Mettler-Toledo International, Inc.

Hello, and welcome to the Mettler Toledo third quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question, please press star one. I would now like to turn the conference over to Adam Ullman, head of investor relations. You may begin.

Hey, thanks, Sarah, and good morning, everyone. Thanks for joining us. On the call with me today 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 on today's call is available on our website. This call will include forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks, uncertainties, and other factors that may cause our actual results, financial condition, performance, and achievements to be materially different from those expressed or implied by any forward-looking statement. For a discussion of these risks and uncertainties, please see our recent annual report on Form 10-K and quarterly and current reports filed with the SEC. The company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statements except as required by law. On today's call, we may use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable measures is provided in the 8K and is available on our website. Let me now turn the call over to Patrick.

Thanks, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our third quarter financial results the details of which are outlined for you on page three of our presentation. We experienced good growth during the third quarter in our laboratory business and had particularly strong growth in service. While China grew modestly this quarter, market conditions remained challenging, particularly in the industrial sector. We are very pleased with our team's strong execution of our growth and margin expansion initiatives, which supported good earnings growth in the quarter. We continue to execute very well and will benefit from the prior year shipping delays in the fourth quarter. However, global market conditions remain soft. We have introduced many exciting innovations as well as next generations of our Spinnaker sales and marketing and Stern Drive productivity programs over the past year. We also continue to leverage our business diversity and ability to provide value throughout our customer's value chain to identify and capture growth opportunities and believe we are very well positioned to gain market share and deliver good earnings growth in the future. Let me now turn the call over to Sean to cover the financial results and our guidance, and then I will come back with some additional commentary on the business and our outlook. Sean?

