Hello and welcome to the Mettler-Toledo Third Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference over to Adam Uhlman, Head of Investor Relations. You may begin.

Thanks, Sarah 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 on today's call is available on our website. This call will include forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. 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 statement. For 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 may use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable measures is provided in the 8-K and is 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 3 of our presentation. We experienced good growth during the third quarter in our Laboratory business and had particularly strong growth in Service. While China grew modestly this quarter, market conditions remain challenging, particularly in the industrial sector. We are very pleased with our team's strong execution of our growth and margin expansion initiatives, which supported good earnings growth in the quarter. We continue to execute very well and will benefit from the prior-year shipping delays in the fourth quarter. However, global market conditions remain soft. We have introduced many exciting innovations as well as next generations of our Spinnaker sales, marketing, and SternDrive productivity programs over the past year. We also continue to leverage our business diversity and ability to provide value throughout our customers' value chain to identify and capture growth opportunities and believe we are very well positioned to gain market share and deliver good earnings growth in the future. 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 $954.5 million, which represented an increase in local currency and in U.S. dollars of 1%. On Slide number 4, we show sales growth by region. Local currency sales grew 1% in Europe, declined 1% in the Americas, and grew 4% in Asia/Rest of the World. Local currency sales increased 1% in China in the quarter. On Slide number 5, we show sales growth by region for the first 9 months of the year. Local currency sales were flat for the first 9 months with 4% growth in Europe, 1% growth in the Americas, and a 6% decline in Asia/Rest of the World. Local currency sales decreased 15% in China on a year-to-date basis. As a reminder, our first quarter sales benefited by 6% from recovering delayed product shipments, which is a 2% benefit to our year-to-date results. Excluding this, our local currency sales declined 2% on a year-to-date basis. On Slide number 6, we summarize local currency sales growth by product area. For the quarter, Laboratory sales increased 5% and Industrial was flat, with core Industrial down 1% and product inspection up 1%. Food Retail declined 20% in the quarter against significant project activity last year. The next slide shows local currency sales growth by product area for the first 9 months. Laboratory sales increased 2% and Industrial decreased 2%, with core Industrial down 4% and product inspection up 1%. Food Retail decreased 14% on a year-to-date basis. Let me now move to the rest of the P&L which is summarized on Slide number 8. Gross margin was 60%, an increase of 60 basis points, as positive price realization and benefits from our SternDrive program were partially offset by lower volume. R&D amounted to $47.1 million in the quarter, which is a 1% increase in local currency over the prior period. SG&A amounted to $228.8 million, a 5% increase in local currency over the prior year and includes higher variable compensation. Adjusted operating profit amounted to $296.6 million in the quarter, unchanged from the prior year. Adjusted operating margin was 31.1%, which represents a decrease of 30 basis points over the prior year. A couple of final comments on the P&L. Amortization amounted to $18.2 million in the quarter. Interest expense was $18.6 million, and other income amounted to $1.9 million. Our effective tax rate was 19% in the quarter. This rate is before discrete items and is adjusted for the timing of stock option exercises. Fully diluted shares amounted to $21.2 million, which is approximately a 3% decline from the prior year. Adjusted EPS for the quarter was $10.21, a 4% increase over the prior year. On a reported basis in the quarter, EPS was $9.96 as compared to $9.21 in the prior year. Reported EPS in the quarter included $0.23 of purchased intangible amortization, $0.10 of restructuring costs, and an $0.08 tax benefit from the timing of option exercises. The next slide illustrates our year-to-date results. Local currency sales were flat for the 9-month period. Adjusted operating income decreased 3% or declined 1%, excluding unfavorable foreign currency, and our adjusted operating margin contracted 50 basis points. Adjusted EPS was flat on a year-to-date basis and grew 2%, excluding unfavorable currency. That covers the P&L and let me now comment on adjusted free cash flow, which amounted to $671 million for the first 9 months, a 7% increase on a per share basis from the prior year due to favorable working capital. DSO was 36 days, while ITO was 4x. Let me now turn to our guidance for the remainder of this year and our initial thoughts on next year. As you review our guidance, please keep in mind the following factors. Market conditions remain soft, especially in China. While we are not seeing a negative change in market conditions, we are also not seeing a significant improvement. Secondly, while there is uncertainty in our core markets, the global economy, and geopolitics, we expect market conditions to gradually improve throughout 2025. We also expect to continue to benefit from customer trends in automation, digitalization, and on and near-shoring. Third, we assume foreign currency at current rates. And finally, please keep in mind that our third-party logistics provider delays negatively impacted our Q4 results last year by $58 million, nearly all of which was recovered in our first quarter sales results this year. This will benefit our Q4 2024 sales growth by approximately 6% and will reduce our sales growth in 2025 by 1.5%. This also negatively impacts our margin expansion in 2025. Now turning to our guidance. For the fourth quarter of 2024, we expect local currency sales to grow by approximately 8%. This includes an expected benefit of approximately 6% from the prior-year shipping delays. We expect adjusted EPS to be in the range of $11.63 to $11.78. Currency for the quarter at recent spot rates would be neutral to fourth quarter sales and adjusted EPS. For the full year 2024, our local currency sales growth forecast is unchanged at approximately 2% or down 1%, excluding the previously mentioned shipping delays. We expect full year adjusted EPS to be in the range of $40.35 to $40.50, up $0.15 on the low end of our prior guidance range. Free cash flow and share repurchases for 2024 are expected to be approximately $850 million. We have also provided our initial guidance for 2025. Based on our assessment of market conditions today, we would expect local currency sales to increase approximately 3%, which includes the previously mentioned headwind to full year sales growth of 1.5% from the shipping delays that benefited 2024. Adjusted EPS is forecast to be in the range of $41.85 to $42.50, which represents a growth rate of 4% to 5%. At recent spot rates, foreign exchange is estimated to be a slight headwind to adjusted EPS growth. Lastly, I would like to share a few other details on our 2025 guidance to help you as you update your models. We expect total amortization, including purchased intangible amortization to be approximately $75 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $24.8 million on a pre-tax basis or $0.92 per share. Interest expense is forecast at $82 million for the year, and other income is estimated at approximately $2 million. We expect our tax rate before discrete items will remain at 19% in 2025. Free cash flow is forecast at approximately $860 million in 2025, and share repurchases are expected to be approximately $875 million. 