Mettler-Toledo International Inc. (MTD) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Mettler-Toledo Third Quarter 2026 Earnings Conference Call. I will now hand the conference over to Adam Uhlman, Head of Investor Relations. Please go ahead.

Thanks, Jonathan. Good morning, everyone. I appreciate you joining us. On the call with me today is Patrick Kaltenbach, our Chief Executive Officer; and Shawn Vadala, our Chief Financial Officer. Let me cover some administrative matters. This call is being webcast and is available for replay on our website at mt.com. A copy of the press release and the presentation that we'll refer to on today's call is also 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 statements. For a discussion of these risks and uncertainties, please see our recent annual report on Form 10-K and quarterly and recent reports filed with the SEC. The company disclaims any obligation or undertaking to provide updates or revisions to any forward-looking statements, except as required by law. On today's call, we will use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in the 8-K and is available on our website. Let me now turn the call over to Patrick.

Thank you, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our third financial results, the details of which are outlined for you on Page 3 of our presentation. We delivered an excellent third quarter, achieving relatively broad-based growth across our portfolio while capitalizing on improving market demand. Performance was particularly strong in Asia and Rest of the World. Improved sales volume and strong execution of our strategic initiatives result in another quarter of robust growth in adjusted EPS. We continue to benefit from investments in recent years that have strengthened our position and prepared us for the growth opportunities we see ahead of us. We have accelerated our innovation, expanded our digital capabilities, further enhanced our spending sales and marketing excellence program and involved our global supply chain setup for increased resilience and agility. As market conditions improve, we are well positioned to deliver strong financial performance going forward. Let me now turn the call over to Shawn to cover the financial results and our guidance, and I will come back with some additional commentary on the business and our outlook. Shawn?

Thanks, Patrick, and good morning, everyone. in the quarter were $1.1 billion, up 6% in U.S. dollars and in local currencies. Organic local currency sales growth was also 6%. On Slide #4, we show local currency sales growth by region. Organic sales increased 3% in the Americas, 2% in Europe and 13% in Asia Rest of World including 13% growth in China. Slide #5 shows sales growth by region on a year-to-date basis. On Slide #6, we summarize sales growth by product area. Organic sales increased 6% in laboratory and 6% in Industrial, which included 5% growth in core industrial and 8% growth in product inspection. Food Retail declined 2% in the quarter. Lastly, service revenue grew 7%. Slide #7 details sales growth by product area on a year-to-date basis. Let me now move to the rest of the P&L, which is summarized on Slide #8. Gross margin was 59.8% in the quarter, an increase of 60 basis points due to benefits from favorable price realization lower tariff rates compared to the prior year in volume growth, partially offset by higher material and transportation costs. R&D amounted to $54 million a quarter and up 4% on a local currency basis over the prior period. SG&A amounted to $267 million and increase in local currency over the prior year and includes sales and marketing investments and higher variable compensation, offset bar by cost savings. Adjusted operating profit amounted to $333.5 million in the quarter, up 8% versus the prior year. Adjusted operating margin was 30.5% and an increase of 40 basis points versus the prior year. Adjusted EPS for the quarter was $12.57, a 13% increase over the prior year. On a reported basis in the quarter, EPS was $12.29 as compared to $10.57 in the prior year and a recession to GAAP is located in our press release. That covers the P&L, and let me now comment on adjusted free cash flow, which amounted to $652 million on a year-to-date basis and was negatively impacted by the timing of tax payments which were $72 million higher than the prior year. Excluding taxes, free cash flow per share increased 7% versus the prior year. I'll now share additional thoughts on our guidance for the fourth quarter and our initial thoughts for 2027. As you review our guidance, please keep in mind the following factors. First, we are encouraged by the relatively broad-based momentum in our business, especially in China and emerging markets. Second, conditions in the Middle East remain volatile. And while we have limited exposure to the region, this could impact customer decision-making should conditions significantly change. We are not currently seeing any change in related customer behavior and have not included an escalation of the conflict in our forecast. Third, we are encouraged by the increasing momentum and activity related to onshoring investments, while we have while-- while we are encouraged by the increasing momentum and activity related to onshoring investments, we have not assumed this will be meaningful to our 2027 results. And lastly, we are very confident in our ability to execute on our growth and productivity initiatives and believe we are well positioned to gain market share regardless of the macro environment. Now turning to our guidance. For the fourth quarter 2026, our local currency sales growth forecast is approximately 5% and adjusted EPS is forecast to be in the range of $14.85 and to $15.04, which represents a growth rate of 11% to 13%. At recent spot rates, foreign exchange is not expected to significantly impact our results. For the full year 2026, we have increased our local currency sales growth forecast from approximately 4% to 5% to approximately 5%, reflecting organic growth of 4%. Note that our forecast also excludes the impact on sales and cost of sales from tariff refunds. Adjusted EPS is forecast to be in the range of $47.70 and to $47.90, which represents a growth rate of 12%. We've also provided our initial guidance for 2027. And based on our assessment of market conditions today, we expect local currency sales to increase approximately 5%. Our outlook reflects continued strength in China and emerging markets, favorable trends in the U.S. and benefits from our Spinnaker sales and marketing growth initiatives and robust product portfolio, offset in part by a cautious view in Europe given various macro uncertainties. Adjusted EPS is forecast to be in the range of $52.50 to $53.50 which represents a growth rate of 10% to 12%. At recent spot rates, foreign exchange is estimated to be a 1% headwind to sales growth and neutral to EPS. Some further comments on our 2027 guidance. We expect total amortization, including purchased intangible amortization to be approximately $76 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $27 million on a pretax basis were approximately $5 per share. Interest expense is forecast at $68 million for the year. Other income is estimated at approximately $22 million. We expect our tax rate before discrete items will decline from 19% in 2026 to 18% in 2027. The free cash flow is expected to be approximately $950 million in 2027, which represents 8% growth on a per share basis. Share repurchases are also expected to be $950 million. That's it from my side, and I'll now turn it back to Patrick.