Thanks, Patrick, and good morning, everyone. Sales in the quarter were $954.5 million, which represented an increase in local currency and U.S. dollars of 1%. On slide number four, we show sales growth by region. Local currency sales grew 1% in Europe, declined 1% in the Americas, and grew 4% in Asia, rest of the world. Local currency sales increased 1% in China in the quarter. On slide number five, we show sales growth by region for the first nine months of the year. Local currency sales were flat for the first nine months with 4% growth in Europe, 1% growth in the Americas, and a 6% decline in Asia, rest of the world. Local currency sales decreased 15% in China on a year-to-date basis. As a reminder, our first quarter sales benefited by 6% from recovering delayed product shipments, which is a 2% benefit to our year-to-date results. Excluding this, our local currency sales declined 2% on a year-to-date basis. On slide number six, we summarize local currency sales growth by product area. For the quarter, laboratory sales increased 5% and industrial was flat, with core industrial down 1% and product inspection up 1%. Food retail declined 20% in the quarter against significant project activity last year. The next slide shows local currency sales growth by product area for the first nine months. Laboratory sales increased 2% and industrial decreased 2%, with core industrial down 4% and product inspection up 1%. Food retail decreased 14% on a year-to-date basis. Let me now move to the rest of the P&L, which is summarized on slide number 8. Gross margin was 60%, an increase of 60 basis points as positive price realization, and benefits from our Stern Drive program were partially offset by lower volume. R&D amounted to $47.1 million in the quarter, which is a 1% increase in local currency over the prior period. SG&A amounted to $228.8 million, a 5% increase in local currency over the prior year, and includes higher variable compensation. Adjusted operating profit amounted to $296.6 million in the quarter, unchanged from the prior year. Adjusted operating margin was 31.1%, which represents a decrease of 30 basis points over the prior year. A couple final comments on the P&L. Amortization amounted to $18.2 million in the quarter. Interest expense was $18.6 million, and other income amounted to $1.9 million. Our effective tax rate was 19% in the quarter. This rate is before discrete items and is adjusted for the timing of stock option exercises. Fully diluted shares amounted to 21.2 million, which is approximately a 3% decline from the prior year. Adjusted EPS for the quarter was $10.21, a 4% increase over the prior year. On a reported basis in the quarter, EPS was $9.96, as compared to $9.21 in the prior year. Reported EPS in the quarter included $0.23 of purchased intangible amortization, $0.10 of restructuring costs, and an $0.08 tax benefit from the timing of auction exercises. The next slide illustrates our year-to-date results. Local currency sales were flat for the nine-month period, adjusted operating income decreased 3%, or declined 1% excluding unfavorable foreign currency. And our adjusted operating margin contracted 50 basis points. Adjusted EPS was flat on a year-to-date basis and grew 2% excluding unfavorable currency. That covers the P&L, and let me now comment on adjusted free cash flow, which amounted to $671 million for the first nine months, a 7% increase on a per share basis from the prior year levels due to favorable working capital. DSO was 36 days, while ITO was four times. Let me now turn to our guidance for the remainder of this year and our initial thoughts on next year. As you review our guidance, please keep in mind the following factors. Market conditions remain soft, especially in China. While we are not seeing a negative change in market conditions, we're also not seeing a significant improvement. Secondly, while there is uncertainty in our core markets, the global economy, and geopolitics, we expect market conditions to gradually improve throughout 2025. We also expect to continue to benefit from customer trends in automation, digitalization, and on and near shoring. Third, we assume foreign currency at current rates. And finally, please keep in mind that our third-party logistics provider delays negatively impacted our Q4 results last year by $58 million, nearly all of which was recovered in our first quarter sales results this year. This will benefit our Q4 2024 sales growth by approximately 6%, and will reduce our sales growth in 2025 by 1.5%. This also negatively impacts our margin expansion in 2025. Now turning to our guidance for the fourth quarter of 2024, we expect local currency sales to grow by approximately 8%. This includes an expected benefit of approximately 6% from the prior year shipping delays. We expect adjusted EPS to be in the range of $11.63 to $11.78. Currency for the quarter at recent spot rates would be neutral to fourth quarter sales and adjusted EPS. For the full year 2024, our local currency sales growth forecast is unchanged at approximately 2% or down 1% excluding the previously mentioned shipping delays. We expect full year adjusted EPS to be in the range of $40.35 to $40.50 up 15 cents on the low end of our prior guidance range. Free cash flow and share repurchases for 2024 are expected to be approximately $850 million. We have also provided our initial guidance for 2025. And based on our assessment of market conditions today, we would expect local currency sales to increase approximately 3%, which includes the previously mentioned headwind to full-year sales growth of 1.5 percent from the shipping delays that benefited 2024. Adjusted EPS is forecast to be in the range of $41.85 to $42.50, which represents a growth rate of 4 to 5 percent. At recent spot rates, foreign exchange is estimated to be a slight headwind to adjusted EPS growth. I would like to share a few other details on our 2025 guidance to help you as you update your models. We expect total amortization, including purchased intangible amortization, to be approximately $75 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $24.8 million on a pre-tax basis or 92 cents per share. Interest expenses forecast at $82 million for the year, and other income is estimated at approximately $2 million. We expect our tax rate before discrete items will remain at 19% in 2025. Free cash flow is forecast at approximately $860 million in 2025, and share repurchases are expected to be approximately $875 million. That's it for 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, which grew approximately 5% compared to last year. We had good growth across most of the portfolio and regions and continue to benefit from our robust offering and recent innovations, as well as our initiatives to accelerate growth in service and consumables. Farmer customer activity has been mixed, but improving at a low pace. Our process analytics business return to solid growth this quarter as our bioproduction customers have finished destocking excess inventories. To expand our already broad portfolio of instruments we offer to our laboratory customers, we recently launched a new stain-free automated cell counter and a new microblade reader to help our customers in R&D and QA QC labs. These new products add further to the long list of innovations we have brought to the market in recent years and expand our technology leadership. Shifting now to our industrial business, sales for the quarter were flat and slightly lower than expected, primarily due to market headwinds in China. Product inspection sales growth of 1% benefited from our growth initiatives targeting the mid-market, but the food manufacturing industry remains challenged overall. Our core industrial sales declined 1%, reflecting sluggish market conditions across most industries. Our team remains active in leveraging Spinnaker to identify and capture the most attractive market opportunities in core