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 grew approximately 5% compared to last year. We had good growth across most of the portfolio and regions and continue to benefit from our robust offering and recent innovations, as well as our initiatives to accelerate growth in Service and Consumables. Pharma customer activity has been mixed but improving at a low pace. Our Process Analytics business returned to solid growth this quarter as our bioproduction customers have finished destocking excess inventories. To expand our already broad portfolio of instruments we offer to our laboratory customers, we recently launched a new stain-free automated cell counter and a new microplate reader to help our customers in R&D and QA/QC labs. These new products add further to the long list of innovations we have brought to the market in recent years and expand our technology leadership. Shifting now to our Industrial business. Sales for the quarter were flat and slightly lower than expected, primarily due to market headwinds in China. Product inspection sales growth of 1% benefited from our growth initiatives targeting the mid-market, but the food manufacturing industry remains challenged overall. Our core Industrial sales declined 1%, reflecting sluggish market conditions across most industries. Our team remains active in leveraging Spinnaker to identify and capture the most attractive market opportunities in core Industrial, which has reduced our sensitivity to the economy, although we are not immune. Additionally, we have further enhanced our portfolio and have expanded our line of weighing terminals that feature integrated software solutions, leveraging advanced algorithms. These new terminals provide process automation control for many different filling and dosing workflows, seamlessly integrating into customer systems. Lastly, shifting to our Food Retail business. As I mentioned earlier, our Food Retail sales declined against a very significant project-related growth in the prior year. Now let me make some additional comments by geography. Starting in the Americas, our sales declined 1% in the quarter. We had good growth across our Lab portfolio with pharma customers, while Food Retail declined against very significant growth in the prior year. Core Industrial sales declined slightly as demand for our automation-related solutions was offset by lower demand in other areas. Sales in Europe grew 1% in the quarter and included growth both from Laboratory and core Industrial, benefiting from modest growth from pharma customers, while food manufacturing remained soft. Our teams in Europe continue to execute well despite challenging economic conditions across the region. And finally, our Asia/Rest of the World results this quarter were in line with our expectations. Our China operations returned to sales growth in the quarter due to easier comparisons and strong execution of our sales team, but underlying demand remained soft due to weak economic growth and excess capacity in certain industries. Our teams across Asia continue to execute very well on driving sales and market share growth. Targeting growth in emerging markets such as Southeast Asia and India remains an important element of our long-term growth strategy. In summary, market conditions overall have remained challenged, but our team is executing very well. We have continued to fund important growth investments in areas like innovation and field sales and service, while we have reinforced our unique go-to-market strategies with the launch of the next wave of Spinnaker. In 2025, we will make additional targeted investments in these areas to further extend our market leadership and strengthen our competitive advantages. An important element of our growth algorithm is gaining market share in our highly fragmented markets and pursuing growth opportunities in faster-growing market segments. Spinnaker helps us identify these new growth opportunities and guides our sales force to ensure we maximize our potential. We continue to see significant market trends and opportunities related to the localization of strategically important technologies, investments to develop new energy solutions for the future, and efforts to increase resilience in supply chains around the world. At the same time, customers continue to seek productivity and insights through automation and digitalization. Spinnaker encompasses our lead generation programs with existing customers, and it houses our Top K program to identify growth opportunities with potential new customers. Top K uses proprietary data analytics on our internal big data warehouse and external data sources to identify and pursue opportunities. Our teams are expanding our capabilities in this area to automate more of the qualification processes and accelerate the rate that we can generate tailored and actionable investment alerts for our field sales force. This program has been very important in driving lead growth with new customers this year, and our team remains focused on expanding our data sets and adding sophisticated analytics and automation to enhance this program in 2025. Another important driver for our long-term growth is to accelerate the growth of our Service business. As a reminder, Service represents approximately 25% of our sales and has grown 7% on a year-to-date basis in local currencies, which includes very strong growth of 9% in the third quarter. Service will continue to be an important growth driver in the future. Service is a key part of our solutions offering and is a very important competitive advantage as we support our customers' ability to maintain uptime, improve productivity, and comply with regulatory requirements. We believe we have the largest service network amongst our direct competitors with over 3,000 technicians, delivering a very professional and consistent service experience to customers throughout the world. Our customer satisfaction ratings for our Service business and our Net Promoter Scores are excellent and are at record high levels. We aim to grow our Service business faster than the company average over the medium term and are making dedicated investments in field technicians, in telesales, and data analytics resources to support our growth aspirations. Additionally, we continue to benefit from our actions to improve the productivity of our service organization and increase its capacity to serve customers, including leveraging new software capabilities to estimate service durations, semi-automated scheduling of service visits, and utilizing expanded core triage capabilities to resolve service requests remotely and reduce trips to our customer locations. We are also expanding the use of sophisticated data analytics and automation technologies to increase the effectiveness of our dedicated Service sales team. Our largest opportunity is servicing a greater proportion of our installed base, which approximates $3 billion of potential Service revenue. Today, we have penetrated about 1/3 of this opportunity. And given the vast amount of data we possess about it, like when an instrument was sold, who's using it, and in what application it's being used, we can create targeted sales campaigns to service them specifically tailored to their needs based on our data. This will help further expand our coverage. Service contracts help ensure that the measurements from our precision instruments are reliable and also help prevent costly downtime. We have maintained our focus on selling more service packages at the point of new product sale. Over the years, we have made important enhancements and differentiation to service levels of prepaid contracts to meet the varying needs of our customers. We have also enhanced our portfolio of services over the years with solutions like our RapidCal Tank Scale Calibration service. Regular calibration of tank scales is required across industries such as pharma and chemical to ensure measurements are accurate and reliable. Our RapidCal service can calibrate these scales three times faster than traditional methods and also does not require the tank to be emptied, cleaned, and filled with expensive ultra-pure water that would need to be discharged afterwards. So it is not only faster but also much more efficient and environmentally friendly. We have also enhanced our offering of certified calibration certificates to ensure compliance with regulations and avoid the cost of inaccurate measurements. Our calibration services are highly differentiated from the competition and include our comprehensive and audit-proof electronic documentation that adheres to the highest industry standards. So that is a brief overview of the efforts we have underway to accelerate our growth by reinforcing our unique go-to-market approaches with Spinnaker, identifying and capturing growth opportunities with new customers in growth industries, and accelerating the growth rate of our Service business. We expect our focused execution on these initiatives will continue to deliver very tangible benefits over the next year and beyond. Now, this concludes our prepared remarks. Operator, I'd now like to open the line to questions.

