Mettler-Toledo International, Inc.

Good day and thank you for standing by. Welcome to the MET with Toledo Quarterly Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Mary Finnegan. Please go ahead.

Mary Finnegan, Thank you, and good evening, everyone. I'm Mary Finnegan, and responsible for investor relations at Mettler Toledo, and happy that you're joining us this evening. I am joined on the call today with Patrick Kaltenbach, our CEO, and Shawn Videla, our chief financial officer. Let me cover just a couple of administrative matters. This call is being webcast and is available on our website. A copy of the press release and the presentation that we refer to on today's call is also on the website. Let me summarize the Safe Harbor language, which is outlined on page two of the presentation. Statements in this presentation, which are not historical facts, constitute 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, level of activity, performance, or achievements to be materially different from those expressed or implied by any forward-looking statement. For discussion of these risks and uncertainties, please see the discussion in our recent Form 10-K and other reports filed with the SEC from time to time. All of the forward-looking statements are qualified in their entirety. by reference to the factors discussed under the captions, factors affecting our future operating results, and the business and management discussion and analysis of financial condition and results of operations sections of our filing. One other item, on today's call we may use non-GAAP financial measures. More detailed information with respect to the use of and differences between the non-GAAP financial measure and the most directly comparable GAAP measure is provided in the 8 . Let me now turn the call over to Patrick.

Thanks, Mary, and good evening, everyone. We had a great finish to 2021 with strong fourth quarter results. We capitalized on robust customer demand and executed very well particularly with respect to our supply chain to meet customer demands. The strength and agility of the teams around the world are reflected in these results. The highlights of the quarter are on page three of the presentation. Local currency sales growth was 11%, and we had particularly strong growth in the Americas and Asia and rest of the world. Both our laboratory and industrial product lines performed very well. As expected, food retail was a headwind to our overall sales growth as we again had a significant decline in the quarter. Despite facing higher material and transportation costs due to challenges in the supply chain, we had very solid growth in adjusted operating profit and strong growth in adjusted EPS in the quarter. The fourth quarter was the end to an excellent year of results. For the full year, We achieved an 18% increase in local currency sales, a 26% increase in adjusted operating profit, which resulted in a margin improvement of 130 basis points. We had outstanding 32% growth in adjusted EPS. And finally, cash flow generation in 2021 was excellent. We not only achieved great results, we also strengthened our competitive position in 2021 as innovation nourished our excellent product portfolio and comprehensive services offering combined with our Spinnaker sales and marketing strategies helped us capture growth opportunities. We also did a superb job navigating the hurdles in the global supply chain. Our agility and excellent execution further reinforced our already strong brand. Importantly, our impressive results last year allowed us to make important investments for future growth. We are confident in our ability to continue to gain share and believe we are ideally positioned to deliver strong results in 2022 and beyond. I will have some additional comments later, but let me turn it first to Sean to cover the financial results. Sean?

