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

Thank you and good morning, everyone. Thanks 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 include forward-looking statements within the meaning of the US 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. For a discussion of these risks and uncertainties, see our recent Annual Report on Form 10-K and quarterly and current reports as 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-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 third quarter financial results, the details of which are outlined for you on page three of our presentation. Market conditions were weaker than expected in the third quarter, especially in China, where market demand significantly deteriorated relative to our expectations. Our team has reacted quickly to address the market challenges, adjusted our cost structure and delivered good margin and cash flow performance despite these headwinds. As we look to the remainder of 2023, we expect market conditions to remain weak, especially in China. And based on market conditions as of today, we would expect these headwinds to persist into next year. However, we remain confident in the factors we can control, including strong execution of our proven corporate programs like Spinnaker to drive growth and capture market share and SternDrive to manage our costs effectively. Our go-to-market strategy, innovative portfolio, and unique culture have been important differentiators during challenging conditions. 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 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.

Thanks, Patrick; and good morning, everyone. Sales in the quarter were $942.5 million, which represented a decrease in local currency of 5%. On a US dollar basis, sales declined 4% as currency increased sales growth by 1%. On slide number four, we show sales growth by region. 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 five, we show sales growth by region on a year-to-date basis. Local currency sales grew 1% for the first nine 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. On slide number six, we summarized 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. Laboratory sales decreased 3% and Industrial increased 2%, including 1% growth in core industrial and 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&L, which is summarized on slide number eight. 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. R&D amounted to $46.1 million in the quarter, which is a 1% increase in local currency over the prior period, including increased project activity. SG&A amounted to $217.4 million, 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 million 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. A couple of final comments on the P&L. Amortization amounted to $18.3 million in the quarter. Interest expense was $20.3 million and other income amounted to $1.2 million. 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 fourth quarter. Fully diluted shares amounted to 21.9 million, which is approximately a 3% decline from the prior year. 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, $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 nine-month period. Adjusted operating income increased 4% or 8% excluding unfavorable foreign currency. And our operating margin expanded 140 basis points. Adjusted EPS grew 4% on a year-to-date basis or 9% excluding unfavorable foreign currency. That covers the P&L. And let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $251.7 million, up $27 million, helped by favorable working capital. Year-to-date, cash flow per share grew 32%. DSO were 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 market conditions very quickly, and we feel very good about our market position in the country. However, economic conditions remain challenged and there's low visibility. Outside of China, there's 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. 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 $39.10 to $39.30. This includes an expected headwind to adjusted EPS growth of approximately 3% to 4%. Free cash flow for the year is now expected to be approximately $875 million 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 million in 2023. With respect to the fourth quarter, we would expect local currency sales to decline 7% to 8%. We expect fourth 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. Based on our assessment of market conditions today, we would expect local currency sales to be approximately flat 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. Relative to sales, currency is expected to be a headwind to sales growth of approximately 1% in 2024.

So, if I might add, because Dan also has asked about SternDrive, just to add data on SternDrive, we launched SternDrive phase three with a strong focus on automation on the shop floor, smart automation and we expect that also to continue to significantly contribute to our performance next year and drive savings both on the automation side, but also back-office efficiency, etc. So the program is fully running and the team is very committed to drive additional savings next year.

Hi. Good morning, everyone. Thank you for the questions. Shawn, to start with China, what are your expectations for its performance in 2024? I understand that it's challenging to predict specifics at this stage, but could you discuss your expectations for the first half compared to the second half, especially since the comparisons will be more favorable in the latter half? It seems you anticipate a decline in the first half for China, followed by potential growth in the second half. Can you provide a comparison of how those two segments may look next year, and what overall expectations you have?

Thank you, Dan. For next year, we expect China to experience a decline in the high single digits, with a more pronounced drop anticipated in the first half of the year. Additionally, we're forecasting a significant decrease in the fourth quarter, likely in the mid-20s, similar to what we observed in the third quarter. However, we remain very optimistic about growth in the second half of the year. As you mentioned, we will face easier comparisons then, and several factors in the local market should also become clearer. We recognize that some inventory stocking may have occurred among customers due to supply chain issues during COVID, and we believe that much of this inventory will be cleared by the second half of next year.

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

Sure. We're pleased with our margin expansion this year, showing an increase of about 140 basis points on a year-to-date basis. For the full year, excluding currency effects, we expect a rise of over 100 basis points, but on a reported basis, it will likely be around 50 basis points. Looking ahead to next year, we anticipate our operating margin will be fairly stable, with approximately a 20 basis point increase when excluding currency influences. As for pricing, it performed well this year, coming in around 4.5% for the third quarter; we expect it might drop to about 4% in the fourth quarter. For next year, we foresee a more normalized environment with pricing around the 2% range. Volume should remain relatively consistent year-over-year. We are also implementing various cost-saving measures, which we are optimistic about, particularly those aimed at enhancing productivity. These will provide some benefits next year, although we will need to return bonuses to a more typical level, which may pose a challenge as we move forward. Despite the challenges, we are proactive and focused on emerging from this situation even stronger. We are carefully balancing our costs and investments, continuing to invest in innovation and our service organization, which we believe positions us well for the future. Lastly, foreign currency is anticipated to create about a 2% headwind to our EPS next year.