Your first question comes from the line of Vijay Kumar with Evercore ISI.

Patrick, maybe my first one for you on the fiscal '25 assumptions here. I think ex the 150 basis points headwind, the underlying mid-singles, it's in line with the peers. What are you assuming for Labs versus Industrials? And I think your comments on Services was helpful. Is Services still expected to grow in the mid-singles plus high singles in fiscal '25?

Yes. So let me start with the last part of the question and I'll let Shawn walk you through the details on the growth expectations of the different segments. So Services, yes, we expect to continue to grow above the company average. So we expect it to continue to mid- to high single digits next year. As I said in my prepared remarks here, we're investing quite heavily in our Service business, not only in expanding our service portfolio but also strengthening our telesales team, leveraging more data to reach the installed base, and tapping into that installed base that we don't cover yet today is a significant growth opportunity for us in the future. So Shawn, will you walk Vijay through the details of the segments' assumptions?

Vijay, I will outline the various assumptions for 2025, discussing both the reported figures and adjustments for shipping delays for clarity. For our Lab business, we expect growth in the low to mid-single digits on a reported basis and mid- to high single digits when excluding the impact of shipping delays. Our core Industrial and Product Inspection businesses are projected to grow at a low single digit for both reported and adjusted figures, which will also apply to our overall Industrial business. The Retail business is anticipated to remain flat or increase slightly on a low single-digit basis when accounting for shipping delays. Regarding regional performance, the Americas are expected to grow in the low to mid-single digits on a reported basis, and mid-single digits after adjusting for shipping delays. The European market is also projected to grow in the low single digits reported and mid-single digits adjusted. Lastly, China is expected to see low single-digit growth for both reported and adjusted figures.

That's helpful, Shawn. And maybe one on margins here. EPS guidance. I know you guys start typically conservative. What are you assuming for operating margin expansion for fiscal '25? And are Service margins above corporate?

