Mettler-Toledo International, Inc.

If you would like to withdraw your question, press star 1 again. At this time, I would like to turn the conference over to Adam Ullman, Head of Investor Relations. Please go ahead.

Thanks, Audra. And good morning, everyone. Good afternoon from Switzerland. Thanks for joining our call today. On the line with me is Patrick Kaltenbach, our Chief Executive Officer, and Sean Vidal, our Chief Financial Officer. Let me cover some administrative matters. This call is being webcast. and is available for replay on our website at mt.com. A copy of the press release and the presentation that we will refer to today on the call is available on the website as well. This call will include forward-looking statements within the meaning of the US Securities Act of 1933 and the US Securities Exchange Act of 1934. These statements involve risks, uncertainties, and other factors that may cause our actual results, financial condition, performance and achievements to be materially different from those expressed or implied by any forward-looking statements. For discussion of these risks and uncertainties, please see our annual report on Form 10-K and our 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 statement except as required by law. On today's call, we might use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in the 8 and is also available on our website. Let me now turn the call over to Patrick.

Thanks, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our fourth quarter financial results, the details of which are outlined for you on page three of our presentation. As previously announced, the transition to a new external European logistics service provider significantly impacted our fourth quarter results, which we expect to largely recapture in the first quarter. Excluding the impact of these delayed shipments, our results were in line with our previous expectations. Market demand has remained weak in China and across our core end markets of pharma and biopharma, fruit manufacturing, and chemicals, but also does not appear to have deteriorated further. Looking forward, we expect market conditions to remain soft in the first half of the year, and we would then expect our sales return to growth in the second half of the year as we begin to let easier comparisons. We are focused on the things we can control, including increasing our competitive advantages through innovation and continuous improvement of our corporate programs in nurturing our unique global culture. I'm confident these actions will drive market share gains and help us emerge stronger in the market recovery. Let me now turn the call over to Sean to cover the financial results for the quarter and our guidance for the year, and then I will come back with some additional commentary on the business. Sean?

Thanks, Patrick, and good morning, everyone. Sales in the quarter were $935 million, which represented a decrease in local currency of 13%. On a U.S. dollar basis, sales declined 12% as currency increased sales growth by 1%. On slide number four, we show sales growth by region. Local currency sales declined 7% in the Americas, 16% in Europe, and 18% in Asia, rest of the world. Local currency sales in China declined 23% in the quarter. Excluding the impact of the previously disclosed shipping delays related to a new logistics provider in Europe, we estimate our sales in Q4 declined about 7%. With the Americas down approximately 3%, Europe down approximately 6%, and Asia down approximately 14%. On slide number five, we show sales growth by region for the full year 2023. Local currency sales declined 3% in 2023, with sales in the Americas down 1%, Europe down 2%, and Asia, rest of the world, down 5%. Local currency sales decreased 10% in China for 2023. Excluding the logistics headwind in Q4, we estimate our full-year sales declined approximately 1%, with the Americas flat, Europe up 1%, and Asia down 5%. On slide number six, we summarize local currency sales growth by product area. For the quarter, laboratory sales decreased 18%, and industrial decreased 8%, with core industrial down 6%, and product inspection down 10%. Food retail grew 9%. Service sales grew 6% in the quarter. Excluding the logistics delays, we estimate laboratory product sales declined approximately 11%, Industrial declined 5% with core industrial down 2% and product inspection down 10% and food retail grew 17%. The next slide shows local currency sales growth by product area for the full year 2023. Laboratory sales decreased 7% and industrial sales declined 1% with core industrial down 1% and product inspection flat. Food retail increased 27%. Service sales grew 10% in 2023. Excluding the logistic delays, we estimate laboratory product sales declined approximately 5%. Industrial was flat across both core industrial and product inspection, and food retail grew 29%. Let me