Mettler Toledo International Inc/ Q1 FY2023 Earnings Call

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. At this time, I would like to turn the conference over to Adam Uhlman, Head of Investor Relations. Please go ahead.

Thank you, Angela. Good morning everyone. Thank you for joining us. On the call with me today is Patrick Kaltenbach, our Chief Executive Officer; and Shawn Vadala 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. A copy of the press release and the presentation that we will refer to today is available on our website. This call will also include forward-looking statements within the meaning of the US Securities Act of 1933 and the US Securities Exchange Act of 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. For a discussion of these risks and uncertainties, please see our recent annual report on Form 10-K and quarterly and current reports 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 will 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-K and is also available on our website. Let me now turn the call over to Patrick.

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 various strategies 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 costs effectively to help us deliver 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?

Thanks, Patrick, and good morning everyone. Sales in the quarter were $928.7 million, which represented a local currency increase of 7%. On a US dollar basis, sales increased 3% as currency reduced sales growth by 4%. We estimate that the impact of not shipping to Russia was a headwind of almost 1% to sales growth. On slide number four, we show sales growth by region. We had broad-based sales growth in Q1 as local currency sales increased 6% in both the Americas and in Europe and 10% in Asia/Rest of the World. Excluding Russia, our sales growth in Europe grew 9%. Local currency sales increased 9% in China in the quarter. On slide number five, we summarize local currency sales growth by product area. For the quarter, lab sales increased 5%, industrial increased 7%, with core industrial and product inspection, both up 7%. Food Retail grew 36% in the quarter, as we benefited from significant project activity in prior year comparisons. Let me now move to the rest of the P&L, which is summarized on slide number six. Gross margin was 58.9%, an increase of 100 basis points, as pricing was partially offset by higher cost, business mix and currency. R&D amounted to $45.5 million in the quarter, which is a 9% increase in local currency over the prior year, reflecting increased project activity. SG&A amounted to $234.6 million, a 2% increase in local currency over the prior year. Adjusted operating profit amounted to $266.5 million in the quarter, a 10% increase. Currency reduced operating profit growth by approximately 7%. Adjusted operating margin was 28.7%, which represents an increase of 180 basis points over the prior year. A couple of final comments on the P&L. Amortization amounted to $17.8 million in the quarter, interest expense was $18.2 million and other income amounted to $0.4 million. Our effective tax rate was 18.5% in the quarter. This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter and we expect to maintain this rate for the full year. Fully diluted shares amounted to $22.3 million, which is approximately a 3.5% decline from the prior year. Adjusted EPS for the quarter was $8.69, a 10% increase over the prior year or an 18% increase excluding unfavorable currency. On a reported basis in the quarter, EPS was $8.47 as compared to $7.55 in the prior year. Reported EPS in the quarter includes $0.23 of purchased intangible amortization and $0.16 of restructuring costs. We also had a $0.17 headwind due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises that normalizes in the fourth quarter of every year. That covers the P&L and let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $135.3 million, up $60 million helped by better inventory and accounts receivable trends as well as lower incentive payments. DSO was 38 days while ITO was 3.6x. Let me now turn to guidance. To start off forecasting remains challenging and market conditions remain dynamic. As previously mentioned, there is uncertainty in the economy and our end markets. We're basing our guidance for the second quarter and the full year assuming market conditions remain as they are today. For the second quarter, we expect approximately 3% local currency sales growth. This level of growth reflects the challenging multiyear sales growth comparisons we faced in the second quarter as well as a growth headwind of approximately 2% from reduced sales in our pipette business. We expect second quarter adjusted EPS to be in the range of $9.90 to $10 representing a growth rate of 5% to 7% or 10% to 11% excluding unfavorable foreign currency. For the full year 2023, we have left our local currency sales growth guidance of approximately 5% unchanged. We expect full year adjusted EPS to be in the range of $43.65 to $43.95 representing a growth rate of about 10% to 11% or approximately 12% to 13% excluding unfavorable foreign currency. This compares to our previous guidance of adjusted EPS in the range of $43.55 to $43.95. Total amortization including purchased intangible amortization is forecast to be $72 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $26 million on a pre-tax basis or $0.92 per share. Now let's turn to cash flow. For 2023 we continue to expect free cash flow in the range of $900 million and we still expect to repurchase approximately $1 billion of our shares this year. That's it from my side and I'll now turn it back to Patrick.