Thanks, Patrick, and good evening, everyone. Sales in the quarter were $1.037 billion. This represents our first billion-dollar quarter, which was a nice way to end 2021. This represented a local currency increase of 11%. On a U.S. dollar basis, sales also increased 11%. The Pendotek acquisition contributed approximately 1% to local currency sales growth in the quarter, while we estimate that the impact of reduced volume of pipette tips and COVID testing was a headwind of approximately 1% of sales growth in the fourth quarter. On slide number four, we show sales growth by region. Local currency sales increased 16% in the Americas, 4% in Europe, and 14% in Asia, rest of the world. Local currency sales increased 12% in China in the fourth quarter. The next slide shows sales growth by region for the full year 2021. Local currency sales grew 18% in 2021, with a 20% increase in the Americas, 12% in Europe, and 21% growth in Asia, rest of the world. Local currency sales increased 25% in China for the full year. On slide number six, we summarize local currency sales growth by product area. For the fourth quarter, laboratory sales increased 15%, industrial increased 11%, with core industrial up 11% and product inspection up 10%. Food retail declined 20% in the quarter. The next slide shows local currency sales growth by product area for the full year 2021. Laboratory sales increased 22%, industrial increased 15%, with core industrial up 18% and product inspection up 10%. Food retail declined 6% in 2021. Let me now move to the rest of the P&L for the fourth quarter, which is summarized on slide number eight. Gross margin in the quarter was 58.5%. We benefited from volume in pricing, which was offset by challenges in the global supply chain, namely higher material and transportation costs, as well as the impact of temporary cost actions we undertook in 2020. R&D amounted to $45.6 million in the quarter, which is a 14% increase in local currency over the prior period. The impact of temporary cost savings undertaken last year and greater project activity contributed to this increase. SG&A amounted to $242.4 million, an 8% increase in local currency over the prior year. The impact of the temporary cost savings that we undertook last year, higher variable compensation, and increased investments in sales and marketing were the principal factors driving the increase. Adjusted operating profit amounted to $319.1 million in the quarter, a 9% increase over the prior year amount of $292.8 million. The increase reflects strong sales growth combined with good execution. Adjusted operating margins were 30.8% and were impacted by higher costs associated with our global supply chain and transportation costs. A couple of final comments on the P&L. Amortization amounted to $16.9 million in the quarter. Interest expense was $11.5 million in the quarter. Other income, excluding one-time items in the quarter, amounted to $5.3 million, primarily reflecting non-service related pension income. We reduced our effective tax rate from 19.5% to 19.0% in the quarter. This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter. We're pleased with this reduction and expect to maintain the 19% rate in 2022. Fully diluted shares amounted to 23.2 million in the quarter, which is a 3% decline from the prior year. Adjusted EPS for the quarter was $10.53, a 14% increase over the prior year amount of $9.26. On a reported basis in the quarter, EPS was $9.94 as compared to $9.03 in the prior year. Reported EPS in the quarter includes $0.21 of purchased intangible amortization and $0.09 of restructuring. We also had two items impacting income taxes. We had $0.17 of cost due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises, and we had a $0.14 benefit from adjusting our tax rate to 19% for the first three quarters. Finally, we had a $0.26 acquisition charge, principally reflecting an increase for the Pendotek acquisition earn-out due to their updated projections. The next slide shows our P&L year-to-date. As Patrick mentioned, we had an exceptional year of results in 2021 with local currency sales growth of 18%, an adjusted operating profit increase of 26%, and our operating margins increasing 130 basis points to 28.5%. Finally, adjusted EPS grew 32% to $34.01 in 2021. We're extremely pleased with these results and our ability to capitalize on growth opportunities and navigate a challenging supply chain environment. That covers the P&L, and let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $206.6 million, which was better than what we had expected and was impacted by the timing of tax payments. DSO showed further improvement in the quarter with a decline of two days to 35 days as compared to the prior year. ITO came in at 4.3 times flat with the prior year. For the full year, adjusted free cash flow amounted to $821.9 million, an increase of 31% on a per-year basis as compared to the prior year. The strength of our cash flow is apparent in our net income conversion, which reached 103% in 2021. Let me now turn to guidance. Forecasting remains challenging. Demand in our end markets is favorable, although there are pockets of uncertainty in the global economy, particularly in China. The challenges within the global supply chain and in transportation and logistics and the corresponding inflationary impact also creates uncertainty. Finally, we acknowledge that COVID is not behind us and variants and lockdowns can occur quickly. We recognize the importance of remaining agile and adapting to unexpected changes in the environment. We remain cautious about factors outside of our control and remain focused on our growth initiatives. We believe we can continue to gain market share and drive margin improvement via our pricing and stern drive initiatives. Now let me cover the specifics. For the full year 2022, we now expect local currency sales growth to be approximately 7%. This compares to previous guidance of 6%. We expect full year adjusted EPS to be in the range of $38.15 to $38.50, which is a growth rate of 12% to 13%. This compares to previous guidance of adjusted EPS in the range of $37.25 to $37.65. Some additional comments on 2022 guidance. We expect a slight headwind to sales growth from the impact of COVID testing on our pipette business. We expect gross margins for the full year to increase in the 30 to 40 basis point range. However, we expect to see improvement in gross margins in the second half of the year as we see further benefit in pricing and other margin initiatives. Interest expense is estimated at approximately $50 million in total amortization, including purchased intangible amortization, to be $67 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $25 million on a pre-tax or 86 cents per share. Other income, which is below operating profit, is estimated at approximately $14 million. Finally, as I already mentioned, we expect our effective annual tax rate before discrete items will be 19%. Turning to the first quarter, based on market conditions today, we expect local currency sales growth of approximately 10%, and expect adjusted EPS to be in the range of $7.25 to $7.35, a growth rate of 11% to 12%. A couple further comments. A reminder that comparisons in the first quarter are particularly challenging as adjusted EPS grew more than 60% in Q1 last year. We would expect gross margins to be down in Q1 due to higher supply chain and transportation costs. We will provide more insight on our next call, but it is worth mentioning now as you update your models that Q2 will have a very tough prior year comparison as local currency sales were up 27% and adjusted EPS increased more than 50% in the second quarter of last year. Some final details and guidance. With respect to the impact of currency on sales growth, we expect currency to decrease sales growth by approximately 1% in 2022 and decrease it by 2% in Q1. In terms of adjusted EPS, currency is a little worse than the last time we provided guidance. We now expect currency will be a headwind to adjusted EPS growth of approximately 1% in 2022 and a headwind of approximately 2% in the first quarter. Let me comment on free cash flow. For the full year 2022, we estimate it will reach $855 million. As we mentioned on our last call, our cash flow this year is impacted by higher variable compensation payments related to the very strong performance in 2021. In fact, we expect cash flow in Q1 to be down versus the prior year. Once we get beyond 2022, we expect free cash flow per share will grow in line with earnings per share and net income conversion will be in the 100% range. We expect to repurchase approximately $1 billion in shares in 2022, which should allow us to maintain a net debt to EBITDA leverage ratio of approximately one and a half times. That is it from my side, and I'll now turn it back to Patrick.