now move to the rest of the P&L, which is summarized on slide number eight. Gross margin was 59%. a decrease of 80 basis points due to our lower volume, offset in part by positive pricing in our cost savings initiatives. R&D amounted to $46.4 million in the quarter, which is a 3 percent decrease in local currency over the prior year. SG&A amounted to $223.4 million, a 4 percent decrease in local currency compared to the prior year, and benefits from our cost-saving initiatives and lower variable compensation. Adjusted operating and profit amounted to $281.8 million in the quarter, a 21% decrease. Adjusted operating margin was 30.1%, which represents a decrease of 380 basis points from the prior year due to our decreased volume. A couple of final comments on the P&L. Immunization amounted to $18.1 million in the quarter, interest expense was $19.7 million, and other income amounted to $1.6 million. Our effective tax rate was 19% in the quarter. This rate is before discrete items and adjusting for the timing of stock option exercises. Fully diluted shares amounted to $21.7 million, which is approximately a 3% decline from the prior year. Adjusted EPS for the quarter was $9.40, a 22% decrease over the prior year. On a reported basis, EPS was $8.52 as compared to $11.86 in the prior year. Reported EPS in the quarter includes 23 cents of purchase intangible amortization, 49 cents of restructuring costs, and a 16-cent tax headwind from the timing of option exercises. The next slide illustrates our year-to-date results. Local currency sales declined 3% for the year Adjusted operating income decreased 3% or flat, excluding unfavorable foreign currency, and our adjusted operating margin was flat at 30.4% for the year. Adjusted EPS declined 4% in 2023, excluding the impact of unfavorable currency for the year. Adjusted EPS declined 1%. That covers the P&L. Let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $260.1 million, a conversion of approximately 130 percent of adjusted net income due to favorable working capital. In 2023, free cash flow was $908 million, up 20 percent over last year on a per-year basis due to the reduction in working capital with a conversion of approximately 109 percent of adjusted net income. Let me now turn to guidance for the first quarter and for the full year. First, while we are extremely disappointed by the shipping delays in the fourth quarter from our third-party logistics provider, we have seen good momentum so far this year in catching up on these delayed shipments and continue to expect to largely recover them in the first quarter. Secondly, given the soft trends across most of our core end markets in the global economy, We expect our customers to be cautious with their investments to start off the year. We're also closely watching events in the Middle East and other potential impacts the war could have on logistics and other costs for our suppliers and customers. Lastly, as a reminder, we have implemented many cost savings programs during the second half of last year to mitigate the impact of lower demand. We continue to expect to maintain and add to these savings in 2024 but also face headwinds from resetting variable compensation programs and inflation. Now turning to our guidance. For the first quarter of 2024, we expect local currency sales to decline approximately 4 to 6 percent. This forecast includes an approximate 5 percent benefit from the delayed shipments in the fourth quarter. We expect adjusted EPS to be in the range of $7.35 to $7.75. Currency at recent spot rates for the quarter would be less than a 1% headwind to first quarter sales, but a headwind to adjusted EPS of approximately 4%. For the full year 2024, we expect local currency sales to grow approximately 1% to 2%, which is up from our previous guidance of approximately flattish to reflect the shift of our delayed shipments from our European logistics hub from Q4 into Q1 of this year. We expect full-year adjusted EPS to be in the range of $39.60 to $40.30, which compares to our prior guidance of $39.10 to $39.80. This includes an expected headwind to adjusted EPS growth of approximately 2% from unfavorable foreign exchange. Lastly, I'll share a few comments on our two 2024 guidance. We expect total amortization, including purchased intangible amortization, to be approximately $73 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $26 million on a pre-tax basis or 99 cents per share. Interest expense forecast at $84 million for the year and other income is estimated at approximately $3 million. We expect our tax rate before discrete items will remain at 19% in 2024. We expect free cash flow of approximately $850 million, representing a conversion of approximately 100% of adjusted net income. We continue to expect share repurchases of approximately $850 million in 2024. That's it from my side, and I'll now turn it back to Patrick.