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 to 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 probably 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 particularly 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 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 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 that drive for productivity and 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. 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, and 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. 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 placed on this important topic. As we think about these trends and how they impact 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.

Your first question comes from the line of Josh Waldman with Cleveland.

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, leaving you more cautious on the second quarter?

Sure, thanks Josh. As mentioned in the prepared remarks, destocking is affecting Q2. The expected 3% decline in pipette sales will reduce our growth by about 2%. Without this headwind, our growth would be 5%. It's also important to consider the multiyear comparison. Looking back at the last few years, our three-year compound annual growth rate, including the 3% decline, is about 13%. This is quite similar to our Q1 performance, which showed 7% growth. To provide some context, we grew on top of a 10% increase last year, which itself followed a 27% growth in the year prior. This significant past growth is influencing our current outlook. Now, I’ll quickly go through our typical guidance by business area and region. In the lab business, we're anticipating low single-digit growth in Q2, with the pipette business contributing around a 4% headwind, resulting in high single-digit growth without that impact. For the full year, we now expect mid-single-digit growth for the lab business, reduced slightly due to a stronger then-expected headwind when analyzing the first quarter's 7% growth which included about a 2.5% hit from pipettes. In product inspection, we forecast low single-digit growth for Q2 and low to mid-single-digit growth for the year. Although our start was strong in the Americas, we're encountering some challenges and caution in investment within packaged foods, as highlighted by various industry news. For core industrial, we're predicting low single-digit growth in Q2 and mid-single-digit growth for the full year, which is a bit better than our prior expectations. We're consistently impressed with the resilience and execution of that business. Regarding food retailing, we expect mid-single-digit growth for Q2 and high single-digit growth for the year, benefiting from a stronger-than-expected start driven by robust project activity. For the regions, we're seeing low single-digit growth in the Americas for Q2 and low-to-mid single-digit growth for the full year, although this area is more significantly impacted by the pipette decline. In Europe, we anticipate low single-digit growth for Q2 and low-to-mid single-digit for the full year, which is slightly better than our last forecast due to a solid Q1 performance. Finally, for China, we expect mid-single-digit growth for Q2 and high single-digit growth for the full year, consistent with our previous outlook.

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.

Sure. Good morning Josh. Look, at the cadence in China, as you have seen we started off strong in Q1 with 9% growth in China, so very solid results. And that of course was a quarter where as you know we had the COVID rate at the beginning of the quarter and yet our organization really executed extremely well and delivered strong results. As Shawn mentioned, the plan of schedule right now for Q2 is mid-single-digit growth for China and that is of course also based on the fact that we have very strong compares, for Q2 and then for the full year, we have China still at high single-digit growth. So that's kind of the outline in terms of growth. Now, what we are seeing there, again, we have seen very strong growth for the Lab business. Specifically for analytical instruments, the analytical business is performing really well for us and also benefits from the hot segments. Shawn made a comment on the industrial business the growth has moderated against really difficult comparisons. Again, a reminder, we grew almost 60% in industry in Q1 2021 and over 20% in Q1 2022. So those compares of course will also account for Q2 moving forward. When we break it down say where does the growth come from we still see a lot of interest in solid growth opportunities in the hot segments like, the battery manufacturing for example, it's really impressive how China is putting emphasis behind building out the industry beyond cars. And I mentioned also the power grid and how they start producing large modules that it will place long power grids for next two solar power plants to take up excess energy and keep it back at night et cetera. So I think there will be continued investment. And that goes along with the overall investment that we see in automation solutions across Lab industry. China continues to look for productivity gains. They are facing an aging workforce and the fact that they will not have enough workforces moving forward. So they're proactively really looking for automation and productivity solutions where our portfolio plays really well, that's where again our overall confidence in the China business comes from. We are extremely well positioned with the team we have. And we are confident that the long-term trends that the government wants to follow-up on them and drive growth and invest in a longer five-year China growth plan whether it's the health care or stronger research and development in China all plays very well into our portfolio.