Thanks, Shawn. Let me start with some comments on our operating businesses, starting with flat, which had broad-based growth in the quarter across nearly all product areas. In addition to growth in bioprocessing, it was encouraging to see another quarter of strong growth from customers in quality labs, where we sell a wide range of analytical instruments and lab balances, while trends in biopharma and biotech research improved resulting in very strong growth in our liquid handling business. The also benefited from growth in hot segments this quarter like semiconductor, battery and GLP-1 among others. Our innovative portfolio resonates well with customers, and we have a deep pipeline of new innovations that will reinforce our technology leadership. In Process Analytics, -- we launched a new online bioburden analyzer and provides real-time monitoring of microbial contamination for example, in pharmaceutical water systems. The launch further strengthens our position in critical bioprocess applications. Turning to Industrial. Core Industrial had another quarter of solid growth on top of 10% organic growth in the prior year. Sales growth this quarter was again led by our automation and digitalization solutions. We have maintained steady cadence of new product introductions in recent years. And further expanded our portfolio recently by the introduction by introducing the ACT305 weighing transmitter, which is a high-performance device designed for fast accurate transmission of weight data and status to control systems, enabling enhanced process control. It is easy to use crypto commission and integrate seamlessly into industrial environments for filling and dosing, check weighing and other applications. Moving on to product inspection. We had a very good quarter with organic growth of 8% with strong results across the portfolio. Our mid-market strategy is working well on helping us target growth opportunities within growth segments of the food manufacturing market. We've also further expanded our portfolio of client solutions to help our customers take up [indiscernible] physical contamination. We also introduced AI-enabled image reposition software for our X-ray systems improving contamination detection while reducing false checks for customers. Finally, food retail sales declined slightly due to the timing of project activity, especially in the Americas. Now let me make some additional comments by geography. Starting in the Americas, where sales grew 3% versus 9% organic growth in the prior year. We had strong results across most lab product categories, and it is encouraging to see strengthening demand for products used in research and development locations, especially by tax. Industrial also had good growth oncology growth in the prior year with strong product inspection results and strength across 4 industrial products that enable automation and digitalization. Growth in these areas was offset in part by softer sales in food retail and Transport & Logistics due to timing of project activity. Turning to Europe. Growth in Europe was modest but broad-based across the portfolio. While macroeconomic conditions remain subdued, customer activity is good, and our team continues to execute well on capturing available growth opportunities. Finally, Asia, rest of world had excellent growth results again this quarter with strong growth across the portfolio. This included 13% growth in China which was led by our industrial business and strong results across our laboratory products. Other emerging markets also grew double digits. That concludes my comments on our Q3 results. And now let me share with you some additional thoughts on our initial guidance for 2027. I recently came off our annual budget meeting with our senior leaders around the world. [indiscernible] incredibly encouraged by the energy, optimism and focus I saw throughout the business. What stood out most was the breadth of growth initiatives that are being pursued across the organization. Our teams have a deep pipeline of initiatives to drive growth and enhance profitability and are executing at a high level. Importantly, many of the investments we have made over the past several years are beginning to generate tangible results. We have strengthened our product portfolio, accelerated innovation deploying new tools across our ospinica sales and marketing excellence program and enhanced our digital footprint. We have also invested in a more resilient and agile global supply chain. We remain committed to investing to support future growth and see significant opportunities ahead as replacement demand improves, companies increased investments to support onshoring and supply chain resilience particularly in the United States and customers place increased emphasis on automating and digitizing the operations. These trends align exceptionally well with our strategy and provide confidence in our ability to drive growth over the long term. Our biopharma customers are making substantial investments in artificial intentions digitalization and next-generation research capabilities that we expect will accelerate drug discovery and development. We are uniquely positioned to support customers with our broad portfolio of innovative solutions across the entire value chain from research and development all the way to manufacturing. From a regional perspective, we expect solid growth in the United States in 2027 and where investments in advanced manufacturing and automation are expected to build as the year progresses. We also expect good growth in China despite more difficult comparisons given the strong second half results in 2026. We are well aligned with the investment priorities in China in life sciences, technology, new materials and clean energy as well as trends in automation and digitalization. We are also well positioned globally to capture growth in various segments such as semiconductors, advanced materials and batteries to name few. We expect to see strong momentum across emerging markets and expect these regions to remain important contributors to our long-term growth strategy. We also expect to translate these growth opportunities into another year of double-digit growth in adjusted EPS through the focused execution of our initiatives. In summary, we delivered an excellent third quarter, and are pleased to have increased our full year outlook. We are entering 2027 with positive momentum across the business as the investments we have made over the past several years are producing results and our growth initiatives remain on track. We remain confident in our ability to continue creating compounding value over the long term and we look forward to discussing our strategy in greater detail at our investor meeting on Monday. So that concludes our prepared remarks. Operator, I'd now like to open the line to questions.