Thanks, Sean. Let me start with some comments on our operating businesses, starting with lab. As we had expected, demand trends across most of our lab customers remained weak in the fourth quarter, especially pharma and biopharma. Sales declined across most product categories, and we continue to see soft demand across all geographies, especially in China. While market conditions have been weaker, we continue to focus on the things we can control, which includes bringing new innovations to market enhancing our sales and marketing programs, and expanding our service offering and capacity. This past year saw the launch of many exciting new and upgraded products. We are excited about our innovation pipeline, and we believe organizations that maintain their growth investments during market downturns will emerge even stronger during recovery periods. Our investments have had a particular emphasis on supporting our customers' needs for laboratory automation and data integrity requirements, which we are confident will be a significant driver of continued market share gains going forward, and we are excited to share with you additional developments over the coming months. Switching to our industrial business, sales for the quarter were in line with our previous guidance despite the headwind from delays of our European logistics hub. Core industrial demand in the Americas and in Europe has been relatively resilient this past year despite declines in purchasing manager indexes. We continue to see solid interest from customers looking for advanced automation solutions, and we expect to benefit from customer investments in onshoring and nearshoring over the coming year. Regarding our product inspection business, We have seen weak food manufacturing customer demand in Europe and soft demand in the Americas. We continue to target faster-growing segments and have a focus on engaging new customers with a refreshed portfolio of innovative solutions. Lastly, food retail results were very strong, excluding the negative impact from our European logistics hub. We had solid performance for the year due to strong project activity particularly in the Americas. Now let me make some additional comments by geography. Sales in Europe, excluding the estimated impact from our European logistics hub delays, were softer than we had expected, following resilient performance for much of the year. As mentioned earlier, the demand from European food manufacturing customers weighed on our product inspection business. Additionally, We also saw soft but unexpected demand from our lab and core industrial customers in the quarter. We remain cautious on the outlook for Europe due to low PMI readings in the region, the continuing war in the Ukraine, and the potential for additional impacts for the economy from the conflict in the Middle East. Turning now to the Americas. Our results for the quarter excluding estimated logistic headwinds were slightly better than we had expected due to steady core industrial demand and robust food retail growth. Going forward, we are well positioned to capture increased demand from emerging growth industries and onshoring activities. Finally, Asia and the rest of the world results were slightly better than we had expected as our core industrial sales declines in China were less than we had anticipated. Pharma and biopharma demand in China has remained very weak, and we continue to expect reduced demand for the first half of the year. Our team is doing an excellent job adjusting to the current market conditions. We are confident in the long-term growth opportunity for our business in the region. That concludes my comments on the fourth quarter results. Now I'd like to share with you some deeper insights on the next wave of sales and marketing initiatives we have introduced to our Spinnaker program and a few examples of enhancements that are on the way. To start, and as a reminder, the significant diversity of our business and the fragmented customer base means we need to set a set of sophisticated tools, analytics, and processes to identify prioritize and pursue the most attractive and profitable growth opportunities for our sales teams, with a specific focus on new customer opportunities and cross-selling opportunities within our existing customers. Spinnaker is our global excellence program in sales, service, and marketing that enables us to drive sales growth and gain market share. Continuous improvement is an important part of our strategy and culture, and it is very much at the heart of our Spinnaker program. We constantly enhance and refine our initiatives, releasing new waves of enhancements to the program periodically that builds on previous waves of initiatives, reinforcing our strong foundation and increasing our competitive advantages. We are currently launching the sixth wave of Spinnaker, which is focused on leveraging new possibilities offered by digitalization of processes and further enhancing the customer experience. I'd like to share with you some tangible examples of the initiatives we have on the way. Starting with our digitalization efforts, this year we are making multiple improvements to our top K in Salesforce guidance programs. As a reminder, in addition to generating sales leads for our various marketing activities, Our Top K program provides our field teams with tailored and actionable investment alerts about specific sales opportunities that are generated by proprietary data analytics and deep learning software solutions, leveraging external data sources and our own internal databases. These sales opportunity alerts are created fully automatically, qualified, and are fed into our CRM. In addition to expanding our Top K program to more areas of our business, this next wave of Spinnaker features a significant expansion of data sources to feed our big data warehouse, enabling Spinnaker to provide intelligent prioritization of target sites for our field sales teams. This also enables real-time smart profile reports to ensure timely follow-up and the most accurate background of potential customers including data on the digital engagements with us. Other improvements include expanded capabilities to optimize and prioritize our marketing activities, including campaigns for replacing aging equipment across our installed base. This wave of Spinnaker also features additional big data capabilities to support our sales team cross-selling efforts. With each of our product categories having their own dedicated sales specialists, cross-selling is a very important growth opportunity for us because leads generated by colleagues in other product areas have high conversion rates. Today, our cross-selling penetration to existing customers is still rather low, but big data analytics across our CRM and various processes is helping us unlock sales leads across our businesses, including from our service teams, and Spinnaker is an excellent tool to help provide additional transparency on these sales opportunities. Now, from a customer perspective, we are also advancing several important enhancements to Spinnaker to improve our customer experience. We have previously focused on increasing our digital connectivity with our customers. However, We now see additional opportunities to provide advanced platforms that will create impactful experiences that further strengthen our customer relationship and overall value proposition. Examples include offering customers the ability to gain deep insights across their installed base of MetaToledo instruments, be it access to calibration certificates or known last service dates or contract coverage or renewal agreements. We have also enhanced our integration to do customer systems to streamline the entire procure to pay process. By offering various levels and types of integration from punch out to order and invoice integration, we aim to increase productivity and drive process efficiencies for our customers. We already receive about 40% of our product orders, mainly consumables and less complex products through digital interfaces today. providing a seamless and efficient buying experience for our customers. Our customer portal allows customers to browse personalized product catalogs, review real-time inventory levels, and manage orders all in one place. Our end-to-end order management systems include efficient tracking and management of both online and offline orders, and includes an intuitive product selection and configuration process. For less complex products that do not require support from our specialists, customers can easily find specific products and use our smart configuration tool to simplify their ordering. One element of the next wave of Spinnaker includes improving the order process by leveraging new technologies to facilitate assisted experience with a MetaToledo expert. This includes enhanced chat functionality, click to book a meeting, with a tele-sales representative or digital sales rooms that automatically guides customers through the product selection process and provide them all the information they need at any time to make an informed decision. For more complex solutions, in addition to providing on-site demonstrations of our instruments, we also provide virtual demonstrations of customers that are very effective. As part of our continuous improvement, We have revamped the studio setups of our virtual demos, making it more efficient and focused, significantly reducing preparation time by curating a series of demonstration menus based on customers' most frequently asked questions. This helps to deliver a comprehensive demo that addresses customers' questions in a very concise way. Customers have already reported an enhanced experience, gaining a deeper, more intuitive understanding of our instruments, and our representatives find it easier to showcase our product features, and it makes technical details more accessible and digestible with this new approach. Lastly, to ensure we are meeting and exceeding our customers' expectations through every step of their journey with our sales teams, we have also begun to implement customer feedback loops and net promoter scores for product sales. in addition to what we are already doing or what we already do for our service teams. This has proven to be a very effective source of opportunities for process improvements, and we expect improved results with our expanded program. So, I hope these few examples give you a flavor for the much broader set of new initiatives that are underway with our new spinnaker program. We believe they will continue to expand our sales and marketing lead over our competition and ensure our teams are spending the time with the most attractive opportunities and optimize our win rates while further strengthening our customer relationship. So that is the conclusion of our prepared remarks. Operator, I'd like now to open the line for questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll go first to Jack Meehan at Nefron Research.