Our operating margin for next year is expected to be similar to this year, possibly increasing slightly. Our Service business does operate with a margin above the corporate average. I want to address the shipping delays and their impact on our earnings guidance. Regarding sales, we anticipate a 1.5% headwind, which is largely understood. Therefore, our organic sales growth for 2025 is projected to be 4.5%, adjusted for the timing of these shipping delays. Additionally, we expect a significant effect on our EPS growth and margin expansion, especially since the majority of affected products are from our Lab business, which has above-average margins. You can observe this in the operating profit margin compression we experienced in Q4 of last year compared to the margin expansion forecasted for Q4 of this year, which indicates an increase of about 320 basis points compared to last year. While we won't provide specific details for Q1 at this moment, expect to see similar margin compression in Q1 of 2025, after which we anticipate returning to a more regular rhythm. It’s reasonable to consider our overall gross margin percentage and its related increments, which might be a bit higher due to our fixed cost structure. Importantly, if there were no shipping delays, our EPS growth guidance would closely align with our typical relationship between sales growth and EPS growth, likely being about 4% higher than our current EPS guidance. Additionally, our variable compensation for 2024 is not back to target levels, which will present a slight headwind for 2025. Currency fluctuations are also currently unfavorable to EPS, as noted. Ultimately, we want to emphasize that we still have many exciting opportunities to invest in the business and will not reduce our investment plans due to the shipping delays affecting our sales growth. We believe this is crucial because we have several promising initiatives we are investing in. We remain very confident in our ability to grow earnings and expand margins in alignment with our medium- to long-term guidance.

The next question comes from Matt Sykes with Goldman Sachs.

Patrick, maybe just first on Services. You guys gave a lot of great color in your prepared comments. One thing I'm just curious about and understanding that the margins are already above corporate average. But just curious about the level of operating leverage you can extract from Services, understanding the 3,000 technicians you already have. It sounds like you're willing to make more investments in that. I'm just wondering on the technology and automation side, how much of that can offset maybe increased hiring to create operating leverage in the Services business margin?

Thank you for that question, Matt. We're always looking to enhance the effectiveness of our service team. As I mentioned earlier, we're utilizing advanced software, including deep learning algorithms, to optimize our scheduling and improve technician efficiency in the field. We continuously refine this process. Recently, we've launched a new service template on our platform aimed at maximizing the use of our technicians. Additionally, we're expanding our future product lineup to include more remote service capabilities, which will also enhance service efficiency. That said, we do plan to increase our Service headcount, both for technicians and for supporting our marketing campaigns and service lead generation. I've previously talked about the untapped potential of instruments we currently don’t service. We have data on when and where these instruments were purchased and their applications, which allows us to reach out to customers with an expanded service offering. Servicing these instruments will necessitate hiring more technicians in the future, presenting a significant growth opportunity that should also enhance customer satisfaction. Our Net Promoter Scores in Services are excellent; customers appreciate our service not just for its proficiency but also for how it assists them with compliance. This is a strong growth driver for us going forward and will contribute to margin expansion, but it does require headcount investment. Alongside our efforts to drive efficiency through smarter software solutions and deep learning algorithms, we have data scientists working on knowledge management tools to better equip our service engineers, reducing the need for dual visits and ensuring they have all necessary information to achieve first-time fixes. There are many opportunities here, which is why we are committed to investing in this area, and I expect to see significant growth from this business in the coming years.

Great, Patrick. And then just on China, understanding your guidance for next year for low single-digit growth. Just curious how much stimulus impact are you kind of assuming in that growth rate? And then just more longer-term, have you changed your assumptions on longer-term China growth as it faces your business? Just curious to see if that's been adjusted. I know there are a lot of different potential headwinds that could come in but I’m just curious about how your framing of that growth has changed?

Yes, excellent. Look, for next year and your question regarding the stimulus, we have not factored anything regarding the stimulus in our forecast of low single-digit for next year. As you probably also heard from some of our competitors, it's pretty unclear yet when the stimulus will really gain traction. So we take a more cautious approach here when we forecast the growth for next year. With the last stimulus that came out, our team is still actively working with our customers, making sure that they can bundle solutions in the right way, so they basically can apply for the stimulus that is out there. But I don't think it will have a meaningful impact this year, and we also have not factored anything yet in for next year. And that basically brings us then to the low single-digit growth model for next year. Long-term, we think there's still a very good potential for us in China. We have not changed our long-term outlook of high single-digit growth in China. Yes, it will have to come back into growth in many areas. But I think the fundamentals in China, investing in healthcare, in safer, clean environments, and safer food, investing in important technologies like semiconductors, etc., are all areas where we serve our customers with dedicated solutions. We have a great team in China that works very closely with our customers to develop solutions for the Chinese market. That also makes us compete very effectively against local players. So, I think we have a great opportunity to continue also there to drive market share and participate in the underlying growth but, on top of that, gain market share. That's why we have not changed the long-term model for China.

The next question comes from Dan Arias with Stifel.

Shawn or Patrick, maybe just another one on the outlook for '25. Obviously, a lot of moving parts out there. Whereas you sit today, do you see the biggest sources of variability when it comes to what could have you better or worse than the initial outlook? Obviously, China is a big one. So, I get that. But if there's more to add there, then by all means. But beyond China, I'm just kind of interested in where you see the error bars as being the widest when it comes to just the businesses or the key regions that you have?