[Operator Instructions] Your first question is from the line of Luke Sergott from Barclays.

I just wanted to talk about kind of the -- what you're seeing there in China. I know I appreciate some of the color that you gave. But when I'm thinking about the puts and takes that we're seeing here, and it's starting to recover for the rest of the group pretty strongly. Just kind of dig in from an end market perspective. And then what's also embedded within that '27 guidance? Like is there any material improvement in some of the slower parts of the areas?

Thanks, Luke, for the question. Of course, we are very pleased with the 30% growth we have seen in China this quarter. Increased Q3 to give you a little bit more flavor also included a strong industrial growth and lab growth. We actually feeling very good about the momentum in China because we are, as I said, in the pre-remarks, we are really well aligned with the investment priorities in China to invest into the future building out the pharma portfolio, investment in life sciences and technology and new energy and others. This really fits our portfolio very well. We're also benefiting from the In China For China strategy. We have a strong manufacturing footprint there. We have a strong local sales team and benefit from our global tools like spending to really address top-up markets. Because overall, I would say, roll-based trend clearly into automation and digitalization in China as well. And given all the updates we have made to our portfolio and the innovation we have put in there, we feel really well positioned for the future growth in China. Of course, next year, we face, especially in the second half, we will face some tougher comps, but we're overall really confident and I hand it over to Shawn to give you some more details in terms of the growth rates in China.