Thank you. Good morning. Sean, just wanted to start. It would be great to get your forecast by segment for the first quarter and for the year.

Yeah, sure. So let me start with The lab business, so we expect lab in Q4, I mean, I'm sorry, in Q1 2024 to be down low to mid single digit. And for the full year, we expect it to be up low single digit. For core industrial, we expect Q1 to be down mid single digit. And for the full year to be flattish. Product inspection, we expect to be down mid single digit for Q1 and for the full year, flattish. And then retail, we expect to be down about 10% in Q1 and for the full year, down mid to high single digit. And then if we look at the geographies, we expect the Americas to be down low single digit in Q1 and then for the full year, up low single digit. We expect Europe to be up low single digit in Q1 but in up low to mid single digit for the full year. We expect China to be down low to mid 20s in Q1 and down high single digit for the full year. Excellent.

And then just as a follow-up, what does your first quarter guidance assume for EBIT margins? And can you just walk us through like the pacing throughout the year, what kind of bridges to the full year forecast?

Yeah, sure. So in the first quarter, I mean, of course, the first quarter, we're going to have a significant volume decline in the first half of the year. So for the first quarter, we're going to be down over 200 basis points, probably in like the 230, 240 kind of basis point range. Now, it's important to understand, too, like currency has a pretty big effect on the first quarter. So it's probably like 100% negative headwind to our margin. in the first quarter. And I think we called out in the press release a 4% headwind to earnings per share. But that's going to change quite a bit as we get into the second half of the year, especially the fourth quarter. And so for the full year, we're looking at the operating margin to be up in the kind of like 30 bps kind of a range. And if you exclude currency, it's probably in like the 70 plus kind of bps kind of a range. Super. Thank you. Yeah, welcome.

We'll move to our next question from Dan Arras at Stiefel.

Hi, guys. Thanks for the questions. Sean, maybe just going back to the guide, if you take out the $58 million and you add it to 2024, it does get you to that upper point or two that you're guiding to. But in order to have the dollars be the same, it seems like the outlook would need to be for three points or so of growth. Is there something else that's amounting to a partial offset? How do you see the outlook now versus last quarter when you exclude the logistics issue?

Yeah, hey, Dan, it's a fair point. Like, as you mentioned, we built the, we expect the shipping delays to largely, you know, benefit the first quarter of this year. And so we acknowledge there's upside to the full year guidance because in addition to that benefit, There's also like a growth rate benefit as we get to, you know, to the end of the year in the fourth quarter, you know, given the base that we're kind of growing off of. But, you know, when we kind of step back from all that, we just kind of felt like it's still very early in the year. And while we're not seeing anything new in the business, I mean, you know, Patrick talked about in the prepared marks that, yes, there's still challenges in the market, but just want to confirm we're not seeing anything new at this point, but it's still early in the year. We just prefer to be a little bit cautious, given various uncertainties and the back weighting of the year. But, you know, when we look at the second half of the year, we still feel good. You know, we feel like we're really well positioned for the second half. You know, we talked about some of these new product launches in the prepared remarks. We have a lot of really exciting programs that we're launching. I mean, we spent a little bit of time talking about Spinnaker 6 in the prepared remarks, but there's other corporate programs that we're working on as well. So we feel like we are well positioned for the second half. And just acknowledge, I think there's a little bit of upside. Yeah, we're being a little bit cautious as we start the year, but we just want to see how things play out a little bit.

Okay. So just to be clear here, you're not passing along the full amount of the logistics offset, but you also don't see anything in the end market makeup that has you feeling less confident than before, or that has you looking for less growth than before. Is that a fair summation? Yeah, I think that's fair. Okay. And then just as a follow-up, maybe from an end market standpoint, it would be great if you could just give any color you could on the degree to which sentiment on China has changed in the quarter versus last quarter. Maybe it hasn't at all, but it would be good to get sort of an updated view on the word on the street when it comes to ground level conversation, thoughts on rebound, et cetera.

Yeah, I'll take that. Look, Sean and I have been in China in December, and of course, we have continued conversations with the local team there, with the sales management team, to see if there are any changes. I would say China at the moment is still quite weak, especially in pharma, biopharma, but from our perspective, the situation has not deteriorated from what we reported on at the JP Morgan conference. Clearly, they have seen still facing many headwinds. There has been very significant spending and growth during the COVID period. But right now, we are facing a situation where there's a lack of stimulus from the government. There's a lot of uncertainty still there. There is some reduced foreign investment as well. So overall, a weak economy that is focused on stabilizing the real estate market, and I think that in itself leads to just also softer demand at the moment but overall it hasn't changed as i said in my in my comments core industrial has been actually a bit better than expected in q4 but we remain a bit cost on our outlook still in the first half of 24 and there is um the second half will be easier for us because we have much easier compares as a reminder we had We have been down 25% in Q3 last year, 23% in Q4 this year. We told you that the first half will be down, so the second half will be now, for us in 2024, will be an easier compare. I think we have a lot of good strategic drivers there. We have a very strong team, and we are confident that we will be able to continue to gain market share with our programs, our products that we have there. And there's also long-term that the market in China has, as we told you before, has high single-digit growth opportunities.

Okay. Thank you, guys. Yes, thanks.

We'll go next to Derek DeBrun at Bank of America.

Hi. Good morning. Thanks for taking my question. So can you talk a little bit more about what you had to do to sort of like fix the logistical issues and what your third party is and I guess just, you know, are Are you confident that these are not going to be it with that? And you made some sort of allusion to or comment about the Middle East. Are you seeing, you know, I mean, what do you think is really sort of the risk there? I mean, I don't think you ship much through the Red Sea, but can you just sort of talk about sort of like what you've done to sort of ameliorate and fix some of the issues around that? Thanks.

Yeah, hey, Derek, maybe I'll start off. So maybe I'll start off with the latter part of the question with the Red Sea and the Middle East. I mean, of course we do. you know, have things coming from Asia that are on, you know, that are on boats and ships, you know, going through the Red Sea. So we will have higher freight costs, you know, a little bit as we kind of go into this year. But I think the bigger thing is really what does that mean to our customers? You know, it's not really directly related to us, as you say. It's really about what does it mean to our customers. So I think there's still an unknown there. You know, I know, especially in Europe, there's been a lot of sensitivity around, various inflationary topics over the last couple of years, whether it's all the geopolitics that have put pressure on energy costs or whether it's just inflation in general. This is just another thing kind of in the mix. In terms of our business, just to be clear, you're right, we don't sell very much at all into that region, so it's not a direct impact at all. In terms of what are we doing to improve the logistical situation, Patrick, did you want to take it?