Yeah. Thanks for all the detail guys.

Thank you.

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

Thank you. Good morning. I was wondering if you could update us on how much pricing contributed in the quarter? And how is your full year expectation for that changed at all?

Thanks Jack. So, pricing came in pretty much as we expected in the 6% 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 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.

Great. And either Shawn or Patrick can you just elaborate a little bit more on the pipette destocking that you're seeing? Just to be clear like how much of this do you think is specifically related to COVID and just how much visibility do you have into improvement in the second half of the year?

I can take it. Look I mean the destocking affects 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 about the 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 still be a topic for Q2.

Thank you.

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

Morning guys. Thanks for the question. Shawn maybe just following on a question on pricing there. Can you kind of put a 1% volume year that's implied here with the guide in the context of prior years or prior periods where you had some macro or end market factors moving around? How often did you see flattish volume growth? And as we move through the year here what about this year makes you think that that's most likely to be true?

What stands out this year, Dan, is that we are coming off an unprecedented period of growth. The compound annual growth rates for the last three years at 13% are significantly higher than we anticipate for the long term based on our algorithm. Therefore, we always expected some level of moderation at some point this year. It's challenging to draw historical comparisons, but in 2020, we had a slow start to the year regarding volumes due to COVID, followed by a reversal in the second half. We will see how things unfold, but we must consider that we have been in a weak macro environment for quite a while, with PMIs below 50. While we have been resilient and executing well in our core industrial business, which is typically more sensitive to economic conditions, we are not completely immune. As headlines emerge from our end markets, particularly regarding challenges faced by food manufacturing, chemical companies, and industries like biopharma, we are keeping those factors in mind as well.

Yes. Okay. And then maybe just as a follow-up small and emerging biotech is obviously getting a ton of attention these days. What would you call your exposure there? And can you kind of just describe your sensitivity to spending by that portion of the customer base? And then anything you would add to the conversation on how that's likely to evolve this year? Thanks much.

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 generally a very small part of that business. So, nothing in particular that I would call out.

Operator, next question please.

Your next question comes from Patrick Donnelly with Citi.

Thank you for taking the questions. I wanted to follow up on Jack's question regarding the pipette side. Patrick, could you discuss your visibility into normalization in the second half? Is it influenced by comparable dynamics or customer conversations that provide you with confidence in this normalization, considering the discussions happening in the market about this sector? I want to ensure we understand what gives you confidence regarding the performance in the second half.

Yes. The reality is that we consider multiple factors. We analyze historical data, growth rates, and the volumes we've experienced. We also engage in discussions with customers and have indications that Q2 will involve more destocking before returning to normal inventory levels. We expect overall volumes to normalize and align with the growth rates observed over the past three to four years for Q3 and Q4. This involves assessing the underlying market growth and our anticipated market share gains. We have a robust pipette portfolio, and our uranium business has a significant market share, particularly in the US. Taking all these factors into account, we anticipate headwinds in Q2, but we expect to see a return to normal growth rates in Q3 and Q4.

Okay. Understood. And Shawn maybe one following up on the pricing piece. On the margin side, can you talk about the expectations for 2Q? Obviously, the earnings came in a little light of where the Street was. And then just that similar to that ramp in the second half, just the moving pieces on the margins would be helpful.

Yes, absolutely. One important point to note is that our gross margin increased by approximately 130 basis points, or 140 basis points when excluding currency effects, in the quarter. This result was fairly consistent with our earlier guidance on a currency-neutral basis. Currency fluctuations had an impact, and we also experienced some unfavorable mix effects among our various business segments, with pipette being more profitable compared to retail. Looking ahead for the rest of the year, we anticipate a gross margin improvement of around 60 basis points in the second quarter, and if we exclude currency effects, that translates to about 100% improvement. For the full year, we expect a 70 basis point improvement, which amounts to approximately a 110 basis point increase on a currency-neutral basis, slightly down by about 10 basis points from our previous estimates. Regarding operating margins, we began the year strongly as anticipated, projecting a roughly 90 basis point improvement in the second quarter, and again about a 180 basis point gain on a currency-neutral basis, marking a solid start to the year. For the full year, we're still forecasting a 130 basis point improvement, similar to our last outlook, but on a currency-neutral basis, we are seeing an increase of around 200 basis points, which indicates significant improvement.