Yes. Dan, this is Shawn. I'll take that. I mean, I think you said it. I mean, China, we've always said in the past, things can move relatively fast and quickly in either direction. And I'm sure we'll continue to have zigs and zags along the way. So we certainly see upside to the guidance in China. But who knows how things develop here over the next year. Other swing factors, I mean, of course, our end markets are a big part of that. When do companies really get back to moving forward with a lot of projects that have been on the sidelines recently? I think you guys all know what our core secular exposures are. But you kind of quickly just get into things outside of our control, whether it's market conditions, macro, geopolitics, those types of things. But in terms of what we can control, we feel very good about that. The teams just continue to execute really well. Patrick and I were just on our world trip recently, and it's always really engaging and energizing for the two of us to be with all of our teams around the world.

Yes. Okay. And then maybe on margins, a good portion of the Lab portfolio has been refreshed, I believe, at this point. And I think the idea for you is to replace products with those that have better margins. So is that something that you think can be meaningful when it comes to overall profitability next year?

I think no individual product launch significantly impacts us, but we have had a strong flow of releases recently, which is beneficial. You can see this reflected in our margin expansion this year. I view it as one of the contributing factors to our overall margin growth, and it's something we are definitely attentive to. More importantly, the new products are being very well received in the market, which enhances our value proposition and increases customers' willingness to pay. This, in turn, supports our pricing strategy in the market as well.

The next question comes from Dan Leonard with UBS.

I have a question about a potential change in the tariff environment. How are you preparing for any change? And is there anything different about your business today versus the 2018, 2019 time frame when tariffs were a topic?

Yes, that’s a great question. Looking back to 2018 and 2019, we successfully managed tariffs then as well. One significant change for us is that we have expanded our production capabilities worldwide, particularly in Mexico to serve the U.S. market and improve our manufacturing flexibility. Over the past two years, we have also begun building additional manufacturing lines that were initially only in China, now also in Mexico. This global manufacturing footprint provides us with more flexibility. China and Mexico are not our only locations, and we continuously monitor for any challenges or changes. If necessary, we will adapt our manufacturing strategy. Our global supply chain offers us a unique advantage, which we fully utilize. We have taken important steps to mitigate risks associated with our larger presence in China and ensure we have sufficient redundancies in place. While we remain exposed to tariffs, we believe we are well-prepared to respond to any issues.

Appreciate that. And then a quick follow-up, Patrick. You mentioned that in speaking to your Process Analytics business that destocking is fully behind you at this point. What does the growth rate of that business then look like in the absence of destocking? Is it back to traditional long-term growth rates? Or is it something different?

Yes, we are very pleased to see that the momentum in our product and mix business has significantly increased. This clearly indicates that destocking is behind us. It’s not just the size of the orders we receive; it's also the frequency that indicates customers are returning to normal operations. Additionally, with the new product launches we had over the past years, we are well positioned to maintain our strong market presence. Regarding the growth rate, do we have the year-over-year growth rate for Product Inspection for the last quarter?

Yes. We don't give out specific numbers, but I would say within our Lab portfolio, we had good growth throughout the portfolio, but we had very strong growth. I think it was double digits in product - Process Analytics. And by the way, we also had really good growth in Analytical Instruments.

The next question comes from Jack Meehan with Nephron Research.

I wanted to ask about the assumptions for the fourth quarter guidance. I did some calculations and it seems the revenue forecast indicates around 6% sequential growth. Looking back, I think it was more like just over 10%. I'm curious why you are assuming a more conservative outlook this time compared to what we've seen in the past.

I'm sorry, Jack, can you repeat it? I didn't pick it up.

Just looking at the ramp from the third quarter to the fourth quarter on total sales, I think it's about 6% sequential growth is what your guide implies? In the past, it's been a little bit over 10%. Just why you're embedding a little bit more conservatism?

Yes, sorry, thanks, yes. So yes, I think I understand the question. Yes, I think it might be even closer to 7% sequential, but I understand it. Yes, we're a little bit more cautious right now. I think China is a big part of it on market conditions in general, but particularly China. I think if you kind of dig into the sequentials, you'll see China is the one that is more affirm to standout there. And yes, I was a little distracted because I was just looking at the notes on this Process Analytics thing. We grew double digits in Europe and in the U.S., but we grew high single digits globally.

Could you provide an update on the transition from the third quarter to the fourth quarter? I'm interested in your historical observations regarding budget flushes. Some companies experience a more dynamic situation, so I would appreciate your expectations in this area.

I think there will be some activity, but we are not anticipating a complete flush. As you pointed out in your first question, the typical average sequential change from Q3 to Q4 is usually around 10%. This indicates that we are not expecting a full flush. Additionally, this situation is partly influenced by developments in China. We receive mixed reports from our teams; there is certainly a lot of activity and some positive signs, but there are also ongoing delays, and the situation can vary depending on the customer.

The next question comes from Rachel Vatnsdal with JPMorgan.

I wanted to follow-up on some of the China comments but really more focused on the near-term trends. So you mentioned that China returned to growth this quarter. You also highlighted that there's some excess capacity in some of the markets and pressures in Industrial as well. So can you just unpack that for us a little bit more? And then, Shawn, you just mentioned on Jack's question that in terms of that 3Q to 4Q sequential ramp, some of that is pressured by China. So can you just walk us through what are your China assumptions into 4Q as well?