industrial, which has reduced our sensitivity to the economy, although we are not immune. Additionally, we have further enhanced our portfolio and have expanded our line of weighing terminals that feature integrated software solutions leveraging advanced algorithms. These new terminals provide process automation control for many different filling and dosing workflows, seamlessly integrating into customer systems. Lastly, shifting to our food retail business, as I mentioned earlier, our food retail sales declined against a very significant project-related growth in the prior year. Now let me make some additional comments by geography. Starting in the Americas, our sales declined 1% in the quarter. We had good growth across our lab portfolio with pharma customers, while food retail declined against very significant growth in the prior year. Core industrial sales declined slightly as demand for automation-related solutions was offset by lower demand in other areas. Sales in Europe grew 1% in the quarter, and included growth both from laboratory and core industrial, benefiting from modest growth from pharma customers while food manufacturing remained soft. Our teams in Europe continue to execute well despite challenging economic conditions across the region. And finally, our Asia rest for world results this quarter were in line with our expectations. Our China operations returned to sales growth in the quarter due to easier comparisons and strong execution of our sales team, but underlying demand remained soft due to weak economic growth and excess capacity in certain industries. Our teams across Asia continue to execute very well on driving sales and market share growth. Targeting growth in emerging markets such as Southeast Asia and India remain an important element of our long-term growth strategy. In summary, market conditions overall have remained challenged, but our team is executing very well. We have continued to fund important growth investments in areas like innovation and field sales and service, while we have reinforced our unique go-to-market strategies with the launch of the next wave of Spinnaker. In 2025, we will make additional targeted investment in these areas to further extend our market leadership and strengthen our competitive advantages. An important element of our growth algorithm is gaining market share in our highly fragmented markets and pursuing growth opportunities in faster growing market segments. Spinnaker helps us identify these new growth opportunities and guides our sales force to ensure we maximize our potential. We continue to see significant market trends and opportunities related to the localization of strategically important technologies, investments to develop new energy solutions for the future, and efforts to increase resilience in supply chains around the world. At the same time, customers continue to seek productivity and insights through automation and digitalization. Spinnaker encompasses our lead generation programs with existing customers, and it houses our Top K program to identify growth opportunities with potential new customers. Top K uses proprietary data analytics on our internal big data warehouse and external data sources to identify and pursue opportunities. Our teams are expanding our capabilities in this area to automate more of the qualification processes and accelerating the rate that we can generate tailored and actionable investment alerts for our field sales force. This program has been very important in driving lead growth with new customers this year, and our team remains focused on expanding our data sets and adding sophisticated analytics and automation to enhance this program in 2025. Another important driver for our long-term growth is to accelerate the growth of our service business. As a reminder, service represents approximately 25% of our sales. It has grown 7% on a year-to-date basis in local currencies, which includes very strong growth of 9% in the third quarter. Service will continue to be an important growth driver in the future. Service is a key part of our solutions offering and is a very important competitive advantage as we support our customers' ability to maintain uptime improve productivity, and comply with regulatory requirements. We believe we have the largest service network amongst our direct competitors with over 3,000 technicians, delivering a very professional and consistent service experience to customers throughout the world. Our customer satisfaction ratings for our service business and our net promoter scores are excellent and are at record high levels. We aim to grow our service business faster than the company average over the medium term and are making dedicated investments in field technicians, in telesales and data analytics resources to support our growth aspirations. Additionally, we continue to benefit from our actions to improve the productivity of our service organization and increase its capacity to serve customers, including leveraging new software capabilities to estimate service durations, semi-automated scheduling of service visits, and utilizing expanded call triage capabilities to resolve service requests remotely and reduce trips to our customer locations. We are also expanding the use of sophisticated data analytics and automation technologies to increase the effectiveness of our dedicated service sales team. Our largest opportunity is servicing a greater proportion of our installed base which approximates $3 billion of potential service revenue. Today, we have penetrated about one-third of this opportunity, and given the vast amount of data we possess about it, like when an instrument was sold, who's using it, in what application it's being used, we can create targeted sales campaigns to service them specifically tailored to their needs based on our data. This will help further expand our coverage. Service contracts help ensure that the measurements from our precision instruments are reliable and also helps prevent costly downtime. We have maintained our focus on selling more service packages at the point of new product sale. Over the years, we have made important enhancements and differentiation to service levels of prepaid contracts to meet the varying needs of our customers. We have also enhanced our portfolio of services over the years with solutions like our RapidCal tank scale calibration service. Regular calibration of tank scales is required across industries such as pharma and chemical to ensure measurements are accurate and reliable. Our RapidCal service can calibrate these scales three times faster than traditional methods and also does not require the tank to be emptied, cleaned, and filled with expensive ultra pure water that would need to be discharged afterwards. So it is not only faster, but also much more efficient and environmentally friendly. We have also enhanced our offering of certified calibration certificates to ensure compliance with regulations and avoid cost of inaccurate measurements. Our calibration services are highly differentiated from the competition and include our comprehensive and audit-proof electronic documentation that adheres to the highest industry standards. So that is a brief overview of the efforts we have on the way to accelerate our growth by reinforcing our unique go-to-market approaches with Spinnaker, identifying and capturing growth opportunities with new customers and growth industries, and accelerating the growth rate of our service business. We expect our focused execution on these initiatives will continue to deliver very tangible benefits over the next year and beyond. Now, this concludes our prepared remarks. Operator, I'd now like to open the line to questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Please ensure that your phone is not on mute when called upon. Thank you. Your first question comes from the line of Vijay Kumar with Evercore ISI. Your line is open.