Thanks, Sean. Let me start with some comments on our operating results. Our lab business had very strong growth in the quarter despite having great growth in the prior year. Almost all product lines showed robust growth. We will start the year with very good momentum in lab in the first quarter, while growth in the remaining quarters will be impacted by challenging multi-year comparisons. With our excellent product portfolio and effective sales and marketing initiatives, we believe we are well positioned to capture growth and continue to gain market share in our laboratory business. Turning to our industrial business. Core Industrial did very well in the quarter and will have a strong start to 2022. We are benefiting from our attractive product portfolio, very good implementation of Spinnaker sales and marketing initiatives, as well as increasing demand from our customers for automation and digitalization. We will face tougher comparisons as the year progresses, but expect to continue to gain share here as well. We are pleased with another quarter of good growth in product inspection, which increased 10% in the quarter. We expect a good start to the year and are optimistic that we will have good growth in 2022 as large packaged food companies show more appetite for investments. Finally, food retail declined 20% in the fourth quarter. We were impacted by shortages of electronic components as well as timing of project activity. We expect low double-digit decline in the first quarter and overall do not expect much growth here in 2022. Now let me make some additional comments by geography. Sales in Europe increased 4% in the fourth quarter, which was in line with our expectations. Both lab and industrial had solid growth, while retail was down double digits. We expect good growth in Europe to start the year and overall solid growth for the full year 2022. America's had another quarter of very strong growth with 16% increase. Lab had excellent growth while industrial also did very well. Retail was down significantly. Americas will also have a strong start to the year and then face more challenging comparisons as the year progresses. Finally, Asia and the rest of the world grew 14% in the fourth quarter with outstanding growth in laboratory and product inspection and very good growth in core industrial. China grew grew 12% with excellent growth in lab. We are very strongly positioned in China and the team continues to execute well. One final comment on the business, service and consumables performed really well and grew up 10% in the quarter. We continue to be very pleased with the growth in this important and profitable part of the business. That concludes my comments on the business. While COVID is not yet behind us, we believe we will exit the pandemic in a stronger competitive position. Many factors have contributed to this, including our excellent product portfolio, extensive service offering, well-engrained and proven sales and marketing strategies, and an agile and experienced supply chain team. Another important factor is our process and system harmonization program, Blue Ocean, which is the foundation and enabler of many of our corporate programs and initiatives. Blue Ocean is a multi-year program that harmonizes how we do business, internally and with customers. It encompasses all aspects of our franchise, sales, service, supply chain, R&D, HR, and finance. With harmonized processes and data, we can leverage a globally standardized single instance IT system that digitalizes our processes and provides data that increases our business transparency. Let me provide some additional insight. Blue Ocean supports the framework for our Spinnaker sales and marketing initiatives. Our CRM and install base provides extensive details on customers and potential customers that we use in marketing campaigns, sales project alerts, cross-selling campaigns, and support for other data analytics techniques. It provides comprehensive data on customers' purchasing activity. Blue Ocean is also the foundation for our pricing program. It provides data analytics to guide us in our pricing decisions and also allows us to implement pricing increases efficiently on a global basis. Similarly, Blue Ocean harmonizes our services offering, allowing us to provide standardized services on a global basis. It also provides transparency in terms of field service productivity, service profitability by customer, and highlight additional sales opportunities. Our supply chain is highly complex as it involves more than 3,000 possible suppliers, 150,000 different SKUs, more than 800,000 components, 19 production organizations, and three logistic hubs. Blue Ocean provides us with the transparency and real-time data that is critical for navigating supply chain challenges. Agility and collaboration between our market organizations and business units allow us to leverage our supply chain as a competitive advantage in helping us gain share. Blue Ocean is critical to the success of our SternDrive program as it provides the data and transparency to continually make improvements to our back office and manufacturing productivity. Finally, Blue Ocean is instrumental in providing meaningful, real-time information that has become particularly important during the last two years, given how quickly market conditions have been changing. We develop specialized and tailored data alerts, allowing us to see firsthand the impact on our business and allow us to make decisions quickly. We will continue to evolve Blue Ocean and believe it has become a clear competitive advantage for us. Before I conclude, I also want to make a brief comment on our ESG initiatives. We are committed to sustainable development across the broad environmental, social, and governance aspects covered by our longstanding green MT sustainability program. We believe it is our responsibility to act in a manner that considers future generations. We have great accomplishments in ESG, including achieving carbon neutrality with respect to scope one and two emissions and sourcing 100% renewable electricity. We focus on five key areas. One, environmental. Two, sustainable products and services. Three, responsible supply chain. Four, engaged employees. And five, good corporate governance. While we have an excellent track record in ESG, we have set ambitious targets for the future. Importantly, we have recently committed to absolute emission reduction targets consistent with the latest criteria issued by the Science-Based Target Initiative. This will cover scope one, two, and three emissions. We have also set a target to reduce our waste intensity by 20% and achieve zero waste to landfill by 2025. To reinforce the importance of ESG, executive management compensation in 2022 will incorporate specific environmental as well as diversity targets. I think both Blue Ocean and our ESG goals are great examples on how Metler Toledo focuses on the long term to enhance the value of our franchise. I would now like the operator to open the call for questions.