Thanks, Patrick. Patrick and I were in China recently to meet with them. And then we also, of course, for on our annual budget to what we got to meet with all the other colleagues in the region as well as around the world. And we really came back feeling very positive on the region in general. What was nice to see is that the breadth of the growth kind of throughout the portfolio, particularly in China. If you think about earlier in the year, we started to see the momentum building on the industrial side, which we continue to see, but we also saw good results in lab in the quarter. I think in the quarter, industrial was up probably like mid-teens and lab was a high single digit -- very, very high single digit in the quarter. And as we kind of like look to Q4, we've had flat growth probably even further improving. And overall, we're thinking mid-teens for Q4 in China in both businesses. For next year, we're a little bit more modest, just mostly because of the comps that we're facing. We're probably thinking more like mid-single digit in China for the year. as we know, things in China can always change quickly going in either direction, but we feel really good about what we're seeing the momentum throughout the portfolio, especially in the pharmaceutical side, I think, as Patrick mentioned, too. and we think about next year, that mid-single digits, probably more like mid to high on the lab side and maybe more low to mid on the industrial side, acknowledging there could be some upside, but we're just a little bit cautious given the comps.

Okay. Great. And then I guess just a follow-up there and continuing on the 27 guide theme. You guys are usually frame kind of what you're looking for from that could be upside driver downside drivers outside of geography and macro, but I kind of look at when I'm thinking about the upside, you have a pretty large installed base from an instrumentation perspective and as I think AI kind of hits in the manufacturing sector. That's an unappreciated aspect of it. And I'm just trying to think about the upgrade cycle from an instrumentation perspective how much of your stuff is cloud agentic-ready? And I'm sure that's a huge focus for you on innovation. But as I think about some of upside drivers next year, like could a rebirth or restart of an instrument upgrade cycle be one of them?

Look, I think you're hitting a good point here is that we have invested a lot into our technology and digitalization capabilities over the last few years. And you're absolutely right. We have put a lot of emphasis on making sure that our sensors or instrument will seamlessly plug into the customers' digital environment. So we provide what I will call across the value chain, all the sensors that you need to take the relevant data to either optimize the manufacturing workflow processes or in the environment, drive automated lapse, et cetera. What is important is that we also provide what I call the mid-layer data infrastructure that connect to our sensors and instruments that then seamlessly integrates into our customers' AI software solutions and everybody uses something else, but it's important that they have a good interface that can connect against with our instruments. And or all the new products that we have out there. Connectabx, for example, is a really strong platform that connects to almost the entire fleet of we have in the lab space and we typically cover 40% of the [indiscernible] the ATC lab, which is also heavily used only, but that drives self-driving maps. And I think those of you who will be on 1 day will be excited about some of the showcases we had here in that direction as well. So yes, I think we definitely will benefit from the trend of AI and said prepare portfolio extremely relevant.

Yes. And just to be clear, Luke, I think you framed it correctly. Like as Patrick says, we're really well positioned for these trends. We will talk more about it on our Investor Day on Monday, but it's not like we've built anything meaningful into our guidance for next year. I view it more as upside .

Your next question comes from the line of Tycho Peterson from Jefferies.

Maybe just sticking with the '27 outlook. I wondering if you can break down some of the other assumptions by end market and geographies. You obviously hit on China already, but -- you're seeing a lot of recovery here across the board, right? And are there other areas that are lagging that potentially could come back next year? Maybe just to walk through by end market and geography what's baked into that 5% ?

Yes. Sure, Tycho. I'll take that one. And so for 2027, I'll start with the division. So for lab, we're -- our guidance is mid- to high single digit. So that would be an improvement from what we saw this year, kind of like the momentum we saw in the second half of the year kind of continuing. One of the nice things with lab is if you kind of think about our business, we kind of like to serve the different aspects of the customers' workflow or value chain. Earlier in the year, we were seeing good trends in bioprocessing last quarter, it was Q2 being last quarter. We saw things really improving in the QA/QC bench. And then this quarter, we saw better activity in R&D which was really nice to see like in areas like. And so we're encouraged as we kind of go into 2027 in lab. And core industrial we're guiding mid-single digit for next year kind of also benefiting from a lot of the favorable trends in automation and digitalization, and product inspection, were maybe a little bit more cautious, maybe low to mid-single digit in PI. And then food retailing, we're also a little bit more cautious with low single-digit. In terms of the Americas, we're guiding mid- to high single digit with kind of some of these favorable trends that we see kind of exiting this year in terms of the market. Europe are a little bit more cautious in guiding to low single digit. And then China, we already mentioned mid-single digit.