Hi, guys. Good morning, and thanks for taking my question. Patrick, maybe my first one for you on the fiscal 25 assumptions here. I think the 150 basis points had when the underlying mid-singles, it's in line with the peers. What are you assuming for labs versus industrials? And I think your comments on services It was helpful. Is services still expected to grow in mid-singles plus high singles in fiscal 25?

Yes, so let me start with the last part of the question, and then let Sean walk you through the details on the growth expectations of the different segments. So services, yes, we expect to continue to grow above company average. So we expect it to continue to meet to high single grid digits next year. As I said in my prepared remarks here, we're investing uh quite heavily in our service business not only in expanding our service portfolio but also strengthening our telesales team leveraging more data to reach to an installed base and tapping into that installed base that we don't cover yet today is a is a significant growth opportunity opportunity for us in the future so sean will you walk uh each through the details of the segment yeah hi vj hey maybe i'll just walk you through the different assumptions for 2025 and

And I'll do it on a reported basis, but I'll also do it adjusting for the headwinds on the shipping delays, just so that that's clear. So our lab business, we're assuming will grow low to mid single digit on a reported basis, but will grow mid to high single digit, excluding the headwind of the shipping delays. Our core industrial business and our product inspection businesses are both estimated to grow low single digit on both the reported and an adjusted basis. And that would be the same for our obviously our total industrial business. And then our retail business is expected to be flat next year or up low single digit adjusted for the shipping delays. And then I'll give you the regions, too, since we're doing it. America is on a reported basis is expected to grow low to mid single digit. And on an adjusted basis for the shipping delays, it would grow mid single digit. Our European business is expected to grow low single digit on a reported basis. And adjusted for the shipping delays, it would grow mid single digit. And then China is expected to grow a low single digit on both the reported and adjusted basis.

That's helpful, Sean. And maybe one on that more sincere. EPS guidance. I know you guys start typically conservative. What are you assuming for operating margin expansion for fiscal 25 in our service margins about corporate?

Yeah. So our operating margin for next year is expected to be flattish to this year, maybe up slightly. you know, our service business, yeah, does have a margin above the corporate average. But hey, maybe I use this as an opportunity to talk about maybe some of the optics about the shipping delays on earnings, because I can imagine that's a challenge to try to understand the guidance. So we talked about the first optic, which is on sales. And then from a sales perspective, It's a 1.5% headwind. I think that's pretty well understood. So our organic sales growth for 2025 is expected to be 4.5% adjusted for the timing of the shipping delays. But there's also a very meaningful impact on our EPS growth as well and our margin expansion, especially since most of our products that were affected are in our lab business, which are at above average margins. And you can kind of see this like if you think about the operating profit margin compression in Q4 of last year and the operating margin expansion in our Q4 guidance of this year. If you look at our Q4 guidance of this year, it implies an operating margin expansion over last year of about 320 basis points or so. And directionally, we're going to see something, you know, we're not going to give out details at this time for Q1, but directionally, you're going to see something similar in terms of margin compression in Q1 of 2025. And then, you know, after that, we should get back to more normal cadence. And if you think about it, it kind of makes sense if you think about our overall gross margin percentage and the related incrementals associated with timing shifts. because they're going to be a little bit higher because of the nature of our fixed cost structure. But we also wanted to communicate if we didn't have this effect of these shipping delays, our EPS growth guidance would be more in line with our typical relationship between sales growth and EPS growth. And we've estimated probably be about 4% higher to our EPS guidance. And then we also have a couple of other additional items. Variable compensation in 2024 is not back to target level, so we'll have a little bit of a headwind for that in 2025. And then currencies are slightly unfavorable to EPS at the moment too, and we mentioned that in the script. But when we step back from all that, the other message we wanted to make sure we could communicate today too is that, you know, we still have a lot of very exciting opportunities to invest in the business, and we're not going to slow down these investments just because of the optics of the shipping delay to our sales growth. And I think that's important because I think we have a lot of good things in the pipeline that we're investing in. And also just to remake, you know, the other thing we wanted to communicate is that, you know, we do remain very confident about our ability to grow earnings and expand margins going forward in accordance with our medium to long-term guidance.

Understood.

Thanks, guys.

The next question comes from Matt Sykes with Goldman Sachs. Your line is open.

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

Yeah, thanks, Matt. It's a great question. And of course, we continuously also can improve the effectiveness of our service team. I mentioned a little bit in the call that we're using special software capabilities, including deep learning algorithms to understand how we can most effectively schedule services and and also with that drive up efficiency of our technicians in the field. And we make continuous improvements along this. We, on our platform, we just recently also launched a new service template that takes care of that to make sure that we most effectively use our service technicians. We are, of course, also changing more and more of our future product portfolio with more remote service capabilities and with that driving more efficiency of the service team as well. But that said, I mean, we still will expand to probably headcount in service as well, not only on the technician side, but also making sure that we have enough support to drive marketing campaigns and lead generation for service out there. I talked a little bit about this untapped opportunity of instruments that we happen to feel that we don't service today. We have information, again, as I said, when they have been bought, where they are, what application they are used for. And we are now getting back to these customers, reaching out to them and offering new and broader service portfolio. And to service these instruments and these solutions will require also more technicians in the future. I think it's a great growth opportunity. I think it's something that leads to strong customer satisfaction. Our net promoter scores and services are outstanding, customers love our service, not only because of the proficiency, but also again, helping them with compliance, et cetera. So it's, again, it's a strong growth driver for us moving forward and also helping us on the margin expansion. But it will require also investments in headcounts. Besides all the efforts we do, and we continue to do this in driving efficiency with smarter software solutions, again, deep learning algorithms, and we have data scientists in the group as well, using the future also more knowledge management tools to understand really how we can more efficiently drive the information to service engineers that we can reduce, you know, dual visits to customers, et cetera, making sure that they have all the right information when they get to customers, et cetera, to make sure they can increase and maximize first-time fixes, et cetera. So there's a lot of opportunities. And that's why we are continuing to invest in this and we'll see in the next years to come also nice growth from this business.