If I may add some information regarding SternDrive, we launched phase three this year with a strong emphasis on shop floor automation. We anticipate that this will continue to significantly enhance our performance next year and generate savings in both the automation sector and back-office efficiency. The program is fully operational, and the team is dedicated to driving further savings next year.

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

Hey, good morning. Thanks for taking my questions, guys. Maybe one for Shawn and then one for Patrick. Shawn, I wondered can you talk a bit more on the assumptions that went into the guide, particularly as it relates to the sequential progression from Q4 into '24. I mean, it seems like the guide implies a bit more of a step-up than normal on an absolute basis into '24. I mean, anything you're seeing like in the markets that you're trying to capture within the guide, suggesting that maybe like fourth quarter is trough and things start to get better as we roll into '24?

I think one topic we have for Q4 is that market demand is likely to be lower than usual at the end of the year. Typically, we see an increase in market demand, especially in the Lab business, towards the end of the year. However, we're not expecting much of a pickup in our fourth quarter guidance. This is something to consider when comparing this year to next year. Looking ahead, while I don’t want to be too specific at this point, we believe the first half of the year will likely resemble the second half of this year, and we expect to see a decline in the first half. However, we anticipate a return to growth in the second half, particularly as we face easier comparisons. The dynamics in Q4 should also improve next year. Additionally, there have been various destocking issues affecting parts of our portfolio at different times, such as with pipette tips, consumables, and bioprocessing, particularly in single-use products. Also, I mentioned earlier some challenges we’re experiencing in China.

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 pressures growth and profitability as we move into '24?

Thank you, Josh, for your question. I am very proud of our service organization, and we are continuing to invest in this area this year. We have also increased our headcount in services to meet the demands from our customers. As I noted in previous earnings calls, we've enhanced our portfolio of service offerings. This improvement has allowed us to drive more services at the point of sale, leading to a higher connect rate, and to engage with our installed base and potential products that are not yet under service contracts through telemarketing campaigns and other efforts. In Q3, our growth rate was 6%, and we still anticipate high-single digits to low-double digits growth for the full year in services. The first half has been very strong, although we are facing tougher comparisons due to last year’s strong growth in the second half. Looking ahead, we see significant opportunities within our installed base and for products not currently under contract, ensuring customers recognize the full benefits of our service contracts. Customers who engage in service contracts are more likely to make additional purchases, having experienced the advantages of partnering with Mettler-Toledo. We continue to explore our offerings, aiming for more advanced services for complex solutions, which will help maintain momentum in our service segment. I am optimistic about the long-term prospects for our services and expect to see growth of at least mid-single digits next year.

Got it. Appreciate all the detail, guys.

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

Hey, guys. Good morning, and thanks for taking my question. Patrick, maybe one on, you know, when you look at the Q4 guidance sequentially stepping down from 3Q shouldn't be a surprise given your commentary. Like what is changing from a Mettler's perspective, right? Can you comment on end market, pharma versus industrial, like what are you seeing in China versus non-China, trying to figure out if this is all China or ex-China you're seeing softening?

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

Understood. That's helpful. Shawn, did I catch correctly that you mentioned pricing normalizing by two points next year? Considering Patrick's remarks and the tougher end markets, what gives you confidence in pricing for next year? Should we anticipate gross margins remaining relatively flat year-on-year?

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

Hello. Good morning. Thank you for allowing me to ask a question. My first question is about the Analyst Day last November, where you updated your long-term guidance for revenue growth to between 5% and 6%. I agree that China's market won't remain down for an extended period and will eventually recover. What do you envision will happen once the market starts to rebound? We are in a different environment now with changes in politics and other factors. How much of the 6% growth assumption is based on a return to business as usual from previous years, and what assumptions have you made regarding China in that guidance? I understand you can't predict the future, but I believe this is an important question.

Yes, it is important. Let me start and then Shawn can add his thoughts. When we discuss a 6% long-term growth model for Mettler-Toledo, that number remains relevant for the mid to long term for several reasons. Firstly, our factory in China is expected to contribute high-single-digit growth in the long term. While we may not see the same growth rates as in the past two years, it’s still likely that high-single digits are achievable in the mid-term again in China. Another key point is that we have consistently shifted our portfolio to include faster-growing segments, and this trend continues in the Lab business and the life sciences market. In Industrial automation, we see strong demand driven by various industries, including the needs of an aging workforce that pushes for automation, as well as the overall trend of digitalization. We have a robust portfolio in both the Lab and Industrial sectors. Additionally, in Product Inspection and software, we hold a very unique position that should allow us to differentiate ourselves and capture market share amidst an underlying market growth of around 4% to 4.5%. We believe we can achieve the 6% target by taking the market share we are aiming for. Our portfolio is strong, and we have significantly increased our investments in the past two years to drive new solutions to the market. You can expect to see many exciting solutions next year as I firmly believe that differentiation will drive our growth and profitability.