As a reminder, to ask a question, you will need to press star one in your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question will come from Dan Arias with Stifel. Please proceed with your question.

Hi, this is Eric on for Dan. Thanks for taking the question. Just one on capital deployment. Could you just discuss your plan for that for the year? Besides the $1 billion share buyback? Like, are you finding any assets becoming more attractive given the recent market moves that might have you looking for one that might be, you know, on a larger scale than the usual smaller tuck in deal?

Yeah, hey, maybe so. I guess there's two parts to that question. So, you know, in terms of our M&A strategy, I'll let Patrick kind of comment on that, but no change in our strategy. We still think we're a great platform for bolt-on acquisitions. We also feel very strongly about our organic story, so we're very selective in terms of the acquisitions. But if you look at, like, the Pendotech acquisition we did last year, I think that's a really excellent example of the type of acquisition that we're looking for. And Pendotech, of course, has been a great addition to Mettler Toledo. In terms of capital deployment, you know, we also feel good about our share repurchase program. The program continues to be very successful from our perspective, and we target about a one and a half times net leverage ratio, and right now we're expecting to repurchase about $1 billion in of shares in 2022. And as a reminder, we do that on a very consistent basis throughout the year.

Okay. And then could you just provide a rundown of the top line assumptions by segment for the first quarter and for the 2022 that's baked into the improved guide?

Yeah, sure. So, hey, I'll start with the divisions. So I'll start with the lab division. Right now our guidance is low double-digit growth for Q1 and high single-digit growth for the full year. For core industrial, we expect high single-digit growth in Q1 and mid-single-digit growth for the full year. For product inspection, we expect high single-digit growth for Q1 in high single-digit growth for the full year. And for food retailing, we expect to be down double-digit in Q1, but grow low single-digit for the full year. And then I'll also give you the geographies. For Europe, we expect Q1 to be up mid-single-digit to high single-digit, and for the full year to be up mid-single-digit. For the Americas, we expect to grow low double-digit in Q1, and grow in single-digit to high single-digit for a year. And then for China, we expect to grow approximately 10% in 2021 and approximately 10% for the full year. Thank you so much. You're welcome.

Your next question will come from the line of Derek DeBruin with Bank of America. Please proceed with your question.

Hey, this is Nisargan for Derek. Thanks for the question. So geographically, two-parter on China here, are you seeing any impacts in China specifically from lockdowns? And also, you know, trade tensions are heating up with some touching the bioprocessing CDMO segment. Is there any concern that the trade issues could slow demand for lab products?

Yeah, let me take that, Tim. Look, I mean, our business in China has been very strong. We have a very strong footprint in China. We have been there for 30 years. We serve many customers of our base. Also, as a reminder, more than 40% of our business in China is industrial business. But to biopharma, what we're seeing there is very healthy trends for us. We have overall not seen impacts from lockdowns in the last quarter. And right now, at least what we are hearing from the team is they are not concerned of any of the impacts that you mentioned regarding biopharma right now.

Great. And then one more on the margins for the quarter. Can you go more into detail on some of the pressures you saw and how do you kind of expect them to impact early on in 2022? Do you think there's going to be any carryover there?

Yeah, hey, so I'll take that one. So, hey, maybe I'll talk more broadly about the margin and then kind of like then kind of talk about 2022 as well. So, as we mentioned in the prepared remarks, our gross margin was down 110 basis points in the quarter. On one hand, we had, you know, favorable price realization. Our price realization was just over 3% in the quarter, which would translate to approximately 140 basis point benefit to the margin. Of course, we also benefited from our volume in the quarter. But the one thing that clearly stood out from our perspective was the higher material costs as well as higher transportation costs in the quarter. And as we kind of like look to Q1, we're expecting to see similar trends overall for gross margin with probably very similar dynamics. Probably that pricing will continue to be in that 3% kind of a range, but we'll still continue to have like a bit of a headwind on material costs and transportation. So if we look at gross margin for Q1, wouldn't be surprised if we're down another 100 basis points in Q1. But we still remain very confident about our ability to expand the margin. And so as we look to the full year, we still believe we can expand our gross margin by 30 to 40 basis points. And we expect to still increase our operating margin overall at the higher end of our typical guidance. So as a reminder, we typically would say, hey, we can expand margins on an annual basis, 70 basis points to 100 basis points. If you look at the midpoint of our guidance, we're towards the higher end of the range of that, probably about 90 basis points. So when you break that down, we are expecting a little bit better pricing in 2022 than what we previously expected. We were previously guiding to about 3% for next year. Right now, we're thinking it will be probably 3.5% or so. It wouldn't be surprised if we get to the 4% kind of a range next year. in the second half of the year because, of course, we're going to continue to adjust and do actions as we see appropriate, especially as we saw some of the pressures in the fourth quarter on our cost structure. But it's not only about pricing, of course. We're also going to be doing some things in terms of optimizing our supply chain as we continue to look for opportunities, for example, to re-engineer components or look for other sources in the supply chain.