Great. Thanks for that caller, Patrick. And then just on China, understanding your guidance for next year for low single-digit growth, just curious how much stimulus impact are you kind of assuming in that growth rate? And then just more longer term, have you changed your assumptions on longer-term China growth as it faces your business?

um just just curious to see if that's been adjusted i know there's a lot of different uh potential headwinds uh that could come in but just curious about how your framing of that growth has changed yeah excellent yes look for for next year in a question regarding the stimulus we have not factored um anything regarding the stimulus in our forecast of flow single digit for next year um as you probably also have heard uh from some of our competitors. It's pretty unclear yet when the stimulus will really gain traction, so we take a more cautious approach here when we forecast a growth for next year. With the last stimulus that came out, our team is still actively working with our customers, making sure that they can bundle solutions in the right way so they basically can apply for the stimulus that is out there, but I don't think it will have a meaningful impact this year, and we also have not factored anything yet in for next year. And that basically brings us into the low single-digit growth model for next year. Long, mid and long-term, we think there's still very good potential for us in China. We have not changed our long-term outlook of high single-digit growth in China. Yes, it will have to come back to growth in many areas, but I think the fundamentals in China, investing into healthcare, into safer, clean environment and safer food, investing in important technologies like semiconductors, et cetera. They're all areas where we serve our customers with dedicated solutions. We have a great team in China that works very closely in China with our customers to develop solutions for the Chinese market. And it also makes us compete very effectively against local players. So I think we have a great opportunity to continue also there to drive market share and participate in the underlying growth, but on top of that, gain market share. That's why we have not changed the long-term model for China.

Thank you very much.

The next question comes from Dan Arias with Stifel. Your line is open.

Good morning, guys. Thanks for the questions here. Sean or Patrick, maybe just another one on the outlook for 2025. Obviously, a lot of moving parts out there. Where, as you sit today, do you see the biggest sources of variability when it comes to what could have you better or worse than the initial outlook? Obviously, China is a big one, so I get that. But if there's more to add there, then by all means. But beyond China, I'm just kind of interested in where you see the error bars as being the widest when it comes to just the businesses or the key regions that you that you have.

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

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

You know, I think I mean, no individual product launch moves the needle for us, but we have had a very good cadence recently. It's definitely helps. I think you see it in our margin expansion this year. and but i just i just kind of view that as part of the the overall uh one one of the ingredients of many that that drives our overall margin expansion but yeah definitely something we're we're mindful of uh you know for sure and i think even more importantly the new products are very well received in the marketplace and and that drives our value proposition and and ultimately a customer's willingness to pay so it certainly helps us with our pricing in the market as well too

Okay, thanks very much.

The next question comes from Dan Leonard with UBS. Your line is open.

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

Yeah, good, good question. And yes, as you also point back to 2018-19, we definitely have really successfully navigated tariffs in the past as well. I mean, what has changed since then for us? Number one is we, of course, have also continued to really expand our production footprint worldwide and expand, for example, our Mexico production to supply the U.S. and providing us also with more manufacturing flexibility. So we have also started already over the last two years building some redundant manufacturing lines that we had initially only in China, now also in Mexico. But we have more flexibility as we have really global manufacturing footprint. China, Mexico are not the only footprints we have. If there's more happens or changes out there which we continuously monitor, we will of course tap into that opportunity as needed then adjust our manufacturing footprint if that is needed. I think we have a unique advantage with our global supply chain, and we do definitely continue to fully leverage that. I think we have definitely made the right steps to start early on de-risking the setup that we had with the bigger footprint in China, making sure we have enough redundancies that we will continue to do so. And I think it will actually, in that regard, I think we are Still, of course, exposed to tariffs, but we are pretty, I think they're pretty good prepared to react on those.

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

Yeah, we actually are extremely happy to see that the momentum in our product and mix business really has picked up. It's a clear sign that destocking is behind us. It's not only the size of the orders we receive, it's also the frequency of the orders we receive that really tells us that customers are back to normal operation. I think also with the launches of new products that we had over the last years, we are well positioned to maintain our strong market position there. And in terms of the growth rate, John, do we have to get the growth rate for the last order for product inspection for ProView? Basically, we've been on the lab number.