Yes, I can start, and Patrick can add more details. There are a couple of positive points to highlight. First, we have returned to growth after experiencing significant declines in China. It's been a period of adjustment over the last four quarters, so seeing modest growth this quarter is encouraging. The Lab business experienced low single-digit growth, while the Industrial business saw a low single-digit decline. It's important to note that the Lab business faced a more challenging comparison as it began declining earlier than the Industrial side. Despite the tough market conditions, the Industrial business has shown notable resilience, and the low single-digit decline reflects the team's strong execution. Recently, Patrick and I met with the Industrial team, who shared some of their innovations in both the Industrial and Laboratory sectors, which was impressive. Looking ahead to the fourth quarter in China, we anticipate some divergence between the Lab and Industrial sectors due to these comparisons. For Q4, our guidance for China is mid-single-digit growth. However, if we exclude the effects of shipping delays, the growth will likely be closer to low single-digit. On a reported basis, we expect low double-digit growth in the Laboratory sector, acknowledging the easier comparison they're facing. Conversely, for the Industrial business, we anticipate a decline in the high single digits, potentially rounding up to around 10%. We'll monitor how these trends develop.

Yes, thank you, Shawn. I'd like to add some insights regarding the growth areas in China. We are noticing stronger recoveries in pharmaceuticals, process analytics, and certain specialty chemicals, which are performing well. Additionally, we have moved past destocking in these areas. However, industrial automation is still not experiencing a similar recovery. This is partly due to exceptional growth in sectors like batteries over the past two years, which has led to overcapacity. As a result, there is currently no investment in expanding capacity and automation solutions, which is negatively affecting our growth rates in industrial automation in China.

Great. That's all helpful. And then just as my follow-up, could you walk us through those 4Q assumptions by segment and geography in terms of what you're assuming, including and excluding the comp?

Yes, absolutely. I'll start with Lab. For 2025, we expect the reported number for lab to be up low double digits, while on an adjusted basis accounting for last year's shipping delay, it will be up mid-single digits. The core Industrial business is anticipated to increase by low single digits on a reported basis and slightly decline on an adjusted basis due to the shipping delay. For Product Inspection, we expect both numbers to rise by high single digits. This results in total Industrial growth of mid-single digits on a reported basis and low single digits on an adjusted basis. In Retail, we foresee a decrease of about 10% on a reported basis and a decline in the high teens on an adjusted basis. Regarding geographies, we expect the Americas to grow by low to mid-single digits on a reported basis and remain flat on an adjusted basis. Europe is projected to increase by low double digits on a reported basis and low single digits on an adjusted basis. China, as mentioned earlier, is expected to show mid-single digit growth on a reported basis and low single digit growth on an adjusted basis due to the shipping delay.

The next question comes from Josh Waldman with Cleveland Research.

Patrick, it seems like you've made more of a point to talk on share gains over the last couple of quarters. Do you think you're seeing improvement in momentum here? And if so, is it more a function of a change in the competitive landscape or maybe the environment from, say, a customer preference or anything like that? Or is it more just building momentum on some of the internal service and sales efforts?

Yes, I believe it's a combination of both, Josh. Thank you for your question. We are observing that our launched products across various categories are performing very well in the market. Additionally, when we analyze our competitors' growth numbers over the past few quarters, we notice that we are outperforming them in several areas, even in a challenging low-growth environment. Our win-loss ratios in the markets we serve remain stable, and our products are positively received by customers. Our sales teams are effectively competing with our portfolio. This feedback was also supported by discussions Shawn and I had with our global market organizations during the budgeting process. They expressed satisfaction with our latest product releases across different categories, including Lab and Product Inspection, allowing them to compete successfully with these new offerings. We've even penetrated market segments that we previously did not serve. In the Product Inspection sector, we've introduced a line of midrange products that complement our historical market leadership in the high-end segment, which has enabled us to explore the mid-range market more thoroughly. This approach is yielding positive results. Our newly launched X-ray products are contributing to our success in the mid-range sector while also facilitating upselling opportunities within our product portfolio. Overall, it's a synergistic effort alongside strong marketing strategies. Whenever we identify new and emerging market segments, we leverage our Top K and Spinnaker portfolios to identify prospective customers, prepare appropriate marketing materials for our sales teams, connect with these accounts, qualify them, and ensure our portfolio stays top of mind for potential new customers. I believe this combination of an innovative product portfolio and effective sales tools is our winning strategy moving forward.

Got it. Patrick, could you elaborate on the trends you're observing in the pharmaceutical end market? You mentioned there is strength in the U.S. and Europe. Is that primarily benefiting Process Analytics and Pipettes, or are you also noticing improvements in Instruments? Given what you're observing in these accounts in real-time, do you believe we are on track to achieve normalized long-term growth in 2025 from these accounts?