Great. Thank you.

Your next question will come from Josh Waldman with Cleveland Research. Please proceed with your question.

Hi, thanks for taking my questions. Just a couple for you. Sean or Patrick, I guess from a demand outlook perspective, could you talk through the product areas or the regions that improved versus your plan 90 days ago that led you to pull your organic growth up this early in the year?

Maybe I start, John, and let you chime in as well. So let me talk through the product categories. I mean, we see sustained demand, healthy demand in our lab business moving forward. And John gave you the numbers in terms of the growth expectations. So lab I would say holds are very strong, has been strong in Q4 already. We're also pleasantly surprised by the momentum that we still see in industrial driven by the demand for automation and digitalization and our product portfolio that we have there really serves the demand very well. I think I mentioned in my comments also the fact that we're still seeing some healthy appetite in product inspections from some of the packaged food companies out there. So overall, I would say we are actually on a broader front across these categories that I just mentioned, really well, nicely surprised that we see stronger demand than we anticipated when we gave you the last guidance, and that's why we raised the guidance. I wouldn't point to any specific end market here, not to any specific region. I would say overall, we see better demand to be expected.

Got it. Got it. Then, Sean, I wondered if you could provide us a bridge to the updated earnings guide. I mean, it sounds like most of the increase was due to organic growth, I guess. Is that correct? And then, If you could provide us kind of your assumptions for the low and the high end of the EPS range as it relates to maybe organic growth and margin, that would be helpful.

Yeah, hey, so I'd say, you know, if you kind of bridge EPS, you know, like you said, a lot of it has to do with higher sales growth, increasing the sales growth. Of course, we also added in our beat for 2021, which includes a lower tax rate, you know, at 19%. And that was offset a little bit by unfavorable currency.

Could you provide the range or the assumptions that went into the range for the updated guide, EPS guide?

Yeah, hey, we typically don't get too much into like the specific assumptions for the low end and the high end. I mean, we, you know, for the top line, for example, we said approximately 7%. So I don't want to try to start deviating from is it, you know, six point this or seven point that or, you know, on the margins a little bit lower, a little bit higher. But, you know, you could probably flex your model and get a sense for, you know, what that would translate in terms of an EPS range. But, you know, you can appreciate, Josh, I mean, there's a lot of You know, there's a lot of ingredients into the recipe at this point in time of the year. A lot of things can change as we get into the year. It's a very, very dynamic environment, and so there's always going to be things that can be a little bit better, but there's, of course, there's things that can be a little bit worse.

Sure. Appreciate it, guys.

You're welcome.

Your next question will come from Tycho Peterson with J.P. Morgan. Please proceed with your question.

Hi, this is Rachel on for Tyco. Thanks for taking the questions, and congrats on the quarter, you guys. So a few questions here on lab. So lab was better than expectations. You guys grew about 15% versus guidance of low double digits for 4Q. So can you talk about if you saw any catch-up spending on the lab side of things, and then were there any other underlying changes in that market to drive the beat there?

No, look, I wouldn't say – There was catch up or any pent-up demand. We saw, we see really strong demand for our products. We have a very strong product portfolio. I think it competes extremely well. Right now, we also have been able to deliver to our end customers. And that came to some extent at some cost, as Sean also mentioned, that had a little bit of impact on our gross margin, because we do broker buys for chips, et cetera, that make components more expensive. But it's very important for us to really make sure that we can deliver products to our customers. Overall, I think we see very strong demand for our products, and it's reflected in those numbers. There is not a specific market segment that I would point to. Pharma, biopharma, as we said, is very strong for us, for lab. But it's also, of course, deployed in other segments, like even battery segment, or if you look at the product chemical segment, of course, all of the labs buy products from us. And there is healthy demand. from these end markets, none of them really specifically that sticks out in terms of change versus what we have guided regarding Q4.

Yeah, and you can see that strong momentum is also reflected in our Q1 guidance, you know, of low double digit for lab.

Yeah, helpful. And then maybe going off that for the segment guidance, So appreciate the comments around the expectations by geography as well. So it looks like you have an improved outlook in Europe and Americas for the year. So can you just talk about what's driving your confidence in those regions? Is it specific segments that's driving it or kind of what drove the increase there?