Yeah, we don't give out specific numbers, but I would say within our lab portfolio, we had good growth throughout the portfolio, but we had very uh very strong growth i think it was double digit and product process analytics and we and and by the way we also had really good growth and analytical instruments okay thank you the next question comes from jack mehan with nephron research your line is open thank you good morning um i'm going to ask a little bit about the assumptions on the

fourth quarter guide. I was just doing some simple math. I think the revenue forecast implies something like 6% growth sequentially. I was just benchmarking, you know, looking back, I think it was more something more like a little over 10%. So we're just curious, like, if you look sequentially, you know, like why you were building in a little bit more conservatism than we've seen previously.

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

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

Sorry, thanks. Yeah, yeah, yeah, yeah. So, yeah, hey, I understand the question. Yeah, I think it might be even closer to 7% sequential, but I understand it. Yeah, hey, we're a little bit more cautious right now. You know, I think China's a big part of it. you know, on market conditions in general, but particularly China. I think if you kind of dig into the sequentials, you'll see China is the one that is more of the standout there. And yeah, and hey, I was a little distracted because I was just looking at the notes on this process analytics thing. We grew double digit in Europe and in the US, but we grew high single digit globally.

And then maybe just to follow up on, again, like kind of this third quarter to fourth quarter dynamic, can you just remind us like what you've historically seen as it pertains to a budget flush? Like I know some companies have more, you know, it's a little bit more dynamic, but if you just talk about what you're expecting in that regard and just what you're expecting.

I think there's going to be some, we're not counting on a full flush. I mean, and I think it, you can see it with your first question, right? I think a typical like five or 10 year average of sequentials from Q3 to Q4 is more than a 10% kind of a range. So you can tell we're not counting on a full flush, but I think part of that's also related to China. I mean, we hear mixed things when talking to our teams. I mean, there's definitely a lot of activity. We definitely see some positive things out there, but there's also things that are still delayed, you know, and so it's a little bit on, you know, which customer you're talking to sometimes.

Sounds good. Thank you, Sean. Yeah, you're welcome.

The next question comes from Rachel Vansdell with J.P. Morgan. Your line is open.

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

Yeah, sure. Maybe I'll start and I'll let Patrick kind of pick it up. So a couple of positives. One, overall, we did return to growth. I mean, we've been going through a period in China now of very significant decreases. There's been kind of this resetting, if you will, over the last four quarters. So it was nice to see modest growth in the quarter. We did have low single-digit growth in the lab business, and then we had a low single-digit decline on the industrial business. In fairness to the industrial business, the lab had an easier comparison. I mean, our lab business kind of started to downturn a lot more than on the industrial side, and you could argue the industrial has been held up pretty resiliently in spite of a very challenging market situation overall. So low single-digit is relative to market conditions, I think shows how well the team still continues to execute there. And Patrick and I were just there recently and the industrial team was sharing with us a lot of the innovations that they've come out with also on the laboratory side. And it's just, it's really kind of neat to see the breadth of the things that they're doing locally and bringing to the market. In terms of how we're thinking about China for the fourth quarter, Because of some of these comps, we're going to start seeing a little bit more divergent in terms of lab and industrial. You know, we mentioned that the comp overall, well, I don't know, did we give guidance for Q4? I can't remember. I think, so just to be clear, our guidance for Q4 for China is mid-single digit growth. And if you exclude the impact of this shipping delay benefit, it's going to be more like low single digit growth in the fourth quarter. Sean SeLegue, And on a reported basis that will kind of translate into more like low double digit growth on the laboratory side acknowledging their their their. Sean SeLegue, Their lapping you know still an easy comparison there and then on the industrial side, it would you know we're expecting it to be down high single digit maybe maybe you know, on the higher end of high single digit might might even round to attend we'll see how it plays out yeah.

Sean SeLegue, Excellent thanks Sean if I. uh may add in terms of the question regarding and unpacking the growth areas in china i think we are seeing better recoveries in pharma and in process analytics also in some of the special chemistry spaces in china that's recovering well again also there we have key stocking behind us the area where we still are not yet in the same recovery mode is in industrial automation part of that is also linked to areas that have seen exceptional growth over the last two years, like, for example, the battery segment in China. And that's, truly, that's a capacity issue. I mean, they are sitting on a lot of overcapacity, so they are not, at the moment, not investing in additional capacity expansion and automation solution, and that's pulling some of our growth rates in China down on this industrial automation.

Great, that's all helpful. And then just as my follow-up, could you walk us through those four key assumptions by segment and geography? in terms of what you're doing, including and excluding the comp? Perfect. Thanks, guys.

Yeah, absolutely. I'm going to start with the top with LAB. So like I did before, for 2025, I'll give you the reported number, and then I'll give you the adjusted number for the shipping delay from last year. So on a reported basis, we expect LAB to be up low double digit, and on an adjusted basis for the shipping delay, up mid single digit. The core industrial business, we expect to be up low single digit on a reported basis and down slightly low single digit on an adjusted basis for the shipping delay. For product inspection, we expect both to be up high single digit. So that would translate into a total industrial growth of mid single digit on a reported basis and up low single digit on an adjusted basis. And then retail would be down about 10% on a reported basis and down high teens on an adjusted basis. And then as we look at the geographies, we estimate America's will be up low to mid single digit on a reported basis and flattish on an adjusted basis. Europe would be up low double digit on a reported basis and up low single digit on a adjusted basis. And then China, we already mentioned, would be up mid-single digit on a reported basis and then up low single digit on an adjusted basis for the shipping delay.