Sure, I can take it. We are making, actually, we're quite pleased with the ongoing progress that we're making, and we are also expecting really to work down the backlog during Q1. We have a lot of our own experts there on site as well to help the local management team of our service partner there to get all the processes in place and stabilized, which have been the issue during Q4 when we transferred the full 100% of the volume from our former logistics provider to this new logistics provider. There are a lot more comprehensive processes involved on site there, like mini finish processes, et cetera. And they can be brought our expert there, our experts there to help them understand these processes, building up capacity and making sure that everything from product into the logistics center to product out of logistics center, that process flow is stable and really matching the volumes that we are expecting. As I said, we're making good progress there. We expect the backlog to go down and having a more stable operation clearly at the end of Q1. And while it still might maintain some more oversight from us during the next couple of quarters, we are confident that this is a very good logistics part of moving forward and that they can deliver the performance that we expect from them.

Got it. And then just one follow-up. Are we done with the – I mean, where are we on the stocking issues and pipette tips and sensors and all that? Can you just sort of like give us an update? I mean, do you still have – Is there still waiting for customers to burn down inventory?

Yeah, I'll start with it, and Sean, feel free to chime in. When you mentioned pipette tips, I think we're done with the pipette tip stocking issue. And the reason why I'm saying that is that we see now more normal order patterns. I mean, customers are ordering more frequently, not at very high volumes, but the order pattern is back to normal. So while the volume is still a bit lower, then during or still lower than during the pandemic, the frequency of orders has normalized. And that, for me, is an indication that the overstocking of is behind us. We still are working down or our customers are working down some inventory more on the process and on the expenses with the sensors they have ordered, mainly also in the biopharma area. And we expect that to remain through Q1 and Q2. And then by the end of Q2 or towards the second half of the year, that's at least what we're hearing right now from the channels. They should also have worked off that inventory as well.

Thank you.

We'll go next to Joshua Waldman at Cleveland Research.

Patrick, I wondered if you could give an update on just how you perceive visibility in the business. Has visibility improved or deteriorated over the last 90 days? I guess you commented that market conditions seem to have stabilized or are not getting worse, but maybe also mentioned seeing a softer start to the year. Can you just kind of unpack what you're seeing there?

Sure, absolutely. And again, I'll probably give you some insights into the different regions, but also the different end markets. So what we're seeing is A lot of very good activity out there, meaning customers are really interested, especially in the new products that we have launched over the last year, and that's why we are so excited about the future. There is good customer engagement. We have a lot of discussions. Still, it takes longer than normal to close the opportunities to orders, and that's also a sign that our customers are still reluctant to really spend the budgets that they have now at hand, or maybe they have some reduced budgets. really very good activity. And if I look into the leads and the funnel that we have, the opportunities, I think we are quite positive about the momentum we are seeing there. But, and we don't see any further deterioration from what we had seen last year. So, that's why we position in saying, hey, the underlying market conditions haven't deteriorated further, whether it's in the pharma, biopharma market where it's still soft, whether it's in the industrial space, where we see actually a very good demand for industrial automation and digitalization efforts, and we have a great portfolio there as well. We saw a bit softening, especially in Europe, on product inspection throughout Q4 and also now starting into Q1, and that's largely in Europe, and it's big demand. customers in the food area that are still holding back budgets. They have projects, but they are not ready to spend the money yet. And I think that's also based on the fact that they are under pressure. I mean, if you read the news, you hear a lot of news about these packaged food customers that are also under pressure with reduced profits and bigger demand as well. But otherwise, I would say markets are stable. The regions have developed as we expected it, and China, I outlined already, the U.S. could demand, and Sean has outlined the growth for the year for the different regions as well. The EU is a bit softer at the moment. It was very resilient last year. At the moment, it's a bit softer than you have seen it last year, especially in Germany.

Okay. Okay. Thanks for that. And then, Sean, for the follow-up, I wondered if you could walk through the moving pieces on the 24 EPS raise. You know, how much of the raise was from the shipping-related revenue push-out versus, you know, other inputs like FX and maybe margin? I guess the impetus of the question is you missed the Q4 guide by, call it, $1.20. Shouldn't that have been added to the 24 guide, or were there other moving pieces that were missing?

Yeah, it's very, very much related to how we position sales. I mean, you know, like, you know, and I think I go back to, you know, Dan's question towards the beginning, you know, it's very much how we position our sales guidance. I mean, in terms of, you know, margins and costs, I mean, there's, of course, some moving pieces, you know, within there. There's, you know, a couple nits and nats, you know, but I'd say In the end, I feel like the margin is actually, you know, I feel good about our margin guidance for the year. I mean, I think we'd already mentioned it earlier, but, you know, for the operating margin should go up about, you know, 30 basis points on a full year basis. And if you exclude currency, you know, it's up probably about 70 basis points. So, Josh, I kind of go back. It's very much to how we were thinking of a reflection of how we guided on the top line.

Okay, thanks, guys.

Yep.

Next, we'll go to Vijay Kumar with Evercore ISI.