Okay. That's helpful. And then industrial has come back better. You are accelerating on a tougher comp here -- is any of that receiving help from the chemical recovery or recapturing delayed orders? Maybe just talk about whether there's any sort of timing elements in what you're seeing now versus broader underlying improvement?

Yes, I'd say certainly chemical is better than it was in Q1. We had that soft start. I'd say out of our core segments, it's still a softer market relative to like pharma pharma was probably the more standout in the quarter. But nothing special here, like that market certainly has different -- has had different challenges in the past with higher energy costs. But right now, we're seeing decent activity there, but it's relatively softer compared to the other markets. .

Your next question is from the line of Vijay Kumar from Evercore ISI.

Maybe a big picture one for you, Patrick. You've heard a lot of your peers speak about AI, lab in the loop how some of the things that you speak about, liquid handling being very strong, process analytics being strong are these things products that go into some of these AI lab in a loop end markets? And have you tried to quantify what it means for Mettler?

Yes, Vijay, thanks for the question. Look, lab in loop is a self-driving labs, so there's several ways you can call this. I mean, in bioprocessing, I think it benefits, of course, from our closest alt portfolio where the connectivity of the sensors and the digital centers provide to our customers and teams integrating their data systems, allow them to optimize their process that many manufacturing of their with other digital centers and increase yields and productivity, et cetera, and also use their own AI solutions to optimize processes and their setup. But it's important that they have the right data points, and this is where our digital sensor is playing for the room. On the self-driving labs, all lab in loop approach I'd point then more to, I would say, the late-stage Angio R&D side as well, whether it's in the pharmaceutical industry or in areas like personal as where we see these labs applying our instrumentation of solutions together with robots that will serve our instruments that could then control together with all to control the entire workflow. And then do self-optimizing experiments. We have again in several accounts already. There's quite a lot of interest in these solutions. And the important also is connectivity to the AI-driven approach that customers use on the other side. Again, everybody has a different model. But the importance is that we have the right data aggregation that we provide, for example, with LabX, they can plug into and then run fully at experience and the time and optimization. -- it's still I would say it's still early innings, but we see really strong interest. And again, for those of you who will be on Monday, we'll see a practical example of that as well.

Understood. That's helpful. Sean, maybe 1 for you on the Q4 guidance assumptions, 5%. Your comps get easier -- why -- you just did 6%. Why is organic going to slow down in -- maybe if you could just talk about what is pricing in 3Q and Q4 assumptions and why Q4 stepping down? That would be helpful.

Yes. Sure, Vijay. So maybe I'll start with the pricing assumption. So in pricing in Q3, it was just over 2.5%, and we expect to be in that 2.5% range also in Q4. Probably, the biggest difference in Q4 versus Q3 is if you like a I kind of see the lab getting that mid- to high single digit. Core industrial probably being high single digit, but then maybe going the other way. You see retail down mid-single digit. And as a reminder, retail was up was up like, I think, 19% in Q4 of last year. So it's just lapping a really big comp. And as you know, that business can tend to be lumpy based upon customer activity. . And then we're also a little bit more cautious on our product inspection business. I mean, PI has had a very good year, year-to-date, had a strong quarter, but it's probably going to be more flattish in the third quarter. And it's just probably, if you look at the comp there for last year and then the year before, I think it grew organically double digit last year in Q4 and double-digit the year before. So we're just kind of lapping some difficult comps there on a stacked basis. But just more customer activity. We're actually competing really well and the product portfolio looks great. We have some introduced new products as well that you'll see here on Monday as well.

Your next question comes from the line of Dan Arias from Stifel.

Shawn, low singles for Europe. Can you just maybe talk a little bit about what we should expect out of labs specifically in Europe as we look to the end of the year here? And then into next year. That's been an area that's soft. It sounded like you felt better about things like bioprocess at least earlier in the year. So how might that translate -- are you assuming just sort of similar activity overall in European lab or might there be an acceleration trend that we can look forward to?