The next question comes from Josh Waldman with Cleveland Research. Your line is open.

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

Yeah, I think it's a bit of both, Josh. Thanks for the question. But what we're seeing is that the products that we have launched in the different categories compete extremely well. Of course, we're also looking also at growth numbers of competitors in the last couple of quarters and see that we are doing really well. Despite the low growth environment, we are still outgrowing these competitors in many areas. We see also that our win-loss ratios in the markets that we serve are very stable, that our products are being well received by our customers, that our teams our sales teams are really able to compete with this portfolio very effectively. That's also part of the feedback we, Sean and I, got when we did our budget tour and talked to the market organizations worldwide. Actually, they are very happy with the products, the latest releases that we have in different categories, whether it's lab, whether it's, for example, also product inspection. They can compete effectively with these new products that we have launched. And in some areas, we even went into market segments that we didn't serve before. If you think about the product inspection business where we have launched a number of mid-range product, we call them. So at the more mid-range product level, we historically had been always the market leader and still are the market leader in high-end segment. But here with this new portfolio, we can really also tap deeper into the mid-range product portfolio. And that's going very nicely for us. We have launched several X-ray products and that is helping us winning in the mid-range, but also opening more doors and helping us to upsell some of this product portfolio. So it's, again, it's a blend together with the strong go-to-market strategies that we have. Whenever we see new market segments, new hot segments, using our top key and spinning up a portfolio to identify these customers, to prepare the right materials for our sales team and and get them in touch with these accounts and qualified accounts and bring up a portfolio and top of mind of these new customers. I think that's a differentiation and that's really the combination of a strong innovative product portfolio of the right sales tools to also get it in front of the customers, also new customers that we don't serve today is the winning recipe also moving forward.

Got it. And then Patrick, can you talk a bit more on the trend you're seeing within the pharma and market? commented strength on strength in the U.S. and Europe. Is that more a benefit to process analytics and pipettes, or are you seeing improvement in instruments? And then, you know, based on what you're seeing from these accounts, kind of real-time and where you expect to end the year, do you think we're on a path back to kind of normalized longer-term growth in 25 from these accounts?

Yeah, good question. I mean, I talked a bit about process analytics in the pharma space and also the biopharma space. That is definitely back to good growth for us. And again, both in terms of order frequency and order volumes, we're very happy with that. On the analytical instrument side across the pharma business, I would also say we're seeing better sales engagement, better momentum. And some accounts still prolong sales cycles, to be honest. I mean, there are customers out there who want to upgrade their portfolio, who see the benefit of our new products, but it still takes them longer to get them through the internal approval cycles. But I'm quite optimistic that also that will, in the, let's say, quarters to come, we'll get back to more normal levels. Look, I mean, 70 to 80% of our business is replacement business, and that have been tuned down for almost two years now. That also means moving forward, there is one point in time when the budgets will be released, there is a catch up that we can capture. That's why we are also really focusing so much on innovation and getting, having the best updated portfolio out there to capture this wave when these budgets are released. Got it. Okay.

Thank you.

The next question comes from Patrick Donnelly with Citi. Your line is open.

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

Yeah, sure, sure. Thank you. Yeah, sure. I understand the question, Patrick. I mean, so if you look at 24, our operating profit margin is expected to expand in the 50 basis point kind of range. You're right. If you exclude the shipping delay, that probably would have been down a little bit. You know, it's kind of the same as you kind of like look at the sales growth, right? The sales would have been, I mean, we need to acknowledge volumes are still down, you know, so if you adjust for the shipping delay. So what's our guidance? And if you exclude the three, we're minus one. And then if you exclude pricing volumes down, down 3%. So there's a reality there. But I think if you kind of look back, know if you're just like looking at the last couple years i think you're you're looking at a period where where there hasn't been volume growth you know and and and that but that's after a period where there was exceptional volume growth and so i think you need to go back if you really want to do a look back i'd go back to like you know 2019 pre-coveted and our margins have expanded you know they were at that time they were under 26 so we've had tremendous margin expansion still over this time. It just wasn't quite a straight line. Now, as we kind of look forward, we still remain very confident, as I mentioned earlier in the Q&A, and why do we remain confident? All the things that we have at our disposal to increase margins have a lot of runway to them. It starts with growing the business. We have a lot of opportunities there. We still serve very highly fragmented markets. We've been investing a lot on innovation. We just launched a new generation of Spinnaker 6, so we have plenty of opportunities to expand sales going forward. And then we talked about service today. Second is pricing. Pricing has been and will continue to be a key lever. We have a lot of very innovative things within the program. We have Very sophisticated analytics. We have very sophisticated pools. We have teams all around the world working together with our market organizations and as well as our product organizations to optimize price. We have some pretty sophisticated things also in terms of our ability to provide pricing recommendations. And all this has been also supported well by our R&D pipeline, which is continuing to increase the value propositions of our products. And then Stern Drive, we talked about it earlier this year about launching the latest generation and wave of Stern Drive, which is about how do we improve efficiencies in the organization, primarily targeting our supply chain as well as reducing costs. Lots of very interesting things in that program. Still have many innings to go in terms of the runway. There are also a lot of new technologies that we're able to take advantage of in our manufacturing setup to be more productive. And then on the last call, we talked about Blue Ocean. And that was also a little intentional to remind people of the power of Blue Ocean. And there's a lot of things that Blue Ocean gives us in terms of a foundation and an enabler for a lot of the programs we do. But it also helps us drive productivity, whether it's through the ability to automate processes, and leverage shared service centers, but also providing better insights to make better decisions in the business through more advanced analytics.