Hey, guys, thanks for taking my question. A couple of guidance questions. Your Q1 minus 6 to minus 7% guidance, like if I go back to Q4, you know, pre-logistics, I think the guide was minus high single, and if you resume, the first half of 24 to be similar to last year. One would have assumed Q1 to be down high singles, but now given the timing of these logistic push out, the revenues push out, shouldn't Q1 have been a little bit better than the minus six to minus seven? I'm just trying to think about the year on year versus the sequential cadence and how you're looking at Q1 guidance.

Yeah, sure, Vijay. I'm happy to answer that one. So, hey, just to clarify, our Q1 guidance in constant currencies is minus 4 to minus 6. So it's minus 4 to minus 6. And as we mentioned, there is about a 5% benefit here from the shipping delays, which I can understand asking a question about that. But I think there's also a few things that are very important to our first quarter. The first one is that comps really do matter. You know, yes, Q1 was our strongest quarter last year. We grew 7%, but I think it's important to kind of go back to the couple of years before that, like what we're growing on top of, and we're really cycling a very difficult multi-year comparison. You know, if you kind of go back, we grew 14% in Q1 of 2022, and that was on top of 18% growth in Q1 of 2021. So I think it's hard for us to, you know, ignore that, you know, as we're looking at the first quarter here. You know, China, of course, we were, you know, we were happy that it came in a little bit better than what we expected if you excluded the effect of the shipping delay. But nonetheless, you know, it's still down over 20%. And as we kind of like look here at the first quarter, you know, we have 20% of our business kind of down low to mid-20s in the first quarter. So that's another thing that's a bit on our mind. And again, that's a bit of a comparison topic as well as kind of like this resetting that's going on in the country. But just to be clear, we're not seeing anything new in our end markets, but we do assume that customers here are going to likely start the year a bit more cautious with a more normalized budget flush at the end of the year. But, of course, we acknowledge it's early. It's difficult for us to tell at this point in time. March is a very important month in the first quarter, but that's kind of how at least we were thinking about Q1 at this point in time.

Understood. And then one on what's being assumed for share count, share repurchases, and is free cash conversion expected to be similar to fiscal 23?

Yeah, so our share buyback assumption is $850 million, which I think is the same or similar number as we're thinking free cash flow for this year. And that's also assuming, you know, plus or minus right around 100% free cash flow conversion. So we're really happy with the focus around the company on cash flow. I mean, it's something we always like to focus on and very, very pleased with the teams around the world, all the the efforts on working capital and all the other things that go into efficient end-to-end processes that can drive an order-to-cash cycle. So it's something we're going to continue to focus on this year.

Understood. Thanks, guys.

We'll take our next question from Dan Leonard at UBS.

Thank you. Two questions. First off, what was the pricing benefit in Q4 and what is your outlook for 2024? Yeah.

So for Q4, we came in pretty much as we expected. It was about 4%. That put us on a full year basis in 2023 at about 5%. And as we kind of mentioned in previous quarters, we were benefiting a bit in the first half of the year from some pricing actions that we did in the second half of 2022. But we're very pleased with how things came together this year. I think, you know, it really shows the value proposition that we have to customers. I feel, I've said it many times, but I do feel like our value proposition has very much increased over the last few years, especially as the markets have moved towards the topics like automation and digitalization. It really plays to a lot of the the strengths of our portfolio that can provide tangible paybacks to customers. All the things that we're doing from an innovation perspective also will really help fuel that going forward too. So that's something that we feel good about. And then in terms of 2024, we're consistent with how we were thinking about pricing with our earlier guidance for the year. And we're expecting price realization to be around 2%.

I appreciate that. And my follow-up, I'm curious on your outlook for pipette tips and really any other part of your business that suffered from destocking. Does growth normalize back to trend or is there an above trend growth period since your comping and inventory burned down?

No, I mean, I'll start and let Patrick jump in if he wants to. You know, I think that the challenge with pipettes right now is that there is just weak market demand in general. You know, like we don't have at Mettler Toledo a significant exposure to early research or to biotech R&D, but we certainly do in pipette tips. And so we're not immune to those trends right now at the moment. So there are softer market conditions there. But I think, you know, I think we're more optimistic as we get into the second half of the year. As Patrick mentioned, ordering patterns are looking a little bit better as well. And, you know, just similar to my comments on innovation, we have, you know, we have a couple things. there as well, too, that, you know, we were actually out at our facility, you know, recently last month and, you know, it was really fun to spend some time with the team there and look at some of the things they're working on. Some of them are more medium term, but some of them are things that we have in the market this year.

Thank you.

Yeah, welcome.

We'll move next to Matt Sykes at Goldman Sachs.

Good morning. Thanks for taking my questions. Maybe just the first one, just going back to the logistics issue, you outlined the revenue impact, and that seems isolated to Q1. Could you maybe talk about any cost implications that could bleed into Q2? My understanding is there had to be some temporary changes in how things were being shipped out of Europe, and I'm just wondering if there are any lingering costs that could impact margins in Q2 or beyond.

Yeah, I mean, of course, there's some incremental costs associated with it. A lot of the costs are really opportunity costs because we're allocating resources to support the transition. I mean, the incremental travel costs, those things are less of an issue. Yes, there's some higher transportation costs, but when you step back from it, I'd say it's not overall significant. you know, to our overall financial statements and certainly something we kind of considered as we provided guidance here for the first quarter.

Got it. Thanks for that. And then just on Europe, you've talked pretty cautiously about it, but I still think, unless I misheard, that you're expecting positive growth this year. Can you maybe just talk about sort of your cautious comments versus sort of the growth that you're expecting this year in Europe and what's driving that?

