost actions have been taken to benefit Q4 EPS, but it is too early to know the magnitude of the benefits.

The company has been negatively impacted by unfavorable foreign currency, which has been more significant than initially expected. This has caused the EPS growth for the second half of the year to be anywhere from flat to minus 3%. Despite this, the company still expects to be able to expand margins and continue to invest in the business in order to protect the medium and longer term.

Patrick Kaltenbach is pleased with the performance of the service business, which grew 14% in the first quarter and 13% in the second quarter. To increase service sales, the company has increased the emphasis on service sales at the point of sales, restructured the quoting process, and trained the service team more efficiently on selling services. For the full year, they are forecasting growth of high single digits to low double digits, potentially close to 10%.

The paragraph discusses the strong demand for services, which is driving the momentum in the product category and is not seeing a lot of pushback on pricing. The company has invested in its service team to deliver an outstanding customer experience, which is helping them differentiate from their competitors. The paragraph then goes on to discuss the hot segments, such as lithium-ion batteries, semiconductors, and sustainable materials, which are experiencing strong growth globally and by region.

Patrick Kaltenbach stated that the weakness in China's Lab business is broad-based and focused on the pharma and biopharma market segment. Shawn Vadala added that consumables are down more due to the COVID testing that took place in China last year.

Patrick Kaltenbach discussed the company's performance in packaged food in the Americas, noting that they have taken market share. He also noted that Europe is a different investment environment and customers are under pressure when it comes to their margins. Kaltenbach mentioned that the company had a successful trade show in Europe and launched new products, and they are confident they are taking market share despite the lower growth rate.

Patrick Kaltenbach and Shawn Vadala discussed the modest decline in guidance for product inspection, mainly in the U.S., due to tougher compares and customers slowing down their investments. They also mentioned that process analytics had very modest growth in the quarter, but there were different storylines underneath. Joshua Waldman followed up by asking if they were seeing any softness in the process analytics business, to which Shawn replied that they were seeing more negative situations than what they experienced in the second quarter.

The company is seeing headwinds in bioprocessing technologies and downstream bioprocessing due to softness in pharma and biopharma, but is seeing good growth in segments like semiconductors. The company has a more modest expectation for the second half due to the pressures in pharma and biopharma. The company has launched a new unbreakable sensor with success in the dairy business, and is continuing to launch it into new market segments. There is a difference in buying trends between large pharma customers and smaller biotechs.

Patrick Kaltenbach explains that the majority of their customer base is comprised of larger customers in the pharma and biopharma industries and that they are seeing a slowdown in decision-making, which could be attributed to pharma companies becoming more cautious with spending. Shawn Vadala then adds that they feel good about their value propositions and R&D investments and that they expect to be in a more normalized situation in terms of pricing in 2024, depending on the inflationary environment.

Shawn Vadala discussed the growth of Mettler's Industrial business in China, noting that it was mid-single digit in the second quarter but is expected to be down mid-single digit in the second half of the year. He also mentioned that the decline is due to the same end market exposures that Mettler's Laboratory business is facing. Elizabeth Garcia then asked about the launch of the next wave of the Spinnaker initiative, which has been successful in increasing market share.

Shawn Vadala discusses how Mettler is innovating in the field of Spinnaker and is launching a new wave. He does not expect a year-end budget flush in the pharma/biotech industry, but if macro conditions stabilize or don't worsen, it could be a potential outcome.

Patrick Kaltenbach answers a question about multinationals pulling out of China and the potential geopolitical risks. He notes that there has not been a significant impact yet, but sees the potential for Lab to capture investments if companies reshore from China to other countries. He believes Lab has the right market sensing tools in place to capture these opportunities and guide their sales team to the companies as they reinvest in other countries.

The main cause of the economic slowdown in China is not related to the coronavirus, but is instead due to a lack of confidence in the market and a wait-and-see attitude towards stimulus until companies decide how much they can invest in the future.

This summary was generated with AI and may contain some inaccuracies.