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

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

And then, Patrick, just quickly on the industrial side, it sounds like China, obviously, weighing on things. Can you just talk industrial broadly? Is it mainly China that's the issue, and what you're seeing on that front from customers would be helpful. Thank you, guys.

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

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

The next question comes from Tycho Peterson with Jefferies. Your line is open.

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

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

Yeah. Okay. I mean, I think we need to see what they come out with, but I, you know, I think what we find is every time there's a concern about, you know, are people still going to buy whatever, you know, there's, there's new brands, there's new sizes, you know, there's new shapes, there's, you know, there's, you know, like, and so people are still going to eat, you know, and so, and so that, that, and so there, there, there tends to be always opportunities, even if there's risks with change.

Yeah, there's again, there's different modalities we serve from check weighing, making sure that it's the right amount and customers are as concerned that they package enough into the package food, but also not too much. So they want to have check weighing at the end of the line. And then the other control when it comes to physical contamination, it's a brand protection for these companies. We make food safe and our customers use it definitely as a big part of their brand protection. Nobody wants to find

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

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

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

No. Thanks, Tycho. You know, we're still thinking 2% for Q4, and we're also thinking 2% for next year. Okay. Thank you. Thanks.

And your final question comes from Michael Ryskin with Bank of America. Your line is open.

Great. Thanks. Excuse me, guys. I'll be quick. First, Sean, I want to confirm some comments you made earlier. I thought I heard you say that margins flat in 2025. I just want to make sure I heard that correctly, and it's not sort of an adjusted number, just a little bit hard to reconcile the EPS with guide with that. Is that kind of like flattish, maybe down a little bit, or is that a hard flat? so operating margin margins flattish yeah maybe yeah and then the um and then but the gross profit margin would be up like 30 to 40 bits yeah okay yeah all right exactly that makes sense and then um uh sort of follow up on that on the uh shipping component just want to make sure we back it out correctly um the way you kind of described it um for 2024 you know is it fair to say that x shipping margins would be up something like 50 75 bps range 50 70 bps next year and that's the swing um i'm just trying to yeah i mean i haven't here yeah i don't know the exact math but that sounds like a reasonable range to me yeah okay and then um Last one from me. I think Tiger was just asking about product inspection. I want to ask a little bit about food retail. I know it's not a critical part of your business, not something you talk about a lot, but that's just sort of been declining pretty consistently for a while. I mean, you often have tough comms, one-time customer issues, things like that. It's just gone from like 15% of revenues back in the day down to, I think, five, and continues to face some challenges. Just taking a step back, what are your thoughts on that? I mean, is that Is that something you continue to think can be a core part of the business, or could there be some strategic solutions there? Thanks.

Well, good question. I mean, look, food retail, as you say, is a very lumpy business. We do a lot of key account management there, so a lot of the major customers in retail chains are there buying from us, but they come in project ways. And the decline you see this year is really on back of a very strong year last year. Last year, we had... lot of good projects out there. Overall, it's still about 5% of our total revenues. We don't expect that to significantly increase. It's really a strong technology platform leverage that we have. It's a weighing solution. With that regard, we think it's still a very part of our portfolio. We have invested actually a bit in the last couple of years updating the products. We came out with very new, really interesting solutions for customers, also using AI-based features to automatically detect what you put on the scale, simplifying the workflow, not only for the customer, but also for the checkout servants. And that's been received very well. So we see also, again, a good number of projects in the pipeline. But strategically, again, we don't think about any immediate change there. other than having this part of the platform leverage and technology leverage in the follow-up portfolio.

Okay. Makes sense. I'll leave it there. Thanks, guys. Thank you.

This concludes the question and answer session. I'll turn the call to Adam for closing remarks.

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

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