Yeah, hey, that's a good question. You know, Europe, of course, is going to benefit the most from the shipping delays. So, I think if you exclude that, you know, you get to a different answer. And it's probably, you know, if you take the fact of the Q1 and if you also look at maybe the easier comp in Q4, you know, Europe's probably more flattish on the year if you exclude those two things. So, so it's marginally a bit softer than what we were originally expecting. But we'll caution again. It's early in the year. It was softer in the fourth quarter than we expected. A lot of it had to do with product inspection, as Patrick mentioned. But we did see just generally weaker market conditions. We've been very pleased with how resilient Europe was in 2023. You know, if you would have asked us a year ago out of the major regions of the world, we would have probably expected things to be a little bit softer there, just given all the concerns with the energy crisis and what that impact might be to our customers. So we're very pleased with how the business performed in 2023. But, you know, just sitting here today, we're just a little bit more cautious on it. Got it. Thank you very much, Sean. Yeah, you're welcome.

We'll go next to Catherine Schulte at Baird.

Hey, guys. Thanks for the questions. Maybe first just on the revenue guide, I get that you want to leave a little bit of a cushion given where we are in the year, but if we looked at your outlook by segment, excluding the shipping delays, I guess, which segments are you baking in some extra conservatism into?

Yeah, good question. I'd say, you know, PI, you know, and I guess you can see that one because it doesn't have as much of an impact, if any, you know, from the shipping delays. So, I think we were saying that was up slightly the last time we guided for the full year, and this time we're saying it's flat, you know, about flattish. And then, you know, this comment on Europe, you know, Europe is is is a little bit lighter than what we would have guided before and then when you kind of break it into divisions it kind of trinkles into to lab a little bit and so so lab might be excluding the shipping delays more instead of staying up slightly it's probably more more flattish okay got it and then maybe on the margin guide what should we be expecting for gross margins for the first quarter in the full year yeah for the first quarter um we should be down about 40 basis points. And there's a lot of currency in the margin in Q1. So if you excluded the currency, it would probably be up about 20 bps. And then if you look at the full year for gross margin, we'll be up, you know, our estimate is we'll be up around 50 basis points. And again, currency has an impact on that. So if you excluded that, it would be up probably more like 90 bps.

Great. Thank you. Yes, thanks, Katherine.

We'll go next to Rachel Vestal at JPMorgan.

Perfect. Thanks for taking the questions and good morning. So you mentioned that you're expecting customers to be more cautious with investments starting off the year. We've heard this from some of your peers as well. So can you just dig into what you've specifically been hearing from customers in January and now into the first week of February here? And then which markets and geographies have you been seeing more of that cautious spending to kick off the year as well?

Yeah, thanks, Rachel. And I'll start, and then, Sean, if you have some additional comments, feel free to chime in. So I think the majority of cautiousness we have proposed in Europe and also down in what we told you in the PI business, in the food segments, where we see customers not releasing purchases as fast as we had expected. Again, there is good engagement for the sales teams. We have launched a great fleet of new products, also mid-range products that help us to get to accessing market segments. But the whole conversion from opportunity to final sale still takes longer than we expected. And that's part of what we're hearing in the European market. Otherwise, I think that, as we said, it's not a big change. Tom, do we have anything else? No? Okay.

Right, and then just on my follow-up, given that you're expecting most of this logistics issue to really benefit 1Q, can you just walk us through the sequentials on how should we be thinking about 2Q and the step-ups there, and then kind of bleeding into the back half on top line as well?

Yeah, hey, I mean, I think it's a little early for us to provide too much color on Q2, but we kind of stick to what we said before, is that we expect the first half of the year to be down. I expect Q2 to still be down. A big part of that is going to be China. We still have to lap, I think, a full cycle in China for Q2. So that's something that's very much on our minds. But I think when we get to the second half, we do have, with a company that only typically sits on one and a half months of backlog, it's hard to have too much confidence when you're starting to go out several months. But I do I think we feel encouraged by lapping these comps as we get into the second half of the year, as we just field maybe the organization, looking at the initiatives, looking at how we're trying to position things. A lot of our focus has always been on coming out of this stronger. And I think we try to focus on the things we can control. And when we talk about all these product launches, all these launching of corporate programs, Spinnaker 6, things we're doing with the customer experience. There's a lot of good things that I think should help us out for the second half of the year. We'll get through the first quarter and then we'll provide a little bit more color as to how we're seeing things at that point in time.

We'll go next to Brandon Coulard at Jefferies.

Thanks. Good morning. Patrick, the service business remains pretty healthy. I mean, you grew 10% last year against the double-digit comp. Where are you having the most driving attach rates, and what's your outlook for that business in 24?

Yeah, very good question, Brian. Thanks for that. I mean, service, again, I'm super excited about our service opportunity. By the way, it's also an organization that we continue to invest in throughout 2023, while we had to make some adjustment in other areas, we continue to invest in services because we see a big opportunity out there. Broadening our service portfolio, there's good demand from our customers. We have a large installed base. Last year, we grew 10% and we expected to grow in a mid-single-edge range this year again. So another year where you will see services growing ahead of products. We continue to work with our sales teams to make sure that they can sell services at the point of sales, train them about the value of services, make sure they have the value proposition when they talk to customers, increasing the connect rates. Of course, these are different from product category to product category, but we continue to make improvements there. I still see a lot of opportunity for us moving forward to increase our share of services.