Yes. So for Europe, I mean, we feel like our team continues to execute really well in a more challenging environment. If you think about all the different topics in the world, Europe, is probably a little bit more under pressure for different reasons, whether it be energy costs or whether it's like how some of these trade disputes are playing out. If you think about the pharmaceutical industry, certainly, we see a lot more activity outside of Europe than we see inside of Europe. But nonetheless, we still feel like within that low single digit, it's probably about the lab business, it's probably still in that kind of mid-single digit kind of a range in terms of the fourth quarter and with the other businesses being a little bit more cautious and a little bit more exposed to the macro. As we kind of look forward to next year, I mean, of course, we're only sitting on about 1.5 months of backlog at any point in time. But looking at the different regions, this is the one area that we have probably a little bit of a closer eye on kind of going into next year.

Okay. And then Patrick, maybe as a follow-up to Vijay's question there. You guys have been talking about automation and digitalization for a while now, certainly, before the AI discussion became what it is today. Is that tangibly accelerating as a growth driver? I mean is that something that you think will mean more to the P&L next year than this year? And maybe that's what you're saying to this question. I just need to hear it again. But I'm just curious about how much more you're seeing that kind of falls into that camp versus prior periods, future periods.

Clearly, as the portfolio is shifting more towards rationale I mean we see a lot of interest shifting more in the direction that you can call it broader digitization and automation. But behind it, of course, there's a lot of also opportunities as customers now drive leveraging AI. And I think we are exceptionally well positioned because we provide them the instruments and the terminals to connect to the sensors and instruments, stock and power them to drive this AI solutions. This is still a bit early innings, but we see really good interest in this area and really good engagements with customers across the board, whether it's in pharma interactive discovered areas that to try to drive optimize the experimentation, whether it's set in, for example, in the battery segment, when you think about things like electrolyte composition optimization for different battery types but they really were at these labs and these automated setup running around the clock to optimize the chemical or the chemistry that they need for the batteries, et cetera. This is very exciting to see this. But again, it's what customers are looking for is really a open environment and a data aggregation layer that we can plug into and drive them the experiments using their own AI approaches. The different ones customers use. I think we are really well positioned there with our digital sensors of our analytical instruments that we have and the connection layers of software and terminals that customers need to do it.

Your next call is from the line of Jack Meehan from Operan Research. .

I wanted to ask about the 2027 guide. If you look at the 5% local currency growth. Can you just talk about like a few of the factors like price versus volume? How you're thinking about Spinnaker share gain versus market growth? And then are you assuming any recovery in the replacement cycle? Or could that be upside?

Yes, Jack. I'll start and Patrick wants to add some color as well. So in terms of the 5% between volume and price, we expect to do just over 2% next year on price kind of our triple baseline is about 2. We'll have a little bit -- we'll do a little bit more than that, just given some of the pricing actions we did midyear this year. . And of course, we'll continue to evaluate that as we go through next year based upon the inflationary environment. So that puts the volume in the 3%-ish kind of a range. In terms of replacement cycle. I feel like it's always difficult to tell like how much of the things are replacement. But certainly, if we look at some of the categories that lend themselves to replace that, we've seen really good activity like in the analytical instrument category now for at least a couple of quarters in a row. And so that's very encouraging same with lab balances. And so right now, we kind of expect what we're seeing to continue in next year. We haven't necessarily built an acceleration from where we are. We'll talk a little bit more about this at the Investor Day on Monday, but we see this to be certainly a broader theme kind of going forward in terms of exactly how things play out with replacement kind of given the significant sales we had back in '21 and '22 and then how that could play out with the life of our products. And then in terms of market share, our market, we don't have, I think, of course, a perfect view on what the market growth would be just given the breadth of our portfolio, but we certainly feel very good about our ability to gain just a little bit of share each year through our Spinnaker program. And we spent a lot of time in this past week with our executive team and the Board is kind of going through a lot of the different things that we're doing there. And the program just continues to increase with sophistication and we'll actually share a little bit of that on Monday as well, too.