Yeah, so the Americas was up a little bit. I mean, we just continue to, I mean, you saw what we did in the fourth quarter. in the Americas as well. I mean, there's just really, not to overuse the word, but really good momentum, very broad-based growth in the portfolio. And that was despite our food retailing business being down in the quarter. I would say our industrial business is, our lab business is doing very well, but our industrial business continues to be really resilient and performing well. And as Patrick was saying earlier, we very much are benefiting from a lot of these trends towards automation and digitalization I mean, there's a, there's just a huge demand in the world to be more productive and we're just very fortunate to be in a position to be able to help serve that demand. And, and, you know, the, The teams have done just such a great job in this division. There's a lot of good innovation. There's also really good execution. And, you know, as we've been trying to also pivot the business towards the more attractive market segments over the years, we continue to see that paying a lot of dividends. And then also, as Patrick mentioned, there are these hot segments in the world, both on the lab side and the industrial side, that we also have been good at in terms of capturing growth.

Great, that's it for me. Thank you.

Thank you.

Your next question will come from Jason Reaver with Citi. Please proceed with your question.

Hey there, you got Jason on for Patrick. Congrats on the great quarter. Two quick questions for you. One, you've seen strength in the industrial market. Just curious about the visibility into that strength into 22. And then two, just wondering on how PenderTech is performing relative to expectations and any further color to shed there. Thanks.

Yeah, I'll take that. Good questions on industrial. I think it is, as we look into 2022, of course, we will face tougher comparisons, as I said, as we're going deeper into 2022 towards the second half. But we see good demand in the markets. It's driven basically in all major regions by demand for automation and for digitalization. Sean mentioned that as well. That's the really fundamental driver. We have an outstanding performance platform there on the product side to serve those demands. And we are confident that also the new products that we launched this year, like the industry 360 terminal, really addresses these demands nicely. And we think that will continue into 2022. Of course, given that we will have tougher comparisons, you will not see the same growth rates in the second half. But we are competing extremely well there. On your comment regarding PandaTech, we are very pleased with the back decision. Actually, it outperformed our expectations in 2021, and we see continued strong demand as we go into 2022 for the products.

Great. Thank you.

Your next question will come from the line of Jack Meehan with Nephron Research. Please proceed with your question.

Thanks, and good afternoon. I had another question on industrial, but was hoping you could weigh in. You know, we're seeing higher commodity prices, along with the talk around inflation. Was curious, just from a demand perspective, if you saw that playing out in terms of any of the industrial customers for your coverage and for your customers just amongst your customer base on the industrial side?

No. Hey, Jack, this is Sean. No, we're not seeing that impact any of our customer demand at all. Interesting comment, but no, we're not seeing it from a customer side.

Interesting. Okay. And then back on product inspection. So the guide for the first quarter, high singles, you know, the headline looks good. I have that compounding, though. still kind of in the low single digits given the comps. Just be curious just to get a little bit more color as you're talking with your customers when you think just the timing for when some of the renewed spend could be going into CapEx.

I'm sorry, Jack. Go ahead, Patrick.

Okay, Sean, I'll take it. Okay, good. Yeah, really happy with the results of product inspection in Q4. um also with folio results we are clearly a leader in product inspections we have the products broadest product range and also the largest services network our outlook for 2022 is good and we're assuming that we see more investment from large food manufacturing so there is some pent-up demand and yeah that's why we're also guided to you know double digit growth in the first quarter and we expect this this segment for us to perform really, really well. But also as a reminder to understand food manufacturers represent only about 70%. of our product inspection business. And these customers have been impacted by COVID. Remember, last year we talked about the fact that it was also difficult for our service people to get in some of these accounts and deliver services. That is coming back, has come nicely back. So we will also see better service growth than we had last year in this segment as well.

That's helpful. Thank you, Patrick.

Your next question will come from the line of Matt Sykes with Goldman Sachs. Please proceed with your question.

Hi. Thanks for taking my questions. I appreciate it. Maybe, Patrick, just a high-level one for you. As you think about the supply chain, you've been dealing with a lot of challenges there. It sounds like you've been making a number of investments in Blue Ocean and other areas to try to improve that, and I'm sure this environment has probably led you to see a number of pressure points that you might be able to alleviate with spend. But I guess my question is, If we do come out of it and the supply chain does start to loosen up, do you feel like the investments that you've made so far will lead to greater efficiencies in productivity and maybe acceleration, margin expansion if we get out of this because of what you've already put into the business to make it better?

Well, look, very good question, Matt. Thanks. I mean, we continuously invest in Blue Ocean since many, many years, right? And you move right now about 85% of the overall business is on Blue Ocean. So we still have a couple of roll-ins to do, but we're making good progress there. Definitely the investments we're doing are all targeting productivity enhancements across the board so we will continue to benefit from those whether it will be an acceleration of margin improvement I don't think so I mean we have history have made always good improvements in margin expansion so I wouldn't put that in into you know consideration we move forward we will continue to make improvements But I think we will not see acceleration just by the fact that we do these investments in Blue Ocean. We have done this in the past. We're making great progress. We are absolutely convinced it is a competitive advantage for us. And it will continue to drive improvement, but not accelerate it.