Just one more, Sean, on China. If I bake in the first quarter being down and caught low to mid-20s, does this imply that China is back to kind of double-digit growth in the second half of the year? How should we think about cadence, first half versus second half?

Yeah, I mean, again, I don't want to get too specific, but I think if you do the math, you probably kind of get into that neighborhood for the second half of this year. you know, but we'll provide more guidance on our next call depending on how we're thinking about the pacing with Q2 and everything. You know, right now we do see, you know, for the full year lab, you know, lab being down more than the industrial business. So, you know, kind of looking at lab being down more like low teens. while industrial would be down like more mid-single digits. So the industrial business was a pleasant surprise in the fourth quarter. We're a little bit more cautious on it for Q1, but we'll see how things play out here. Great. Yeah, and just to read correctly, Brandon, that doesn't mean that the algorithm going forward, we're expecting double-digit growth in China. We just know that not only they have an easier comp, we know that they're lapping a lot of things in the market. I think, you know, one of the topics, there's a few topics there, right? You know, one of them was all the spending during COVID, you know, potentially an acceleration of replacement cycles. But then the other thing is I think there's just a lot of inventory, you know, throughout the customers. And I think just given the nature of the lockdowns during COVID and all the logistical challenges, you know, there's just more people purchasing a lot more inventory than in other regions. And I think that's one of the things that is kind of on our mind as well for the second half of the year. So as we kind of go forward, I mean, just to reiterate what we said in the past, we kind of view China as more of a high single-digit growth opportunity more longer term.

Next, we'll move to Patrick Donnelly at Citi.

Hey guys, thanks for taking the questions. Sean, I wanted to pick up on that kind of the ramp question. I think Rachel and Brandon both hit on a little bit there. You know, if we just back out the comps, because that's pretty formulaic, just in terms of the sequential dollar improvement as you work your way through the year into the second half, you know, China being obviously one example, you know, you mentioned the month, month and a half of backlog. Can you just talk about, I guess, the visibility into it? Is it just the confidence level that, you know, there was a lot of, inventory in the channel in areas like China, and that just, you know, you guys are confident it normalizes as you get to the second half and dollars come back. Maybe just talk about, again, the confidence, you know, comps excluded on that dollar ramp as we work our way through the year, China and otherwise.

Yeah, I mean, of course, there's also a lot of noise and sequentials right now, right? Like, you have a lack of a budget flush in Q4 of 2023, and now we add more complexity with these shipping delays. And then we probably throw another one at you saying, like, we just expect customers to potentially start a little bit slower in Q4, I mean, Q1 of this year, you know, with a more normalized seasonality in the back half. But I think if you kind of cut through all that and you look at maybe longer-term sequentials for us, I think we're actually very consistent, you know. And so that's one thing. I think when we look at, like, multi-year contracts, comps, you know, and, you know, multi-year CAGRs and just kind of like cut through the whole COVID period. And you look at that by quarter, I think that gives us a lot of more confidence as well, too. And then you kind of layer in some of these things that we know, like the one-year comps and some of these stocking topics, the comments I just made on China. And then the final thing is, you know, I think we are you know, we are doing a lot inside the company to drive growth too, you know? And so I think, you know, nothing drives growth like new products and we have some really cool things that we're launching right now. We're going to probably spend more time talking about that on our next call next quarter. And I, you know, I think those are types of things that will help. And of course, Spinnaker 6, right? There's a reason why we're talking about it on the call. It's, you know, kind of like, I think a preface to like a lot of things we're doing to focus on growth in the company and, you know, the combination of all these, digitalization things that are just continue to improve, plus, you know, all the things that we're doing to further enhance that relationship with a customer. It's a very powerful combination, and we think those things will gain momentum as we kind of get into the second half of the year as well.

Okay, that's helpful. And then maybe just on, you know, the cost structure, I think you mentioned a few times you guys want to come out of this stronger. Can you just talk about, I guess, the level of, you know, investments you're making currently with the softer backdrop versus, you know, trying to be mindful of protecting the margins. How nimble can you be on the cost side and how are you guys approaching that? Thank you.

Yeah, I mean, hey, this has been a very important balancing act for us, something that we've been spending a lot of time as an executive team, you know, really thinking about and reviewing over the last year. I feel like we have a really good balance. On one hand, we're really looking at parts of the organization where we've lost productivity over the last year, and so we're working on those areas. On the other hand, there are growth opportunities. We're trying to make sure that we're continuing to invest for those. Patrick mentioned service as an example. On a full-year basis, we continue to invest in and service throughout the year, and that's something that we'll continue to do in 2024. But it's not just service. You know, there's different regions of the world. There's different – there's also things, you know, like innovation that we talked about a few times already today, as well as other things, you know, that I think will help make us a stronger organization going forward. So when you kind of step back from that, I feel very good. Of course, we do have a headwind next year, too, with variable comp coming back to more normalized levels. So there's a lot of moving parts. But when you look through it all, I feel like good that we can still expand margins, even though it's maybe a little bit lower than what we normally do. We can still expand margins next year with a low growth year. And then if you look at 2023, we were able to hold our margins flat for the full year, despite a lot of the challenges that we had as well, too. So I feel like in the end, we have a good balance.

And there are no further questions at this time. I would like to turn the conference over to Adam Ullman for closing remarks.

Hey, thanks, Audra. And thank you, everybody, for joining our call today. If you have any questions, feel free to reach out to me. Hope you have a great rest of your day, and we'll talk to you soon. Thank you.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.