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

Got it. As a follow-up, your business operates on a relatively short cycle and doesn’t accumulate a significant backlog. I’m curious about where your visibility is coming from, especially regarding the aggressive ramp-up expected in the second half of the year. Also, regarding your comments on pharma and biopharma returning to a normal replacement cycle, I'm surprised to hear that given your visibility for the next few quarters. Can you provide more confidence on what factors are at play beyond the tougher or easier comparisons in the latter half of next year?

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

Certainly. The topic of destocking has been evident in pipettes and sensors in our Pro business, among others. We believe that for most customers, this issue is mostly behind us. Orders for these consumables and sensors, which are used in manufacturing, have returned to normal patterns. Customers are no longer building excess inventory, and we are hearing that their order cycles and usage models for the sensors are back to what is considered normal.

Hi. Good morning. Thanks for taking my questions. Maybe just first on Europe, where there was some relative strength there, but just on the core industrial side and particularly on the chemical side, just the data points for getting things simply deteriorating, but there and you talked about the PMIs. Could you maybe talk about that as in sort of the context for '24, Europe and on the core industrial side?

I'll start with Europe, where we've actually seen good performance this year in margins. The Middle East also showed easier comparisons to last year, especially compared to China and the US, which experienced more growth last year. One of our concerns going into the year was the high energy prices in Europe, which affected the market significantly; however, it held up quite well for us in Q3. This can be attributed to two factors. First, our ability to continue gaining market share thanks to a strong sales team in Europe that operates effectively and quickly identifies opportunities, including key areas like lithium-ion batteries. We are a bit more cautious about Q4 and expect a more moderate outlook for 2024. You're correct that the PMIs indicate a downward trend, which contributes to our caution for next year. Investment sentiment across Europe is fairly healthy, particularly in Southern Europe, including markets like Spain and Portugal. Conversely, Germany has been slower this year than anticipated, but there is considerable excitement in France. France has initiated a 2030 plan that aims to invest in core technologies such as pharma, biopharma, semiconductors, and the lithium-ion battery and energy sector, which should drive growth in the future. Overall, we are forecasting a very moderate outlook for Europe next year, but we believe there is still potential for low-to-mid single-digit growth in the long term.

Yeah. And just to clarify, we see a lot of excitement in France. France has implemented a plan for 2030 that includes investments in key technologies such as pharma, biopharma, semiconductors, as well as lithium-ion batteries and the energy market. I believe this will continue to drive growth in the future. Overall for Europe next year, we expect very moderate growth, but long-term, we still anticipate low-to-mid single-digit growth from Europe.

And then just one point to mention. Go ahead. Yeah.

I was just going to say, just to answer your question specifically for next year, we're a little bit more cautious on Europe in core industrial specifically, probably expecting it to be more, more flattish next year. And this 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.

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

I apologize, Matt. I don’t have that specific detail in our model. It’s still early to provide specifics for any quarter next year. We always aim to share what we know at this time of year, even though it’s early. We believe it’s helpful for everyone to understand our thoughts, which can assist you in organizing your models. As the year progresses, we will refine our insights as we gain more information about trends.

Hey, guys. Thanks for the questions. Maybe first, you mentioned manufacturing customers in the 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 '24, and what gets them to start being a little more constructive around spend.

Sure, I’ll start, and then Patrick can add more. We've discussed food manufacturing quite a bit over the past few years, and overall, it has exceeded our expectations to some extent this year. However, we're noticing significant pressure in that segment as we approach the fourth quarter, and we have enough visibility to acknowledge this. In the fourth quarter, we're anticipating declines in both the Americas and Europe. That market has been facing significant challenges related to their cost structures and inflation, leading to food companies closing plants and restructuring. There is still interest, but approvals are being delayed. On a positive note, beyond the Americas and Europe, we're experiencing strong growth currently. As we enter 2024, we have exciting innovations in our portfolio, particularly in Product Inspection, such as our x-ray and metal detection products, which are being well received in the market. We’re optimistic about our efforts and how we’re positioning ourselves. The market environment remains challenging, but it has been this way for a while, with ups and downs. Nevertheless, our value proposition is solid as companies continue to seek productivity improvements, and we believe they recognize our ability to assist them. Additionally, with the ongoing emphasis on food safety and brand protection, we can support companies as they address these critical needs.

Okay. Great. And any update on how PendoTECH is performing and your thoughts on there going forward?

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

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

Thank you.

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.