Understood. Thanks for the color.

Thanks.

Your next question comes from Vijay Kumar with Evercore ISI.

Thank you for taking my question. I have a question for you, Patrick. You mentioned some points about the macro environment and it seems that there's a more cautious tone in this call, but your outlook for the industrial sector has remained unchanged. When you refer to a more cautious macro perspective, could you clarify if this is related to specific regions or end markets? I would have expected some changes in the industrial segment, but the guidance reflects that most adjustments came from Labs. How should we interpret your macro commentary?

Certainly. That’s a great question, Vijay. From examining the macro economy and end markets, there are several points worth noting. First, the PMIs have remained quite low, which has historically indicated a potential slowdown in our industry. Thankfully, we haven't fully seen that materialize yet due to our robust portfolio, but the persistently low PMIs are concerning. We've also observed concerning trends in the packaged food sector. As mentioned in Q1, Europe was already facing challenges, and we’re now hearing that some customers in the US are reducing their investments and are reporting less favorable results than before. These developments are not encouraging. Additionally, there are concerns regarding biotech, which, while not our primary focus, still impacts our overall macroeconomic assessment. Regarding the regions, Shawn noted earlier that Europe performed better than expected in the first quarter, but we remain cautious due to the potential consequences of the war in Ukraine on the economy going forward. Therefore, we are keeping our forecast fairly moderate. In the US, with the possibility of an impending recession, it’s important to approach the overall outlook with caution.

That's helpful, Patrick. I have a follow-up regarding your customer base, which is quite large. When you analyze your daily run rate items like pipettes and order rates, did you conduct a survey of your customers to determine when these order rates might increase? I'm interested in your thoughts about the second quarter and the assumptions for the second half of the year. What kind of customer feedback have you received that supports your confidence in the guidance for the second half?

I believe that our comparisons will be easier in the second half regarding growth rate. We experienced significant growth last year in the second quarter, which is why we are seeing a stronger decline this year. Many of the customers we engage with in the pharma and biopharma research sectors are using pipettes quite extensively. From some of these customers, we have received positive signals that overstocking issues will be less prevalent in the second half.

Understood. Thanks, guys.

Your next question comes from the line of Tim Daley with Wells Fargo.

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.

Yes, certainly. Looking at the second quarter, we experienced low single-digit growth in our lab division. We anticipate similar low single-digit growth for both the Americas and Europe. The Americas will be the most affected by the decline in pipette sales, which is why we expect slower growth in that region compared to others. In China, we expect growth to be in the mid to high single-digit range. It's also worth noting that in the first quarter, we achieved double-digit growth in most other product categories, and we're still witnessing strong growth in many of the popular segments. However, the multi-year comparisons and the challenges related to pipette sales will impact our performance as we progress through the year.

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.

Yes, that's a great question. Our service segment has been performing well. Last year, we achieved a 12% growth, and we started this year with an impressive 15% growth. There's significant potential as we look at the overall installed base we serve, which suggests a substantial opportunity for our service business. We offer a strong value proposition by assisting companies with uptime, compliance, accuracy, and minimizing waste, and these benefits resonate well in the market. Additionally, we provide value-added services such as validating and certifying processes. We are actively pursuing these opportunities through our big data analytics program and improving our sales strategies by incorporating these services into our quoting process, leading to good traction in capturing this market. Our Net Promoter Scores have reached all-time highs, which reflects our team's excellent execution globally. Looking ahead, we remain optimistic for the rest of the year, and I wouldn't be surprised to see growth in the 10% range again for Q2. We will evaluate how things unfold for the full year.

Great. Thank you for the time. Appreciate it.

Yes. Thank you.

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

Hi. Good morning.

Hey, Derik.

Hey. Apologies if I missed this, but can you remind us what your FX assumptions are for the revenue impact in Q2 and for the full year now? Has that been updated?