Yes, that's a great question. I've mentioned that Process Analytics in the pharmaceutical and biopharmaceutical sectors is experiencing strong growth for us, reflected in both order frequency and volumes, which we are pleased with. In the Analytical Instrument sector within the Pharma business, we are also noticing improved sales engagement and momentum, although some accounts are still facing extended sales cycles. There are customers interested in upgrading their portfolios, and while they see the advantages of our new products, the internal approval processes are still lengthy. I remain optimistic that in the upcoming quarters, we will return to more typical levels. A significant portion of our business, around 70% to 80%, consists of replacement sales, which have been down for nearly two years. This means that when budgets are eventually released, there will be an opportunity for us to capture some of that potential. That’s why we are putting so much emphasis on innovation and ensuring we have the best and most updated portfolio available to take advantage of this opportunity when the budgets are released.

The next question comes from Patrick Donnelly with Citi.

Shawn, I wanted to drill a little more into the margins. Certainly get the moving pieces on '25. It sounds like flat for '25, mainly due to the kind of the logistics catch-up. But I guess when you look at '24, that was boosted by the logistics catch-up. I mean, would '24 have been down on margins without that logistics catch-up? Again, just trying to feel out the margin algorithm here, just given if we look at over a 2-, 3-year period, you just haven't seen much expansion. I guess what are the key levers going forward off of this? Are the China headwinds maybe weighing on things a little bit? Can you talk about the China margins? Just trying to dive into the margin piece ex some of that logistics, if you can.

Yes, I understand your question, Patrick. For 2024, we anticipate our operating profit margin will increase by approximately 50 basis points. You are correct that excluding the shipping delays, margins might have seen a slight decline. This is similar to the sales growth analysis. We need to recognize that volumes are still down when adjusted for shipping delays. Our guidance for growth is 2%, but if we exclude the 3% impact, we are actually down 1%. Without pricing, volumes are down 3%. This reflects the current reality, but looking back over the past couple of years, we can see a period without volume growth following exceptional growth. To truly understand this, we should refer to pre-COVID 2019 when our margins were below 26%. Since then, we have achieved significant margin expansion, though it hasn’t been linear. Looking ahead, we remain very confident, as I emphasized earlier in the Q&A. Our confidence stems from the many opportunities we have to enhance margins. Starting with business growth, we still operate in highly fragmented markets with numerous opportunities. We've invested heavily in innovation, including the launch of the new Spinnaker 6 generation. This sets the stage for expanding our sales. Additionally, pricing remains a crucial lever. It has been and will continue to be a priority, and we possess sophisticated analytics and tools to optimize pricing. Our teams worldwide are collaborating to enhance this aspect, supported by our R&D pipeline that improves our product value propositions. We also mentioned earlier this year the latest generation of SternDrive aimed at boosting efficiencies, particularly in our supply chain and cost reduction efforts. There are many exciting developments in this program with plenty of runway for growth. We’re utilizing new technologies in our manufacturing processes to enhance productivity. Lastly, we discussed Blue Ocean previously to illustrate its importance; it provides a strong foundation for many of our initiatives while enhancing productivity through process automation and better insights for decision-making via advanced analytics.

That's really helpful. Anything on the China margins quickly, if you don't mind?

China, I think China is at above corporate average margin. So it's been a bit of a headwind to our overall margin over the last year. But it's nice to see that we're starting to turn the corner there on growth and going forward. But nothing particular. Within China, we've addressed productivity issues there with the volume decrease. The team has been very focused on acknowledging that. But we also feel like we have a very strong organization that executes well and is prepared for the future. I’d say our Chinese team is certainly one of the leaders in our company when it comes to areas like SternDrive and driving productivity, and they're a very innovative organization.

That's really helpful. Patrick, can you quickly discuss the Industrial side? It seems like China is a significant factor. Can you provide a broad overview of the Industrial sector? Is China the primary issue, and what insights are you gaining from customers in that area?

Yes. Good question. Look, I mean, China is definitely a factor, as I said, but it's also in the U.S. and Europe where we have seen a slower market in the last quarter. Some of the areas, I would say it wouldn't take a pause, but also there, the decision cycle is taking a bit longer. If you compare, if you also look at the earnings reports of some of our competitors in the industrial space, you can see that some of the automation growth has been slowing down quite a bit. I think we're still competing very effectively, but we are not totally immune to these changes out there. I mean, PMIs, while I don't want to always link it to PMIs but has been down now for many quarters. With that, there has been a subdued, I would say, investment in some of the industrial automation. That I'm sure that will come back because there is a need for productivity gains. There is also a shrinking workforce if you look into Europe and the U.S. And that will require also investment in automation and digitalization. Our solutions are front and center here. They are empowering our customers to drive the needed productivity gains and also compliance when it comes to data handling, etc. So midterm, I'm not concerned about that, to be honest. So again, we have a strong product portfolio. I think the trend for automation and digitalization will stay intact. But yes, we had a slower quarter this last quarter, and it was not only China. China was probably more prominent but also the U.S. and Europe are somewhat smaller.

Yes. As a reminder too, our Industrial business, while it has more exposure to the general economy than our other businesses, about 60% of it still is anchored in our core segments of a combination of pharma, biopharma, food manufacturing, and chemical. But we also see a lot of these delays and things taking a little bit longer in our core segments as well, too. It's not just the general economy.