Got it. And then maybe, Sean, you had mentioned you're preparing marks, some uncertainty around China, which I think is pretty apparent. You're looking for sort of 10% growth. for the year. Anything that you're concerned about regarding China, you know, underlying that kind of uncertainty comment, or is it sort of COVID-related, lockdown-related type issues?

Yeah, I mean, we're not seeing anything specific in our business, Matt, but it's just that general, you know, knowledge that everyone has about, like, there's just a lot of things going on there. I mean, it could be, like you said, it could be COVID, it could be lockdowns, you know, the the way that they, they, they handle COVID with their zero tolerance policy, you know, could have implications on the business or in the local economy. You know, PMIs have been floating, you know, right around 50 on and off. But, you know, there's always, there's always uncertainty there. And then there's, there's always, and we always say things can change quickly there, right? They can, they can go in either direction very quickly. And that's, That's always been our history there. So I think for us, it's always important to remind people that when we give guidance to provide that type of caution so that people understand those risks. But when we look at China and we look to the media in the long term, I mean, we're very favorable. I mean, we continue to feel very good about the growth. We continue to feel very good about our business. We feel like a lot of the governments focus with their five-year plan in terms of life sciences and health and safety and A lot of the emerging industries that they're heavily investing in, they all play very well to our portfolio. And then this general theme of automation and digitalization also is a big theme in China as well. And as they continue to expand the economic development to the West, I mean, our industrial business will also benefit. So we continue to feel very strongly about it. But in the short term, there can always be volatility.

Understood. Thanks. Very helpful.

Your next question will come from Vijay Kumar with Evercore ISI. Please proceed with your question.

Hey, guys. Congrats on a nice print here, and thanks for taking my question. I guess that one on the queue itself, you know, the gross margin here is sequentially flat. Historically, you guys have had a very strong queue for gross margins. I'm curious. Was there any timing element here in Q4 or what happened to gross margins?

No. Hey, Vijay, this is Sean. No, I mean, just basically we just saw the cost inputs increase much faster than what we expected. And it was kind of broad-based in a lot of different cost categories, but I'd probably highlight electronic components as an area that was much higher than the others. And also transportation costs came in higher than expected, which was a little bit of a surprise if you just think about like it's not a new topic and we were already facing cost headwinds in terms of transportation going back to Q4 of last year. But like we always say, like I think the key in this environment is to make sure that we have, you know, the systems in place to be able to monitor these changes and so that we can react quickly. And I think, you know, you can, you know, and that's what we're doing. We're highly focused on it as an organization. We're going to see some similar trends in Q1, but I think as you kind of look to the full year, we certainly still feel good about our ability to expand margins. And as I said earlier before, we still believe we'll expand our gross margin for the full year of 30 to 40 basis points. And then from an operating margin perspective, we expect to be at the high end of our typical guidance, probably around 90 basis points at the midpoint of the guidance.

That's helpful, Sean, and maybe one for Patrick here. The Q1 guidance here, the comps are really tough. I'm just curious, given the lockdowns here in China, what visibility do you have into those numbers, or what is driving this Q1 trend? And the guidance raised for the year by 100 basis points, how much of that was pricing versus volume, if you will?

Yeah, well, I mean, it's... Look, our confidence in Q1 is driven by demand. We are seeing, as we said, we are not dramatically impacted by any lockdowns in China right now. There is, of course, a little bit uncertainty moving forward. It might have some impact, but we are pretty confident on the 10% that we have given you for Q1. We see the demand. We see the regions performing, not only Asia Pacific and not only China. It's also the US and Europe is performing as we expect, and that gives us confidence that we will have a really solid Q1. In terms of the other questions, it's a little bit of both. It's a little bit of volume, and it's also, of course, a little bit of pricing. I mean, we don't want to quantify that perfectly. Sean already made comments on pricing, but it's a component of both. We have volume increase, and we have some pricing impact as well.

Got it. Thank you, guys.

Your next question will come from the line of Brandon Couillard with Jefferies. Please proceed with your question.

Hey, thanks. Good afternoon. Just a couple for you, Sean. In terms of pricing for the year, should we think about that as being fairly similar between lab and industrial, or is it more weighted towards one segment or the other? And secondly, in terms of the gross margin outlook, is your expectation that kind of the material and transport headwinds fade by the second half, or is that still a drag on the gross margin line?

Yeah, hey, good question, Brandon. Hey, so in terms of pricing, you know, probably slightly better on the lab side than on the industrial side. And if I just think about the portfolio, but of course, you know, I think we'll have good price increases in both divisions. In terms of material costs, You know, I think we'll certainly see a drag, you know, probably through certainly in the first half of the year. Probably I'd like to think by the time we get to Q4, you know, we're not going to see a drag. And so hopefully there's a little bit of a benefit by the time we get to the fourth quarter. But I wouldn't count on too much right now until we we see things play out.