Yes. Just a moment. So, the foreign exchange impact for Q2 is just under 1%. For the full year, it is expected to be neutral, possibly slightly positive. To clarify, the more significant aspect from my viewpoint is the foreign exchange effect on earnings per share. We previously noted a 4% headwind for Q2, and for the full year, it represents about a 2% headwind to earnings per share. In our earlier guidance, this was approximately 1.5% worse than anticipated.

Yes. Can you remind us of the division between PI and core industrial, as well as the margin differences between Lab and Industrial? I am trying to reflect on the margin trends for the year.

Sure. Our core industrial business represents approximately 60% of our industrial exposure, while PI accounts for about 40%. The exact percentages may vary slightly but are likely in that range. Regarding margin differences, our Lab business generally achieves higher margins compared to the rest of our operations, with pipettes being a particularly high-margin segment within that.

Right. Great. Have you noticed any cancellations? I understand your business is more short cycle, and quarters typically accumulate a backlog. Have you observed any cancellations, particularly regarding your instruments like PH meters, or any hesitation in purchasing? Are things still looking relatively healthy?

Not seeing any cancellations. Q1 was actually quite good. Of course, hard to talk about if they're 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.

And then just one final one. What was the actual growth percentage in pipette and price of analytics in the first quarter?

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 your question? Analytics process?

Process analytics. Yes.

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 but that of course is a much smaller part of our business and portfolio.

Yes, that’s exact – and that is exactly where I was going with that process analytics question.

Thanks, Derik.

Sure. Absolutely. Thank you very much. See you next week.

All right. See you Derik. Take care.

Your next question comes from the line of Catherine Schulte with Baird.

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?

Yes. So good question. So our – let me just make sure I get the right number here. So our consumable business was down about 12% and that was almost entirely due to the decline that we saw in pipette. I think we had growth in all of our other consumable categories.

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?

Yes, I'll take that Catherine. Good morning. Look, again an industry comes down to our portfolio and solutions to help customers automate processes. And we see still a very healthy investment and interest in our product portfolio and I think we compete extremely well. Especially, also with the new products that we released last year with Industry 360, I think we talked about it at the Investor Day, a very successful product and also the overall OEM business for us is doing really well. We see strong demand. I think again around the world, there's still a lot of interest in building out automated solutions. And we play a significant part as a supplier in this segment. So that gives us quite some confidence moving forward that industry will besides a very negative PMI trend will not be affected as badly as the PMI looks but again, we are pointing to low single-digit growth in Q2 because it's also tough compares. Don't forget we are really looking at super tough compares on a three-year basis here for industry. We have massive growth in China over the last three years in the industry. We had very good investments in Europe in the US. And of course, this compares to put additional positive growth in it means quite something.

Great. Thank you.

Your next question comes from Matt Sykes with Goldman Sachs.

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?

Yes. Actually I forward you to Shawn on this question because he has the growth numbers in front of him.

Yes. Thanks, Matt. We are indeed pleased with the growth we've been experiencing in our service sector, which we see as a significant opportunity. At the start of the year, we had a three-year compound annual growth rate of approximately 10%. However, we exited last year's fourth quarter with around a 7% CAGR. While I don't have the full-year figures at hand, I wouldn't describe this as a double-digit growth business moving forward. Nonetheless, we are optimistic and will encourage our team to excel this year. Going forward, I would classify our growth as above the corporate average, suggesting high single digits. This should provide benefits and potential upside to our overall growth trajectory over time. I don't want to emphasize anything differently than our historical perspective, except that we are executing very well at the moment.

Got it. Thanks for that. And then just on automation that space. You guys typically compete against within fragmented markets. Is automation any different from that? I'm just thinking of sort of the larger European players or Japanese players automation as you sell into China and other regions. Is that a different type of competitive landscape that you guys are facing in automation, or is it similar, or are you going to find other ways to compete?

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.

I agree, I mean, it's about how easy our sensors and our terminals plug in and both into the system but also the overall software environment that the end user has and I think we have a very strong portfolio there and very up-to-date portfolio that resonates very well with the system integrators.

Thank you.

Your next question comes from Liza Garcia with UBS.

Thank you for taking my question. I'd like to discuss customer types, specifically in the pharmaceutical sector. There seems to be a lot of interest in the pharma landscape. Earlier, you mentioned the sensors, but could you elaborate on what you're observing in the pharmaceutical environment and the growth trends, even if it's just qualitatively?