The next question comes from Tycho Peterson with Jefferies.

Actually, I just want to follow up on some of the Industrial stuff. So Product Inspection, you're guiding to high single digit in the fourth quarter. I assume that's easy comp because you're talking about low single digit next year. But can you maybe just touch on Food Manufacturing? That's been a challenging business for a while. And any risks, I guess, with the new administration on deregulation for either that or broader parts of the portfolio? I know it's early days.

Shawn?

Yes, you want to...

Yes, I can start and you can chime in, Shawn. Look, I mean, as I said in the beginning, the good news here is we are competing really well with Product Inspection with our upgraded portfolio also with the new mid-range products. Yes, the market is still slow. Customers are under pressure. If you look at the big packaged food customers out there, they all, of course, are under pressure when it comes to their margins. That's why what we're seeing is good engagement but prolonged sales cycles. Still, Q4, I think, is a bit an easier comp compared to last year. That's right. But midterm, I think we will stay in that low to mid-single-digit range that we have forecasted for next year for PI. There is not a fundamental change, I would expect from the current administration when it comes to the impact of packaged food companies which is a large part of our customer base.

Yes. I mean I think we need to see what they come out with. But I think what we find is every time there's a concern about are people still going to buy whatever. There are new brands, there are new sizes, there are new shapes. And so people are still going to eat. And so there tends to be always opportunities even if there are risks with change.

Yes. There are various ways we assist businesses, including check weighing to ensure the correct quantity in packaged food. Customers want to make sure they are packaging enough but not too much, which is why check weighing is important at the end of the production line. Additionally, we address physical contamination as part of brand protection for these companies. We ensure food safety, as it is crucial for our customers’ brand integrity. No one wants to discover physical contamination in their food.

And then, Patrick, I'm trying to reconcile your comments in the opening about just more onshoring but then automation was soft in the Americas. I mean just when do you think automation actually turns here? Do you think you could actually overshoot next year given some of the onshoring initiatives?

We'd love to overshoot, of course. But, again, I can tell you, I mean that onshoring reshoring process is something that we monitor very closely. But I mean, this takes also time, right? It's not like you shut down somewhere or you slow down your business in China and then move it within 6 months to the U.S. or to Europe; it takes time. I think you have not seen, I would say, the material part of the reshoring activities worldwide. There is still to come. When it really will gain momentum, probably more of that next year in the years to come, but the exact timing is difficult to forecast, to be honest.

Okay. And the last one, Shawn, just pricing assumptions in the fourth quarter and then thinking about next year, obviously, with inflation coming down, what's your pricing power? Has the algorithm changed at all?

No. Thanks, Tycho. We're still thinking 2% for Q4, and we're also thinking 2% for next year.

And your final question comes from Michael Ryskin with Bank of America.

I'll be quick. First, Shawn, I want to confirm some comments you made earlier. I thought I heard you say that margins flat in 2025? I just want to make sure I heard that correctly and that's not sort of an adjusted number. Just a little bit hard to reconcile the EPS with guidance with that. Is that kind of like flattish, maybe down a little bit? Or is that a hard flat?

So operating margin is flattish. Yes, maybe...

Flattish?

Yes, the gross profit margin would increase by about 30 to 40 basis points.

Okay. Yes. All right. Exactly. That makes sense. And then sort of a follow-up on that. On the shipping component, I just want to make sure we back it out correctly, the way you kind of described it for 2024. Is it fair to say that ex shipping margins would be up something like 50, 75 bps range, 50, 70 bps next year, and that's the swing? I'm just trying to...

Yes, I don't know the exact math, but that sounds like a reasonable range to me.

Okay. And then last one for me. I think Tycho was just asking about Product Inspection. I want to ask a little bit about Food Retail. I know it's not a critical part of your business, not something you talk about a lot, but that's just sort of been declining pretty consistently for a while. I mean you often have tough comps, one-time customer issues, things like that. It's just gone from like 15% of revenues back in the day down to, I think, 5% and continues to face some challenges. Just taking a step back, what are your thoughts on that? I mean is that something you continue to think can be a core part of the business, or could there be some strategic solutions there?

That's a good question. Food Retail is a very inconsistent business. We engage in key account management, and our major customers or retail chains buy from us in project-based ways. The decline this year follows a very strong year last year, which featured many successful projects. Overall, it's still about 5% of our total revenues, and we don't anticipate a significant increase. We believe our strong technology platform adds value in this area. We see it as a valid part of our portfolio and have invested in updating our products over the last few years. We've introduced interesting new solutions for customers, including AI-based features that automatically identify items placed on the scale, which streamline the workflow for both customers and checkout staff. This has been positively received, and we still have a strong number of projects in the pipeline. Strategically, we don't foresee any immediate changes apart from continuing to leverage this technology within our portfolio.

Great. Hey, thanks, everybody, for joining us this morning. If you have any follow-up questions, please feel free to reach out. And I hope you all have a great weekend. Take care.

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