And that's true for both. That's true for material, but also transportation. We don't think that will ease up before the second half.

Yeah.

Gotcha. That's helpful. And then just one follow-up on China. In the fourth quarter, could you break out the lab versus industrial businesses for the fourth quarter and kind of what you're assuming for the 22 within China?

Yeah, sure. So our lab business in the fourth quarter is grew in about high 20s. And then our industrial business in the quarter grew mid-single digit. And, you know, kind of for the full year, you know, we're expecting lab to be probably like low double digit. And then with industrial, probably like mid-single digit.

Thank you.

You're next. Your next question will come from the line of Catherine Schulte with Baird. Please proceed with your question.

Hi, thanks for the questions. I guess first, you mentioned consumables and services were up 10% in the quarter. How sustainable do you think that growth is going forward, and what's your expectation from those categories in 2022?

Very good question, Catherine. Thank you. Look, I think we have very good potential in consumables and services. In services, of course, we're also going after our install-based, making sure that those customers who do not have their products on the contract can also switch to contract because it just gives them a more reliable service pattern overall in terms of early maintenance, et cetera. The 10% we have seen was definitely very strong in Q4, I would say, My expectation for services is it maintains the high single digit range for 2022. It's a very profitable business for us and we are putting a lot of emphasis on making sure that our customers understand the benefit of our services and we're broadening the service offering over time. So I think this has quite some runway.

Yeah, hey, Catherine, maybe one additional comment on the consumables is, of course, we won't have the benefit of the COVID testing that we've had in the past, so that could be a little bit of a headwind.

Yeah, okay, got it. And then in pharma and some other industries, we've seen a bigger push for onshoring and creating redundancy in supply chains as COVID has played out. Where do you think we are in terms of that phenomenon and capacity buildup? I'm just curious. How much longer do you think that could continue to be a tail end for the market?

I think it will probably continue as it played out in 2021 and 2020 into probably the next one or two years. That's what we are seeing at least from some of the counts that we are closely monitoring. And I think it's not only pharma, by the way, we see also some very good momentum in semiconductor, where the big facilities coming up now in the United States, where a lot of core facilities are coming back to the United States, which is also very good business for us. So I think that, again, that will continue from our perspective at least through 2022, maybe also 2023. It's definitely some good tailwind.

Great, thank you.

Your next question will come from Lou Lee with Wells Fargo. Please proceed with your question.

Thank you for taking my questions. I just want to follow up on the pricing. I think you mentioned 3.5% or even close to 4% for this year. Do you hear any pushback from customers? And then does that impact your ability to further increase the pricing for next year?

Yeah, hey, so, yeah, hey, just to clarify, so I said our guidance previously was three, and we're kind of like thinking it's about 3.5% or so for the full year, but we wouldn't be surprised if we're in the 4% kind of a range in the second half of the year. You know, we continue to feel good about our ability to, to pass on price when we need to, when we face these inflationary challenges. And I think we'll continue to do that as market conditions change.

Got it. Another question on the 7% growth guidance. Does that change your long-term growth outlook? Like should we think about like 7% going forward?

Very good question. Maybe I start with some backdrop. We believe we have strengthened our competitive position throughout the pandemic and tend to believe that we are coming out of COVID stronger. We have a very strong foundation across many businesses. We have market-leading positions. We have an excellent product portfolio and a global service network. I think we are able to adapt our sales and marketing tools and techniques to the new environment And as a result, we continue to gain share, as we mentioned many times, despite the challenge in these environments. Our markets nicely rebounded in 2021 and have worked very effectively to capitalize on this growth. Now, looking forward, I still think you should think about us as a mid-single-digit growth on an organic basis in the midterm. That's about the dimension that we also think about it. It, of course, will depend on how the underlying market performs. If it goes back to where it has been pre-pandemic, I think that's the wide range we are thinking right now. Of course, if there is momentum in the market, we will, again, our goal is to grow above our underlying market. But I would like you to think still in mid-single digits

Got it. That's very helpful. Thank you.

At this time, there are no further questions in queue. I would now like to turn the call back over to Mary Finnegan for any closing remarks.

Thank you. And I just have two additional comments before I let you go for the night. First, we anticipate holding an investor meeting at our facility in Boston on Monday, November 7th. We'll come back to you with more details in the coming months, but wanted to mention it to you now as you plan your calendars for this year. Hey, second, we are happy to announce that Adam Ullman has recently joined our investor relations team. He was formerly a senior equity research analyst at the Cleveland Research Company. Adam will take over the lead in investor relations later this year as I will retire towards the end of 2022. It's great to have Adam on board Please join me in welcoming him, and I look forward to introducing him to you in due time. For the time being, please continue to direct your investor relations matters to me. As always, if you have any questions, please don't hesitate to reach out. Take care, everybody. Bye-bye. Bye-bye.

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