I can start with that. When considering pharma and biopharma, it's important to recognize our diverse exposure due to our broad portfolio. We serve customers in research and development with a comprehensive analytics portfolio along with pipette solutions. Downstream, our solutions for scaling up manufacturing are strong within the pharma sector. Our bioprocessing business and plastic industry portfolio also contribute significantly to the downstream industry. Overall, we have extensive exposure in this area. We have observed continuing long-term investment in pharma and biopharma, despite a slowdown in some vaccine manufacturing which has affected our biopharma exposure. For example, we've seen a decline in demand for single-use sensors from PendoTECH used in biopharma processes. Nevertheless, we continue to see robust demand on the R&D side as well as significant investment in quality assurance and quality control. There is a large installed base of instruments that we support, along with a steady replacement business that caters to pharma on a broader scale. Regionally, we currently see no significant slowdown in pharma and biopharma sales in the US as of Q1, and sales in China have also been strong in this segment. Looking ahead, there may be changes in the biopharma sector in China that could bring some pressure; however, with our broad portfolio, we are well-positioned to capitalize on growth opportunities.

Just to clarify his comment on US was excluding the pipette.

Okay. That's helpful. You mentioned lithium-ions and sustainable polymers in that business, and while it may be on a smaller scale, can you discuss your perspective on the long-term prospects in that area? Specifically, how should we assess the growth outlook?

Yes, definitely. There is significant investment and research happening in sustainable polymers and new materials, which are part of our broader portfolio. Much of this focuses on our lab business. When we examine our material characterization offerings, we collaborate closely with our customers to gauge their needs and understand the workflows they require and the solutions they seek. Given the current market trends, I believe we are still in the early stages. There is considerable demand and opportunities to develop solutions for conventional plastics, as well as more sustainable materials moving forward. While this segment is still small for us, it is one of the promising areas, much like what we've observed with lithium-ion batteries. If we engage with customers early and offer them the appropriate solutions and workflows, we can establish ourselves as leaders in that growth as they progress from research to manufacturing, and also in pipetting. We have already applied this approach in the battery segment, where we engaged early with our customers to understand their needs, and now we are benefiting from growth opportunities in both R&D and manufacturing in several areas.

Thanks so much, Pat.

Thank you.

Your next question comes from Brandon Couillard with Jefferies.

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?

Brandon, I'll address the first part of your question. In the first quarter, we had a strong start in our Lab business, experiencing mid-teens growth. We saw significant growth across the portfolio, although there was a slight headwind from pipette sales, which is a smaller segment of our business. In the Lab sector in China, similar to our other segments, we've benefited from several strong areas, such as lithium-ion batteries, which drove robust growth in our analytical instruments. On the industrial side, we had low single-digit growth this quarter. It's essential to contextualize this against last year's 24% growth and the 63% growth the year before. Therefore, China is facing some challenging comparisons in their industrial sector in the first half of the year. Looking ahead to the second quarter and the rest of the year, we anticipate low single-digit growth again in the Industrial segment, also due to challenging comparisons. However, we expect to see better results in the second half as comparisons improve. We are likely to consider this business as low to mid-single-digit growth for the full year, consistent with our earlier outlook. Additionally, the Lab segment may experience some moderation due to comparative topics on a multiyear basis in Q2, potentially landing in the mid to high single-digit growth range. We remain optimistic for the full year, especially following the strong start in Q1.

Thank you, Brandon. Regarding the competitive landscape in China, I would say there has been no significant change. It's indeed a very competitive market, and while we have local competitors, I want to emphasize our strong history in China. We have a robust research and development and manufacturing presence there. As I mentioned earlier, we produce many of our products locally and customize some applications to meet local market needs. This enables us to compete effectively with our product offerings. Our sales and marketing teams employ the same Spinnaker strategy to pursue growth opportunities in the Chinese market. The example I provided about the battery segment illustrates our success in this area. So, while the market is competitive, I believe it hasn't shifted dramatically for us. Our team is well-equipped to continue competing, and we have made numerous beneficial investments to ensure we have the right product portfolio to succeed in the market.

Very helpful. Thank you.

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